On October 13, 2016, the Treasury Department released final
regulations (and related temporary regulations) under section 385
(Final Regulations).1 The Final Regulations
recharacterize certain issuances of related-party debt as equity
for U.S. federal tax purposes.
The Final Regulations represent a revision of proposed
regulations released on April 8, 2016 (Proposed Regulations). The
Proposed Regulations were intended to limit the ability of
multinational companies to shift profits outside the United States
through intercompany financing transactions. They generated intense
controversy among tax practitioners, who criticized the Proposed
Regulations both for exceeding the Treasury Department's
administrative authority under section 385 and for their burdensome
overbreadth. Many practitioners feared that the Proposed
Regulations would apply to many routine and inoffensive
transactions engaged in by multinational groups of corporations
– for instance, by preventing the
