Funds Escape Debt-Equity Regulation Net - For Now

Introduction

On October 13, 2016, the Internal Revenue Service (IRS) and the Treasury Department issued final and temporary regulations (T.D. 9790) (the "New Regulations") under Section 385 of the Internal Revenue Code ("Code"). Section 385 of the Code, titled "Treatment of Certain Interests in Corporations as Stock or Indebtedness," authorizes the issuance of regulations to determine whether an interest in a corporation is to be treated as stock or indebtedness. Regulations were initially issued under the statute in the early 1980s, but were subsequently withdrawn without ever taking effect. Until regulations were once again proposed under the statute in April of this year, no substantive guidance was provided under the statute for determining whether an interest in form as debt was to be treated as equity. Although the regulations as proposed earlier this year were initiated as a result of the public furor over corporate inversions, the regulations that were