Are The Proposed Code Sec. 385 Regulations, Which Represent Significant Changes In Law, In Part, Impermissibly Retroactive?

I. Overview

On April 4, 2016, the Treasury and the IRS released proposed regulations under Code Sec. 385¹ addressing whether purported indebtedness issued to certain related parties will be treated as stock or indebtedness, or as in part stock and in part indebtedness (the "Proposed Regulations").² Although they were issued with other proposed regulations focused on preventing inversion transactions, the Proposed Regulations contain sweeping rules that would recharacterize many related-party debt instruments without regard to whether the parties are foreign or domestic.³ This article provides a general summary of the Proposed Regulations, while pointing out a few of the key concerns that have been identified so far. It also raises the question of whether Proposed Reg. §1.385-3, if finalized with its proposed effective date, could be viewed as an impermissibly retroactive regulation and how any changes to the Proposed Regulations adopted in final regulations should be