IRS Removes "Section 385 Documentation" Requirements, Proposes New Rules On Distributions

The IRS issued final regulations removing "Section 385 regulations" regarding specified documentation requirements. Section 385 provisions deal with the classification of related-party debt as debt or equity for U.S. federal income tax purposes. The new regulation is now in effect. The IRS also issued a proposed rulemaking that would modify Section 385 regulations regarding actual or deemed distributions. Comments on the proposed rule are due on February 3, 2020.

As previously covered, the Section 385 regulations are primarily composed of (i) rules establishing minimum documentation requirements that normally must be satisfied in order for purported debt obligations among related parties to be treated as debt for U.S. federal tax purposes, and (ii) rules that treat as stock certain debt that is issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result. The applicability