At a public hearing, the Internal Revenue Service and the U.S. Treasury Department (the "Treasury") examined proposed regulations under Section 385 of the Internal Revenue Code. The proposed regulations recharacterize certain debt instruments issued to related parties as equity for U.S. federal income tax purposes.
The majority of the participants at the hearing expressed disapproval of the proposed regulations, with many suggesting withdrawing the rule entirely, or, at the very least, delaying its implementation.
Participants questioned the authority of the Treasury to issue the proposal. They argued that Section 385A gives very limited authority to the Treasury Secretary to decide what is debt and equity. Others described unintended consequences that the regulations might have on the economy, such as the possibilities of causing greater uncertainty and the likelihood of higher compliance costs.
Participants argued further that the proposed regulations should include more exemptions for foreign transitions, certain kinds of acquisitions, debt reclassified as stock, short-term loans, cash pool loans, foreign banking organizations and standard business practices. They suggested limiting the rule to only target actual inversions, contending that debt is not tax-motivated. Further suggestions included extending the time period for filing returns from 30 days to the end of the tax filing year.
Participants requested more time for investigation and comment on the proposed regulations. The IRS was also asked to release the information it relied on as a source when composing the proposal.
The Internal Revenue Service and the Treasury will hold a public hearing to review jointly proposed debt-equity regulations. The proposed regulations were published in the Federal Register.