Jul 18, 2016 - 10:00am

Summertime Sadness: The IRS Hearing on the Proposed Section 385 Rules

Former Vice President, Tax Policy & Economic Development
Former Chief Tax Policy Counsel


The Internal Revenue Service headquarters in Washington, D.C.
The Internal Revenue Service headquarters in Washington, D.C. Photo credit: Dennis Brack/Bloomberg.

As the heat index crept into the triple digits Thursday and the congressional summer recess kicked off, many folks in the nation's capital engaged in fun summer activities – hitting the pool, the beach, or the links. I was not one of those people. Instead, after having Internal Revenue Service security confiscate my coffee, I had the pleasure of spending the morning in an IRS hearing room with woefully inadequate air conditioning joined by  about 100 other tax wonks and media scribes where speakers, including myself, almost unanimously made the same request – withdraw the proposed Section 385 rules.

If Treasury chooses not to withdraw the rules, then it has a lot of work to do. For starters, the Chamber highlighted some of the most frequently mentioned collateral consequences of these rules. As picked up by Tax Notes (subscription required):

They make efficient global cash management nearly impossible, they hinder repatriation strategies, they result in lost interest deductions and increased dividend withholding, in instances they result in double taxation . . . they impact ordinary legal entity restructurings as well as equity compensation practices, and they cause additional problems such as increased compliance and the creation of complex hybrid instruments.                                                                                

As an initial ask, and one echoed by many speakers, the Chamber requested that the effective date of all provisions be delayed until 2019. Then, we turned to substantive issues. To prevent significant interference with common business practices, we urged:

  • Certain ordinary course funding mechanisms and transactions be excluded from the rules.
  • Foreign-to-foreign transactions be exempted from the rules.
  • Double taxation due to the loss of foreign tax credits be addressed.
  • Certain issues relating to both the general and funding rules be addressed, including the need for:
    • An expansion of the current year E&P exception;
    • A “double jeopardy” safe harbor;
    • Solutions to certain equity compensation concerns;
    • A rule to prevent cascading; and
    • Solutions to issues relating to ordinary legal entity restructurings.
  • The period of the per se funding rule be shortened.
  • Certain issues resulting from the compliance burdens associated with the documentation rules be addressed, including:
    • Extending the 30-day documentation period;
    • Providing a de minimis exception; and
    • Clarification that routine actions on existing debt don’t cause retesting.
  • Certain issues with the bifurcation rules be addressed, namely providing more detail on when those rules would apply and the application consequences.
  • Certain specialized issues be addressed – concerns over S corporation, REIT qualification and the consolidated group definition.

As the reader will note, these comments are highly technical and wide-ranging, consistent with the enormity of the consequences of the proposed rules.

The Chamber concluded by once again calling for withdrawal of the rules. And again noted that in the absence of withdrawal, the effective date of all provisions must be delayed until 2019 and the concerns outlined must be addressed to prevent unnecessary disruption to normal business operations, as well as to ensure both that U.S. companies can compete globally and that foreign capital is welcomed within our borders.

And the end result? Unclear, but perhaps hopeful. IRS officials gave no indications any substantive or timing changes were being considered. But across town, Mark Mazur, the Treasury’s assistant secretary for tax policy, offered a ray of hope when he indicated that “[w]e've gotten hundreds of comment letters - some incredibly helpful ones that point out some of the possibly unintended consequences, things that we'd like to try and fix.”

Let’s hope Treasury’s air conditioning is working as Mazur and his crew have a lot of work to do.

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About the Author

About the Author

Former Vice President, Tax Policy & Economic Development
Former Chief Tax Policy Counsel

Caroline Harris is former vice president, tax policy and economic development, and chief tax policy counsel at the U.S. Chamber of Commerce.