Capitalizing a Business Entity: Debt vs. Equity (Portfolio 702)

Tax Management Portfolio, Capitalizing a Business Entity: Debt vs Equity, No. 702, contains an analysis of debt and equity, including both their core differences and the sometimes blurry nature of the boundary between them. To view this Portfolio, visit Bloomberg Tax for a free trial.

 

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Description

Tax Management Portfolio, Capitalizing a Business Entity: Debt vs Equity, No. 702, contains an analysis of debt and equity, including both their core differences and the sometimes blurry nature of the boundary between them. The Portfolio extensively examines:

  • The final and temporary debt-equity regulations that were issued on October 21, 2016;    
  • The case-by-case multi-factor test, including its components, that has historically been applied to determine whether an instrument, or advance on open account, constitutes debt or equity for tax (and often legal) purposes; and    
  • The continued viability and significance of the case-by-case multi-factor test under case law alongside the criteria of the debt-equity regulations.

In addition, the Portfolio analyzes the consequences of classification as debt or equity, ranging from interest expense deductions and the dividends received deduction to issues such as qualification for foreign tax credits and existence of a partnership interest. Aggressively tax-motivated transactions are also discussed in the debt-equity context, including the effect that aggressive tax motivation can have on classification. Practical advice is provided throughout the Portfolio.

The Portfolio also discusses additional issues and problems with regard to debt-equity classification, including as hybrid securities and the international implications of debt-equity classification. These international implications include the attention being paid by the OECD to debt-equity classification in the broader context of increasing global vigilance in auditing what is perceived as aggressive international tax planning. Finally, the Portfolio discusses both past attempts by Congress, the Treasury and IRS to make debt-equity classification more uniform and predictable, the enactment of §385 and issuance of Notice 94-47 respectively, which met with limited success at best; and now the latest attempt, which may well be more successful, the issuance on October 21, 2016, of final and temporary regulations under §385.

This Portfolio may be cited as Handler, 702 T.M., Capitalizing a Business Entity: Debt vs Equity.

Authors

R. Arnold Handler

R. Arnold Handler is a tax consultant, writer, and lecturer in New York City. Mr. Handler is on the faculty of the Graduate Tax Program of Baruch College and of the Center for Professional Tax Education. Mr. Handler's prior professional positions include Director of International Tax Research and Planning, Citigroup (1990–2013) (financial products, audit and appeals; international joint ventures, restructuring, timing and sourcing of income and losses, transfer pricing); Group Tax Counsel, Mobil Corp (1976–1990) (audit and appeals; all aspects of international taxation, including sourcing, acceleration and deferral of income and deductions; joint ventures; real estate); Senior Tax Associate, Carter Ledyard & Milburn (1970–76) (international M&A, partnerships, losses by financial institutions and investors; debt restructure; real estate); Adjunct Professor, Fordham University (1999–2003) (Taxation of Financial Products); Captain, Judge Advocate General's Corps (1966–70) (twice awarded U.S. Army Commendation Medal).

Mr. Handler attended the University of Rochester and London School of Economics (B.A., 1961); Harvard Law School (J.D., 1964), where he served on the Harvard Student Legislative Research Bureau and helped organize the seminal Harvard Journal on Legislation; and New York University School of Law (LL.M. Tax and Corporation Law, 1966).

Mr. Handler's writings include: 543 T.M., The Mark-to-Market Rules of Section 475 (2000) (co-author) (cited in Technical Explanation of Camp Financial Products Reform Proposal); 910 T.M., Foreign Partnerships and Partners (1993); 6906 T.M., Transfer Pricing: International Joint Ventures; 594 T.M., Acquisition, Financing, Refinancing and Sale or Exchange of Residence — Moving Expenses (1995); and an extensive number of journal articles, including Tax Consequences of Mortgage Foreclosures and Transfers of Real Property to the Mortgagee, 31 Tax L. Review 193 (1976).

Gratitude is expressed to Ronald M. Anderson for his sharing of his years of international tax expertise, thoughts and insights.

Table of Contents

Detailed Analysis
I. Overview: The Hazy Boundaries Between Debt and Equity
A. Introduction
1. Increased Sensitivity to Debt-Equity Classification
2. Basic Concepts of “Debt” and Equity”
a. Equity
b. Debt
B. Blurred Debt-Equity Boundaries
1. Shareholder Loans — Thin Capitalization and/or Advances to Failing Business
2. Hybrid Securities
3. Other Instruments with Elements of Debt and Equity
4. Partnership Interests in Tax-Avoidance Transactions
5. Derivatives with Debt-Like Characteristics
6. Overall Complexity and Challenge
7. Confronting the Challenge
C. Basic Rules Governing Debt-Equity Characterization
1. Core Difference Between Debt and Equity
2. Blurring at the Boundaries
3. Characterization Through the Multi-Factor Test
4. Case-by-Case Application of the Multi-Factor Test
a. The Tax Multi-Factor Test in Brief — Variance in Factors Considered and Their Weight
b. Comparable (But Not Identical) Factors Considered in Each Case
c. Weight to Be Given Each Factor Depends on All Facts and Circumstances
d. Standard of Review at the Circuit Court of Appeals Level
(1) Appellate Review of District Court Decisions
(2) Appellate Review of Tax Court Decisions
e. Reasons for Case-by-Case/Multi-Factor Approach Despite the Problems It Causes
5. Section 385 — Legislative and Regulatory Attempts to Make the Multi-Factor Test More Objective and Uniform
a. Enactment of §385(a) and §385(b) in 1969
b. Attempts to Issue Effective Regulations — Past Failures, Current Success
c. Section 385 Amendment in 1989 to Allow Bifurcation by the IRS
(1) Legislative History
(2) Practical Impact of the Bifurcation Amendment
d. Enactment of §385(c) in 1992 — Requiring Consistency of Debt-Equity Treatment Between Issuer and Holders
(1) Legislative History
(2) Code and Regulations
6. Notice 94-47 — Limited Debt-Equity Guidance
a. Language and Scope
b. Limitations and Problems
II. The New Regulatory Tests Under §385
A. Summary of Current §385 Regulations
1. Introduction
a. Background and Issuance
b. Inversions, Earnings Stripping, and the §385 Regulations
c. Basic Structure of the §385 Regulations
d. Multi-Factor Debt-Equity Test Continues to Apply
2. Key Changes from the Proposed Regulations in Terms of Overall Scope
a. Exclusion of Foreign Issuers
b. Exclusion of S Corporations and Non-Controlled RICs and REITs
c. Elimination of the Bifurcation Rule
3. Narrowing and Relaxation of Documentation Requirements
a. The Proposed Documentation Rules
b. Documentation Requirements Still Apply Only to Expanded Group Interests
c. Easing of the Documentation Requirements in Key Areas
(1) Extension of Time Required for Timely Preparation
(2) Rebuttable Presumption for Limited Failure to Comply
(3) Delayed Implementation
(4) Limiting the Equity Recharacterization Rules
(5) Effective Dates of the §385 Regulations
B. Which Entities Are Subject to the §385 Regulations?
1. Entities Subject to the §385 Regulations in Whole or Part
a. Large Domestic C Corporate Issuers Not Joining in a Consolidated Return with Related Party Lender
b. Controlled Partnerships — Limited Applicability of Equity Recharacterization Rules and Documentation Requirements
c. Disregarded Entities — Documentation Requirements and Possibly Equity Recharacterization Rules
d. Controlled RICs and REITs
2. Entities Excluded from the §385 Regulations in Whole or Part
a. Small-to-Medium-Sized Issuing Expanded Groups
(1) Documentation Requirements
(2) Equity Recharacterization Rules
b. Exclusion of S Corporations from Expanded Group
c. Issuer and Holder Joining in Consolidated Return
d. Controlled Partnerships — Limited Applicability of Documentation Requirements and Equity Recharacterization Rules
e. Foreign Corporate Issuers
f. Individuals; Further Exclusions
C. General Principles and Definitions
1. Continuing Applicability of Multi-Factor Test Alongside the §385 Regulations
a. Multi-Factor Test Applies Where the §385 Regulations Do Not Apply
b. Multi-Factor Test's Express Applicability Under the Documentation Rule
c. Special Weighting of Factors When Presumption of Stock Treatment Rebutted
2. Expanded Groups and Expanded Group Interests
a. Expanded Group
(1) Membership; Inclusion and Exclusion
(2) Attribution of Ownership for Expanded Group Purposes
(a) Upward Attribution from Corporations
(b) Option Attribution
(c) Family Attribution and Downward Attribution
(d) Upward Attribution from Partnerships to Partners
(e) Hook Stock
(3) Overlapping Expanded Groups
b. Expanded Group Interest (EGI)
c. Critical Significance of the Definitions of Expanded Group, EGI, Covered Member, and Covered Debt Instrument
3. Controlled Partnership
a. Definition; Expanded Group and Expanded Group Interests
b. Documentation Requirements Generally Applicable Only to Instruments Held by Controlled Partnership, Not Instruments Issued
c. No Aggregation Rules for Purposes of Documentation Requirements
d. Aggregate Treatment of Controlled Partnerships Under the Equity Recharacterization Rules
(1) Controlled Partnership's Acquisition of Property from Expanded Group Member
(2) Acquisitions of Expanded Group Stock When a Member of the Expanded Group Becomes a Partner After the Acquisition
(3) Issuance of Debt Instrument to Expanded Group Member
4. Covered Member/Covered Debt Instrument
a. Covered Member — Definition; Exclusion of Foreign Corporations
b. Covered Debt Instrument — Definition
c. Covered Member/Covered Debt Instrument — Applicability of Documentation Requirements
d. Covered Member/Covered Debt Instrument — Equity Recharacterization Rules
(1) Issuance by a Covered Member
(2) Issuance to a Member of the Issuer's Expanded Group
e. Disregarded Entity as Issuer or Holder of Covered Debt Instrument
(1) Disregarded Entity as Issuer
(2) Disregarded Entity as Holder
5. Disregarded Entity and Regarded Owner
a. Expanded Group/Expanded Group Interest
b. Applicability of the Documentation Requirements to a Disregarded Entity
(1) In General
(2) Deemed Exchange of Debt for Stock
6. Section 385(c) Regulations
a. Section 385 Regulations — Documentation Requirements and Equity Recharacterization Rules
(1) Documentation Requirements
(2) Equity Recharacterization Rules
(3) Instruments Not Covered by the Documentation Requirements or the Equity Recharacterization Rules
b. Language of Statute vs. Regulations
c. Applicability of §385(c) to Controlled Partnerships
d. Questions Under the §385(c) Regulations
7. Effective Date of Reg. §1.385-1
D. Documentation Requirements — Expanded Group Interests
1. Basic Approach and Operation of Documentation Requirements
2. Applicability of Documentation Requirements
a. General Rules
b. Exceptions
(1) Anti-Avoidance Rule: Principal Purpose
(2) Issuer Not the Sole Obligor
(3) Substance over Form
3. Issuers and/or Holders Exempted in Whole or Part from the Documentation Requirements
a. Foreign Corporations
b. S Corporations; Non-Controlled RICs and REITs
c. EGIs Issued and Held by Members of Consolidated Group
d. Controlled Partnerships
(1) Anti-Avoidance Rule: Principal Purpose
(2) Issuer Not Fully the Obligor
(3) Substance over Form
e. Individuals
f. Issuers Exempted Because of Their Size
4. Four Key Indebtedness Factors for Which Documentation and Information Must Be Prepared and Maintained
a. In General
b. The Four Key Indebtedness Factors
(1) Unconditional Obligation
(2) Creditor's Rights
(3) Reasonable Expectation of Repayment
(a) Nonrecourse EGI
(b) Multiple EGIs from Same Issuer
(c) Material Event
(d) Third-Party Report or Analysis
(e) EGI Issued by Disregarded Entity
(f) Acceptable Documentation
(g) Preparation of Required Documents
(4) Actions Evidencing Debtor-Creditor Relationship
(a) Payment
(b) Default
(c) Non-Enforcement of Creditor's Rights
5. Special Documentation Rules for Revolving Credit, Omnibus, Umbrella, Master, Cash Pool, and Similar Agreements
a. Unconditional Obligation to Pay a Sum Certain and Creditor's Rights
b. Reasonable Expectation of Ability to Repay
c. Material Event of the Issuer
d. Additional Requirements for Cash Pooling
6. Timely Preparation and Maintenance Requirements
7. Consequences
a. Consequences of Meeting the Documentation Requirements
b. Consequences of Not Meeting the Documentation Requirements
(1) Exceptions to General Rules
(a) Rebuttable Presumption
(b) Reasonable Cause
(c) Ministerial or Non-Material Failure or Error
(d) EGI No Longer Held by Member of Issuer's Expanded Group
(2) Special Weighting of Factors when Presumption of Stock Treatment Rebutted, and Its Implications
8. Affirmative Use
9. Coordination with Other Rules of Law
10. Cascading Effect
11. Effective Date of Documentation Requirements
E. Equity Recharacterization of Covered Debt Instruments That Do Not Finance New Investment in Issuer's Operations
1. In General
2. Equity Recharacterization Rules Apply Only to Covered Debt Instruments
3. General Rule
a. Exempt Exchange
b. §304 and Exchange of Covered Debt Instrument for Expanded Group Stock
4. Funding Rule
a. Qualified Short-Term Debt Instrument
(1) Short-Term Funding Arrangements
(2) Ordinary Course Loans
(3) Interest-Free Loans
(4) Demand Deposits with a Qualified Cash Pool Header
b. Per Se Funding Rule
c. Principal Purpose Rule
d. Predecessors and Successors
5. Special Rules
a. Anti-Cascading and Non-Duplication Rules
b. Anti-Abuse Rule
c. Timing Rules
d. Partial Recharacterization
e. Exceptions, Exclusions, and Reductions
(1) Order of Application
(2) Exclusions
(a) Acquisition of Subsidiary Stock
(b) Compensatory Stock Acquisition
(c) Distributions or Acquisitions Resulting from Transfer Pricing Adjustments
(d) Acquisitions of Expanded Group Stock by a Dealer in Securities
(e) Anti-cascading Exception to the Funding Rules for Specified Acquisitions
(3) Reductions
(a) Expanded Group Earnings
(b) Qualified Contributions
(4) Handover from the General Rule to the Funding Rule
6. Effective Date of Equity Recharacterization Rules
F. Equity Recharacterization Rules for Controlled Partnerships
1. Applicability of the Equity Recharacterization Rules to Controlled Partnerships and Partners
2. Deemed Conduit Approach: Specified Portions and Deemed Transferred Receivables
3. Partner in Consolidated Group
G. Consolidated Groups
1. Consolidated Groups and Documentation Requirements
2. Consolidated Groups and Equity Recharacterization
a. The One Corporation Rule
b. Exceptions to the One-Corporation Rule
(1) Determining Members of an Expanded Group.
(2) Recharacterized Stock Treated as Stock of Issuing Member
(3) Covered Debt Instruments and Qualified Short-Term Debt Instruments
(4) Partnership
(5) Order of Operations
3. Consolidated Group Debt Instrument — Leaving the Consolidated Group
a. Holder or Issuer Leaving the Consolidated Group
b. Transfer of Debt Instrument to Expanded Group Member Not in Consolidated Group
c. Overlap Transactions
d. Subgroup Exception
H. Deemed Exchanges
1. Basic Consequences, Operating Rules and Occurrences of “Deemed Exchanges”
a. Basic Consequences
b. Operating Rules of Reg. §1.385-1(d)(1)(iv)
(1) Disregarded Entity
(2) Partnership
(3) Other Situations
c. When Deemed Exchanges Occur
2. Deemed Exchanges Under Documentation Requirements
a. EGI Treated as Stock Ceases to Be an EGI
b. EGI Treated as Equity from Date of Issuance
c. Applicable Interest Becomes EGI and Subsequently Treated as Equity
d. EGI Recharacterized as Equity Due to Actions of Issuer or Holder After Issuance
e. EGI Issued by Disregarded Entity
3. Deemed Exchanges Under Equity Recharacterization Rules
a. Covered Debt Instrument Previously Recharacterized as Stock Leaves Expanded Group
b. Covered Debt Instrument Recharacterized as Equity as of Date of Issuance
c. Covered Debt Instrument Recharacterized as Equity After Issuance
d. Recharacterization of Covered Debt Instrument Issued by Disregarded Entity
(1) Recharacterized Debt Treated as Stock of Regarded Owner, Not Disregarded Entity
(2) Consequences of Disregarded Entity's Recharacterized Debt Being Treated as Equity of Regarded Owner
(3) Controlled Partnership as Regarded Owner of Disregarded Entity; Consolidated Return
(4) Application of Reg. §1.385-3T(d)(4) to Disregarded Entity
(5) Deemed Exchange for Debt Issued by Disregarded Entity
e. Equity Recharacterization of Covered Debt Instrument Issued by Controlled Partnership
(1) In General
(2) Deemed Exchange Equity Recharacterization of Covered Debt Instrument Issued by Controlled Partnership
4. Modifications of Debt Instruments Under Reg. §1.1001-3
III. Applying the Multi-Factor Test to Distinguish Debt and Equity for Legal and Tax Purposes
A. Tax and Legal Use of Multi-Factor Test to Distinguish Debt from Equity
B. Debt-Versus-Equity in Legal and Tax Contexts — The Stakes in Each
C. Multi-Factor Test — Legal Authorities
D. Multi-Factor Test for Determining “Tax Ownership”
1. AM 2012-007 — Ownership Determined by Multi-Factor Test
2. Grodt & McKay — Determining Tax Ownership by Reference to “Benefits and Burdens” of Ownership
IV. The Debt/Equity Multi-Factor Tax Test Explained
A. The Multi-Factor Test in a Nutshell
1. Factors Considered, and Their Weight, Vary
2. Number of Possible Factors
a. Total Number
b. Practical Limitation
3. Reasons for Variance in Debt-Equity Factors Expressly Listed, and in Their Number
4. Factors Most Likely to Be Considered
B. Label or Name of Instrument, Advance or Investment; Formal Indicia (If Any); and Reporting Treatment
1. In General
2. Audit/Litigating Position in Absence of Written Instrument
3. Foreign Characterization, Name/Label/Reporting
4. Virtually Every Debt-Equity Determination Refers to Label/Name/Formal Indicia and/or Reporting Treatment as a Factor to Be Considered
5. Label/Name/Formal Indicia and Reporting Treatment Carry Only Limited Weight in Support of the Taxpayer's Position
a. Closely Held Issuers
b. Tax-Indifferent Holders
c. Form Contrary to Economic Reality
6. Limited Weight from Reporting Treatment Can Be Helpful
7. In Contrast, Label/Formal Indicia and/or Reporting-Treatment Contrary to One's Tax Position Can Undermine That Tax Position
8. Execution of Documents After the Fact
9. Disavowals of Chosen Form of Instrument
a. Disavowal of Form by Taxpayer — In General
b. Disavowal of Debt or Equity Form by Taxpayer
(1) Honest and Consistent Respect for the Substance of the Transaction
(2) Actions of Related Parties, Including Foreign Parties, Relevant to “Honest and Consistent Respect”
10. Difference in Characterization Under U.S. and Foreign Law
a. Difference Not Considered Inconsistency for U.S. Tax Purposes — Majority of Decisions
b. Difference Considered an Inconsistency for U.S. Tax Purposes — Minority of Decisions
11. Section 385(c) — Consistency Between Issuer and Holder; Disclosure
a. Disclosure When Difference in Characterization Arises Under Laws of Different Jurisdictions
b. Disclosure When Inconsistency Results from Differences Between Tax and Regulatory, Rating, or Financial Accounting Rules
12. Effect of §385 Regulations
13. Practical Principles on Label/Name/Formal Indicia, Reporting, and Disclosure
a. Decide Early and Take Notes from the Beginning
b. Be Punctilious in Matters of Name/Label, Formal Indicia, and Documentation
c. Be Equally Punctilious in Matters of Reporting and Disclosure
C. Holder's Degree of Risk
1. “Risk” Relates to Relative Security of Investments in the Same Enterprise
2. Date of Determination of Degree of “Risk”
a. Basic Test — Date of Investment
b. Relevance of Subsequent Events
3. “Risk” Comprises Other Debt-Equity Factors
a. Commentary
b. Section 385 and Notice 94-47
c. Case Law
D. Debt-to-Equity Ratio — Thin Capitalization vs. Adequate Capitalization
1. Industry Standards
2. Fair Market Value or Book Figures
3. Thin Capital Indicative of Equity but Not Conclusive
E. Availability of Independent (Non-Shareholder) Sources of Credit
F. Advances to Failing Business
1. Shareholder-Investors
2. Third-Party Investors
G. Existence of a Sinking Fund
H. Subordination to Other Debts
I. Source of Payments — Whether Principal and Interest Is Payable from All Assets or Only from Earnings
1. Practical Necessity of Reasonably Anticipated Cash Flow or Liquid Assets
2. Questioning of “Source of Payments” as an Anomalous Debt-Equity Factor
J. Security for Advances; Guarantees
1. Security Interest
2. Guarantees
a. Guarantees Generally Indicative of Debt
b. Guarantee Recast as Loan to Guarantor, Followed by Capital Contribution to Borrower
c. Treatment of Guarantor's Loss — Santa Anita and Reg. §1.166-9
K. Fixed Maturity Date
1. Right to Payment on Prescribed Date
2. Payment Tied to Occurrence of Specified Event
3. Demand Notes
4. Open Account and Revolving-Credit Advances
5. “Unreasonably” Long Maturity Date
6. Issuer's Right to Redeem Prior to Maturity
L. Right to Enforce Payment Upon Default
M. Repayment History — Whether Debtor Made Timely Repayment
N. Holder's Potential Upside (“Participating Debt”)
1. Equity Kicker
2. Convertible Debt
3. Package of Debt and Stock
O. Identity (Proportionality) of Interest Between Equity Owners and Holders of Instrument in Question
1. “Equity” Implications of Identity of Interest
2. Increased Scrutiny of “Debt”
3. Reduced Significance for Form and Formal Indicia
4. Family Ownership
5. Sole Shareholder
6. Brother-Sister Companies
7. “Debt” Implications of Lack of Identity of Interest
8. Identity of Interest and Stapling of Stock and Debt
P. Participation in Management
1. Increased Participation in Management as a Result of the Advance
2. Voting Rights in Event of Default or Breach of Covenant
3. Voting Rights in Absence of Default or Breach of Covenant
Q. Use of Contributed Funds to Purchase Capital Assets
R. The Parties’ Intent
1. Weight Given “Intent” Varies
2. Determining “Intent”
a. General Rule — Look Primarily to Objective Indicators
b. Objective Indicators Ambiguous or in Dispute
3. A.R. Lantz Co.’s Focus on Subjective Factors — An Outlier
4. Summary of Key General Rules on “Parties’ Intent”
S. Complexity, Tax Avoidance, and Marketed Tax-Avoidance Proposals
T. Partnership as Issuer of Debt/Equity Instrument
1. Debt-Equity Classification for Business Partnerships
2. Debt-Equity Classification for Partnerships Perceived by IRS as Aggressively Tax-Motivated
a. Significance of Equity Interest in Partnership
b. The Four Castle Harbour Cases — Determining “Equity” by Traditional Factors
(1) Continuation of “Partnership” in Castle Harbour Cases Despite GECC Subsidiaries Being Under Common Control
(2) Effect of the Check-the-Box Regulations on the Castle Harbour Cases
c. Pritired 1 LLC v. United States
(1) In General
(2) Detailed Mechanics of Pritired Transaction
(3) Taxpayer Argument
(4) Pritired Holding
U. Substance, Form, and Intercompany Arrangements
V. Tax-Aggressive Debt-Equity Transactions — Practical Application
1. Disclosure
2. Advance Preparation of Supporting Brief
3. Impartial Outside Counsel
4. Exit Plan
W. Hybrid Securities — Prospects and Obstacles
1. U.S. Hybrids
2. Equity-Linked “PIK” Debt — Debt Payable in Equity — §163(l)
3. Hybrid Securities and International Tax Arbitrage
4. Derivatives and Debt — Merck Case
a. Derivative vs. Debt Classification
b. Bifurcation of Notional Principal Contracts with Nonperiodic Payments
X. Preferred Stock
V. Consequences of Classification as Debt or Equity
Introductory Material
A. Interest Expense Deduction
1. Debt-Financed Investment
a. Investment in Equipment
b. Investment in Assets as a Whole
2. Other Tax Considerations
a. Marginal Tax Rates on Individual's Investment Income from Debt and Equity
b. Tax on Net Investment Income
c. Pease Provision, PEP and Payroll/Self-Employment Taxes
3. Economic Implications of Interest Expense Deduction
4. Original Issue Discount, Bond Premium, and Related Concepts
5. Limitations on the Interest Expense Deduction
a. Pre-2018 Limitations
b. Overall Limitation on the Deduction of Business Interest Expense (§163(j))
(1) Computation of the Limit on Deductibility
(2) Exceptions to Application of Overall Limitation
(a) Floor Plan Financing
(b) Certain Small Businesses
(c) Trade or Business of Performing Services as an Employee
(d) Electing Real Property Trade or Business
(e) Electing Farming Business
(f) Certain Public Regulated Utilities
B. Loans; Return of Investment
1. Loans — Treatment of Borrower
2. Return of Investment — Treatment of Lender vs. Treatment of Shareholder
C. Treatment of Losses on Debt and Equity
1. Debt Not Embodied in a “Security” Under §165(g); Shares of Stock
2. Worthless Securities Under §165(g) — General Rule
3. Worthless Securities Under §165(g)(3)
4. Summary
D. Dividends Received Deduction
1. DRD Holding Period
2. Debt-Financed Portfolio Stock
3. Tax Rates for Dividend Versus Interest Income
E. Foreign Tax Credit
1. Direct Foreign Tax Credit (FTC) — §901
2. Indirect (Deemed-Paid) Foreign Tax Credit — Former §902 (Repealed)
a. Hewlett-Packard Co. v. Commissioner
b. Non-FTC Business Transactions Where IRS Upheld Equity Character of Preferred Stock Comparable to Hewlett-Packard Preferred Stock
F. Transfer of Equity in Nonrecognition Transactions
1. Transfer of Appreciated Property to Corporation for Stock
2. Tax-Free Reorganizations
3. Stock for Same Class of Stock of Same Corporation
G. Other Consequences
1. Cancellation-of-Indebtedness Income
2. Costs of Issuance
3. Loans Bearing Below-Market Rates of Interest
4. Withholding Tax on Cross-Border Payments
VI. OECD and BEPS

Working Papers

Table of Worksheets
Worksheet 1 Funding a Failing Company that Needs Capital Assets
Worksheet 2 Master Agreement—Interaffiliate Medium-Term (2-Year) Loans
Worksheet 3 Intercompany Loan Agreement
Worksheet 4 Individual Shareholder Loan Agreement
Worksheet 5 Enactment of §279 and §385, as explained in the Senate Finance Committee Report to Accompany H.R. 13270 (Tax Reform Act of 1969), Pub. L. No. 91-172 (Nov. 21, 1969)
Worksheet 6 Enactment of §279 and §385(a) and §385(b), as explained in the Joint Committee Staff's General Explanation of the Tax Reform Act of 1969, H.R. 13270, Pub. L. No. 91-172 (Dec. 3, 1970)
Worksheet 7 Enactment of §385(c), as explained in the Conference Report to Accompany H.R. 776, Energy Policy Act of 1992 (Oct. 5, 1992)