For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
April 28 — Treasury Department officials know that a rule that could split up related-party financing instruments into equity and debt portions is all-encompassing,and are willing to be convinced it should be narrowed.
The rule is “written as a ‘could sweep in the world' scenario,” said Karl Walli, Treasury senior counsel (Financial Products). “If people want to make comments to us that say, ‘these seem to be the kind of instruments and situations that would most lend themselves to a bifurcation and maybe the others should not,' we will listen to those suggestions.”
But they want to know fast. The rules will become final “swiftly,” Brett York, an attorney-adviser in Treasury's international tax counsel office, said at an April 28 District of Columbia Bar event.
Treasury released proposed regulations (REG-108060-15) under tax code Section 385 earlier this month, exerting authority over related-party debt after concerns that some groups were treating instruments with equity-like characteristics as debt to take the interest deduction.
The rules allow Internal Revenue Service agents to bifurcate some instruments to treat them partially as debt and partially as equity. The rules also require companies to thoroughly document transactions involving debt (65 DTR GG-1, 4/5/16).
The rules are substance-driven, York said. If an interest has the sufficient equity qualities, the government can choose to turn on the bifurcation rule.
“Why we have a bifurcation rule is to deal with that odd situation where you have, say 49 percent equity, and it is treated as debt, and 51 percent equity is treated as all equity,” York said. “That we think is an uneconomic result and that's what we're trying to avoid with these rules.”
Craig Gibian, a principal at Deloitte LLP, asked if these rules were needed to give the courts authority to bifurcate if the IRS were to attack a related party debt-equity situation in litigation.
“That's certainly my reading of it and that's anecdotally what I've been told how it's played out,” Walli said.
Richard Larkins, a partners with EY LLP, asked why the rules just didn't use a Section 1275 and general tax principle definition of debt.
“We weren't smart enough to think about all the other things that were not debt in form but were debt,” Walli said, adding that the government plans to add a more robust definition in the future. “Frankly, it didn't seem critical to the message we were trying to send.”
Gibian said he views these rules as being about debt—in substance or form—that lead to an interest deduction. So, for example, a prepaid forward contract—where the government has acknowledged there is a time-value component and that it isn't debt in form or substance—shouldn't be at risk for bifurcation.
“My view is that these rules aren't touching those,” Gibian said.
Walli's response? “Interesting theory.”
To contact the reporter on this story: Laura Davison in Washington at email@example.com
To contact the editor responsible for this story: Brett Ferguson at firstname.lastname@example.org
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)