[Federal Register Volume 76, Number 237 (Friday, December 9, 2011)]
[Rules and Regulations]
[Pages 76895-76896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31672]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9562]
RIN 1545-BH77


Conduit Financing Arrangements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations relating to conduit 
financing arrangements. The final regulations apply to multiple-party 
financing arrangements that are effected through disregarded entities, 
and are necessary in order to determine which of those arrangements 
should be recharacterized as a conduit financing arrangement.

DATES: Effective Date: These regulations are effective on December 9, 
2011.
    Applicability Date: These regulations apply to payments made on or 
after December 9, 2011.

FOR FURTHER INFORMATION CONTACT: Quyen P. Huynh at (202) 622-3880 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On August 10, 1995, the Department of the Treasury (Treasury 
Department) and the Internal Revenue Service (IRS) published final 
regulations under Treas. Reg. Sec.  1.881-3 relating to conduit 
financing arrangements pursuant to the authority granted by section 
7701(l) of the Internal Revenue Code (the conduit financing 
regulations). See TD 8611 (1995-37 IRB 20; 60 FR 40997). On December 
22, 2008, the Treasury Department and the IRS published in the Federal 
Register (73 FR 246) a notice of proposed rulemaking (REG-113462-08) 
that proposed amending Sec.  1.881-3(a)(2)(i)(C) of the conduit 
financing regulations to treat an entity disregarded as an entity 
separate from its owner for U.S. tax purposes as a person for purposes 
of determining whether a conduit financing arrangement exists. The 
proposed regulations were proposed to be effective as of the date final 
regulations are published in the Federal Register. In addition, the 
preamble to the proposed regulations requested comments on whether 
``hybrid instruments'' (instruments treated as debt for foreign law 
purposes and equity for U.S. purposes) should constitute per se 
``financing transactions'' under Sec.  1.881-3(a)(2)(ii)(A) and part of 
a ``financing arrangement'' within the meaning of Sec.  1.881-
3(a)(2)(i)(A), or whether, at a minimum, certain hybrid instruments 
should be so treated, depending on specific factors or criteria.
    Only one comment letter responding to the notice of proposed 
rulemaking was received. No public hearing was requested or held. After 
consideration of the comment, this Treasury decision adopts the 
proposed regulations with minor edits to Example 3 and to clarify that 
the effective date of the final regulations also applies to new Example 
3.

Explanation and Summary of Comment

    The comment supported the proposed regulations and their 
interpretation of the term ``person'' to include a business entity that 
is disregarded as an entity separate from its single member owner under 
Sec.  301.7701-1 through Sec.  301.7701-3. The comment stated that to 
disregard an entity that is ``regarded'' for purposes of claiming 
treaty benefits would be inconsistent with the policy and purpose of 
the anti-conduit financing regulations.
    As relates to hybrid instruments, the comment did not support 
either approach raised in the preamble to the proposed regulations, 
expressing both policy and administrative concerns with

[[Page 76896]]

each. The comment stated that any specific abuses that the Treasury 
Department and the IRS were concerned about could be better addressed 
by a more targeted rule that described the specific transactions and 
limited the application of the regulations to those transactions. In 
light of the wide array of considerations raised, the Treasury 
Department and the IRS have decided to continue to study the area and 
not to provide any specific rules on hybrid instruments as part of this 
regulation package. Accordingly, these regulations are finalized 
without change, except to clarify that the effective date of the final 
regulations also applies to new Example 3 and to make minor edits to 
Example 3. The Treasury Department and the IRS continue to solicit 
comments on the treatment of hybrid instruments in financing 
transactions.
    No inference should be drawn from any provision of these final 
regulations as to the treatment of financing transactions entered into 
with disregarded entities before the effective date of these final 
regulations or involving hybrid instruments.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that this regulation will not have a significant economic 
impact on a substantial number of small entities. Accordingly, a 
regulatory flexibility analysis is not required. Pursuant to section 
7805(f) of the Internal Revenue Code, the notice of proposed rulemaking 
preceding this regulation was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these regulations is Quyen P. Huynh of the 
Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and the Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.881-3 is amended by:
0
1. Removing the language ``district director'' throughout this section 
and adding ``director of field operations'' in its place.
0
2. Removing the language ``Sec.  1.1441-3(j)'' throughout this section 
and adding ``Sec.  1.1441-3(g)'' in its place.
0
3. Removing the language ``Sec.  1.1441-7(d)'' throughout this section 
and adding ``Sec.  1.1441-7(f)'' in its place.
0
4. In the last sentence of paragraph (a)(3)(ii)(B), removing the second 
``financed'' and adding ``financing'' in its place.
0
5. Removing the parenthetical language ``(or a similar interest in a 
partnership or trust)'' in paragraphs (a)(2)(ii)(A)(2) and 
(a)(2)(ii)(B)(1) and adding ``(or a similar interest in a partnership, 
trust, or other person)'' in its place.
0
6. Adding a new paragraph (a)(2)(i)(C).
0
7. In paragraph (e), redesignating Examples 3, 4, 5, 6, 7, 8, 9, 10, 
11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, and 25 as 
Examples 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 
21, 22, 23, 24, 25, and 26, respectively.
0
8. Adding a new Example 3 in paragraph (e).
0
9. Revising the paragraph heading and adding a new sentence at the end 
of paragraph (f).
    The revisions and additions read as follows:


Sec.  1.881-3  Conduit financing arrangements.

* * * * *
    (a) * * *
    (2) * * *
    (i) * * *
    (C) Treatment of disregarded entities. For purposes of this 
section, the term person includes a business entity that is disregarded 
as an entity separate from its single member owner under Sec.  
301.7701-1 through Sec.  301.7701-3.
* * * * *
    (e) Examples. * * *

    Example 3. Participation of a disregarded intermediate entity. 
The facts are the same as in Example 2, except that FS is an entity 
that is disregarded as an entity separate from its owner, FP, under 
Sec.  301.7701-3. Under paragraph (a)(2)(i)(C) of this section, FS 
is a person and, therefore, may itself be an intermediate entity 
that is linked by financing transactions to other persons in a 
financing arrangement. The DS note held by FS and the FS note held 
by FP are financing transactions within the meaning of paragraph 
(a)(2)(ii) of this section, and together constitute a financing 
arrangement within the meaning of paragraph (a)(2)(i) of this 
section.
* * * * *

    (f) Effective/applicability date. * * * Paragraph (a)(2)(i)(C) and 
Example 3 of paragraph (e) of this section apply to payments made on or 
after December 9, 2011.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: November 29, 2011.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-31672 Filed 12-8-11; 8:45 am]
BILLING CODE 4830-01-P