[Federal Register Volume 81, Number 204 (Friday, October 21, 2016)]
[Proposed Rules]
[Pages 72751-72753]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25104]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-130314-16]
RIN 1545-BN68


Treatment of Certain Interests in Corporations as Stock or 
Indebtedness

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulation.

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SUMMARY: The Department of the Treasury (Treasury Department) and the 
IRS are issuing temporary regulations that affect corporations and 
partnerships that issue purported indebtedness to related corporations 
or partnerships in the Rules and Regulations section of this issue of 
the Federal Register. The temporary regulations provide rules 
addressing the treatment of instruments issued by partnerships, 
consolidated groups, and certain transactions involving qualified cash-
management arrangements. The text of the temporary regulations also 
serves as the text of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by January 19, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-130314-16), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20224. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
130314-16), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224, or sent electronically via the 
Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-
130314-16).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Austin M. Diamond-Jones, (202) 317-5363, or Joshua G. Rabon, (202) 317-
6937; concerning submissions of comments or requests for a public 
hearing, Regina Johnson, (202) 317-5177 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    The temporary regulations in the Rules and Regulations section of 
this issue of the Federal Register contain rules under sections 385 and 
752 of the Internal Revenue Code (Code) that establish requirements 
that ordinarily must be satisfied in order for certain related-party 
interests in a corporation to be treated as indebtedness for federal 
tax purposes. The text of the temporary regulations also serves as the 
text of the proposed regulations herein. The preamble to the temporary 
regulations explains the temporary regulations and the corresponding 
proposed regulations.

[[Page 72752]]

Special Analyses

I. Regulatory Planning and Review

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. 
Related rules in the final and temporary regulations under section 385 
in TD 9790, published in the Rules and Regulations section of this 
issue of the Federal Register, have been designated a ``significant 
regulatory action'' under section 3(f) of Executive Order 12866. For a 
discussion of the economic impact of those final and temporary 
regulations, as well as these proposed regulations, please see the 
Regulatory Assessment accompanying TD 9790, published in the Rules and 
Regulations section of this issue of the Federal Register.

II. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. Chapter 6), it 
is hereby certified that the final and temporary regulations in TD 
9790, published in the Rules and Regulations section of this issue of 
the Federal Register, and accordingly, these proposed regulations 
proposed by cross-reference to the temporary regulations, will not have 
a significant economic impact on a substantial number of small 
entities. Accordingly, a regulatory flexibility analysis is not 
required.
    To facilitate the federal tax analysis of an interest in a 
corporation, taxpayers are required under existing law to substantiate 
their classification of an interest as stock or indebtedness for 
federal tax purposes. Section 1.385-3 provides that certain interests 
in a corporation that are held by a member of the corporation's 
expanded group and that otherwise would be treated as indebtedness for 
federal tax purposes are treated as stock. Section 1.385-3T provides 
that for certain debt instruments issued by a controlled partnership, 
the holder is deemed to transfer all or a portion of the debt 
instrument to the partner or partners in the partnership in exchange 
for stock in the partner or partners. Section 1.385-4T provides rules 
regarding the application of Sec. Sec.  1.385-3 and 1.385-3T to members 
of a consolidated group. Sections 1.385-3 and 1.385-3T include multiple 
exceptions that limit their application. In particular, the threshold 
exception provides that the first $50 million of expanded group debt 
instruments that otherwise would be reclassified as stock or deemed to 
be transferred to a partner in a controlled partnership under Sec.  
1.385-3 or Sec.  1.385-3T will not be reclassified or deemed 
transferred under Sec.  1.385-3 or Sec.  1.385-3T. Although it is 
possible that the classification rules in Sec. Sec.  1.385-3, 1.385-3T, 
and 1.385-4T could have an effect on small entities, the threshold 
exception of the first $50 million of debt instruments otherwise 
subject to recharacterization or deemed transfer under Sec. Sec.  
1.385-3, 1.385-3T, and 1.385-4T makes it unlikely that a substantial 
number of small entities will be affected by Sec. Sec.  1.385-3T or 
1.385-4T.
    Pursuant to section 7805(f) of the Code, the final regulations in 
TD 9790, published in the Rules and Regulations section of this issue 
of the Federal Register, have been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business. Comments were received requesting that the 
monetary thresholds contained in proposed Sec. Sec.  1.385-2, 1.385-3, 
and 1.385-4 be increased in order to mitigate the impact on small 
businesses. These comments are addressed in Parts IV.B.1.d and V.E.4 of 
the Summary of Comments and Explanation of Revisions in the preamble of 
TD 9790, published in the Rules and Regulations section of this issue 
of the Federal Register. No comments were received concerning the 
economic impact on small entities from the Small Business 
Administration.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ``Addresses'' 
heading. Treasury and the IRS request comments on all aspects of the 
proposed rules. All comments will be available at www.regulations.gov 
or upon request. A public hearing will be scheduled if requested in 
writing by any person that timely submits electronic or written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal authors of these regulations are Austin M. Diamond-
Jones of the Office of Associate Chief Counsel (Corporate) and Joshua 
G. Rabon of the Office of Associate Chief Counsel (International). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

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

    Section 1.385-4 also issued under 26 U.S.C. 385 and 1502.

0
Par. 2. Section 1.385-3 is amended by:
0
1. Revising paragraph (b)(3)(vii).
0
2. Revising paragraph (d)(4).
0
3. Revising paragraph (f).
0
4. Revising paragraphs (g)(5)-(8), (15)-(17), and (22)-(23).
0
5. Revising Example 12 through Example 19 in paragraph (h)(3).
0
6. Adding paragraph (k).
    The revisions and additions read as follows:


Sec.  1.385-3  Transactions in which debt proceeds are distributed or 
that have a similar effect.

* * * * *
    (b) * * *
    (3) * * *
    (vii) [The text of the proposed amendment to Sec.  1.385-
3(b)(3)(vii) is the same as the text of Sec.  1.385-3T(b)(3)(vii) 
published elsewhere in this issue of the Federal Register.]
* * * * *
    (d) * * *
    (4) [The text of the proposed amendment to Sec.  1.385-3(d)(4) is 
the same as the text of Sec.  1.385-3T(d)(4) published elsewhere in 
this issue of the Federal Register.]
* * * * *
    (f) [The text of the proposed amendment to Sec.  1.385-3(f) is the 
same as the text of Sec.  1.385-3T(f) published elsewhere in this issue 
of the Federal Register.]
    (g) * * *
    (5) [The text of the proposed amendment to Sec.  1.385-3(g)(5) is 
the same as the text of Sec.  1.385-3T(g)(5) published elsewhere in 
this issue of the Federal Register.]
    (6) [The text of the proposed amendment to Sec.  1.385-3(g)(6) is 
the

[[Page 72753]]

same as the text of Sec.  1.385-3T(g)(6) published elsewhere in this 
issue of the Federal Register.]
    (7) [The text of the proposed amendment to Sec.  1.385-3(g)(7) is 
the same as the text of Sec.  1.385-3T(g)(7) published elsewhere in 
this issue of the Federal Register.]
    (8) [The text of the proposed amendment to Sec.  1.385-3(g)(8) is 
the same as the text of Sec.  1.385-3T(g)(8) published elsewhere in 
this issue of the Federal Register.]
* * * * *
    (15) [The text of the proposed amendment to Sec.  1.385-3(g)(15) is 
the same as the text of Sec.  1.385-3T(g)(15) published elsewhere in 
this issue of the Federal Register.]
    (16) [The text of the proposed amendment to Sec.  1.385-3(g)(16) is 
the same as the text of Sec.  1.385-3T(g)(16) published elsewhere in 
this issue of the Federal Register.]
    (17) [The text of the proposed amendment to Sec.  1.385-3(g)(16) is 
the same as the text of Sec.  1.385-3T(g)(17) published elsewhere in 
this issue of the Federal Register.]
* * * * *
    (22) [The text of the proposed amendment to Sec.  1.385-3(g)(22) is 
the same as the text of Sec.  1.385-3T(g)(22) published elsewhere in 
this issue of the Federal Register.]
    (23) [The text of the proposed amendment to Sec.  1.385-3(g)(23) is 
the same as the text of Sec.  1.385-3T(g)(23) published elsewhere in 
this issue of the Federal Register.]
* * * * *
    (h) * * *
    (3) * * *
    Example 12. [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 12 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 12 published elsewhere in this issue of the Federal 
Register.]
    Example 13. [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 13 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 13 published elsewhere in this issue of the Federal 
Register.]
    Example 14.  [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 14 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 14 published elsewhere in this issue of the Federal 
Register.]
    Example 15.  [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 15 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 15 published elsewhere in this issue of the Federal 
Register.]
    Example 16. [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 16 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 16 published elsewhere in this issue of the Federal 
Register.]
    Example 17.  [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 17 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 17 published elsewhere in this issue of the Federal 
Register.]
    Example 18. [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 18 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 18 published elsewhere in this issue of the Federal 
Register.]
    Example 19. [The text of the proposed amendment to Sec.  1.385-
3(h)(3), Example 19 is the same as the text of Sec.  1.385-3T(h)(3), 
Example 19 published elsewhere in this issue of the Federal 
Register.]
* * * * *
    (k) [The text of the proposed amendment to Sec.  1.385-3(k) is the 
same as the text of Sec.  1.385-3T(k) published elsewhere in this issue 
of the Federal Register.]
0
Par. 3. Section 1.385-4 is added to read as follows:


Sec.  1.385-4  Treatment of consolidated groups.

    [The text of proposed Sec.  1.385-4 is the same as the text of 
Sec.  1.385-4T published elsewhere in this issue of the Federal 
Register.]
0
Par. 4. Section 1.752-2 is amended by:
0
1. Revising paragraph (c)(3).
0
2. Revising paragraph (l)(4).
    The addition and revision read as follows


Sec.  1.752-2   Partner's share of recourse liabilities.

* * * * *
    (c) * * *
    (3) [The text of the proposed amendment to Sec.  1.752-2(c)(3) is 
the same as the text of Sec.  1.752-2T(c)(3) published elsewhere in 
this issue of the Federal Register.]
* * * * *
    (l) * * *
    (4) [The text of the proposed amendment to Sec.  1.752-2(l)(4) is 
the same as the text of Sec.  1.752-2T(l)(4) published elsewhere in 
this issue of the Federal Register.]

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-25104 Filed 10-13-16; 5:00 pm]
 BILLING CODE 4830-01-P