[Federal Register Volume 82, Number 14 (Tuesday, January 24, 2017)]
[Rules and Regulations]
[Pages 8169-8170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00497]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9790]
RIN 1545-BN40


Treatment of Certain Interests in Corporations as Stock or 
Indebtedness; Correction.

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations; correction.

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SUMMARY: This document contains corrections to the final and temporary 
regulations (T.D. 9790) that were published in the Federal Register on 
Friday, October 21, 2016 (81 FR 72858). The regulations relate to the 
determination of whether an interest in a corporation is treated as 
stock or indebtedness for all purposes of the Internal Revenue Code.

DATES: These corrections are effective on January 23, 2017, and 
applicable October 21, 2016.

FOR FURTHER INFORMATION CONTACT: Austin M. Diamond-Jones, (202) 317-
5363, or Joshua G. Rabon, (202) 317-6938 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    The final and temporary regulations that are the subject of this 
correction are under sections 385 and 752 of the Internal Revenue Code.

Need for Correction

    As published, the final regulations contain errors which may prove 
to be misleading and need to be clarified.

Correction of Publication

    Accordingly, the final and temporary regulations (TD 9790) that are 
the subject of FR Doc. 2016-25105 are corrected as follows:
    1. On page 72877, in the preamble, second column, the fourth 
sentence of the second full paragraph, ``The Treasury Department and 
the IRS have considered this comment and determined that it would be 
appropriate to disregard subordination if the recharacterization 
occurred as a result of Sec.  1.385-3 and the final regulations reflect 
that decision'' is corrected to read ``The Treasury Department and the 
IRS have considered this comment and determined that it would be 
appropriate to disregard subordination if the recharacterization 
occurred as a result of Sec.  1.385-3 or if a recharacterized EGI

[[Page 8170]]

provides creditor's rights under commercial law and the final 
regulations reflect that decision''.
    2. On page 72906, second column, the last paragraph, ``The Treasury 
Department and the IRS have determined that the proposed regulations 
already properly provided for this result. As a result of an issuance 
described in the subsidiary stock issuance exception, the issuer (S2) 
becomes a successor to the transferor (S1) to the extent of the value 
of the expanded group stock acquired from the issuer, but only with 
respect to a debt instrument of the issuer issued during the per se 
period determined with respect to the issuance. If the issuer (S2) 
engages in another transaction described in the subsidiary stock 
issuance exception as a transferor, the acquisition of the stock of the 
expanded group member (the second issuer) would also not constitute an 
acquisition of expanded group stock by reason of the exception. 
Therefore, under a second application of the subsidiary stock issuance 
exception, the acquisition of the stock of S3 by the issuer (S2), a 
successor to the transferor (S1), is not treated as described in the 
second prong of the funding rule and thus cannot be treated as funded 
by a covered debt instrument issued by the transferor (S1). After the 
second issuance, the second issuer (S3) is a successor to both the 
first transferor (S1) and the first issuer (S2), which remains a 
successor to the first transferor (S1). The final and temporary 
regulations change the terminology, but do not change the result of the 
proposed regulations in this regard.'' is corrected to read, ``The 
Treasury Department and the IRS have determined that the proposed 
regulations already properly provided for this result in the situation 
where S2 controls S3 within the meaning of Sec.  1.385-3(c)(2)(i)(B). 
However, the final regulations further clarify the application of the 
subsidiary stock acquisition exception in other tiered transfer 
situations, for instance where S2 subsequently engages in a transaction 
with an expanded group member controlled by S1, but not controlled by 
S2. See Sec.  1.385-3(g)(24)(ii)(B).''.
    3. On page 72916, second column, the second sentence of the first 
full paragraph from the bottom, ``The comments cited leases treated as 
loans under section 467; receivables and payables resulting from 
correlative adjustments under section 482; production payments under 
section 636; coupon stripping transactions under section 1286; and debt 
(or instruments treated as debt) described in section 856(m)(2), 
860G(a)(1), or 1361(c)(5)'' is corrected to read ``The comments cited 
leases treated as loans under section 467; receivables and payables 
resulting from conforming adjustments under section 482; production 
payments under section 636; coupon stripping transactions under section 
1286; and debt (or instruments treated as debt) described in section 
856(m)(2), 860G(a)(1), or 1361(c)(5)''.
    4. On page 72916, third column, the first complete sentence of the 
incomplete paragraph at the top, ``The final and temporary regulations 
also provide an exception for debt instruments deemed to arise as a 
result of transfer pricing adjustments under section 482'' is corrected 
to read ``The final and temporary regulations also provide an exception 
for debt instruments that arise due to conforming adjustments under 
Sec.  1.482-1(g)(3)''.

Martin V. Franks,
Chief, Publications and Regulations Branch, Legal Processing Division, 
Associate Chief Counsel, Procedure and Administration.
[FR Doc. 2017-00497 Filed 1-23-17; 8:45 am]
 BILLING CODE 4830-01-P