Section 385 was added to the Internal Revenue Code more than 40 years ago to provide Treasury with the authority to issue regulations to assist in determining whether an interest in a corporation is to be treated as stock or as debt for tax purposes.
Regulations under §385 that were issued in final form last October (T.D. 9790 (Oct. 21, 2016)) address the classification of related-party debt as debt or equity, and include extensive documentation requirements for certain obligations intended to be treated as debt for tax purposes. Numerous comments were received by the IRS regarding these regulations. A little more than a month ago, these regulations were identified by the IRS, in an interim report, as among eight significant regulation projects that impose undue financial burdens on U.S. taxpayers or add undue complexity (Notice 2017-38, 2017-30 IRB 147). More recently, the effective date of portions of the new §385 regulations that impose documentation requirements was postponed so as to apply only to interests issued or deemed issued on or after Jan. 1, 2019 (Notice 2017-36, 2017-33 IRB __).
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