Section 385 Regulations on Related-Party Debt

The Section 385 regulations represent the IRS' approach to related-party debt. The regulations apply to indebtedness owed by domestic corporations to certain related parties that are members of the same expanded group. The regulations also include specific rules relating to (among other things) controlled partnerships and debt among members of the same U.S. consolidated group.

These rules apply to recharacterize certain covered debt instruments from debt to equity for U.S. tax purposes which may result in a number of potentially detrimental tax consequences. In particular, these regulations could result in the disallowance of interest deductions on the recharacterized "debt" instrument and could subject to interest payments or repayments of principal on debt to dividend withholding tax.

Listen as our experienced panel of expert advisers provides a critical analysis of the Section 385 regulations, offering detailed and practical tools to avoid serious tax consequences arising from the debt-to-equity reclassification rules.

1. Overview of Section 385 related-party rules
2. Entities and structures subject to recharacterization and potential tax consequences
3. Miscellaneous provisions and issues
   1. Impact of US consolidated groups
   2. Rules relating to controlled partnerships

The panel will review these and other critical questions:

• What is the purpose of the final regulations?
• What entities are subject to the regulations?
• What common transactions and instruments are subject to possible recharacterization?
• What structuring steps must tax counsel take to ensure a related-party debt instrument will be respected as such for U.S. tax purposes?

Learning Objectives

After completing this course, you will be able to:

• Identify the specific terms of the regulations under IRC Section 385 covering related-party debt instruments and structures
• Distinguish situations wherein the IRS may decide to bifurcate a purported debt instrument into part debt and part equity
• Ascertain the reporting requirements necessary to ensure that your otherwise qualifying debt instrument is treated as debt for U.S. federal income tax purposes
• Identify entities and common debt structures that may be subject to recharacterization under the new framework
• Recognize the potential tax implications and consequences of having a debt instrument recharacterized as equity for U.S. tax purposes, both for foreign and wholly domestic corporate groups
• Ascertain the documentation requirements for supporting treatment as a debt instrument as debt for tax purposes

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three year+ business or public firm experience at mid-level within the organization with a solid foundation of S corp structure and taxation, related-party debt, debt instruments, transactions between related parties; familiarity with debt bifurcations rules, debt reporting requirements potential transactions that could cause tax issues.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).