Treasury Releases Final Regulations Regarding the Treatment of Certain Interests in Corporations as Stock or Debt

May 2020


On May 13, 2020, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued final regulations under Section 385 dealing with the treatment of certain interests in corporations as stock or indebtedness. The final regulations generally affect corporations, including those that are partners of certain partnerships, when those corporations or partnerships issue purported indebtedness to related corporations or partnerships.


On October 21, 2016, Treasury published T.D. 9790 in the Federal Register (81 FR 72858), which included final and temporary regulations under Section 385. On the same date, Treasury also published a notice of proposed rulemaking (REG-130314-16) in the Federal Register (81 FR 72751) by cross-reference to the temporary regulations, which included §§1.385-3T and 1.385-4T. Technical corrections to the 2016 final regulations were published in the Federal Register (82 FR 8169) on January 24, 2017. The 2016 regulations address the classification of certain related party debt as stock or indebtedness (or as in part stock and in part indebtedness) for U.S. federal income tax purposes. For a more detailed summary discussion of the 2016 regulations, see our October 2016 tax alert. Also, see our November 2019 tax alert for a summary discussion of additional Section 385 guidance issued after the 2016 regulations were issued.
The final regulations adopt the 2016 proposed regulations as final without any substantive change. In addition, the final regulations withdraw the 2016 temporary regulations. For dates of applicability, see §§1.385-3(j)(1) and (k) and 1.385-4(g).