On Friday, September 21, 2018, the Treasury Department issued proposed regulations removing the portion of the final Section 385 regulations dealing with the documentation requirements that must be satisfied for related-party interests to be treated as debt (versus equity) for federal tax purposes. These regulations, issued in 2016, primarily: (i) addressed documentation to be prepared, maintained and provided for use in the debt versus equity analysis and (ii) established certain presumptions and factors to be considered in this analysis. As issued, they applied to interests issued or deemed issued on or after January 1, 2018. In July 2017, the effective date was delayed 12 months to 2019.

The documentation regulations issued under Section 385 had been identified in Notice 2017-38 as one of eight regulations that either imposed an undue financial burden on taxpayers or added excessive complexity to the tax system. The proposed regulations would remove Reg. § 1.385-2 in its entirety and make conforming changes to other regulations that cite Reg. § 1.385-2. The Treasury Department may issue new regulations in the future but such regulations would be simplified and streamlined.

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