The Internal Revenue Service (IRS) has a longstanding concern about taxpayers using debts rather than stock to gain a tax advantage: a deductible interest expense versus a non-deductible dividend distribution (especially for foreign-parent companies of U.S. corporations). This concern has resulted in multiple attempts to create regulations governing the rules for debt versus equity.

The IRS recently issued final regulations under Code Sec. 385 regarding distributions addressing the classification of certain related-party debt as indebtedness or stock, or in-part stock and in-part indebtedness. The final regulation addresses “the issuance of a covered debt instrument to a related person as part of a transaction or series of transactions that does not result in new investment in the operations of the issuer.” It does not change much from the proposed regulations.

Our international practice, Moore Doeren Mayhew, further discusses the debt versus equity issue, expanding on the new distribution regulations as well as the updated documentation regulations. For more information on this growing area of IRS review, read their full article here.