Taxand USA presents an update on the IRS proposed regulations under Section 385.
On 25 July 2016, the IRS posted a revised version of a previously issued Chief Counsel Notice making it clear that any case in exam or litigation raising an issue under Internal Revenue Code Section 385 must be coordinated with the Associate Chief Counsel (ACC) offices.
This increased IRS focus on related-party indebtedness should serve as a call to taxpayers to review all existing related-party debt to identify, and remediate where possible, any exposures.
Even though pre-existing debt will receive protection from challenge under the proposed 385 regulations, this new IRS audit procedure raises the risk of recast under pre-existing case law.
Discover more: IRS steps up enforcement challenging related-party debt
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In addition to signalling that the IRS is preparing for the finalisation of the proposed regulations, the 25 July posting corroborates our expectation that there will be more challenges of debt versus equity at the exam level under pre-existing case law.
