On October 13, 2016, the Internal Revenue Service and Treasury Department released much-anticipated final and temporary regulations (TD 9790) under Section 385. The regulations are expected to be effective on October 21, 2016. The final and temporary regulations:

— Treat as stock certain related-party interests that otherwise would be treated as indebtedness for federal tax purposes (the "Recharacterization Rule"); and

— Establish extensive documentation requirements with respect to related-party indebtedness (the "Documentation Rule").

The Recharacterization Rule generally applies to tax years ending on or after 90 days after the final regulations are published in the Federal Register (i.e., January 2017). It does not apply to debt instruments issued prior to April 5, 2016. The Documentation Rule generally applies to debt instruments issued on or after January 1, 2018.

The final and temporary regulations make substantial changes to the proposed regulations that were released in April 2016, including:

— Excluding foreign issuers. The final and temporary regulations apply only to domestic corporations (including certain partnerships and disregarded entities with domestic corporate owners).

— Excluding certain financial institutions. The Recharacterization Rule generally does not apply to debt instruments issued by certain regulated financial entities, financial groups and insurance companies.

— Eliminating the bifurcation rule. The final and temporary regulations do not include the "bifurcation rule" included in the proposed regulations, under which the IRS was permitted to characterize certain instruments within a "modified expanded group" as part debt and part stock.

— Delaying the Documentation Rule requirements. The Documentation Rule does not apply to debt instruments issued before January 1, 2018.

The final and temporary regulations contain numerous other changes to the proposed regulations including a widely-anticipated cash pooling exception, expanded exceptions for ordinary course transactions, exceptions for S-corporation and certain other entities subject to special treatment under the Internal Revenue Code such as REITS and RICs, and exceptions for statutory debt instruments such as regular REMIC interests and production payments.

A Tax Alert is forthcoming. EY has also planned webcasts on the regulations — look for invitations soon.