The Treasury Department and the IRS have issued final regulations (TD 9897) that adopt without substantive change the 2016 proposed regulations under IRC Section 385. The final regulations address the treatment of qualified short-term debt instruments, controlled partnerships, and consolidated groups under the so-called Distribution Regulations; these regulations recharacterize a debt instrument issued by a domestic corporation as stock if the instrument is issued to a member of the domestic corporation's expanded group in a distribution, in exchange for related-party stock, or in exchange for property in certain asset reorganizations. Although the 2016 proposed regulations cross-referenced temporary regulations that expired on October 13, 2019, taxpayers were permitted to rely on the 2016 proposed rules if they applied the rules consistently and in their entirety (see Tax Alert 2019-1962).

Consistent with recent guidance, the Treasury Department and the IRS also reiterated that they continue to study the appropriate approach to making the Distribution Regulations more streamlined and targeted through future proposed regulations.

A Tax Alert on the final regulations is forthcoming.