Daily Tax Update - October 13, 2016: Treasury Releases Final and Temporary Earnings Stripping Regulations

Treasury Releases Final and Temporary Earnings Stripping Regulations:  The final and temporary regulations under section 385 were released late this afternoon.  According to the Treasury Department fact sheet accompanying the release, the changes to the regulations include the following areas:

  • Exemption for cash pools and short-term loans.  According to the accompanying materials, the regulations provide a broad exemption for cash pools and other loans that are short-term in both form and substance, and therefore do not pose a significant earnings stripping risk.
  • Limited exemptions for certain entities where the risk of earnings stripping is low, including: transactions between foreign subsidiaries of US multinational corporations; transactions between S-corporations; transactions between regulated financial companies; transactions between regulated insurance companies; and transactions between mutual funds (RICs) and real estate investment trusts (REITs) other than those owned by affiliated groups of companies.
  • Expanded exceptions for ordinary business transactions, including an expanded earnings and profits exception, allowing netting of distributions against capital contributions, and an expanded exception for ordinary course transactions.
  • Easing documentation requirements, including extending the deadline for required documentation.

We are reviewing the regulations and will be providing an in-depth analysis soon.  In the meantime, please feel free to contact us if you have any specific questions or would like a focused analysis.

IRS Issues Rules for Disaster Loss Deductions:  Today, the IRS issued final and temporary regulations that extend the due date by which a taxpayer may elect under section 165(i) to treat a loss attributable to a federally declared disaster as sustained in the prior tax year.  These regulations give an additional six months after the due date of the taxpayer’s return for making this election.  These temporary regulations have been made effective immediately because the government expects a significant number of casualty losses due to recent flooding events.  In addition, Revenue Procedure 2016-53 was issued today specifying how to make this election and how to take consistent return positions.