Presentation delivered by Camille Evans, International Tax Director, Eastman Chemical Company and Tasheaya Warren Ellison, Senior Tax Attorney – Tax Dispute Resolution, Shell Oil Company at the marcus evans Tax Officers Summit 2016 in FL.

1. Section 385
Proposed Regulations
on Related Party Debt
Tax Summit – Sept. 26, 2016
Presenters:
Camille Evans – Eastman Chemical Company
&
Tasheaya Ellison – Shell Oil Company

2. AGENDA
 Background of Section 385
 Stated Purpose for Proposed 385 Regulations
 Broad Application and Proposed Effective/Applicability Date
 General Provisions & Some Exceptions
 Documentation and Maintenance Requirements
 Some Key Provisions
 What Happens When Debt Turns to Equity?
 Unknowns, Issues and What’s Next?

3. Section 385
Section 385 provides the Secretary is authorized to
prescribe such regulations as may be necessary or
appropriate to determine whether an interest in a
corporation is to be treated for purposes of this title as
stock or indebtedness (or as in part stock and in part
indebtedness.

4. Section 385 Overview
Section 385 Background Information:
• Original enactment 1969
• 1989 and 1992 Amendments
• 1992 Amendments
• Issuance and Withdrawal of 1980 regulations
• Case Law

5. Stated Purpose for Proposed Regulations
 Section 385 Proposed Regulations included in Inversion
Guidance
 Address whether an interest in a related corporation is
treated as stock or indebtedness, or as in part stock or in
part indebtedness, for purposes of the Code.
 Regulations respond to enhanced incentives for related
parties to engage in excessive cross border debt.
 Lack of Regulations under Section 385
• Interests in corporation treated as indebtedness or equity in part
• Documentation of initial characterization of interest

6. BroadApplicationof the ProposedRegulations
 Applicable to related party transactions between
member of an “expanded Group”
 “Expanded Group” includes foreign entities, tax
exempts and corporations held indirectly through
partnerships.
 Not applicable to interest and transactions amongst
members of a consolidated group.

7. BroadApplicationof the ProposedRegulations
Applicable only to “large” taxpayer groups
• Member of expanded group is publicly
traded
• Expanded groups has financial assets
exceeding $100 million (as reported on
financial statements), or
• Expanded groups total annual revenue
exceed $50 million (as reported on financial
reports)

8. ProposedEffective/ApplicabilityDates
 The proposed regulations would be effective when issued
as finalized regulations (including documentation
requirements)
 The proposed regulations would be applicable to debt
issued on or after April 4, 2016.
• 90 day transition period after the regulations are finalized for
recharacterization of debt as stock.

9. General Provisions& SomeExceptions
 Recharacterizing as stock certain related party interest that
would be treated as indebtedness for federal tax purposes
 The proposed regulations are generally applicable to the
following types of related-party transactions :
• Transaction under the General Rules
 Certain distributions of debt instruments to shareholders
 Loans incurred to acquire related group stock (unless exempt exchange
 Loans incurred in connection with certain asset reorganizations
• Funding Rule: Expanded group debt issued with a principle purpose of
funding a transaction described above.
 Some Exceptions
• Current E&P and Threshold Exceptions

10. Documentation
 Timely documentation and final analysis that demonstrates
intent to create debtor-creditor relationship with respect to a
bona fide indebtedness .
 Documentation Requirement (4 key components)
• Legally binding obligation to pay the debt
• Creditor’s right to enforce the obligation
• Reasonable Expectation of repayment
• Relationship during the life of the interest that is consistent with
arm’s- length relationship between unrelated creditors and debtors

11. Documentation Maintenance
 Maintenance of documentation for all taxable years the
issuance is outstanding and until the period of limitations
expires
 Documentation is required, but not determinative of
characterization of the issuance
 Lacking details on the manner in which records are to be kept
 Reasonable Cause Exception

12. Some Key Provisions
 No affirmative use of the proposed regulations by taxpayers
 Anti-Abuse Rule – Debt instrument issued with principal
purpose of avoiding the proposed regulations
 Coordination Rule – Coordinating between the General Rules
and Funding Rules

13. What Happens When Debt Turns to
Equity?
 Indebtedness is deemed exchanged in whole or in part for
stock
 Issuer deemed to retire same portion of the indebtedness
that is recharacterized as stock
 Determination of the type and terms of the stock
 Impact on federal tax benefits claimed with respect to the
indebtedness

14. Many Unknowns and Issues
 Cash Pools
 Related party payments and timing issues
 Implication of significant modifications to debt
 Implications of the recharacterization to equity
 Funding Rule – Non-Rebuttable presumption during 72-month
period
 Draconian Implications

15. What’s Next ?
When will the final regulations be issued ??

16. Questions??