Hatch Statement on Treasury’s Final Section 385 Debt-Equity Regulations

The U.S. Treasury Department issued final regulations regarding debt and equity rules under Internal Revenue Code section 385.  In response, Senate Finance Committee Chairman Orrin Hatch (R-Utah) issued the following statement:

“Since the day the regulations were first proposed, the Treasury Department has heard pointed concerns from both Republicans and Democrats, and from numerous American job creators and a wide variety of sectors across the U.S. economy that proceeding with the rules would be ill-advised and lead to unintended consequences for America’s innovators.   While the final regulations will need to be scrutinized closely, it is immensely concerning that, despite stark bipartisan concern, the Obama Administration moved forward with completing rules that could jeopardize American businesses and the economy here at home. 

“While Treasury has indicated they have attempted to address some of the major concerns such as cash pooling transactions, foreign subsidiary-to-foreign-subsidiary transactions, and Subchapter S Corporation financing, among others, the devil’s in the details. And, we’ll now have to carefully examine whether the regulations will make the policy less intrusive on some categories of legitimate business transactions. 

“From the outset, my preference has been for Treasury to re-propose the regulations in their entirety. That they failed to heed bipartisan warnings is unfortunate, but comes as little surprise.  Today’s issuance of final regulations continues the administration’s pattern of creating rules unilaterally, forgoing views from Congress, large and small businesses alike, and in this case, ignoring input from members of its own party.

“Sadly, the administration’s refusal to work in good faith with Congress to reform our outdated and uncompetitive tax code year after year has now become its lasting economic legacy.  In the absence of its leadership, we have seen an uptick in inversions and foreign acquisitions as our job creators are forced to compete on a global scale while being hamstrung by the developed world’s highest corporate tax rate here at home.

“Regulations, rules and unilateral fixes will not change the fact that we live in a global economy, and no regulatory wall can be built high enough to keep businesses in the United States when there are strategic options elsewhere.  Only a tax code that is internationally competitive and entices businesses big and small to stay, or to relocate to our country, will give our economy, our workers and our citizens the right environment they need to grow.”  

ADDITIONAL BACKGROUND:

Congress enacted section 385 in 1969, authorizing the Treasury Secretary to write regulations to determine whether an investment in a corporation is more properly characterized as debt or as equity.  Although over the intervening decades there have been attempts to exercise that authority, no such attempts ever resulted in final regulations taking effect.  Section 385 has effectively been a dormant provision of the tax code for the last 47 years.

Today’s regulations are purported to reduce earnings stripping by re-characterizing certain debt as equity.  Hatch has spearheaded efforts in Congress to ensure legitimate business transactions, having nothing to do with tax avoidance or earnings stripping, are not harmed by the new regulations. 

In July, Hatch, along with House Ways and Means Committee Chairman Kevin Brady (R-Texas) convened a Joint Committee on Taxation meeting to give members of each tax-writing committee an opportunity to examine the rules with Treasury officials. Hatch has long expressed concern over the policy and regulatory process of the Treasury Department’s work on the regulations, having called on the department to re-propose the regulations in August and pressing for analysis on their economic impact.