Question

Locate and read Section 385 of the Internal Revenue Code and develop a comprehensive list of factors that indicate legitimate debt. What is the status of the regulations that are to expand on this Code section?

Answer 1

Internal Revenue Code IRC 385 :

The IRC 385 relates to treatment of certain interests in corporation as stock or indebted  to be treated for the purpose of this title the regulation under this section describe various factors which are to be taken in consideration in determining in respect to particular relation that debtor-creditor relationship assist or there is any relationship assists between corporation and the shareholder. These are the factors to be consider under this code 385(b).

IRC 385(b)(1) :

This indicate that there is a written unconditional promise to pay on demand or there is any particular date for some certain money in return for the adequate consideration in order to pay fixed rate of interest either in money or money's worth.

IRC 385(b)(2) :

Whether there is any preference over any indebted of the corporation indicate under this code.

IRC 385(b)(3) :

This code particular to analysis the ratio od debt to the equity of the corporation and analysis are made accordingly.

IRC 385(b)(4) :

This indicate whether there is convertibility into the stock of the corporation.

IRC 385(b)(5) :

This particular code indicate the relationship between holding of the stock in the corporation together with holding of the interest is consider.

Regulation :

The new regulation contain various important terms but not more the concept of expanded group . An expanded group is one or more chain of corporation which are connected through stock ownership with common corporate parent possessing stock ownership which is either

-80% of the total outstanding vote or

-80% of total value of each corporation in the chain

As per section 1.385-2(d)(2)(ii) contains that a transition rule provides the documentation apply to debt instrument issued on or after January 1, 2018 .

As per the recent rule contain in the regulation section 1.385-3 indicates regard re-caste debt resulting from certain transaction which are to be between members of expanded group.

The re-caste rule are separated into two primary set of rules

-The general rule

-Funding rule

There is an high level of over view of the new regulation and rules are very complex and are not to be taken lightly. There are many issues arises under the regulation when they are entering into related party debt transactions.