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NRCA issues a statement about proposed tax regulations designed to curtail corporate inversions

Oct. 20, 2016

On Oct. 13, the Department of Treasury released final regulations under Section 385 of the tax code. The department had issued proposed regulations on April 4, and the proposed regulations designed to curtail corporate inversions were of great concern to NRCA.

NRCA strongly opposed the proposed regulations and undertook numerous efforts to have its members' concerns addressed in the final regulations. NRCA's efforts included working with allied organizations to file detailed comments outlining how the proposed regulations would harm employers; sending a grassroots action alert to all members; and meeting with numerous members of Congress to develop bipartisan opposition within Congress to the proposed regulations.

NRCA is pleased to report the final regulations include nearly all the changes requested and virtually no NRCA members will be affected by the final regulations.

The proposed regulations targeted corporate inversions (where U.S. companies move their headquarters overseas), but many NRCA members organized as pass-through businesses would also have been adversely affected. The proposed regulations would have allowed the IRS to reclassify certain related-party debt as equity (stock) for federal income tax purposes, possibly increasing tax burdens on many businesses now classified as S corporations.

NRCA's major concern was that by reclassifying certain debt as equity, a second class of stock would be created. S corporations only are allowed to have one class of stock and, therefore, would lose their "S" status and be forced to be taxed as C corporations. The final rule exempts transactions between pass-through businesses.

Another concern was the proposed rule restricted the use of cash-pooling arrangements and short-term intercompany loans that many NRCA members use to finance their businesses. The final rule provides a broad exemption for cash pools and short-term loans.

There was concern regarding the effects on stock acquisitions associated with employee compensation plans. The final rule provides an exemption for acquisitions of such stock.

NRCA also was concerned about the paperwork burden associated with disclosing loans to the government within 30 days as required by the proposed rule. That has been pushed back to the date when a company files its tax returns, and the documentation rules don't take effect until January 2018. The rule calls for companies to report any qualifying transactions as of April 4. NRCA had asked the effective date be prospective of when the final rule was issued, but the Treasury Department will retroactively capture some transactions of those taxpayers who are affected by the changes.

Again, the final regulation addresses virtually all NRCA member concerns and, therefore, this is a significant victory for NRCA. NRCA is pleased the Treasury Departmenmt listened to NRCA's concerns and greatly appreciates the support of numerous members of Congress from both parties who sent letters requesting the appropriate changes to the proposed regulations.

More information, including a copy of the final regulations, may be found at the following links:


If you have any questions, please contact Andrew Felz, NRCA's manager of federal affairs, at (800) 338-5765 or afelz@nrca.net.

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