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Mixed News on the Section 385 Front and Two Massachusetts Rulings Affecting Financial Institutions  


Author:  John P. Barrie.


Source: Volume 30, Number 02, Winter 2017 , pp.59-63(5)




Journal of Taxation and Regulation of Financial Institutions

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Abstract: 

This article discusses final and temporary Section 385 regulations, with a focus on their application to financial institutions and state and local tax (SALT) implications. Of particular note are the continued documentation requirements with a delayed effective date (for covered related party debt issued after December 31, 2017) and the broad exclusion of many financial institutions from the transactional rules which, when applicable, convert related party debt to equity on a per se basis.  The article also discusses two recent decisions in Massachusetts: the National Grid decision, finding a purported debt instrument to be treated as equity under common law principles, and the First Marblehead Corp decision upholding Massachusetts’ sourcing of student loans in apportioning income to the state.

Keywords: Section 385 regulations, Related party debt, State and local/385 rules, Debt-equity tax classification

Affiliations:  1: Bryan Cave LLP.

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