On October 13, 2016, the Treasury Department and the Internal Revenue Service issued final and temporary regulations under section 385 of the Internal Revenue Code. The final and temporary regulations recharacterize certain debt instruments as equity for all federal income tax purposes.

The final and temporary regulations narrow considerably the scope of the proposed regulations and will principally apply to debt issued by domestic corporations to foreign corporations that are part of the domestic corporation’s “expanded group” (generally corporations related by an 80% vote or value ownership test).