[Federal Register Volume 73, Number 246 (Monday, December 22, 2008)]
[Proposed Rules]
[Pages 78252-78254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30301]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-113462-08]
RIN 1545-BH77
Conduit Financing Arrangements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to
conduit financing arrangements issued under the authority granted by
section 7701(l) of the Internal Revenue Code (Code). The proposed
regulations apply to multiple-party financing arrangements that are
effected through disregarded entities, and are necessary in order to
determine which of those arrangements should be recharacterized under
section 7701(l) and Treas. Reg. Sec. 1.881-3.
DATES: Written or electronic comments and requests for a public
hearing must be received by March 23, 2009.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113462-08), Internal
Revenue Service, room 5205, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
113462-08), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC 20224 or sent electronically via the
Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-
113462-08).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Quyen Huynh at (202) 622-3880 or John H. Seibert at (202) 622-3860;
concerning submissions of comments, Oluwafunmilayo Taylor, at (202)
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 7701(l) of the Code authorizes the Secretary to prescribe
regulations recharacterizing any multiple-party financing transaction
as a transaction directly among any two or more of such parties where
the Secretary determines that such recharacterization is appropriate to
prevent the avoidance of any tax imposed by the Code. In Treasury
decision 8611 (1995-37 IRB 20; 60 FR 40997), published August 10, 1995,
the Treasury Department and the Internal Revenue Service (IRS) issued
implementing regulations under Treas. Reg. Sec. 1.881-3 relating to
conduit financing arrangements pursuant to the authority granted by
section 7701(l).
In general, Sec. 1.881-3 allows the IRS to disregard the
participation of one or more intermediate entities in a financing
arrangement where such entities are acting as conduit entities, and to
recharacterize the financing arrangement as a transaction directly
between the remaining parties to the financing arrangement for purposes
of imposing tax under sections 871, 881, 1441 and 1442 of the Code.
Section 1.881-3(a)(2)(i)(A) of the regulations defines a financing
arrangement to mean a series of financing transactions by which one
person (the financing entity) advances money or other property, or
grants rights to use property, and another person (the financed entity)
receives money or other property, or rights to use property, if the
advance and receipt are effected through one or more other persons
(intermediate entities). Except in cases to which Sec. 1.881-
3(a)(2)(i)(B) (special rule for related parties) applies, the
regulations apply only if financing transactions as defined in Sec.
1.881-3(a)(2)(ii) link the financing entity, each of the intermediate
entities, and the financed entity.
Since the publication of Sec. 1.881-3 on August 10, 1995, the
Treasury Department and IRS issued the so-called ``check-the-box''
regulations, under Sec. Sec. 301.7701-1 through 301.7701-3, effective
January 1, 1997 (TD 8697, 1997-1 CB 215; 61 FR 66854). Section
301.7701-3 provides, in part, that an entity that is not classified as
a corporation and that has a single owner may elect to be disregarded
as an entity separate from its owner (a disregarded entity).
The Treasury Department and IRS are aware that issues have arisen
regarding the proper treatment of disregarded entities under Sec.
1.881-3. These proposed regulations clarify that a disregarded entity
is a person for purposes of Sec. 1.881-3. Thus, transactions that a
disregarded entity enters into will be taken into account for purposes
of determining whether a financing arrangement exists.
The Treasury Department and IRS are continuing to study conduit
financing arrangements and may issue separate guidance to address the
treatment under Sec. 1.881-3 of certain hybrid instruments.
Specifically, the Treasury Department and IRS are studying transactions
where a financing entity advances cash or other property to an
intermediate entity in exchange for a hybrid instrument that is treated
as debt under the laws of the foreign jurisdiction where the
[[Page 78253]]
intermediate entity is resident and is not treated as debt for U.S.
federal tax purposes. The issue under consideration is whether such
instruments should constitute a financing transaction under Sec.
1.881-3(a)(2)(ii)(A) and part of a financing arrangement within the
meaning of Sec. 1.881-3(a)(2)(i)(A). No inference should be drawn from
the approaches described in this preamble regarding the treatment of
such instruments under current law, including judicial doctrines with
respect to conduit financing transactions.
One possible approach is to treat all transactions involving such
hybrid instruments between a financing entity and an intermediate
entity as financing transactions under Sec. 1.881-3(a)(2)(ii)(A).
Comments are requested on this approach, including whether and to what
extent a connection or relationship between the issuer and recipient of
the hybrid instrument (for example, an equity ownership percentage)
should be required in order to treat such instruments as financing
transactions.
Another possible approach is to add additional factors to consider
in determining when stock in a corporation (or other similar interest
in a partnership or trust) may constitute a financing transaction under
Sec. 1.881-3(a)(2)(ii)(B). The additional factors would focus on
whether, based on the facts and circumstances surrounding the stock (or
other similar interest in a partnership or trust), the financing entity
had sufficient legal rights to, or other practical assurances
regarding, the payment received by the intermediate entity to treat the
stock as a financing transaction. Some possible factors to indicate the
presence of a financing transaction might include:
(1) Intent of the parties to pay all or substantially all payments
received by the intermediate entity to the financing entity;
(2) History of payment of amounts received by the intermediate
entity to the financing entity; and
(3) Precedence of the obligees over other creditors regarding the
payment of interest and principal, currently or in bankruptcy.
Comments are requested concerning other possible approaches and any
additional factors that the Treasury Department and IRS should consider
in expanding the conduit financing regulations under Sec. 1.881-3.
Explanation of Provisions
Section 1.881-3(a)(2)(i)(C) of the proposed regulations provides
that for purposes of this section, the term person includes a business
entity that is disregarded as an entity separate from its single member
owner under Sec. Sec. 301.7701-1 through 301.7701-3. Because a
disregarded entity is a person, any transaction that it enters into
will be taken into account for purposes of determining whether a
conduit financing arrangement exists.
These proposed regulations also modify the parenthetical in Sec.
1.881-3(a)(2)(ii)(A)(2) and Sec. 1.881-3(a)(2)(ii)(B)(1). The proposed
regulations also correct a typographical error in Sec. 1.881-
3(a)(3)(ii)(B) of the final regulations and update titles and cross-
references in the final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It is hereby
certified that this regulation will not have a significant economic
impact on a substantial number of small entities. Accordingly, a
regulatory flexibility analysis is not required. Pursuant to section
7805(f) of the Internal Revenue Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. All comments will be available for public inspection and copying.
A public hearing will be scheduled if requested in writing by any
person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public hearing
will be published in the Federal Register.
Drafting Information
The principal author of these regulations is Paul J. Carlino,
Office of Associate Chief Counsel (International). However, other
personnel from the IRS and Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.881-3 is amended by:
1. Removing the language ``district director'' throughout this
section and adding ``director of field operations'' in its place.
2. Removing the language ``Sec. 1.1441-3(j)'' throughout this
section and adding ``Sec. 1.1441-3(g)'' in its place.
3. Removing the language ``Sec. 1.1441-7(d)'' throughout this
section and adding ``Sec. 1.1441-7(f)'' in its place.
4. In the last sentence of paragraph (a)(3)(ii)(B), removing the
second ``financed'' and adding ``financing'' in its place.
5. Removing the parenthetical language ``(or a similar interest in
a partnership or trust)'' in paragraphs (a)(2)(ii)(A)(2) and
(a)(2)(ii)(B)(1) and adding ``(or a similar interest in a partnership,
trust, or other person)'' in its place.
6. Adding a new paragraph (a)(2)(i)(C).
7. In paragraph (e), redesignating Examples 3, 4, 5, 6, 7, 8, 9,
10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, and 25 as
Examples 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20,
21, 22, 23, 24, 25, and 26, respectively.
8. Adding a new Example 3 in paragraph (e).
9. Adding a new sentence at the end of paragraph (f).
The additions read as follows:
Sec. 1.881-3 Conduit financing arrangements.
* * * * *
(a) * * *
(2) * * *
(i) * * *
(C) Treatment of disregarded entities. For purposes of this
section, the term person includes a business entity that is disregarded
as an entity separate from its single member owner under Sec. Sec.
301.7701-1 through 301.7701-3.
* * * * *
(e) Examples. * * *
Example 3. Participation of a disregarded intermediate entity.
(i) The facts are the same as in Example 2, except that, in
addition, FS is an entity that is disregarded as an entity separate
from its owner, FP, under Sec. 301.7701-3. Under paragraph
(a)(2)(i)(C) of this section, FS is a person and therefore may
[[Page 78254]]
itself be an intermediate entity that is linked by financing
transactions to other persons in a financing arrangement. The DS
note held by FS and the FS note held by FP are financing
transactions within the meaning of paragraph (a)(2)(ii) of this
section, and together constitute a financing arrangement within the
meaning of paragraph (a)(2)(i) of this section.
* * * * *
(f) Effective/applicability date. * * * Paragraph (a)(2)(i)(C) of
this section is effective for payments made on or after the date of
publication of the Treasury decision adopting these regulations as
final regulations in the Federal Register.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E8-30301 Filed 12-19-08; 8:45 am]
BILLING CODE 4830-01-P