Felix Laughlin Speaks to Tax Notes on the Debt-Equity Regs in 1980 and Today

Caplin & Drysdale’s Felix B. Laughlin spoke with Tax Notes concerning the latest efforts to finalize section 385, which addresses whether an interest in a related corporation is debt or equity.  To see the full article, please visit Tax Notes’s website (subscription required).

Excerpt taken from the article "News Analysis: Regulation Redux: The Debt-Equity Regs in 1980 and Today" by Marie Sapirie for Tax Notes.

The different origins of the two regulatory projects account for many of the differences in their approach. Felix B. Laughlin of Caplin & Drysdale Chtd. said that in the 1980s, the government was trying to fulfill congressional intent to enact section 385 through the regulations. The case law had become a jumble of different factors, and Treasury felt obligated to make sense of the rules. But when the guidance process began, the government and taxpayers found that the then-proposed regs were too complicated to be put into effect, Laughlin said. "Now there is a totally different situation. It is the same problem, because debt-equity issues have always been difficult in the related-party context, but these new proposed regulations are focused on a set of circumstances that have produced such huge revenue losses," he said.

"In the old proposed regulations, the rules were so black and white -- that was one of the downfalls of those rules -- and they didn't take into account the myriad factors" that must be taken into account under the statute, Laughlin said, adding that that's also true of the new proposal.

. . .

Laughlin said Treasury made a good case in the preamble to the new proposed regulations that Congress didn't preclude it from being able to write these new rules. Still, "Treasury probably had a better argument for the earlier regulations because they followed the factors in the statute and laid out how those should be applied," he said.