Comment from Anonymous

2026-2027 Priority Guidance Plan Note 2026-23 Response Comment cross-submitted via regulations.gov 'Deregulation Suggestions' Request to Withdraw/Rescind Regulation §1.385-3(b)(3)(iii) - "the Per Se Funding Rule." A. Rationale for Being Part of the Priority Guidance Plan The regulation may be out of scope of the delegation contained within IRC §385, as discussed below. The regulation also imports concepts that may be something other than the best reading of the underlying statutory authority. B. Background on Rule Treasury Regulation §1.385-3 is part of the U.S. Treasury’s broader Section §385 regulations, which determine when an instrument that looks like a loan between related parties should instead be treated as equity for federal income tax purposes. It is one of the strictest regimes issued by the Treasury. If recast, interest deductions are eliminated, dividends are deemed and compliance burdens significantly increase. Specifically, the per se funding rule, found in Regulation §1.385-3(b)(3)(iii), recasts certain loans from related parties into equity where there have been sufficient distributions in the 36-months before or after the day the loan was made. This deeming can occur even where the loan has completely commercial terms or is incurred for bona fide business purposes. The rationale was to prevent a taxpayer from using intercompany loans to potentially disguise what may effectively shareholder distribution, even where if the loan serves a bona fide purpose at commercial terms. C. Reasons for Recission Reason 1: Lack of Clear Congressional Intent IRC §385 gives Treasury the power to distinguish debt from equity. Specifically, the intent in the code was for the Secretary to determine regulations around factors, facts and circumstances and economic reality as opposed to deeming debt to be equity. This provides an inflexible framework that ignores the economic reality of taxpayers. The per se funding rule deems debt to be equity even where they are legitimate loans based solely on timing, rather than substantive evidence of tax avoidance. It is unclear that this regulation fits within congressional intent. Reason 2: Distortion of Business Operations The per-se funding rule drives away companies from being able to use cost-efficient intercompany financing and instead forces them to borrow from third parties, perhaps at less efficient terms, because the per se funding rule arbitrarily targets the related party borrowing, even where conducted at the exact same terms as the third party. The rule disregards the commercial realities of operating in a global business and imposes a regulatory system detached from economic substance. The rule presumes a causal connection between debt and distributions even when entities borrow for capex or working capital, distributions occur for reasons unrelated to debt, or entities may seek to borrow from third parties and on loan the amount through a related party loan where they may be able to receive more attractive financing terms at a parent level. Reason 3: Treasury signaled intent in Advance Notice of Proposed Rulemaking REG-123112-19 to amend but has yet to do so. Reason 4: Costs outweigh the benefits: This rule imposes unprecedented monitoring obligations, requiring tracking of all distributions and contributions over 72 months, tracing intercompany loans and treasury operations. Reason 5: Similar Rules Struck Withdrawn due to Similar Concerns IRC 4501, Repurchase of Corporate Stock, had a similarly proposed “funding rule.” Prior to its removal, the proposed “funding rule” would have subjected U.S. subsidiaries of publicly traded foreign corporations to the 1% stock repurchase excise tax where the U.S. subsidiary was deemed to have funded, directly or indirectly and by any means, a stock buyback by its foreign parent, provided the funding had a principal purpose of facilitating the repurchase or avoiding the tax. The rule relied on broad presumptions and extended beyond the statutory text, creating significant uncertainty for ordinary treasury and cash management activities. Treasury ultimately withdrew the funding rule in the final regulations issued in November 2025, aligning the regulations more closely with congressional intent and limiting the excise tax to transactions explicitly covered by the statute. The Per Se Funding Rule under IRC 385 has similar challenges as the proposal under IRC 4501 but has yet to be withdrawn.