February 26, 2019
Internal Revenue Service
CC:PA:LPD:PR (REG-106089-18)
Courier’s Desk
1111 Constitution Avenue, N.W.
Washington, DC 20224
Re: Section 163(j) Proposed Regulations
Ladies and Gentlemen:
The Securities Industry and Financial Markets Association (SIFMA) appreciates the opportunity to submit comments on the proposed regulations (the “Proposed Regulations”) under Section 163(j) of the Internal Revenue Code (the “Code”). We appreciate and acknowledge the significant effort that went into the drafting of the Proposed Regulations, and the consideration that the government devoted to the numerous issues that are raised by Section 163(j).
We note that this letter does not include a comprehensive discussion of all of the issues that our members have identified with respect to the Proposed Regulations — rather it is intended to address the most critical issues under the Proposed Regulations that we believe should be addressed when the Proposed Regulations are finalized (the “Final Regulations”).
I. Overview of Recommendations
The following is a brief outline of the primary recommendations that are set forth in this letter. Each of these recommendations is discussed in more detail in Part II of this letter.
A. Definition of Interest
1. The Final Regulations should withdraw the broad definition of interest that is set forth in the Proposed Regulations, or, at a minimum, provide that this definition does not apply to financial institutions. Any abusive transactions could be addressed by the general Section 163(j) anti-avoidance rule contained in Prop. Treas. Regs. Section 1.163(j)-2(h).
2. If the Final Regulations retain the broad definition of interest, they should withdraw the rule in the Proposed Regulations under which amounts that are realized in respect of certain hedging transactions are treated as an adjustment to interest income or expense for Section 163(j) purposes. This rule should, at a minimum, be withdrawn in the case of financial institutions.
3. If the Final Regulations retain the broad definition of interest, they should provide that interest should not be imputed for Section 163(j) purposes in respect of nonperiodic payments on cleared swaps and uncleared collateralized swaps.
4. The Final Regulations should withdraw the definition of interest anti-avoidance rule that is set forth in the Proposed Regulations. If this recommendation is not adopted, then the anti-avoidance rule should only apply to transactions that have a principal purpose of avoiding Section 163(j) in a manner that is inconsistent with the intent of the Section 163(j) and the Regulations thereunder. If this recommendation is not adopted, then the anti-avoidance rule should, at a minimum, (a) exclude financial institutions and (b) likewise impute interest income in the case of transactions in which there is an advance of funds and a return received by the taxpayer that is predominantly attributable to the time value of money.
B. Application of Section 163(j) to CFCs
1. The Final Regulations should provide that Section 163(j) does not apply to interest expense of a CFC that does not recognize ECI (subject to the general anti-avoidance rule), or, at a minimum, does not apply to a CFC that is a financial institution.
2. If the Final Regulations retain the application of Section 163(j) to CFCs, then they should withdraw the rule under which a group of CFCs that conducts a financial services business is treated as a separate subgroup that is subject to an independent CFC group election.
3. If the recommendations above are not adopted, then the Final Regulations should provide that a financial services subgroup includes any CFC that constitutes a “financial services entity” under the Section 904 Regulations rather than, as set forth in the Proposed Regulations, only including entities that satisfy the more restrictive definitions under the CFC rules.
C. Application of Section 163(j) to Partnerships
1. If all of the partners of a partnership are members of a single affiliated corporate group, the partnership should be treated as an aggregate (i.e., a pass-through) for Section 163(j) purposes. Under this approach, the partnership would not be subject to an independent Section 163(j) limitation, and each partner in the partnership would include its allocable share of the income and deductions of the partnership for purposes of determining its own Section 163(j) limitation.
2. Interest that is paid by a partnership to a partner should not be taken into account for Section 163(j) purposes to the extent that the deduction for the interest is allocated to the partner that received the interest. Similarly, interest that is paid by a partner to a partnership should not be taken into account for Section 163(j) purposes to the extent that the partnership’s interest income from the payment is allocated to the partner that paid the interest. Furthermore, interest income and expense from loans between partnerships that are owned by the same partners in the same proportion should not be taken into account for Section 163(j) purposes.