Regulations issued in 2016 treat a putative debt instrument as equity if, among other things, (1) the instrument is issued to a person related to the borrower through chains of 80% or greater ownership and (2) a principal purpose of the issuance is to fund certain acquisitions or distributions by the borrower. Under a "per se" rule, the principal purpose test in clause (2) above is automatically satisfied if the putative debt instrument is issued within 36 months of the relevant acquisition or distribution.  

The "per se" rule has raised significant concerns, particularly in the securitization space, because securitization vehicles frequently make distributions to their equity holders within 36 months of issuing debt. We discuss these concerns here.

On October 31, the IRS announced that it intends to eliminate the "per se" rule. Instead, the regulations would apply only if the putative debt issuance "has a sufficient factual connection to a distribution to a member of the taxpayer’s expanded group or an economically similar transaction."