Individual Finds Disconnect in Term Used in Interest, GILTI Regs

BRIEF COMMENTARY ON INTERACTION OF THE TERM “INTEREST”
UNDER PROPOSED 163(j) AND GILTI REGULATIONS

Monte A. Jackel^*

November 29, 2018

QUESTION

Is there is a disconnect between the proposed broad definition of interest in the proposed 163(j) regulations and the narrower definition of “interest expense” in the proposed GILTI regulations dealing with interest expense allocations.

RESPONSE

1. The preamble to the GILTI regulations at page 29 define “interest” in determining specified interest income and expense in a similar but not identical manner as do the section 163j regs. The GILTI regs use the term “predominantly incurred in consideration of the time value of money.” The regulation text at pages 113-115 define the term the same broad way as in 163j but there is no example or regulation text that contains illustrations of this broad concept as do the 163j regulations. What is clear is that this rule applies only to GILTI.

2. The GILTI regulations reference the term “transaction” in describing the time value of money rule. The 163j preamble at pages 16-22 explain the broadness of the time value of money rule there. The regulation text at pages 203-207 explain the rule and there are examples at pages 208-209 that illustrate this rule. Page 205 merely starts off the list of “other amounts treated as interest”'without explaining what that refers to. The term “interest” in these regulations is relevant for what is “business interest income” and “interest income” and “interest expense” and “excess business interest expense”. The apparent attempt is to limit the term “interest” to 163j. 3. Pages 19-22 explain the options considered in the 163j rule. It is clear that the definition used was limited to 163j but I don't see how it could be so limited. See below.

3. Pages 19-22 explain the options considered in the 163j rule. It is clear that the definition used was limited to 163j but I don't see how it could be so limited. See below.

4. When you compare the GILTI rule to the 163j rule, which do not reference each other, you can only conclude that the two provisions could apply to the very same items and the wording in GILTI is broad enough to cover all of what is listed in 163j but there will be uncertainty in GILTI because of the lack of specificity there. As a result, there will be confusion. I think the GILTI rule should now parallel the 163j rule and until they do, there will be confusion.

5. There are many collateral consequences to broadening the definition of “interest” and both sets of rules need to address this. Unless the government tries to limit it to GILTI and 163j, but I don't think they can.

6. I think the expanded rule needs to apply for all purposes of the Code and regs unless a specific provision says otherwise. If you don't do that but say the other Code provisions have to specifically incorporate the new definition, the Code will be a mess. For example, look at the guaranteed payment issue raised in comments yesterday. Doing that would be a sea change in subchapter K but there is not a wiff of a discussion on that. I am sure there are many more examples of this.