This article describes the impact of the Tax Cuts and Jobs Act on securitization transactions. The article addresses in detail the new limitation on the deduction for business interest expense as well as the requirement that the transferee of an equity interest in a partnership engaged in a US trade or business withhold 10% of the amount realized unless the transferor certifies that it is a US person. Specifically, the new limitations on the deductibility of net interest expense could cause a corporate issuer, or the equity holders in a pass-through issuer, in a securitization transaction to recognize phantom income from the issuer’s inability to realize the full tax benefit of its interest expense. And the new 10% withholding requirements imposed on transferees of interests in partnerships (including notes or other securities treated as interests in partnerships) engaged in a US trade or business (and imposed on the partnership itself if the transferee does not comply with its obligations) could restrict the liquidity of certain partnership interests as partnerships institute procedures to ensure the delivery and collection of necessary certifications.
The article also discusses other rules that are likely to have a more modest impact on the securitization market. These rules—(i) the elimination of miscellaneous itemized deductions, (ii) new Subpart F rules, including changes to the definitions of “controlled foreign corporation” and “United States shareholder”, (iii) new rules requiring accelerated income accrual based on financial reporting, (iv) new rules relating to excess business losses and NOLs, (v) new rules relating to life settlements, and (vi) a new limitation on Code Sec. 1031 exchanges to real estate—are summarized in Part II of the article.
This article was published by the Journal of Taxation of Financial Products in its March 2018 issue. The article is posted with permission.
