| REG-101739-00 |
January 17, 2001 |
Clarification of Entity Classification Rules
DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 301 [REG-101739-00] RIN
1545-AX75
TITLE: Clarification of Entity Classification Rules
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document proposes regulations under section 7701 that
address the Federal tax classification of a business entity wholly
owned by a foreign government and provide that a nonbank entity that
is wholly owned by a foreign bank cannot be disregarded as an entity
separate from its owner (disregarded entity) for purposes of
applying the special rules of the Internal Revenue Code applicable
to banks. This document also proposes regulations under section 892
that provide that a partnership can be a controlled commercial
entity for purposes of section 892(a)(2)(B). In addition, this
document provides notice of a public hearing on the proposed
regulations.
DATES: Written comments and outline of topics to be discussed at the
public hearing scheduled for May 16, 2001, must be received by April
25, 2001.
ADDRESSES: Send submissions to: CC:M&SP:RU (REG-101739-00), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU
(REG-101739-00), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers
may submit comments electronically via the Internet by selecting the
"Tax Regs" option of the IRS Home Page, or by submitting comments
directly to the IRS Internet site at:
http://www.irs.gov/tax_regs/regslist.html. The public hearing will
be held in room 6718, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Camille
B. Evans, (202) 622-3860 (not a toll-free number); concerning
submissions and the hearing, Sonya M. Cruse, (202) 622-7180 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Purpose
On December 18, 1996, the IRS and the Treasury Department
published the elective regime under section 7701 known as the check-
the-box regulations. 61 FR 66584. Generally, the check-the- box
regulations allow any business entity to elect to be treated for
Federal tax purposes as a corporation, a partnership (if it has two
or more members), or a disregarded entity (if it has a single
owner). This document proposes to amend the current Procedure and
Administration Regulations (26 CFR Part 301) to address the
treatment of an entity wholly owned by a foreign government (as
defined in §1.892-2T) and a nonbank entity wholly owned by a
foreign bank.
This document also proposes to provide that a partnership can
be a controlled commercial entity under section 892. Explanation of
Provisions
A. §301.7701-2
Section 301.7701-2(b) of the check-the-box regulations specifies
that certain business entities are classified as per se corporations
for Federal tax purposes (i.e., those business entities that are not
permitted to elect a noncorporate Federal tax classification).
Section 301.7701-2(b)(6) classifies a business entity wholly owned
by a State or any of its political subdivisions as a per se
corporation. However, the regulations do not specify that the phrase
State or any political subdivision thereof includes a foreign
government.
The IRS and Treasury believe that it is appropriate to treat a
foreign government similarly to a State in this context. Thus, to
achieve parallel tax treatment under the check-the-box regulations
of a business entity wholly owned by a State or any of its political
subdivisions and a business entity wholly owned by a foreign
government, these proposed regulations provide that a business
entity wholly owned by a foreign government cannot elect to be
treated as a disregarded entity.
The check-the-box regulations also provide a special rule for
the treatment of nonbank entities that are wholly owned by banks. In
particular, §301.7701-2(c)(2)(ii) provides that a bank cannot
treat a wholly owned nonbank entity as a disregarded entity for
purposes of applying the special rules of the Internal Revenue Code
(Code) applicable to banks. The term bank for this purpose is
defined in section 581 to include only domestic entities. Section
301.7701-2(c)(2)(ii) does not explicitly restrict foreign banks from
treating their wholly owned nonbank entities as disregarded entities
for all tax purposes (because foreign banks are not defined as banks
under section 581).
As with the rule described for foreign governments, the IRS and
Treasury believe that nonbank entities wholly owned by domestic
banks and foreign banks should be treated similarly in this context.
These regulations incorporate a reference to section 585(a)(2)(B)
(which includes certain foreign banks that are engaged in a U.S.
trade or business in the definition of the term bank) in
§301.7701-2(c)(2)(ii). As a result, neither domestic banks nor
foreign banks engaged in a U.S. trade or business can treat wholly
owned nonbank entities as disregarded entities for purposes of
applying the special rules of the Code applicable to banks.
B. §1.892-5(a)
Section 1.892-5T(a) currently provides that for purposes of
defining the term controlled commercial entity, the term entity
encompasses corporations and trusts (including pension trusts
described in §1.892-2T(c)) and estates. To ensure that
investments in the United States by a foreign government through
separate juridical entities are treated similarly, these proposed
regulations under §1.892-5(a) provide that, for purposes of
section 892(a)(2)(B), the term entity also includes a partnership.
Proposed Effective Dates
The regulations that address the Federal tax classification of
business entities wholly owned by a foreign government under
§301.7701-2 are proposed to apply on or after the earlier of
[INSERT DATE 365 DAYS AFTER THE DATE THIS DOCUMENT IS PUBLISHED IN
THE FEDERAL REGISTER] or the date these regulations are published as
final regulations in the FEDERAL REGISTER to such business entities
regardless of any prior entity classification, and the regulations
that address the definition of the term entity for purposes of
section 892(a)(2)(B) are proposed to apply on or after the earlier
of [INSERT DATE 365 DAYS AFTER THE DATE THIS DOCUMENT IS PUBLISHED
IN THE FEDERAL REGISTER] or the date these regulations are published
as final regulations in the FEDERAL REGISTER. The regulations
relating to a nonbank entity that is wholly owned by a foreign bank
are proposed to apply to taxable years beginning after [INSERT DATE
THIS DOCUMENT IS PUBLISHED IN THE FEDERAL REGISTER].
Special Analyses
It has been determined that this notice of proposed rulemaking
is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also
has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations, and because these regulations do not impose a
collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not required. Pursuant to section
7805(f) of the Code, these regulations will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final
regulations, consideration will be given to any written comments
(preferably a signed original and eight (8) copies) that are
submitted timely to the IRS. The IRS and Treasury Department request
comments on the clarity of the proposed rules and how they may be
made easier to understand. All comments will be available for public
inspection and copying.
A public hearing has been scheduled for May 16, 2001, beginning
at 10 a.m., in room 6718, Internal Revenue Building, 1111
Constitution Avenue NW., Washington, DC. Because of access
restrictions, visitors will not be admitted beyond the Internal
Revenue Building lobby more than fifteen (15) minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons that wish to present oral comments at the hearing must
submit timely written comments and an outline of the topics to be
discussed and the time to be devoted to each topic (preferably a
signed original and eight (8) copies) by April 25, 2001.
A period of ten (10) minutes will be allotted to each person
for making comments.
An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the
hearing.
Drafting Information
The principal author of these regulations is Camille B. Evans
of the Office of Associate Chief Counsel (International). However,
other personnel from the IRS and Treasury Department participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift Taxes,
Income taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended
as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for "Sections 1.892-1T through 1.892-7T" and
adding the following entries in numerical order:
Authority: 26 U.S.C. 7805 * * *
Section 1.892-1T also issued under 26 U.S.C. 892(c). Section
1.892-2T also issued under 26 U.S.C. 892(c). Section 1.892-3T also
issued under 26 U.S.C. 892(c). Section 1.892-4T also issued under 26
U.S.C. 892(c). Section 1.892-5 also issued under 26 U.S.C. 892(c).
Section 1.892-5T also issued under 26 U.S.C. 892(c). Section
1.892-6T also issued under 26 U.S.C. 892(c). Section 1.892-7T also
issued under 26 U.S.C. 892(c). * * *
Par. 2. Section 1.892-5 is added to read as follows:
§1.892-5 Controlled commercial entity.
(a) through (a)(2) [Reserved]. For further information, see
§1.892-5T(a) through (a)(2).
(3) For purposes of section 892(a)(2)(B), the term entity means
and includes a corporation, a partnership, a trust (including a
pension trust described in §1.892-2T(c)) and an estate.
(4) Effective date. This section applies on or after the
earlier of [INSERT DATE 365 DAYS AFTER THE DATE THIS DOCUMENT IS
PUBLISHED IN THE FEDERAL REGISTER] or the date these regulations are
published as final regulations in the FEDERAL REGISTER.
(b) through (d) [Reserved]. For further information, see
§§1.892-5T(b) through (d).
Par. 3. Section 1.892-5T is amended by:
1. Removing the flush language immediately following paragraph
(a)(2).
2. Adding paragraph (a)(3).
The addition reads as follows:
§1.892-5T Controlled commercial entity (temporary regulations).
(a) * * *
(3) [Reserved]. For further information, see §1.892-5(a)
(3).
* * * * *
PART 301--PROCEDURE AND ADMINISTRATION
Par. 4. The authority citation for part 301 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 5. Section 301.7701-2 is amended by:
1. Revising paragraphs (b)(6) and (c)(2)(ii).
2. Revising the first sentence of paragraph (e).
The revisions read as follows:
§301.7701-2 Business entities; definitions.
* * * * *
(b) * * *
(6) A business entity wholly owned by a State or any political
subdivision thereof, or a business entity wholly owned by a foreign
government (as defined in §1.892-2T); * * * * *
(c) * * *
(2) * * *
(ii) Special rule for certain business entities. If the single
owner of a business entity is a bank (as defined in section 581, or,
in the case of a foreign bank, as defined in section 585(a)(2)(B)
without regard to the second sentence thereof), then the special
rules of the Internal Revenue Code applicable to banks will continue
to apply to the single owner as if the wholly owned entity were a
separate entity.
* * * * *
(e) Effective date. Except as otherwise provided in this
paragraph (e), the rules of this section apply as of January 1,
1997, except that paragraph (b)(6) applies on or after the earlier
of [INSERT DATE 365 DAYS AFTER THE DATE THIS DOCUMENT IS PUBLISHED
IN THE FEDERAL REGISTER] or the date these regulations are published
as final regulations in the FEDERAL REGISTER to a business entity
wholly owned by a foreign government regardless of any prior entity
classification, and paragraph (c)(2)(ii) of this section applies to
taxable years beginning after [INSERT DATE THIS DOCUMENT IS
PUBLISHED IN THE FEDERAL REGISTER]. * * *
Robert E. Wenzel
Deputy Commissioner of Internal Revenue.
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