Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21989

ACTION: Cancellation of notice of public

hearing on proposed rulemaking.

SUMMARY: This document provides

notice of cancellation of a public

hearing on proposed regulations relating

to implementing a provision of the Tax

reform Act of 1984 permitting the

reissuance of mortgage credit

certificates.

DATES: The public hearing originally

scheduled for May 22, 1996, beginning

at 10:00 a.m. is cancelled.

FOR FURTHER INFORMATION CONTACT:

Evangelista C. Lee of the Regulations

Unit, Assistant Chief Counsel

(Corporate), (202) 622–7190 (not a toll

free number).

SUPPLEMENTARY INFORMATION: The

subject of the public hearing is proposed

amendments to the Income Tax

Regulations under section 25 of the

Internal Revenue Code. A notice of

public hearing appearing in the Federal

Register on Friday, April 5, 1996 (61 FR

15204), announced that a public hearing

would be held on Wednesday, May 22,

1996, beginning at 10:00 a.m., in the

Commissioners Conference Room,

Internal Revenue Building, 1111

Constitution Avenue, NW, Washington,

D.C. 20224.

The public hearing scheduled for

Wednesday, May 22, 1996, is cancelled.

Michael L. Slaughter,

Acting Chief, Regulations Unit, Assistant

Chief Counsel (Corporate).

[FR Doc. 96–11778 Filed 5–10–96; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 301

[PS–43–95]

RIN 1545–AT91

Simplification of Entity Classification

Rules

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations that would replace

the existing regulations for classifying

certain business organizations with an

elective regime. These proposed

regulations simplify the existing

classification rules.

DATES: Written comments and requests

to speak (with outlines of oral

comments) at a public hearing

scheduled for August 21, 1996, at 10

a.m. must be submitted by August 12,

1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (PS–43–95), room

5228, 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:DOM:CORP:R (PS–43–95),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Armando

Gomez, (202) 622–3050; concerning

foreign organizations, Ronald M.

Gootzeit or William H. Morris, (202)

622–3880; concerning submissions and

the hearing, Evangelista Lee (202) 622–

7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collection of

information should be sent to the Office

of Management and Budget, Attn: Desk

Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received by July

12, 1996.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The collections of information are

required by §§ 301.6109–1(b)(2)(vi) and

301.7701–3(c). This information is

required by the IRS to ensure the proper

classification of business organizations

and to ensure compliance with the

proposed regulations. The likely

respondents are businesses and other

for-profit organizations, including small

businesses.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

The burden of the collection of

information required by § 301.6109–1

will be reflected in Forms SS–4 and W–

7. The burden of the collection of

information required by § 301.7701–3(c)

will be reflected in such form as is

prescribed by the Commissioner for

purposes of making the election

described in this regulation.

Introduction

This document proposes to revise

§§ 301.7701–1 through 301.7701–3 of

the Procedure and Administration

Regulations (26 CFR part 301) to clarify

which organizations are classified as

corporations automatically under the

Internal Revenue Code (Code) and to

provide a simple elective regime for

classifying other business organizations.

This document also proposes

conforming changes to §§ 1.581–1,

1.581–2, and 1.761–1 of the Income Tax

Regulations (26 CFR part 1), and to

§§ 301.6109–1, 301.7701–4, 301.7701–6,

and 301.7701–7 of the Procedure and

Administration Regulations (26 CFR

part 301).

Background

On April 3, 1995, Notice 95–14,

relating to classification of business

organizations under section 7701, was

published in the Internal Revenue

Bulletin (1995–1 C.B. 297). A notice of

public hearing was published in the

Federal Register on May 10, 1995 (60

FR 24813). Written comments were

received and a public hearing was held

on July 20, 1995. After consideration of

the comments, the Treasury Department

and the IRS propose to replace the

existing classification regulations with a

simplified regime that is elective for

certain business organizations.

Explanation of Provisions

I. Introduction

Section 7701(a)(2) of the Code defines

a partnership to include a syndicate,

group, pool, joint venture, or other

unincorporated organization, through or

by means of which any business,

financial operation, or venture is carried

on, and that is not a trust or estate or

a corporation. Section 7701(a)(3) defines

a corporation to include associations,

joint-stock companies, and insurance

companies.

The existing regulations for

classifying business organizations as

associations (which are taxable as

corporations under section 7701(a)(3))

or as partnerships under section

7701(a)(2) are based on the historical

differences under local law between

partnerships and corporations.

However, many states have revised their

statutes to provide that partnerships and

other unincorporated organizations may

possess characteristics that traditionally

have been associated with corporations,

thereby narrowing considerably the

traditional distinctions between
21990 Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules

corporations and partnerships under

local law. For example, some

partnership statutes now provide that

no partner is unconditionally liable for

all of the debts of the partnership.

Similarly, almost all states have enacted

statutes allowing the formation of

limited liability companies. These

entities provide protection from liability

to all members but may qualify as

partnerships for federal tax purposes

under the existing regulations. See, e.g.,

Rev. Rul. 88–76 (1988–2 C.B. 360).

One consequence of the increased

flexibility under local law in forming a

partnership or other unincorporated

business organization is that taxpayers

generally can achieve partnership tax

classification for a nonpublicly traded

organization that, in all meaningful

respects, is virtually indistinguishable

from a corporation. To accomplish this,

however, taxpayers and the IRS must

expend considerable resources on

classification issues. For example, since

the issuance of Rev. Rul. 88–76, the IRS

has issued seventeen revenue rulings

analyzing individual state limited

liability company statutes, and has

issued several revenue procedures and

numerous letter rulings relating to

classification of various business

organizations. Meanwhile, small

business organizations may lack the

resources and expertise to achieve the

tax classification they want under the

current classification regulations.

Reacting to the fact that publicly

traded entities could easily qualify as

partnerships, in 1987 Congress enacted

section 7704 to require most publicly

traded partnerships to be taxable as

corporations. Thus, even if an

organization could be classified as a

partnership under the current

regulations, it will nevertheless be

classified as a corporation in most cases

if its ownership interests are publicly

traded.

In light of these developments,

Treasury and the IRS believe that it is

appropriate to replace the increasingly

formalistic rules under the current

regulations with a much simpler

approach that generally is elective. To

further simplify this area, the proposed

regulations provide similar rules for

organizations that have a single owner.

With respect to foreign organizations,

Notice 95–14 (1995–1 C.B. 297)

observed that, while the distinctions are

similarly formalistic, the classification

process under the current regulations

involves even more complexities and

requires greater resources than does the

classification process for domestic

organizations. For example, the

classification of a foreign organization

involves not only a review of

organizational documents, but also a

thorough understanding of the

controlling foreign law. Accordingly,

the simplified system provided under

the proposed regulations extends to

foreign organizations as well, with

certain modifications explained below.

In light of the increased flexibility

under an elective regime for the creation

of organizations classified as

partnerships, the Treasury Department

and the IRS will continue to monitor

carefully the uses of partnerships in the

international context and will issue

appropriate substantive guidance when

partnerships are used to achieve results

that are inconsistent with the policies

and rules of particular Code provisions

or of U.S. tax treaties.

To accomplish the changes described

above, the proposed regulations would

replace §§ 301.7701–1, 301.7701–2, and

301.7701–3 with new regulations. In

addition, conforming amendments

would be made to §§ 1.581–1, 1.581–2,

1.761–1, 301.6109–1, 301.7701–4,

301.7701–6, and 301.7701–7.

II. General Classification Rules

A. Business Entities

Proposed § 301.7701–1 provides an

overview of the rules applicable in

determining an organization’s

classification for federal tax purposes.

The first step in the classification

process is to determine whether there is

a separate entity for federal tax purposes

(which is a matter of federal tax law).

The proposed regulations explain that

certain joint undertakings that are not

entities under local law may

nonetheless constitute separate entities

for federal tax purposes; on the other

hand, not all entities formed under local

law are recognized as separate entities

for federal tax purposes. For example,

individuals who own property as

tenants in common may create a

separate entity for federal tax purposes

if the individuals actively carry on a

trade, business, financial operation, or

venture and divide the profits

therefrom. On the other hand, an

organization wholly owned by a State is

not recognized as a separate entity for

federal tax purposes if it is an integral

part of the State. Similarly, tribes

incorporated under section 17 of the

Indian Reorganization Act of 1934, as

amended, 25 U.S.C. 477, or under

section 3 of the Oklahoma Indian

Welfare Act, as amended, 25 U.S.C. 503,

are not recognized as separate entities

for federal tax purposes. See Rev. Rul.

94–16 (1994–1 C.B. 19); Rev. Rul. 94–65

(1994–2 C.B. 14). Also, the proposed

regulations retain the rule under the

current regulations that a qualified cost

sharing arrangement described in

§ 1.482–7 is not a partnership for federal

tax purposes.

An organization that is recognized as

a separate entity for federal tax purposes

is either a trust or a business entity

(unless a provision of the Code

expressly provides for special treatment,

such as the Real Estate Mortgage

Investment Conduit (REMIC) rules, see

section 860A(a)). The proposed

regulations provide that trusts generally

do not have associates or an objective to

carry on business for profit. While these

proposed regulations restate the

distinction between trusts and business

entities, the determination of whether

an organization is classified as a trust

for federal tax purposes is intended to

remain the same as under current law.

Proposed § 301.7701–2 specifies those

business entities that automatically are

classified as corporations for federal tax

purposes. Any other business entity that

is recognized for federal tax purposes

may choose its classification under the

rules of proposed § 301.7701–3. Those

rules provide that a business entity with

at least two members can be classified

as either a partnership or an association,

and that a business entity with a single

member can be classified as an

association or can be disregarded as an

entity separate from its owner.

B. Corporations

The proposed regulations clarify that

business entities that are classified as

corporations for federal tax purposes

include corporations denominated as

such under applicable law, as well as

associations, joint-stock companies,

insurance companies, organizations that

conduct certain banking activities,

organizations wholly owned by a State,

organizations that are taxable as

corporations under a provision of the

Code other than section 7701(a)(3), and

certain organizations formed under the

laws of a foreign jurisdiction or a U.S.

possession, territory, or commonwealth.

Each of these categories is described

briefly below.

The proposed regulations define

corporation to include any business

entity recognized for federal tax

purposes that is organized under a

Federal or State statute, or under a

statute of a federally recognized Indian

tribe, that describes or refers to the

entity as incorporated or as a

corporation, body corporate, or body

politic. Such entities include

governmentally chartered corporations,

as well as business corporations. See,

e.g., 12 U.S.C. 21 et seq. (national

banking associations), 20 U.S.C. 1087–2

(Student Loan Marketing Association),
Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21991

and 36 U.S.C. 1101 (private corporations

established under federal law).

The proposed regulations define an

association by reference to § 301.7701–

3. As discussed in detail below, that

section permits certain business entities

to choose whether to be classified as an

association or as a partnership (or, if the

entity has a single owner, as a nonentity).

The proposed regulations define a

joint-stock company as a business entity

organized under a State statute that

describes or refers to the entity as a

joint-stock company or joint-stock

association. These entities typically

have a fixed capital stock divided into

shares represented by certificates

transferable only upon the books of the

company, manage their affairs by a

board of directors and executive

officers, and conduct their business in

the general form and mode of procedure

of a corporation. See Burk-Waggoner Oil

Assoc. v. Hopkins, 269 U.S. 110, 113

(1925).

The proposed regulations define an

insurance company as a business entity

that is taxable as an insurance company

under subchapter L, chapter 1 of the

Code.

Under the proposed regulations, a

state-chartered bank is classified as a

corporation if any of the bank’s deposits

are insured under the Federal Deposit

Insurance Act, as amended, 12 U.S.C.

1811 et seq., or a similar federal statute.

This rule reflects Congress requirement

that these organizations be incorporated

to be eligible for federal deposit

insurance, see 12 U.S.C. 1813(a)(2), and

provides comparable tax treatment to

state-chartered banks and national

banks chartered under the National

Bank Act, 12 U.S.C. 21 et seq. (which

characterizes national banks as

corporations, see 12 U.S.C. 24). It also

is consistent with Congress historical

treatment of banks as corporations, as

reflected in section 581 of the Code,

which requires a bank to be

incorporated for purposes of subchapter

H of chapter 1. Under this rule,

however, an unincorporated

organization that conducts banking

activities but that does not have federal

deposit insurance, may, under proposed

§ 301.7701–3, choose not to be an

association for federal tax purposes; in

that case, however, the organization is

not a bank within the meaning of

section 581, and thus is not eligible for

treatment under subchapter H.

The proposed regulations also classify

as corporations organizations that are

recognized for federal tax purposes if

they are wholly owned by a State, or

any political subdivision thereof.

Organizations wholly owned by a State

that are not an integral part of the State

must be recognized for federal tax

purposes and scrutinized under section

115 (which excludes from gross income

any income derived from the exercise of

any essential governmental function and

accruing to a State or any political

subdivision thereof, or the District of

Columbia). Accordingly, the proposed

regulations classify any such

organization as a corporation.

Nevertheless, under section 115, the

organization’s income may not be

subject to federal income tax.

The proposed regulations define

corporation to include any business

entity that is taxable as a corporation

under another provision of the Code.

For example, a business entity that is

publicly traded within the meaning of

section 7704 (and not within the

exception in section 7704(c)), is taxable

as a corporation. Similarly, a business

entity that is a taxable mortgage pool

under section 7701(i) is taxable as a

corporation.

Finally, the proposed regulations

classify as corporations certain foreign

business entities (including entities

organized in U.S. possessions,

territories, and commonwealths) that are

listed in the regulations. Notice 95–14

observed that current law does not

automatically classify any foreign entity

as a corporation by reference to the

juridical status or designation of that

entity under local law. That is, current

law does not identify the foreign

analogue to the incorporated state law

entity that is always classified as a

corporation for federal tax purposes,

even though section 7701(a)(3) makes

no distinction between domestic and

foreign entities. Rather, since the

issuance of Rev. Rul. 88–8 (1988–1 C.B.

403), all foreign entities have been

classified based on the characteristics

set forth in §§ 301.7701–2 and

301.7701–3 of the current regulations.

Nevertheless, under this approach,

those foreign entities that are equivalent

to state law corporations are virtually

always classified as corporations.

To ensure the corporate classification

of these foreign entities, the proposed

regulations include a list of foreign

business entities that always will be

classified as corporations. Several

commentators supported inclusion of a

list of foreign business entities that

either would be treated as corporations

per se or that would continue to be

classified under the current regulations.

The Treasury Department and the IRS

believe that classifying the business

entities on the list as corporations in all

cases is consistent with the goal of

simplifying the entity classification

area. The organizations listed are

limited liability entities, such as the

British Public Limited Company, the

French Societe Anonyme, and the

German Aktiengesellschaft. The

Treasury Department and the IRS invite

comments on the composition of the

list.

Under a special grandfather rule,

however, an entity described in this list

will nevertheless be classified as a

partnership under the proposed

regulations if: (1) The entity was in

existence and claimed to be a

partnership on May 8, 1996 and for all

prior periods, (2) that classification was

relevant to any person for federal tax

purposes at any time during the period

that includes May 8, 1996, (3) the entity

had a reasonable basis (within the

meaning of section 6662) for claiming

partnership classification, and (4)

neither the entity nor any member has

been notified in writing on or before

May 8, 1996 that the classification of the

entity is under examination (in which

case the entity’s classification will be

determined in the examination).

When these regulations become final,

and current § 301.7701–2 (on which

Rev. Rul. 88–8 is based) is superseded,

Rev. Rul. 88–8 will be obsolete.

C. Other Business Entities

The proposed regulations define the

term partnership to include any

business entity that has at least two

members and that is not classified as a

corporation.

Some commentators requested

clarification of the effect of these

elective classification rules on an

organization’s ability to elect to be

excluded from subchapter K under

section 761. The proposed regulations

do not change the existing requirements

for the election provided in § 1.761–2.

Accordingly, an organization that is

classified as a partnership under the

proposed regulations may elect to be

excluded from subchapter K, if it

qualifies under § 1.761–2.

Many commentators requested

guidance concerning the classification

of an unincorporated business entity

with a single owner. Some

commentators suggested that these

entities be treated as sole

proprietorships, while others suggested

partnership classification. Because a

fundamental characteristic of a

partnership is the presence of

associates, an entity with a single owner

cannot conduct business as a

partnership. However, the proposed

regulations permit a business entity

with a single owner that is not required

to be classified as a corporation to elect

to be classified as an association or to

have the organization disregarded as an
21992 Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules

entity separate from its owner (in which

case the business activity is treated for

federal tax purposes in the same manner

as if it were conducted as a sole

proprietorship, branch, or division of

the organization’s owner).

III. Elective Classification of Certain

Entities

A. In General

Proposed § 301.7701–3 sets forth rules

permitting a business entity that is not

required to be classified as a corporation

(referred to in the regulation as an

eligible entity) to elect its classification

for federal tax purposes. An eligible

entity that has at least two members

may elect to be classified as an

association or a partnership, and an

eligible entity with a single owner may

elect to be classified as an association or

to be disregarded as an entity separate

from its owner.

B. Default Classification

The proposed regulations are

designed to provide most eligible

entities with the classification they

would choose without requiring them to

file an election. Thus, the proposed

regulations provide default

classification rules that aim to match

expectations. An eligible entity that

wants the default classification need not

file an election.

1. Domestic eligible entities. Notice

95–14 suggested partnership default for

domestic eligible entities. The

comments supported this rule, and the

proposed regulations adopt it. Thus, a

newly formed domestic eligible entity

will be classified as a partnership if it

has two or more members unless an

election is filed to classify the entity as

an association; no affirmative action

need be taken by the entity to ensure

partnership classification. Similarly, if

that entity has a single member, it will

not be treated as an entity separate from

its owner for federal tax purposes unless

an election is filed to classify the

organization as an association.

2. Foreign eligible entities. Notice 95–

14 suggested association default for

foreign eligible entities. The Notice

indicated that while domestic eligible

entities typically are formed with an

intent to obtain partnership

classification, the preferred

classification of foreign eligible entities

is less predictable. For example, the

Notice expressed concern that because

partnership default could subject some

foreign entities to compliance

requirements and excise tax liability

under section 1491, an entity should not

be classified as a partnership

inadvertently. On the other hand, as

some commentators indicated,

association default might not match the

expectations of a foreign eligible entity.

In response to these comments, the

proposed regulations provide a default

rule that should match expectations

more closely. The Treasury Department

and IRS believe that if any of an

organization’s members has personal

liability for the debts of the

organization, the expectation is that the

organization will be classified as a

partnership. Accordingly, the proposed

regulations provide that if one or more

of an eligible entity’s members have

unlimited liability, the entity will be

classified as a partnership if it has two

or more members, or it will be

disregarded as a separate entity if it has

a single owner. Only if all of the entity’s

members have limited liability will the

entity’s default classification be

association.

For purposes of this rule, a member of

a foreign entity has limited liability only

if, based solely on the controlling statute

or law pursuant to which the entity is

organized, the member’s personal

liability for the debts of or claims

against the entity is specifically limited

(for example, to the amount of the

member’s unpaid capital contribution or

to the amount of a statutorily limited

guarantee). If protection from personal

liability is optional under the applicable

law, the entity’s organizational

documents will determine which option

applies. The determination whether

there is limited liability for purposes of

the default rule is intended to be

simpler and more straightforward than

under current law, to ensure that the

default classification is readily

apparent. Thus, the limited liability

inquiry generally will focus solely on

controlling statutes as interpreted by

judicial or administrative review. As a

result, a member’s ability to satisfy

creditors’ claims would not be relevant.

If taxpayers remain uncertain whether

there is limited liability in a particular

case, they may file an election to secure

the desired classification.

3. Existing eligible entities.

Commentators suggested that special

rules should be provided for eligible

entities formed prior to the effective

date of the regulations. These

commentators were concerned that

some existing eligible entities would be

required to file classification elections

immediately to prevent their

classification from being changed under

a default rule. Under the proposed

regulations, eligible entities existing

prior to the effective date of the

regulations that choose to retain their

current classification would not be

required to file an election. Rather,

those entities would retain the

classification claimed under the existing

regulations (except that, if an eligible

entity with a single owner claimed to be

a partnership under the current

regulations, the entity would be

disregarded as an entity separate from

its owner under this default rule). A

foreign entity is considered such an

existing entity only if its classification

immediately prior to the effective date

of these regulations is relevant to any

person for federal tax purposes; other

foreign entities formed prior to the

effective date of these regulations would

be considered new entities at the time

that their federal tax classification

became relevant and, therefore, would

be required to file a classification

election or be classified under the

general default rule described above.

Furthermore, under a transition rule

discussed below, the IRS generally will

not challenge an existing entity’s

claimed classification for periods to

which the existing regulations apply if

the entity had a reasonable basis for the

claimed classification.

C. Elections

1. In general. An eligible entity that

does not want the classification

provided by the applicable default

provision, or that wants to change its

classification, may file an election to

obtain the chosen classification. Some

commentators suggested that the

election be made with Form SS–4

(Application for Employer Identification

Number); others suggested that the

election be made with the filing of the

entity’s first tax return.

An eligible entity may elect its

classification by filing an election with

the appropriate service center. The

proposed regulations would require that

the election specify the name, address,

and taxpayer identifying number of the

entity, the chosen classification,

whether the election results in a change

in classification, and whether the entity

is a domestic or foreign entity. It is

anticipated that the Commissioner will

prescribe a form for this purpose, in

which case elections must be made on

such form. The election will be effective

on a date specified on the election if

that date is not more than 75 days prior

to the date on which the election is

filed, or on the date filed if no such date

is specified on the election. In addition

to the original election, a business entity

that makes an election shall file a copy

of its election with its federal tax return

for the year in which the election is

effective. If the entity is not required to

file a return, the Commissioner will

require direct or indirect owners of the
Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21993

entity to include copies of the election

with their federal tax returns.

Notice 95–14 suggested that all the

members of an electing eligible entity

would be required to consent

unanimously to a classification election.

Most commentators stated that,

although an indication of unanimity

may be appropriate, a requirement that

each member sign the election could

cause significant administrative

difficulties. In response to these

comments, the proposed regulations

require that an election be signed by: (1)

Each member of the entity, or (2) any

officer, manager, or owner who is

authorized to make the election and

who represents to having such

authorization under penalties of perjury.

An electing eligible entity also would

be required to provide its Employer

Identification Number (EIN) on the

election form. To reduce taxpayers’

paperwork burdens when an existing

entity elects to change its classification,

the proposed regulations provide that if

the entity already has an EIN, it will

retain it even though it elects to change

its tax classification. Any organization

without an EIN at the time it files its

election, including an organization that

had not previously been treated as a

separate entity for federal tax purposes,

must apply for an EIN on Form SS–4

when it files its election. If a new singlemember entity elects to be disregarded

as an entity separate from its owner,

then the taxpayer identifying number of

its owner must be displayed on the

election. The proposed regulations

amend § 301.6109–1 to reflect these

requirements.

2. Special rule for exempt

organizations. A special rule is provided

for eligible entities that have been

determined to be, or claim to be, exempt

from taxation under section 501(a). A

substantial majority of exempt

organizations (including those employee

plans that qualify under section 401(a))

will not be eligible entities, either

because they are properly classified as

trusts for federal tax purposes or

because they are not-for-profit

corporations. However, for those exempt

organizations that are eligible entities,

the business entity classification that is

consistent with the claim for exemption

is association (taxable as a corporation).

Accordingly, the proposed regulations

provide that a claim or determination of

exempt status by an eligible entity is

treated as an election to be classified as

an association. Such elections will take

effect on the first day for which

exemption is claimed or determined to

apply, regardless of when the claim or

determination is made, and will remain

in effect unless an election is made to

change that classification after the date

that either the claim is withdrawn or

rejected or the determination is revoked.

3. Limits on changes in classification

by election. Notice 95–14 requested

comments on whether the regulations

should restrict elections to change an

entity’s classification. To varying

degrees, commentators supported such a

restriction. Under the proposed

regulations, an eligible entity that makes

an election to change its classification

cannot change its classification by

election again during the sixty months

succeeding the effective date of the

election. However, an existing entity

that elects to change its classification as

of the effective date of the proposed

regulations may elect to change again

within the first sixty months following

the effective date.

The sixty month limitation only

applies to a change in classification by

election. Thus, if a new eligible entity

elects out of its default classification

effective from its inception, that election

is not a change in the entity’s

classification. Furthermore, the

limitation does not apply if the

organization’s business actually is

transferred to another entity. For

example, an organization could

liquidate into its parent, terminate and

reform as another entity (e.g., by

merger), or contribute its business to

another organization without restriction.

Taxpayers are reminded that a change

in classification, no matter how

achieved, will have certain tax

consequences that must be reported. For

example, if an organization classified as

an association elects to be classified as

a partnership, the organization and its

owners must recognize gain, if any,

under the rules applicable to

liquidations of corporations.

D. Certain Partnership Terminations

Under section 708(b)(1)(B), a

partnership is considered terminated if

within a twelve month period there is

a sale or exchange of fifty percent or

more of the total interests in partnership

capital and profits. Under this rule, a

termination is treated as a liquidation of

the existing partnership and the

formation of a new partnership.

Accordingly, if an existing partnership

terminates under section 708(b)(1)(B),

the newly created entity will be

classified as a partnership (but could

elect to change its classification

thereafter).

IV. Effective Date and Transition Rules

The regulations are proposed to apply

generally for periods beginning on or

after the date the final regulations are

published in the Federal Register.

Sections 301.7701–1 through 301.7701–

3 will continue to apply until these

regulations are effective.

In addition, the IRS will not challenge

the classification of an existing eligible

entity, or an existing entity described in

the list of foreign entities that are

classified as corporations under the

proposed regulations, for periods to

which the current regulations apply if:

(1) The entity had a reasonable basis

(within the meaning of section 6662) for

its claimed classification, (2) the entity

claimed that same classification in all

prior years, and (3) neither the entity

nor any member has been notified in

writing on or before May 8, 1996 that

the classification of the entity is under

examination (in which case the entity’s

classification will be determined in the

examination).

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its 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 (a signed original and

eight (8) copies) that are submitted

timely to the IRS. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for Wednesday, August 21, 1996, at 10

a.m. in the Auditorium of the 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 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

written comments by August 12, 1996

and submit an outline of the topics to

be discussed and the time to be devoted

to each topic (signed original and eight

(8) copies) by August 12, 1996.
21994 Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules

A period of 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 authors of these

regulations are Armando Gomez of the

Office of Assistant Chief Counsel

(Passthroughs and Special Industries)

and Ronald M. Gootzeit and William H.

Morris 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 continues to read in part as

follows:

Authority: 26 U.S.C. 7805. * * *

Par. 2. Section 1.581–1 is revised to

read as follows:

§ 1.581–1 Tax on banks.

(a) For an institution to be a bank for

purposes of section 581, it must be a

corporation for federal tax purposes. See

§ 301.7701–2(b) of this chapter for the

definition of corporation.

(b) This section applies to taxable

years beginning on or after the date that

final regulations are published in the

Federal Register.

§ 1.581–2 [Amended]

Par. 3. In § 1.581–2, paragraph (a) is

amended by removing the first sentence.

Par. 4. In § 1.761–1, paragraph (a) is

revised to read as follows:

§ 1.761–1 Terms defined.

(a) Partnership. The term partnership

means a partnership as determined

under §§ 301.7701–1, 301.7701–2, and

301.7701–3.

* * * * *

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 5. The authority citation for part

301 continues to read in part as follows:

Authority: 26 U.S.C. 7805.* * *

Par. 6. Section 301.6109–1, as

proposed to be amended in project

number INTL–0024–94, published on

June 8, 1995, at 60 FR 30214, and INTL–

062–90, INTL–0032–93, INTL–52–86,

and INTL–52–94, published on April

22, 1996, at 61 FR 17666, is amended as

follows:

1. Paragraph (b)(2)(v) is amended by

removing the language ‘‘.’’ at the end of

the paragraph, and replacing it with the

language ‘‘; and’’.

2. Paragraph (b)(2)(vi) is added.

3. The text of paragraph (d)(2) is

redesignated as paragraph (d)(2)(i).

4. A paragraph heading is added for

newly designated paragraph (d)(2)(i).

5. Paragraph (d)(2)(ii) is added.

The revisions and additions read as

follows:

§ 301.6109–1 Identifying numbers.

* * * * *

(b) * * *

(2) * * *

(vi) A foreign person that makes an

election under § 301.7701–3(c).

* * * * *

(d) * * *

(2) Employer identification number—

(i) In general. * * *

(ii) Special rule for entities electing to

change their federal tax classification

under § 301.7701–3(c). Any entity that

has an employer identification number

and then elects under § 301.7701–3(c) to

change its federal tax classification will

retain that employer identification

number.

* * * * *

Par. 7. Sections 301.7701–1,

301.7701–2, and 301.7701–3 are revised

to read as follows:

§ 301.7701–1 Classification of

organizations for federal tax purposes.

(a) Organizations for federal tax

purposes—(1) In general. The Internal

Revenue Code prescribes the

classification of various organizations

for federal tax purposes. Whether an

organization is an entity separate from

its owners for federal tax purposes is a

matter of federal tax law and does not

depend on whether the organization is

recognized as an entity under local law.

(2) Certain joint undertakings give rise

to entities for federal tax purposes. A

joint venture or other contractual

arrangement may create a separate

entity for federal tax purposes if the

participants carry on a trade, business,

financial operation, or venture and

divide the profits therefrom. For

example, a separate entity exists for

federal tax purposes if co-owners of an

apartment building lease space and in

addition provide services to the

occupants either directly or through an

agent. Nevertheless, a joint undertaking

merely to share expenses does not create

a separate entity for federal tax

purposes. For example, if two or more

persons jointly construct a ditch merely

to drain surface water from their

properties, they have not created a

separate entity for federal tax purposes.

Similarly, mere co-ownership of

property that is maintained, kept in

repair, and rented or leased does not

constitute a separate entity for federal

tax purposes. For example, if an

individual owner, or tenants in

common, of farm property lease it to a

farmer for a cash rental or a share of the

crops, they do not necessarily create a

separate entity for federal tax purposes.

(3) Certain local law entities not

recognized. An entity formed under

local law is not always recognized as a

separate entity for federal tax purposes.

For example, an organization wholly

owned by a State is not recognized as

a separate entity for federal tax purposes

if it is an integral part of the State.

Similarly, tribes incorporated under

section 17 of the Indian Reorganization

Act of 1934, as amended, 25 U.S.C. 477,

or under section 3 of the Oklahoma

Indian Welfare Act, as amended, 25

U.S.C. 503, are not recognized as

separate entities for federal tax

purposes.

(4) Single owner organizations. Under

§§ 301.7701–2 and 301.7701–3, certain

organizations that have a single owner

can choose to be recognized or

disregarded as entities separate from

their owners.

(b) Classification of organizations.

The classification of organizations that

are recognized as separate entities is

determined under §§ 301.7701–2,

301.7701–3, and 301.7701–4 (unless a

provision of the Internal Revenue Code

provides for special treatment of that

organization). For the classification of

organizations as trusts, see § 301.7701–

4. That section provides that trusts

generally do not have associates or an

objective to carry on business for profit.

Sections 301.7701–2 and 301.7701–3

provide rules for classifying

organizations that are not classified as

trusts.

(c) Qualified cost sharing

arrangements. See § 301.7701–3(e) as

contained in 26 CFR Part 301 as revised

as of April 1, 1996.

(d) Domestic and foreign entities. For

purposes of this section and
Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21995

§§ 301.7701–2 and 301.7701–3, an

entity is a domestic entity if it is created

or organized in the United States or

under the law of the United States or of

any State; an entity is foreign if it is not

domestic. See sections 7701(a)(4) and

(a)(5).

(e) State. For purposes of this section

and § 301.7701–2, the term State

includes the District of Columbia.

(f) Effective date. The rules of this

section apply to periods beginning on or

after the date that final regulations are

published in the Federal Register.

§ 301.7701–2 Business entities;

definitions.

(a) Business entities. For purposes of

this section and § 301.7701–3, a

business entity is any entity recognized

for federal tax purposes (including an

entity with a single owner that may be

disregarded as an entity separate from

its owner under § 301.7701–3) that is

not properly classified as a trust under

§ 301.7701–4 (or otherwise subject to

special treatment under the Internal

Revenue Code). A business entity with

two or more members is classified for

federal tax purposes as either a

corporation or a partnership. A business

entity with only one owner is classified

as a corporation or is disregarded; if the

entity is disregarded, its activities are

treated in the same manner as a sole

proprietorship, branch, or division of

the owner.

(b) Corporations. For federal tax

purposes, the term corporation means—

(1) A business entity organized under

a Federal or State statute, or under a

statute of a federally recognized Indian

tribe, if the statute describes or refers to

the entity as incorporated or as a

corporation, body corporate, or body

politic;

(2) An association (as determined

under § 301.7701–3);

(3) A business entity organized under

a State statute, if the statute describes or

refers to the entity as a joint-stock

company or joint-stock association;

(4) A business entity that is taxable as

an insurance company under

subchapter L, chapter 1 of the Internal

Revenue Code;

(5) A State-chartered business entity

conducting banking activities, if any of

its deposits are insured under the

Federal Deposit Insurance Act, as

amended, 12 U.S.C. 1811 et seq., or a

similar federal statute;

(6) A business entity wholly owned

by a State or any political subdivision

thereof;

(7) A business entity that is taxable as

a corporation under a provision of the

Internal Revenue Code other than

section 7701(a)(3); and

(8) Except as provided in paragraph

(d) of this section, the following

business entities formed in the

following jurisdictions:

American Samoa, Corporation

Argentina, Sociedad Anonima

Aruba, Naamloze Vennootschap

Australia, Public Limited Company

Austria, Aktiengesellschaft

Barbados, Limited Company

Belize, Public Limited Company

Belgium, Societe Anonyme or Naamloze

Vennootschap

Bolivia, Sociedad Anonima

Brazil, Sociedade Anonima

Canada, Corporation

Chile, Sociedad Anonima

People’s Republic of China, Company

Limited by Shares

Republic of China (Taiwan), Company

Limited by Shares

Colombia, Sociedad Anonima

Costa Rica, Sociedad Anonima

Cyprus, Public Limited Company

Czech Republic, Akciova Spolecnost

Denmark, Aktieselskab

Ecuador, Sociedad Anonima or

Compania Anonima

El Salvador, Sociedad Anonima

Egypt, Sharikat Al-Mossahamah

Finland, Osakeyhtio/Aktiebolag

France, Societe Anonyme

Germany, Aktiengesellschaft

Greece, Anonymos Etairia

Guam, Corporation

Guatemala, Sociedad Anonima

Guyana, Public Limited Company

Honduras, Sociedad Anonima

Hong Kong, Public Limited Company

Hungary, Reszvenytarsasag

Iceland, Hlutafelag

India, Public Limited Company

Indonesia, Perseroan Terbatas

Ireland, Public Limited Company

Israel, Public Limited Company

Italy, Societa per Azioni

Jamaica, Public Limited Company

Japan, Kabushiki Kaisha

Kazakstan, Ashyk Aktsionerlik Kogham

Republic of Korea, Chusik Hoesa

Liberia, Corporation

Luxembourg, Societe Anonyme

Malaysia, Berhad

Malta, Partnership Anonyme

Mexico, Sociedad Anonima

Morocco, Societe Anonyme

Netherlands, Naamloze Vennootschap

Netherlands Antilles, Naamloze

Vennootschap

New Zealand, Limited Company

Nicaragua, Compania Anonima

Nigeria, Public Limited Company

Northern Mariana Islands, Corporation

Norway, Aksjeselskap

Pakistan, Public Limited Company

Panama, Sociedad Anonima

Paraguay, Sociedad Anonima

Peru, Sociedad Anonima

Philippines, Stock Corporation

Poland, Spolka Akcyjna

Portugal, Sociedade Anonima

Puerto Rico, Corporation

Romania, Societe pe Actiuni

Russia, Otkrytoye Aktsionernoy

Obshchestvo

Saudi Arabia, Sharikat Al-Mossahamah

Singapore, Public Limited Company

Slovak Republic, Akciova Spolocnost

South Africa, Public Limited Company

Spain, Sociedad Anonima

Surinam, Naamloze Vennootschap

Sweden, Aktiebolag

Switzerland, Aktiengesellschaft or

Societe Anonyme

Thailand, Borisat Chamkad

(Machachon)

Trinidad & Tobago, Public Limited

Company

Turkey, Anonim Sirket

Tunisia, Societe Anonyme

Ukraine, Aktsionerne Tovaristvo

Vidkritogo Tipu

United Kingdom, Public Limited

Company

United States Virgin Islands,

Corporation

Uruguay, Sociedad Anonima

Venezuela, Sociedad Anonima or

Compania Anonima

(c) Other business entities. For federal

tax purposes—

(1) The term partnership means a

business entity that is not a corporation

under paragraph (b) of this section and

that has at least two members; and

(2) A business entity that has a single

owner and is not a corporation under

paragraph (b) of this section is

disregarded as an entity separate from

its owner.

(d) Special rule for certain foreign

business entities. A foreign business

entity described in paragraph (b)(8) of

this section is classified as a partnership

if—

(1) The entity was in existence and

claimed to be a partnership on May 8,

1996 and for all prior periods;

(2) That classification was relevant to

any person for federal tax purposes at

any time during the period that includes

May 8, 1996;

(3) The entity had a reasonable basis

(within the meaning of section 6662) for

claiming partnership classification; and

(4) Neither the entity nor any member

has been notified in writing on or before

May 8, 1996 that the classification of the

entity is under examination (in which

case the entity’s classification will be

determined in the examination).

(e) Effective date. The rules of this

section apply to periods beginning on or

after the date that final regulations are

published in the Federal Register.
21996 Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules

§ 301.7701–3 Classification of certain

business entities.

(a) In general. A business entity that

is not classified as a corporation under

§ 301.7701–2(b) (1), (3), (4), (5), (6), (7),

or (8) (an eligible entity) can elect its

classification for federal tax purposes as

provided in this section. An eligible

entity with at least two members can

elect to be classified as either an

association (and thus a corporation

under § 301.7701–2(b)(2)) or a

partnership, and an eligible entity with

a single member can elect to be

classified as an association or to be

disregarded as an entity separate from

its owner. Paragraph (b) of this section

provides a default classification for an

eligible entity that does not make an

election. Thus, elections are necessary

only when an eligible entity chooses to

be classified initially as other than the

default classification or when an eligible

entity chooses to change its

classification. Paragraph (c) of this

section provides rules for making

express elections. Paragraph (d) of this

section provides a special rule for

classifying an entity created pursuant to

a termination of a partnership under

section 708(b)(1)(B). Paragraph (e) of

this section sets forth the effective date

of this section and a special rule relating

to prior periods.

(b) Classification of eligible entities

that do not file an election—(1)

Domestic eligible entities. Except as

provided in paragraph (b)(3) of this

section, unless the entity elects

otherwise, a domestic eligible entity is—

(i) A partnership if it has two or more

members; or

(ii) Disregarded as an entity separate

from its owner if it has a single owner.

(2) Foreign eligible entities—(i) In

general. Except as provided in

paragraph (b)(3) of this section, unless

the entity elects otherwise, a foreign

eligible entity is—

(A) A partnership if it has two or more

members and any member has

unlimited liability;

(B) An association if no member has

unlimited liability; or

(C) Disregarded as an entity separate

from its owner if it has a single owner

that has unlimited liability.

(ii) Definition of unlimited liability.

For purposes of paragraph (b)(2)(i) of

this section, a member of a foreign

eligible entity has unlimited liability if

the member has personal liability for the

debts of or claims against the entity, by

reason of being a member, based solely

on the statute or law pursuant to which

the entity is organized. A member has

personal liability if creditors of the

entity may seek satisfaction of debts of

or claims against the entity from the

member as such. A member has

personal liability for purposes of this

paragraph even if the member makes an

agreement under which another person

(whether or not a member of the entity)

assumes such liability or agrees to

indemnify such member for any such

liability.

(3) Existing eligible entities. Unless

the entity elects otherwise, an eligible

entity in existence prior to the effective

date of this section will have the same

classification that the entity claimed

under §§ 301.7701–1 through 301.7701–

3 as in effect on the date prior to the

effective date of this section; except that

if an eligible entity with a single owner

claimed to be a partnership under those

regulations, the entity will be

disregarded as an entity separate from

its owner under this paragraph. For

special rules regarding the classification

of such entities for periods prior to the

effective date of this section, see

paragraph (e)(2) of this section. For

purposes of this paragraph, a foreign

eligible entity is treated as being in

existence prior to the effective date of

this section only if the entity’s

classification is relevant to any person

for federal tax purposes at any time

during the period that includes the date

immediately prior to the effective date

of this section.

(c) Elections—(1) Time and place for

filing—(i) In general. Except as provided

in paragraphs (c)(1)(ii) and (iii) of this

section, an eligible entity may elect to

be classified other than as provided

under paragraph (b) of this section, or to

change its classification, by filing an

election with the appropriate service

center. Such an election shall specify

the name, address, and taxpayer

identifying number of the entity, the

chosen classification, whether the

election results in a change in

classification, and whether the entity is

a domestic or foreign entity. The

election will be effective on the date

specified on the election if that date is

not more than 75 days prior to the date

on which the election is filed, or on the

date filed if no such date is specified on

the election. If the Commissioner

prescribes a form for this purpose, the

election shall be made on such form.

See § 301.6109–1 for rules on applying

for and displaying Employer

Identification Numbers.

(ii) Limitation. If an eligible entity

makes an election under this paragraph

(c) to change its classification (other

than an election made by an existing

entity to change its classification as of

the effective date of this section), it

cannot change its classification by

election again during the sixty months

succeeding the effective date of the

election.

(iii) Special rule for exempt

organizations. An eligible entity that has

been determined to be, or claims to be,

exempt from taxation under section

501(a) is treated as having made an

election under this section to be

classified as an association. Such

election will be effective as of the first

date for which exemption is claimed or

determined to apply, regardless of when

the claim or determination is made, and

will remain in effect unless an election

is made under paragraph (c)(1)(i) of this

section after the date the claim for

exempt status is withdrawn or rejected

or the date the determination of exempt

status is revoked.

(iv) Examples. The following

examples illustrate the rules of this

paragraph (c)(1):

Example 1. On July 1, 1998, X, a domestic

corporation, purchases a 10% interest in Y,

an eligible entity formed under Country A

law in 1990. The entity’s classification was

not relevant to any person for federal tax

purposes prior to X’s acquisition of an

interest in Y. Thus, Y is not considered to be

in existence on the effective date of this

section for purposes of paragraph (b)(3) of

this section. Under the applicable Country A

statute, no member of Y has unlimited

liability as defined in paragraph (b)(2)(ii) of

this section. Accordingly, Y is classified as

an association under paragraph (b)(2)(i)(B) of

this section unless it elects under paragraph

(c) of this section to be classified as a

partnership. To be classified as a partnership

as of July 1, 1998, Y must file the election

by September 13, 1998. See paragraph

(c)(1)(i) of this section. Because an election

cannot be effective more than 75 days prior

to the date on which it is filed, if Y files its

election after September 13, 1998, it will be

classified as an association from July 1, 1998,

until the effective date of the election. In that

case, it could not change its classification by

election under paragraph (c) of this section

during the sixty months succeeding the

effective date of the election.

Example 2. (i) Z is an eligible entity formed

under Country B law and is in existence on

the effective date of this section within the

meaning of paragraph (b)(3) of this section.

Prior to the effective date of this section, Z

claimed to be classified as an association.

Unless Z files an election under paragraph (c)

of this section, it will continue to be

classified as an association under paragraph

(b)(3) of this section.

(ii) Z files an election under paragraph (c)

of this section to be classified as a

partnership, effective as of the effective date

of this section. Z can file an election to be

classified as an association at any time

thereafter, but then would not be permitted

to change its classification by election during

the sixty months succeeding the effective

date of that subsequent election.

(2) Authorized signatures. An election

made under paragraph (c)(1)(i) of this

section must be signed by—
Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21997

(i) Each member of the electing entity;

or

(ii) Any officer, manager, or member

of the electing entity who is authorized

to make the election and who represents

to having such authorization under

penalties of perjury.

(3) Further notification of elections.

An eligible entity required to file a

federal tax return for the taxable year for

which an election is made under

paragraph (c)(1)(i) of this section shall

attach a copy of the form filed in

accordance with paragraph (c)(1)(i) of

this section to its federal tax return for

that year. If the entity is not required to

file a return for that year, the

Commissioner will require that a copy

of such form be attached to the federal

income tax return of any direct or

indirect owner of the entity for the

taxable year of the owner that includes

the date on which the election was

effective.

(d) Special rule for certain

partnership terminations. When a

partnership terminates by operation of

section 708(b)(1)(B) (on the sale or

exchange of fifty percent or more of the

total interests in partnership capital or

profits within a twelve month period),

the resulting entity created by such

termination is a partnership.

(e) Effective date—(1) In general. The

rules of this section apply to periods

beginning on or after the date that final

regulations are published in the Federal

Register.

(2) Prior treatment of existing entities.

In the case of a business entity that is

not described in § 301.7701–2(b) (1), (3),

(4), (5), (6), or (7), and that is in

existence prior to the effective date of

this section, the entity’s claimed

classification will be respected for all

periods prior to the effective date of this

section if—

(i) The entity had a reasonable basis

(within the meaning of section 6662) for

its claimed classification;

(ii) The entity claimed that same

classification for all prior periods; and

(iii) Neither the entity nor any

member has been notified in writing on

or before May 8, 1996 that the

classification of the entity is under

examination (in which case the entity’s

classification will be determined in the

examination).

Par. 8. Section 301.7701–4 is

amended as follows:

1. The last sentence of paragraphs (b),

(c)(1), (c)(2) Example 1, and (c)(2)

Example 3 are revised.

2. Paragraph (f) is added.

The revisions and additions read as

follows:

§ 301.7701–4 Trusts.

* * * * *

(b) Business trusts. * * * The fact

that any organization is technically cast

in the trust form, by conveying title to

property to trustees for the benefit of

persons designated as beneficiaries, will

not change the real character of the

organization if the organization is more

properly classified as a business entity

under § 301.7701–2.

(c) * * * (1) * * * An investment

trust with multiple classes of ownership

interests ordinarily will be classified as

a business entity under § 301.7701–2;

however, an investment trust with

multiple classes of ownership interests,

in which there is no power under the

trust agreement to vary the investment

of the certificate holders, will be

classified as a trust if the trust is formed

to facilitate direct investment in the

assets of the trust and the existence of

multiple classes of ownership interests

is incidental to that purpose.

(2) * * *

Example 1. * * * As a consequence, the

existence of multiple classes of trust

ownership is not incidental to any purpose

of the trust to facilitate direct investment,

and, accordingly, the trust is classified as a

business entity under § 301.7701–2.

* * * * *

Example 3. * * * Accordingly, the trust is

classified as a business entity under

§ 301.7701–2.

* * * * *

(f) Effective date. The rules of this

section generally apply to taxable years

beginning after December 31, 1960.

Paragraph (e)(5) of this section contains

rules of applicability for paragraph (e) of

this section. In addition, the last

sentences of paragraphs (b), (c)(1), and

(c)(2) Example 1 and Example 3 of this

section apply to taxable years beginning

on or after the date that final regulations

are published in the Federal Register.

Par. 9. Section 301.7701–6 is revised

to read as follows:

§ 301.7701–6 Definitions; person,

fiduciary.

(a) Person. The term person includes

an individual, a corporation, a

partnership, a trust or estate, a jointstock company, an association, or a

syndicate, group, pool, joint venture, or

other unincorporated organization or

group. The term also includes a

guardian, committee, trustee, executor,

administrator, trustee in bankruptcy,

receiver, assignee for the benefit of

creditors, conservator, or any person

acting in a fiduciary capacity.

(b) Fiduciary—(1) In general.

Fiduciary is a term that applies to

persons who occupy positions of

peculiar confidence toward others, such

as trustees, executors, and

administrators. A fiduciary is a person

who holds in trust an estate to which

another has a beneficial interest, or

receives and controls income of another,

as in the case of receivers. A committee

or guardian of the property of an

incompetent person is a fiduciary.

(2) Fiduciary distinguished from

agent. There may be a fiduciary

relationship between an agent and a

principal, but the word agent does not

denote a fiduciary. An agent having

entire charge of property, with authority

to effect and execute leases with tenants

entirely on his own responsibility and

without consulting his principal, merely

turning over the net profits from the

property periodically to his principal by

virtue of authority conferred upon him

by a power of attorney, is not a fiduciary

within the meaning of the Internal

Revenue Code. In cases when no legal

trust has been created in the estate

controlled by the agent and attorney, the

liability to make a return rests with the

principal.

(c) Effective date. The rules of this

section are effective on the date that

final regulations are published in the

Federal Register.

§ 301.7701–7 [Removed]

Par. 10. Section 301.7701–7 is

removed.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96–11780 Filed 5–9–96; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Chapter II

Meeting of the Federal Gas Valuation

Negotiated Rulemaking Committee

AGENCY: Minerals Management Service,

Interior.

ACTION: Notice of meeting.

SUMMARY: The Secretary of the

Department of the Interior (Department)

established a Federal Gas Valuation

Negotiated Rulemaking Committee

(Committee) to develop specific

recommendations with respect to

Federal gas valuation under its

responsibilities imposed by the Federal

Oil and Gas Royalty Management Act of

1982 (FOGRMA). The Department has

determined that the establishment of

this Committee is in the public interest

and will assist the agency in performing

its duties under FOGRMA.

MMS published a proposed rule on

November 6, 1995, in the Federal