[Federal Register Volume 66, Number 242 (Monday, December 17, 2001)]
[Rules and Regulations]
[Pages 64911-64912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31006]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 8970]
RIN 1545-AY16


Amendment, Check the Box Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to elective 
changes in entity classification under section 7701 of the Internal 
Revenue Code. The regulations apply to subsidiary corporations that 
elect to change their classification for Federal tax purposes from a 
corporation to either a partnership or disregarded entity.

DATES: Effective Date: These regulations are effective December 17, 
2001.

FOR FURTHER INFORMATION CONTACT: Beverly Katz, (202)622-3050 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On November 29, 1999, final regulations were published in the 
Federal Register (TD 8844, 64 FR 66580 (1999-2 C.B. 661)) describing 
the transactions that are deemed to occur when an entity elects to 
change its classification for Federal tax purposes. Those regulations 
did not address certain requirements of section 332 as applied to the 
deemed liquidation incident to an association's election to be 
classified as a partnership or to be disregarded as an entity separate 
from its owner. This amendment to the final regulations addresses those 
requirements.
    On January 25, 2000, final regulations were published in the 
Federal Register (TD 8869, 65 FR 3843 (2000-6 I.R.B. 498)) relating to 
qualified subchapter S subsidiaries (QSub). In order to permit the 
deemed transaction resulting from a QSub election to comply with the 
requirement of section 332 that a plan of liquidation has been adopted 
at the time of a liquidating distribution, the final regulations 
provide that a plan of liquidation is deemed adopted immediately before 
the deemed liquidation incident to the QSub election, unless a formal 
plan of liquidation that contemplates the filing of a QSub election is 
adopted on an earlier date. The preamble to the QSub regulations 
provides that Treasury and the IRS intend to amend the section 7701 
regulations regarding elective changes in entity classification to 
provide a similar rule concerning the timing of the plan of 
liquidation.
    Consistent with the commitment in the preamble to the QSub 
regulations, on January 17, 2001, proposed regulations were published 
in the Federal Register (REG-110659-00, 66 FR 3959 (2001-12 I.R.B. 
917)) under section 7701. No comments were received from the public in 
response to the proposed regulations. No public hearing was requested 
or held. The proposed regulations are adopted by this Treasury 
decision.

[[Page 64912]]

Explanation of Provisions

    Section 301.7701-3(g)(1) describes how elective changes in the 
classification of an entity will be treated for tax purposes. Section 
301.7701-3(g)(1)(ii) provides that an elective conversion of an 
association to a partnership is deemed to have the following form: the 
association distributes all of its assets and liabilities to its 
shareholders in liquidation of the association, and immediately 
thereafter, the shareholders contribute all of the distributed assets 
and liabilities to a newly formed partnership. Section 301.7701-
3(g)(1)(iii) provides that an elective conversion of an association to 
an entity that is disregarded as an entity separate from its owner is 
deemed to have the following form: the association distributes all of 
its assets and liabilities to its single owner in liquidation of the 
association.
    Section 332 may be relevant to the deemed liquidation of an 
association if it has a corporate owner. Under section 332, no gain or 
loss is recognized on the receipt by a corporation of property 
distributed in complete liquidation of another corporation if the 
requirements of section 332(b) are satisfied. Those requirements 
include the adoption of a plan of liquidation at a time when the 
corporation receiving the distribution owns stock of the liquidating 
corporation meeting the requirements of section 1504(a)(2) (i.e., 80 
percent of vote and value). The elective change from an association to 
a partnership or to a disregarded entity results in a constructive 
liquidation of the association for federal tax purposes. Formally 
adopting a plan of liquidation for the entity, however, is potentially 
incompatible with an elective change under section 301.7701-3, which 
allows the local law entity to remain in existence while liquidating 
only for federal tax purposes. Accordingly, to provide tax treatment of 
an association's deemed liquidation that is compatible with the 
requirements of section 332, the regulations state that, for purposes 
of satisfying the requirement of adoption of a plan of liquidation 
under section 332(b), a plan of liquidation is deemed adopted 
immediately before the deemed liquidation incident to an elective 
change in entity classification, unless a formal plan of liquidation 
that contemplates the filing of the elective change in entity 
classification is adopted on an earlier date.

Effective Date

    These regulations apply to elections filed on or after December 17, 
2001; however, taxpayers may apply the amendments retroactively if the 
corporate owner claiming treatment under section 332 and its subsidiary 
making the election take consistent positions with respect to the 
Federal tax consequences of the election.

Special Analyses

    It has been determined that these regulations are 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 533(b) of the Administrative Procedures 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. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking preceding these regulations was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Beverly M. Katz of 
the Office of Associate Chief Counsel (Passthroughs & Special 
Industries) and David J. Sotos of the Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and Recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read 
in part as follows:

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


    Par. 2. Section 301.7701-3 is amended as follows:
    1. Redesignating the text of paragraph (g)(2) as paragraph 
(g)(2)(i) and adding a heading for newly designated paragraph 
(g)(2)(i).
    2. Adding a new paragraph (g)(2)(ii).
    3. Revising the first sentence of paragraph (g)(4).
    The additions and revision read as follows:


Sec. 301.7701-3  Classification of certain business entities.

* * * * *
    (g) * * *
    (2) Effect of elective changes--(i) In general. * * *
    (ii) Adoption of plan of liquidation. For purposes of satisfying 
the requirement of adoption of a plan of liquidation under section 332, 
unless a formal plan of liquidation that contemplates the election to 
be classified as a partnership or to be disregarded as an entity 
separate from its owner is adopted on an earlier date, the making, by 
an association, of an election under paragraph (c)(1)(i) of this 
section to be classified as a partnership or to be disregarded as an 
entity separate from its owner is considered to be the adoption of a 
plan of liquidation immediately before the deemed liquidation described 
in paragraph (g)(1)(ii) or (iii) of this section. This paragraph 
(g)(2)(ii) applies to elections filed on or after December 17, 2001. 
Taxpayers may apply this paragraph (g)(2)(ii) retroactively to 
elections filed before December 17, 2001, if the corporate owner 
claiming treatment under section 332 and its subsidiary making the 
election take consistent positions with respect to the federal tax 
consequences of the election.
* * * * *
    (4) Effective date. Except as otherwise provided in paragraph 
(g)(2)(ii) of this section, this paragraph (g) applies to elections 
that are filed on or after November 29, 1999. * * *
* * * * *

    Approved: December 10, 2001.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue Service.
Mark Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 01-31006 Filed 12-14-01; 8:45 am]
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