Source: https://www.federalregister.gov/documents/2003/10/22/03-26547/special-rules-for-certain-foreign-business-entities
Timestamp: 2019-12-10 13:28:18
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Federal Register :: Special Rules for Certain Foreign Business Entities
A Rule by the Internal Revenue Service on 10/22/2003
60296-60299 (4 pages)
TD 9093
1545-AX39
https://www.federalregister.gov/d/03-26547 https://www.federalregister.gov/d/03-26547
On December 18, 1996, Treasury and IRS published in the Federal Register (61 FR 66584) final regulations relating to the classification of business entities under section 7701 (check-the-box regulations). On November 29, 1999, Treasury and the IRS published in the Federal Register (64 FR 66591) a notice of proposed rulemaking (REG-110385-99) proposing to amend §§ 301.7701-2 and 301.7701-3 of the current check-the-box regulations (proposed regulations). A public hearing on the proposed regulations was held on January 31, 2000. In addition, written comments were received. Most of the written and oral comments related to proposed § 301.7701-3(h), which provided a rule that would have operated to change the classification of a foreign disregarded entity if a so-called “extraordinary transaction” occurred one day before or within one year after the election to treat the entity as disregarded. On June 26, 2003, Treasury and the IRS issued Notice 2003-46 (2003-28 IRB 53) announcing the intention to withdraw this extraordinary transaction rule of proposed § 301.7701-3(h) and to finalize the remaining provisions of the proposed regulations.
With the publication of a notice of withdrawal elsewhere in this issue of the Federal Register, proposed § 301.7701-3(h) is withdrawn. This Treasury decision adopts without substantive change the remaining provisions of the proposed regulations. The final regulations thus adopt the following provisions from the proposed regulations: (1) The rule that terminates the grandfathered status of certain foreign business entities when there has been a 50 percent change of ownership of such entity; (2) the provision clarifying that a foreign eligible entity with respect to which an entity classification election is made and which is not otherwise relevant for Federal tax purposes is deemed so relevant only on the effective date specified on a Form 8832, “Entity Classification Election'; and (3) the modifications to the classification rules for certain foreign eligible entities that have never been relevant or are no longer relevant for Federal tax purposes.
The check-the-box regulations allow certain foreign business entities that were in existence and treated as partnerships prior to the date the check-the-box regulations were proposed (PS-43-95, 61 FR 21989) and that would otherwise be classified as per se corporations under § 301.7701-2(b)(8)(i) to remain classified as partnerships if the conditions enumerated in § 301.7701-2(d)(1) are satisfied. These rules also provide that the occurrence of certain events results in a termination of this grandfathered status. See § 301.7701-2(d)(3)(i). The final regulations adopt the rule in the proposed regulations at § 301.7701-2(d)(3)(i) that provides an additional event resulting in the termination of an entity's grandfathered status. Under this rule, an entity's grandfathered status is terminated on the date when one or more persons who were not owners of the entity as of November 29, 1999, own in the aggregate a 50 percent or greater interest in the entity. Consistent with the proposed regulations, the final regulations provide that this rule will apply as of the date the final regulations are published in the Federal Register; therefore, if persons that were not owners of a grandfathered entity on November 29, 1999, obtain a greater than 50 percent ownership interest between November 29, 1999, and October 22, 2003, the grandfathered entity will cease to have that status on October 22, 2003.
These final regulations adopt the two rules in the proposed regulations that relate to the application of the 60-month rule. First, these final regulations adopt the rule providing that the classification of a foreign eligible entity that files an entity classification election is deemed to be relevant for Federal tax purposes on the effective date of the election for purposes of the 60-month rule. Second, these final regulations adopt the rule providing that the classification of a foreign eligible entity whose classification has never been relevant for Federal tax purposes will initially be determined pursuant to the default classification provisions of § 301.7701-3(b)(2) at the time the classification of the entity first becomes relevant.
One commentator requested that the regulations clarify why the classification of a foreign eligible entity, not otherwise Start Printed Page 60298relevant, that files Form 8832, “Entity Classification Election”, is deemed relevant only on the date the entity classification election is effective. The commentator neither suggested what the period of deemed relevance should be if not limited to one day nor suggested a principle for when the deemed relevance should terminate such that the 60-month rule would be triggered. In the interest of certainty and administrability of the application of the 60-month rule, Treasury and the IRS have retained the limitation of deemed relevance to the day on which the entity's classification is effective.
One commentator requested further guidance on when and under what circumstances the classification of a foreign eligible entity that was previously relevant ceases to be relevant under the 60-month rule. Treasury and the IRS believe § 301.7701-3(d)(1) and (3) provide sufficient guidance on when an entity's classification becomes relevant and, accordingly, when an entity's classification ceases to be relevant.
One commentator suggested that the regulations be revised to provide that an election by a non-relevant foreign entity to continue its current classification may be filed at any time within the 60-month period starting on the day after the date of the most recent election for that entity, and that such election will start a new 60-month period. Section 301.7701-3(c) provides that an eligible entity may elect to be classified other than as provided under the default classification rules of § 301.7701-3(b), or to change its election. Allowing an eligible entity whose classification is not relevant to renew its election for purposes of the 60-month rule would frustrate the policies underlying that rule. Accordingly, the suggestion was not adopted.
One commentator requested clarification and examples regarding the determination of the classification of a foreign eligible entity whose classification was never relevant or whose classification has not been relevant for 60 months and therefore has lapsed under the 60-month rule. In either case (assuming in the latter case that no election is made following the lapse of the classification), the entity's classification initially will be determined under the default classification rules of § 301.7701-3(b)(2) when the classification of the entity becomes relevant. Under the general rules of § 301.7701-3(c), an eligible entity may elect at such time to be classified other than as provided under the default classification rules, and may elect at some later time to change its classification. Treasury and the IRS do not believe at this time that further guidance or examples are needed to illustrate these general rules.
The principal authors of these regulations are Aaron A. Farmer and Ronald M. Gootzeit, Office of Associate Chief Counsel (International). However, other personnel from Treasury and the IRS participated in their development.
§ 301.7701-3
(d) Special rules for foreign eligible entities—(1) Definition of relevance—(i) General rule. * * *
(3) Special rule when classification is no longer relevant. If the classification of a foreign eligible entity is not relevant (as defined in paragraph (d)(1) of this section) for 60 consecutive months, then the entity's classification will initially be determined pursuant to the provisions of paragraph (b)(2) of this section when the classification of the foreign eligible entity becomes relevant (as defined in paragraph (d)(1)(i) of this section). The date that the classification of a foreign entity is not relevant is the date an event occurs that causes the classification to no longer be relevant, or, if no event occurs in a taxable year Start Printed Page 60299that causes the classification to be relevant, then the date is the first day of that taxable year.
[FR Doc. 03-26547 Filed 10-21-03; 8:45 am]