Amendment, Check the Box Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [REG-110659-00] RIN 1545-
AY16

TITLE: Amendment, Check the Box Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that provide
guidance relating to elective changes in entity classification. The
proposed 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: Written or electronic comments, or requests for a public
hearing must be received by February 2, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-110659-00), room
5226, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to:

CC:M&SP:RU (REG-110659-00),
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 on the IRS Home Page,
or by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, David J. Sotos, (202) 622-3050; concerning submissions
of comments, or to request a hearing, Sonya Cruse, (202) 622-7180
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

On November 29, 1999, Treasury and the IRS published final
regulations (TD 8844) 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 20, 2000, Treasury and the IRS issued final regulations
relating to qualified subchapter S subsidiaries. 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 have 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 provided 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.

Explanation of Provisions

A. In General

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 changes from association to
a partnership and to a disregarded entity result 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
§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 proposed 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.

B. Proposed Effective Dates

These regulations are proposed to apply to elections occurring on or
after the date final regulations are published in the Federal
Register; however, it is also proposed that taxpayers may elect to
apply the amendments retroactively. Special Analyses It has been
determined that this notice of proposed rulemaking is not a
significant regulatory action as defined in Executive Order 12866.
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, 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 Requests for a 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.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the   "Tax Regs" option on the IRS Home Page,
or by submitting comments directly to the IRS Internet Site at
http://www.irs.ustreas.gov/tax_regs/comments.html. All comments will
be available for public inspection and copying. The Treasury
Department and IRS specifically request comments on the clarity of
the proposed regulations and how they may be made easier to
understand. A public hearing may be scheduled if requested in
writing by any person that timely submits written comments. If a
public hearing is scheduled, notice of the date, time, and place for
the hearing will be published in the Federal Register.

Drafting Information

The principal authors of these proposed regulations are David J.
Sotos, and Jeanne M. Sullivan of Associate Chief Counsel
(Passthroughs & Special Industries). However, other personnel from
the Treasury Department and IRS 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.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 301
is proposed to be amended as follows:

PART 301 B 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 paragraph (g)(2)(i).

2. Adding a new paragraph (g)(2)(ii).

3. Revising the first sentence of paragraph (g)(4).

The addition and revision read as follows: §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 effective on or after the
date these regulations are published as final regulations in the
Federal Register. Taxpayers may apply this paragraph (g)(2)(ii)
retroactively to elections filed before these regulations are
published as final regulations in the Federal Register 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.

* * * * *

Deputy Commissioner of Internal Revenue Service

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