Amendment, Check the Box Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [TD 8970] RIN 1545-AY16

TITLE: Amendment, Check the Box Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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. 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: §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.

* * * * *

Deputy Commissioner of Internal Revenue Service

Approved:

Assistant Secretary of the Treasury

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