Simplification of Entity Classification Rules
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that classify
certain
business organizations under an elective regime. These regulations
replace the existing classification rules.
DATES: These regulations are effective as of January 1, 1997.
For dates of applicability of these regulations, see Effective
Dates under Supplementary Information.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Mark D.
Harris, (202) 622-3050; concerning foreign organizations, William H.
Morris or Ronald M. Gootzeit, (202) 622-3880 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final
regulations
have been reviewed and approved by the Office of Management and
Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1486. Responses to these collections of
information
are required to obtain a benefit (to choose an entity's
classification
by election).
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 estimates of the reporting burden in these final regulations
are reflected in the burden estimates in Form 8832 (Entity
Classification Election).
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP,
Washington,
DC 20224, and 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.
Books or records relating to these collections 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.
Background
On April 3, 1995, Notice 95-14 (1995-1 C.B. 297), relating to
classification of business organizations under section 7701 of the
Code, was published in the Internal Revenue Bulletin. 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.
On May 13, 1996, the IRS and Treasury issued a notice of proposed
rulemaking (61 FR 21989 [PS-43-95, 1996-24 I.R.B. 20]) under section
7701. The regulations proposed to replace the existing regulations
for
classifying certain business organizations with an elective regime.
Comments responding to the notice were received, and a public hearing
was held on August 21, 1996. After considering the comments that were
received in response to the notice of proposed rulemaking and the
statements made at the public hearing, the proposed regulations are
adopted as revised by this Treasury decision. The revisions are
discussed below.
Explanation of Provisions
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. Treasury and the IRS believe that those rules have
become
increasingly formalistic. This document replaces those rules with a
much simpler approach that generally is elective.
[[Page 66585]]
As stated in the preamble to the proposed regulations, in light
of
the increased flexibility under an elective regime for the creation
of
organizations classified as partnerships, Treasury and the IRS will
continue to monitor carefully the uses of partnerships in the
international context and will take appropriate action 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.
A. Summary of the Regulations
Section 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. The regulations
explain that certain joint undertakings that are not entities under
local law may nonetheless constitute separate entities for federal
tax
purposes; however, not all entities formed under local law are
recognized as separate entities for federal tax purposes. Whether an
organization is treated as an entity for federal tax purposes is a
matter of federal tax law, and does not affect the rights and
obligations of its owners under local law. For example, if a domestic
limited liability company with a single individual owner is
disregarded
as an entity separate from its owner under Sec. 301.7701-3, its
individual owner is subject to federal income tax as if the company's
business was operated as a sole proprietorship.
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
Qualified Settlement Fund rules (Sec. 1.468B) or the Real Estate
Mortgage Investment Conduit (REMIC) rules, see section 860A(a)). The
regulations provide that trusts generally do not have associates or
an
objective to carry on business for profit. The distinctions between
trusts and business entities, although restated, are not changed by
these regulations.
Section 301.7701-2 clarifies 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
(including a U.S. possession, territory, or commonwealth).
The regulations in Sec. 301.7701-2 include a special grandfather
rule, under which an entity described in the list of foreign entities
treated as per se corporations will nevertheless be classified as
other
than a corporation. The regulations also list certain situations
where
a grandfathered entity would lose its grandfathered status.
Any business entity that is not required to be treated as a
corporation for federal tax purposes (referred to in the regulation
as
an eligible entity) may choose its classification under the rules of
Sec. 301.7701-3. Those rules provide that an eligible entity with at
least two members can be classified as either a partnership or an
association, and that an eligible entity with a single member can be
classified as an association or can be disregarded as an entity
separate from its owner. However, if the single owner of a business
entity is a bank (as defined in section 581), then the special rules
applicable to banks will continue to apply to the single owner as if
the wholly owned entity were a separate entity.
In order to provide most eligible entities with the
classification
they would choose without requiring them to file an election, the
regulations provide default classification rules that aim to match
taxpayers' expectations (and thus reduce the number of elections that
will be needed). The regulations adopt a passthrough default for
domestic entities, under which a newly formed eligible entity will be
classified as a partnership if it has at least two members, or will
be
disregarded as an entity separate from its owner if it has a single
owner. The default for foreign entities is based on whether the
members
have limited liability. Thus a foreign eligible entity will be
classified as an association if all members have limited liability. A
foreign eligible entity will be classified as a partnership if it has
two or more members and at least one member does not have limited
liability; the entity will be disregarded as an entity separate from
its owner if it has a single owner and that owner does not have
limited
liability. Finally, the default classification for an existing entity
is the classification that the entity claimed immediately prior to
the
effective date of these regulations. An entity's default
classification
continues until the entity elects to change its classification by
means
of an affirmative election.
An eligible entity may affirmatively elect its classification on
Form 8832, Entity Classification Election. The regulations require
that
the election be signed by each member of the entity or any officer,
manager, or member of the entity who is authorized to make the
election
and who represents to having such authorization under penalties of
perjury. An election will not be accepted unless it includes all of
the
required information, including the entity's taxpayer identifying
number (TIN).
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.
B. Discussion of Comments on the General Approach and Scope of the
Regulations
Several comments requested clarification with regard to the rules
for determining when an owner of an interest in an organization will
be
respected as a bona fide owner for federal tax purposes. Some
commentators were concerned, for example, that certain owners would
be
required to maintain certain net worth requirements. Other
commentators, relying on Rev. Rul. 93-4, 1993-1 C.B. 225, suggested
that if two wholly-owned subsidiaries of a common parent were the
owners of an organization, those owners would not be respected as
bona
fide owners and the organization would be treated as having only one
owner (the common parent). Although the determination of whether an
organization has more than one owner is based on all the facts and
circumstances, the fact that some or all of the owners of an
organization are under common control does not require the common
parent to be treated as the sole owner. Consistent with this
approach,
Rev. Rul. 93-4 treated two wholly owned subsidiaries as associates
and
then classified the foreign entity based on the four corporate
characteristics under section 7701. While these four factors will no
longer apply with the adoption of the regulations, determining
whether
the subsidiaries are associates continues to be an issue.
The IRS has received a number of comments asking for
clarification
of the tax treatment of entities that are wholly owned by an Indian
tribe and incorporated under tribal law. Treasury and the IRS are
currently studying this
[[Page 66586]]
issue and will, if necessary, issue separate guidance regarding this
issue.
Most commentators agreed that inclusion of the list of foreign
business entities treated as corporations per se was appropriate.
However, several commentators requested clarification about certain
foreign business entities on the per se list. Other commentators
requested clarification whether and how the list of such corporations
might be updated in the future. The regulations are clarified with
respect to entities formed in the following jurisdictions: Aruba,
Canada, People's Republic of China, Republic of China (Taiwan),
India,
Indonesia, Netherlands Antilles, and Sweden. Any further
modifications
will be announced in a notice of proposed rulemaking and will be
prospective only.
Commentators also raised the issue of how to determine if a joint
venture or other contractual arrangement that is considered a
separate
entity under these regulations is considered a foreign or domestic
entity. This issue is outside the scope of these regulations and thus
is not addressed in the final regulations.
Some commentators raised issues relating to the application of
the
grandfather rule for certain existing entities organized under
foreign
statutes included on the list of per se corporations. In particular,
commentators requested clarification regarding existing entities that
would be listed on the per se list. Commentators have asked whether
an
existing entity on the per se list which had claimed non-corporate
status could retain that status, and, if so, whether it could
subsequently elect to be treated as a corporation. Commentators also
asked for clarification as to the effect of a deemed termination
under
section 708(b)(1)(B) or a division under section 708(b)(2)(B) on a
grandfathered per se entity.
In response to these comments, the grandfather rules clarify that
an entity on the list which was previously disregarded as a separate
entity (i.e., treated as a branch) or was treated as a partnership
may
continue to be treated as such when the regulations become effective.
Moreover, entities on the list which continue to treat themselves as
branches or partnerships after the effective date of the regulations
may subsequently elect to be treated as corporations. However, after
such election they may not subsequently elect to be treated as a
partnership or a branch. Finally, any termination under section
708(b)(1)(B) (except in the case of a sale or exchange of interests
in
an entity described in Sec. 301.7701-2(d)(2) where the sale or
exchange
is to a related person within the meaning of sections 267(b) and
707(b)
and occurs no later than 12 months after the date the entity is
formed)
or division under section 708(b)(2)(B) will end the grandfathered
status of any entity on the per se list, and therefore the successor
entity (or entities) will thereafter be permanently treated as a
corporation.
Other commentators suggested that the requirement that an
existing
entity included on the per se list must have claimed passthrough
treatment for all prior periods is burdensome and precludes
grandfather
treatment for entities that restructured in the past and recognized
the
resulting tax consequences. In response to these comments, the
regulations are modified to indicate that an existing entity can
continue to be treated as a non-corporate entity if it was in
existence
on May 8, 1996, and was reasonably treated as a non-corporate entity
on
that date (or formed thereafter pursuant to a written binding
contract
in effect on May 8, 1996, in which the parties agreed to engage
(directly or indirectly) in an active and substantial business
operation in the jurisdiction in which the entity is formed, and
which
would otherwise meet the grandfather rules if the date the entity is
formed is substituted for May 8, 1996). If the entity changed its
claimed tax status within the sixty months prior to May 8, 1996, the
entity and its members must have recognized the tax consequences that
resulted from that change in tax status. Moreover, the regulations
clarify that the grandfather treatment applies if no person for whom
the entity's classification was relevant on May 8, 1996, treats the
entity as a corporation for purposes of filing such person's federal
income tax returns, information returns, and withholding documents
for
the period including May 8, 1996.
One commentator suggested that it was unclear when the
classification of a foreign entity is ``relevant'' for federal tax
purposes. This determination is important, as it affects whether the
grandfather rule, the default rule for existing entities, or the
default rule for a newly formed foreign entity applies. In general,
an
entity's classification is relevant when its classification affects
the
liability of any person for federal tax or information purposes. The
date that the classification of a foreign entity is relevant is the
date an event occurs that causes an obligation to file a return or
statement for which the classification of the entity must be
determined.
C. Discussion of Comments Relating to the Elective Regime
Most of the commentators agreed that the default rules included
in
the proposed regulations generally would match taxpayers'
expectations.
However, some commentators expressed concern over the application of
the default rule for newly formed foreign eligible entities which
would
treat such entities as associations if no member had unlimited
liability. Specifically, certain commentators noted that under the
definition of unlimited liability in the proposed regulations,
certain
contractual joint ventures which, under current law, would generally
be
classified as partnerships, would be treated as associations under
the
default rule. The members of these contractual joint ventures are not
jointly and severally liable for all debts of the entity; rather,
each
member has unlimited liability for a certain proportion of the debts
of
the entity. To simplify the default rules, the regulations are
modified
to provide that a newly formed foreign eligible entity will--(1) be
treated as a partnership if it has at least two members and at least
one member does not have limited liability; (2) be treated as an
association if all members of the entity have limited liability; and
(3) be disregarded as an entity separate from its owner if it has a
single owner that does not have limited liability.
The regulations are modified to provide that a member does not
have
limited liability if the member, by virtue of being a member, has
personal liability for all or any portion of the debts of the entity.
Certain commentators asked for clarification of the default rule
in
the case where the relevant statute or law of a particular country
provides for limited or unlimited liability. Generally, the
regulations
specify that only the statute or law is relevant. Where, however, the
underlying statute allows the entity to specify in its organizational
documents whether the members will have limited liability, the
organizational documents may be relevant.
Some commentators requested that taxpayers be allowed to make
classification elections with their first tax returns. The
regulations
retain the requirement that elections be made at the beginning of the
taxable year. Treasury and the IRS continue to believe that it is
appropriate to determine an entity's classification at the time that
it
begins its operations. Taxpayers can specify the date on which an
election will be effective, provided that date is not more than 75
[[Page 66587]]
days prior to the date on which the election is filed (irrespective
of
when the interest was acquired) and not more than 12 months after the
date the election was filed. If a taxpayer specifies an effective
date
more than 75 days prior to the date on which the election is filed,
the
election will be effective 75 days prior to the date on which the
election was filed. If a taxpayer specifies an effective date more
than
12 months from the filing date, the election will be effective 12
months after the date the election was filed. No election, whenever
filed, will be effective before January 1, 1997.
One commentator expressed concern about the ability to make
protective elections where there is uncertainty, for example, about
an
entity's status as a business entity. Such protective elections are
not
prohibited under the regulations.
The regulations limit the ability of an entity to make multiple
classification elections by prohibiting more than one election to
change an entity's classification during any sixty month period. One
commentator suggested that the regulations be amended to waive
application of this rule in certain circumstances, particularly when
there has been a substantial change in ownership of the entity. In
response to this comment, the regulations permit the Commissioner to
waive the application of the sixty month limitation by letter ruling.
However, waivers will not be granted unless there has been more than
a
fifty percent ownership change. The sixty month limitation only
applies
to a change in classification by election; the limitation does not
apply if the organization's business is actually transferred to
another
entity.
Several commentators requested clarification concerning the
classification of a foreign entity when the classification of the
entity becomes relevant for federal tax purposes after a period
during
which the classification of the entity was not relevant. Generally,
such an entity will retain its prior classification. However, if the
classification of a foreign eligible entity which was previously
relevant for federal tax purposes ceases to be relevant for sixty
consecutive months, the entity's classification will be determined
initially under the default classification when the classification of
the foreign eligible entity again becomes relevant.
Some commentators requested clarification regarding the rule
permitting elections to be signed by any authorized officer, manager,
or member of the electing entity. The regulations retain this rule,
as
it provides taxpayers with flexibility in complying with the election
requirements. The determination of whether a person is authorized to
make an election is based on local law. Thus, the election can be
made
by anyone authorized to act on behalf of the entity.
Several commentators asked for guidance regarding the necessary
signatures on the classification election. The regulations are
modified
to provide that if the election is made by all of the members, each
person who is an owner at the time the election is made must consent
to
the election. However, if an election is to be effective for any
period
prior to the date it is filed, each person who was an owner between
the
date the election is to be effective and the date the election is
filed
(even if by an authorized person), and who is not an owner at the
time
the election is filed, must also consent to the election.
Several commentators requested that the classification election
be
coordinated with the election under section 856(c)(1) to be a real
estate investment trust (REIT). Because the latter election is
required
to be made with the REIT's first tax return, the regulations are
modified to provide that an election by an eligible entity to be a
REIT
will be treated as a deemed election to be classified as an
association, effective for the entire period during which REIT status
is claimed.
Some commentators suggested that the regulations should not
require
an entity or its direct or indirect owners to attach a copy of the
entity's election to their federal tax returns. Specifically, some
commentators were concerned that the failure of one owner to attach a
copy of the election to the owner's return would void an otherwise
valid election. The regulations retain the requirement that taxpayers
must attach a copy of the election to their returns, but clarify that
failure to do so will not invalidate an otherwise valid election.
Although the failure to attach a copy will not adversely affect an
otherwise valid election, taxpayers are reminded that each member of
the entity is required to file returns that are consistent with the
entity's election. Failure to attach the election form to a federal
tax
or information return as directed in the regulations may give rise to
penalties against the non-filing party. Other applicable penalties
may
also apply to parties who file federal tax or information returns
inconsistent with the entity's election.
One commentator asked for guidance on the treatment of
conversions
by election from partnership to corporation and from corporation to
partnership. This issue is outside the scope of these classification
rules and thus is not addressed in these regulations. Treasury and
the
IRS, however, are actively considering issuing guidance on the
treatment of such conversions.
D. Effective Dates
The regulations are effective as of January 1, 1997. The
regulations provide a special transition rule for existing entities.
The IRS will not challenge the prior classification of an existing
eligible entity, or an existing entity described on the per se list,
for periods prior to January 1, 1997, if--(1) the entity had a
reasonable basis (within the meaning of section 6662) for its claimed
classification; (2) the entity and all members of the entity
recognized
the federal tax consequences of any change in the entity's
classification within the sixty months prior to January 1, 1997; and
(3) neither the entity nor any member had been notified in writing on
or before May 8, 1996, that the classification of the entity was
under
examination (in which case the entity's classification will be
determined in the examination).
Some commentators were concerned that an entity organized after
May
8, 1996, would be excluded from this transition rule for existing
entities. Because Sec. 301.7701-3(f)(2) applies to entities that were
in existence prior to January 1, 1997, no change is necessary to
provide relief for entities organized after May 8, 1996.
Some commentators were concerned about entities that claimed to
be
trusts for the period prior to January 1, 1997, but are subsequently
determined to be business entities. In that case, the entity's
claimed
classification for purposes of applying the provisions of the special
transition rule will be the business entity classification claimed by
the entity after it has been determined to be a business entity.
Effect on Other Documents
The Service has published a number of revenue rulings and revenue
procedures interpreting the section 7701 regulations. The Service is
currently reviewing these revenue rulings and revenue procedures to
determine which are affected by the publication of these regulations.
See accompanying Notice 97-1. Special Analyses
It has been determined that this Treasury decision 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
[[Page 66588]]
U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that these regulations do not have a significant economic
impact on a substantial number of small entities. This certification
is
based upon the fact that the automatic classification rules of
Sec. 301.7701-2(b) and the default classification rules of
Sec. 301.7701-3(b) will operate in such a manner that only a limited
number of entities will need to make an election under Sec. 301.7701-
3(c) to determine their classification. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to section 7805(f) of the
Internal
Revenue Code, the notice of proposed rulemaking preceding these final
regulations has been 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 Armando Gomez and
Mark D. Harris of the Office of Assistant Chief Counsel (Passthroughs
and Special Industries) and William H. Morris and Ronald M. Gootzeit
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.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 301, and 602 are 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:
Sec. 1.581-1 Banks.
(a) In order to be a bank as defined in section 581, an
institution
must be a corporation for federal tax purposes. See Sec.
301.7701-2(b)
of this chapter for the definition of a corporation.
(b) This section is effective as of January 1, 1997.
Par. 3. Section 1.581-2 is amended as follows:
1. Paragraph (a) is removed.
2. Paragraphs (b) and (c) are redesignated as paragraphs (a) and
(b), respectively.
3. Newly designated paragraph (a) is amended by revising the
second
and last sentences.
The revisions read as follows:
Sec. 1.581-2 Mutual savings banks, building and loan associations,
and
cooperative banks.
(a) * * * See section 593 for special rules concerning reserves
for
bad debts. * * * See also section 594 and Sec. 1.594-1 for special
rules governing the taxation of a mutual savings bank conducting a
life
insurance business.
* * * * *
Par. 4. In Sec. 1.761-1, paragraph (a) is revised to read as
follows:
Sec. 1.761-1 Terms defined.
(a) Partnership. The term partnership means a partnership as
determined under Secs. 301.7701-1, 301.7701-2, and 301.7701-3 of this
chapter.
* * * * *
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 is amended as follows:
1. Paragraph (b)(2)(iii) is amended by removing the language
``and'' at the end of the paragraph.
2. Paragraph (b)(2)(iv) is amended by removing the period at the
end of the paragraph, and replacing it with the language ``; and''.
3. Paragraph (b)(2)(v) is added.
4. The text of paragraph (d)(2) is redesignated as paragraph
(d)(2)(i).
5. A paragraph heading is added for newly designated paragraph
(d)(2)(i).
6. Paragraph (d)(2)(ii) is added.
The revisions and additions read as follows:
Sec. 301.6109-1 Identifying numbers.
* * * * *
(b) * * *
(2) * * *
(v) A foreign person that makes an election under Sec. 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 Sec. 301.7701-3(c). Any entity that has an
employer identification number and then elects under Sec.
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:
Sec. 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
[[Page 66589]]
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 Secs. 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 Secs. 301.7701-2, 301.7701-3, and 301.7701-4 unless a provision
of the Internal Revenue Code (such as section 860A addressing Real
Estate Mortgage Investment Conduits (REMICs)) provides for special
treatment of that organization. For the classification of
organizations
as trusts, see Sec. 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. A qualified cost sharing
arrangement that is described in Sec. 1.482-7 of this chapter and any
arrangement that is treated by the Commissioner as a qualified cost
sharing arrangement under Sec. 1.482-7 of this chapter is not
recognized as a separate entity for purposes of the Internal Revenue
Code. See Sec. 1.482-7 of this chapter for the proper treatment of
qualified cost sharing arrangements.
(d) Domestic and foreign entities. For purposes of this section
and
Secs. 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 Sec. 301.7701-2, the
term State includes the District of Columbia.
(f) Effective date. The rules of this section are effective as of
January 1, 1997.
Sec. 301.7701-2 Business entities; definitions.
(a) Business entities. For purposes of this section and
Sec. 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 Sec.
301.7701-3)
that is not properly classified as a trust under Sec. 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 Sec. 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) An insurance company;
(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) Certain foreign entities--(i) In general. Except as provided
in
paragraphs (b)(8)(ii) and (d) of this section, the following business
entities formed in the following jurisdictions:
American Samoa, Corporation
Argentina, Sociedad Anonima
Australia, Public Limited Company
Austria, Aktiengesellschaft
Barbados, Limited Company
Belgium, Societe Anonyme
Belize, Public Limited Company
Bolivia, Sociedad Anonima
Brazil, Sociedade Anonima
Canada, Corporation and Company
Chile, Sociedad Anonima
People's Republic of China, Gufen Youxian Gongsi
Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu
Colombia, Sociedad Anonima
Costa Rica, Sociedad Anonima
Cyprus, Public Limited Company
Czech Republic, Akciova Spolecnost
Denmark, Aktieselskab
Ecuador, Sociedad Anonima or Compania Anonima
Egypt, Sharikat Al-Mossahamah
El Salvador, Sociedad Anonima
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 Terbuka
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
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, Publika Aktiebolag
Switzerland, Aktiengesellschaft
Thailand, Borisat Chamkad (Mahachon)
Trinidad and Tobago, Public Limited Company
Tunisia, Societe Anonyme
Turkey, Anonim Sirket
Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu
United Kingdom, Public Limited Company
United States Virgin Islands, Corporation
Uruguay, Sociedad Anonima
Venezuela, Sociedad Anonima or Compania Anonima
(ii) Exceptions in certain cases. The following entities will not
be treated as corporations under paragraph (b)(8)(i) of this section:
(A) With regard to Canada, any corporation or company formed
under
any federal or provincial law which provides that the liability of
all
of the members of such corporation or company will be unlimited; and
[[Page 66590]]
(B) With regard to India, a company deemed to be a public limited
company solely by operation of Section 43A(1) (relating to corporate
ownership of the company), section 43A(1A) (relating to annual
average
turnover), or section 43A(1B) (relating to ownership interests in
other
companies) of the Companies Act, 1956 (or any combination of these),
provided that the organizational documents of such deemed public
limited company continue to meet the requirements of section
3(1)(iii)
of the Companies Act, 1956.
(iii) Public companies. With regard to Cyprus, Hong Kong,
Jamaica,
and Trinidad and Tobago, the term public limited company includes any
limited company which is not a private limited company under the laws
of those jurisdictions.
(iv) Limited companies. Any reference to a limited company
(whether
public or private) in paragraph (b)(8)(i) of this section includes,
as
the case may be, companies limited by shares and companies limited by
guarantee.
(v) Multilingual countries. Different linguistic renderings of
the
name of an entity listed in paragraph (b)(8)(i) of this section shall
be disregarded. For example, an entity formed under the laws of
Switzerland as a Societe Anonyme will be a corporation and treated in
the same manner as an Aktiengesellschaft.
(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.
(2) Wholly owned entities--(i) In general. 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.
(ii) Special rule for certain business entities. If the single
owner of a business entity is a bank (as defined in section 581),
then
the special rules applicable to banks will continue to apply to the
single owner as if the wholly owned entity were a separate entity.
(d) Special rule for certain foreign business entities--(1) In
general. Except as provided in paragraph (d)(3) of this section, a
foreign business entity described in paragraph (b)(8)(i) of this
section will not be treated as a corporation under paragraph
(b)(8)(i)
of this section if--
(i) The entity was in existence on May 8, 1996;
(ii) The entity's classification was relevant (as defined in
Sec. 301.7701-3(d)) on May 8, 1996;
(iii) No person (including the entity) for whom the entity's
classification was relevant on May 8, 1996, treats the entity as a
corporation for purposes of filing such person's federal income tax
returns, information returns, and withholding documents for the
taxable
year including May 8, 1996;
(iv) Any change in the entity's claimed classification within the
sixty months prior to May 8, 1996, occurred solely as a result of a
change in the organizational documents of the entity, and the entity
and all members of the entity recognized the federal tax consequences
of any change in the entity's classification within the sixty months
prior to May 8, 1996;
(v) A reasonable basis (within the meaning of section 6662)
existed
on May 8, 1996, for treating the entity as other than a corporation;
and
(vi) Neither the entity nor any member was notified in writing on
or before May 8, 1996, that the classification of the entity was
under
examination (in which case the entity's classification will be
determined in the examination).
(2) Binding contract rule. If a foreign business entity described
in paragraph (b)(8)(i) of this section is formed after May 8, 1996,
pursuant to a written binding contract (including an accepted bid to
develop a project) in effect on May 8, 1996, and all times
thereafter,
in which the parties agreed to engage (directly or indirectly) in an
active and substantial business operation in the jurisdiction in
which
the entity is formed, paragraph (d)(1) of this section will be
applied
to that entity by substituting the date of the entity's formation for
May 8, 1996.
(3) Termination of grandfather status--(i) In general. An entity
that is not treated as a corporation under paragraph (b)(8)(i) of
this
section by reason of paragraph (d)(1) or (d)(2) of this section will
be
treated permanently as a corporation under paragraph (b)(8)(i) of
this
section from the earliest of:
(A) The effective date of an election to be treated as an
association under Sec. 301.7701-3;
(B) A termination of the partnership under section 708(b)(1)(B)
(regarding sale or exchange of 50 percent or more of the total
interest
in an entity's capital or profits within a twelve month period); or
(C) A division of the partnership under section 708(b)(2)(B).
(ii) Special rule for certain entities. For purposes of paragraph
(d)(2) of this section, paragraph (d)(3)(i)(B) of this section shall
not apply if the sale or exchange of interests in the entity is to a
related person (within the meaning of sections 267(b) and 707(b)) and
occurs no later than twelve months after the date of the formation of
the entity.
(e) Effective date. The rules of this section are effective as of
January 1, 1997.
Sec. 301.7701-3 Classification of certain business entities.
(a) In general. A business entity that is not classified as a
corporation under Sec. 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 Sec. 301.7701-2(b)(2)) or a partnership, and
an eligible entity with a single owner 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. An entity whose
classification is determined under the default classification retains
that classification (regardless of any changes in the members'
liability that occurs at any time during the time that the entity's
classification is relevant as defined in paragraph (d) of this
section)
until the entity makes an election to change that classification
under
paragraph (c)(1) of this section. Paragraph (c) of this section
provides rules for making express elections. Paragraph (d) of this
section provides special rules for foreign eligible entities.
Paragraph
(e) of this section provides special rules for classifying entities
resulting from partnership terminations and divisions under section
708(b). Paragraph (f) 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--
[[Page 66591]]
(A) A partnership if it has two or more members and at least one
member does not have limited liability;
(B) An association if all members have limited liability; or
(C) Disregarded as an entity separate from its owner if it has a
single owner that does not have limited liability.
(ii) Definition of limited liability. For purposes of paragraph
(b)(2)(i) of this section, a member of a foreign eligible entity has
limited liability if the member has no personal liability for the
debts
of or claims against the entity by reason of being a member. This
determination is based solely on the statute or law pursuant to which
the entity is organized, except that if the underlying statute or law
allows the entity to specify in its organizational documents whether
the members will have limited liability, the organizational documents
may also be relevant. For purposes of this section, a member has
personal liability if the creditors of the entity may seek
satisfaction
of all or any portion of the debts 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 that member for any such liability.
(3) Existing eligible entities--(i) In general. 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 Secs. 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 (b)(3)(i). For
special rules regarding the classification of such entities for
periods
prior to the effective date of this section, see paragraph (f)(2) of
this section.
(ii) Special rules. For purposes of paragraph (b)(3)(i) of this
section, a foreign eligible entity is treated as being in existence
prior to the effective date of this section only if the entity's
classification was relevant (as defined in paragraph (d) of this
section) at any time during the sixty months prior to the effective
date of this section. If an entity claimed different classifications
prior to the effective date of this section, the entity's
classification for purposes of paragraph (b)(3)(i) of this section is
the last classification claimed by the entity. If a foreign eligible
entity's classification is relevant prior to the effective date of
this
section, but no federal tax or information return is filed or the
federal tax or information return does not indicate the
classification
of the entity, the entity's classification for the period prior to
the
effective date of this section is determined under the regulations in
effect on the date 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) (iv) and (v) 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 Form 8832, Entity Classification Election, with the service
center designated on Form 8832. An election will not be accepted
unless
all of the information required by the form and instructions,
including
the taxpayer identifying number of the entity, is provided on Form
8832. See Sec. 301.6109-1 for rules on applying for and displaying
Employer Identification Numbers.
(ii) Further notification of elections. An eligible entity
required
to file a federal tax or information return for the taxable year for
which an election is made under paragraph (c)(1)(i) of this section
must attach a copy of its Form 8832 to its federal tax or information
return for that year. If the entity is not required to file a return
for that year, a copy of its Form 8832 must be attached to the
federal
income tax or information 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. An indirect owner of the entity
does
not have to attach a copy of the Form 8832 to its return if an entity
in which it has an interest is already filing a copy of the Form 8832
with its return. If an entity, or one of its direct or indirect
owners,
fails to attach a copy of a Form 8832 to its return as directed in
this
section, an otherwise valid election under paragraph (c)(1)(i) of
this
section will not be invalidated, but the non-filing party may be
subject to penalties, including any applicable penalties if the
federal
tax or information returns are inconsistent with the entity's
election
under paragraph (c)(1)(i) of this section.
(iii) Effective date of election. An election made under
paragraph
(c)(1)(i) of this section will be effective on the date specified by
the entity on Form 8832 or on the date filed if no such date is
specified on the election form. The effective date specified on Form
8832 can not be more than 75 days prior to the date on which the
election is filed and can not be more than 12 months after the date
on
which the election is filed. If an election specifies an effective
date
more than 75 days prior to the date on which the election is filed,
it
will be effective 75 days prior to the date it was filed. If an
election specifies an effective date more than 12 months from the
date
on which the election is filed, it will be effective 12 months after
the date it was filed. If an election specifies an effective date
before January 1, 1997, it will be effective as of January 1, 1997.
(iv) Limitation. If an eligible entity makes an election under
paragraph (c)(1)(i) of this section 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), the entity
cannot change its classification by election again during the sixty
months succeeding the effective date of the election. However, the
Commissioner may permit the entity to change its classification by
election within the sixty months if more than fifty percent of the
ownership interests in the entity as of the effective date of the
subsequent election are owned by persons that did not own any
interests
in the entity on the filing date or on the effective date of the
entity's prior election.
(v) Deemed elections--(A) 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 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 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.
(B) Real estate investment trusts. An eligible entity that files
an
election under section 856(c)(1) to be treated as a real estate
investment trust 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 day the entity is treated as a real estate
investment trust.
(vi) 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 or information 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
[[Page 66592]]
statute, all members of Y have limited 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 this paragraph (c) to be classified as a
partnership. To be classified as a partnership as of July 1, 1998, Y
must file a Form 8832 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 Form
8832 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 this paragraph (c) 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 this paragraph (c), it
will continue to be classified as an association under paragraph
(b)(3) of this section.
(ii) Z files a Form 8832 pursuant to this paragraph (c) 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--(i) In general. An election made under
paragraph (c)(1)(i) of this section must be signed by--
(A) Each member of the electing entity who is an owner at the
time
the election is filed; or
(B) Any officer, manager, or member of the electing entity who is
authorized (under local law or the entity's organizational documents)
to make the election and who represents to having such authorization
under penalties of perjury.
(ii) Retroactive elections. For purposes of paragraph (c)(2)(i)
of
this section, if an election under paragraph (c)(1)(i) of this
section
is to be effective for any period prior to the time that it is filed,
each person who was an owner between the date the election is to be
effective and the date the election is filed, and who is not an owner
at the time the election is filed, must also sign the election.
(d) Special rules for foreign eligible entities--(1) For purposes
of this section, a foreign eligible entity's classification is
relevant
when its classification affects the liability of any person for
federal
tax or information purposes. For example, a foreign entity's
classification would be relevant if U.S. income was paid to the
entity
and the determination by the withholding agent of the amount to be
withheld under chapter 3 of the Internal Revenue Code (if any) would
vary depending upon whether the entity is classified as a partnership
or as an association. Thus, the classification might affect the
documentation that the withholding agent must receive from the
entity,
the type of tax or information return to file, or how the return must
be prepared. The date that the classification of a foreign eligible
entity is relevant is the date an event occurs that creates an
obligation to file a federal tax return, information return, or
statement for which the classification of the entity must be
determined. Thus, the classification of a foreign entity is relevant,
for example, on the date that an interest in the entity is acquired
which will require a U.S. person to file an information return on
Form
5471.
(2) Special rule when classification is no longer relevant.--If
the
classification of a foreign eligible entity which was previously
relevant for federal tax purposes ceases to be relevant for sixty
consecutive months, the entity's classification will initially be
determined under the default classification when the classification
of
the foreign eligible entity again becomes relevant. The date that the
classification of a foreign entity ceases to be 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 that causes the
classification
to be relevant, then the date is the first day of that taxable year.
(e) Coordination with section 708(b). Except as provided in
Sec. 301.7701-2(d)(3) (regarding termination of grandfather status
for
certain foreign business entities), an entity resulting from a
transaction described in section 708(b)(1)(B) (partnership
termination
due to sales or exchanges) or section 708(b)(2)(B) (partnership
division) is a partnership.
(f) Effective date--(1) In general. The rules of this section are
effective as of January 1, 1997.
(2) Prior treatment of existing entities. In the case of a
business
entity that is not described in Sec. 301.7701-2(b) (1), (3), (4),
(5),
(6), or (7), and that was in existence prior to January 1, 1997, the
entity's claimed classification(s) will be respected for all periods
prior to January 1, 1997, if--
(i) The entity had a reasonable basis (within the meaning of
section 6662) for its claimed classification;
(ii) The entity and all members of the entity recognized the
federal tax consequences of any change in the entity's classification
within the sixty months prior to January 1, 1997; and
(iii) Neither the entity nor any member was notified in writing
on
or before May 8, 1996, that the classification of the entity was
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 addition read as follows:
Sec. 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 Sec.
301.7701-2.
(c) * * *
(1) * * * An investment trust with multiple classes of ownership
interests ordinarily will be classified as a business entity under
Sec. 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 Sec. 301.7701-2.
* * * * *
Example 3. * * * Accordingly, the trust is classified as a
business entity under Sec. 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, are effective as of
January 1, 1997.
Par. 9. Section 301.7701-6 is revised to read as follows:
[[Page 66593]]
Sec. 301.7701-6 Definitions; person, fiduciary.
(a) Person. The term person includes an individual, a
corporation,
a partnership, a trust or estate, a joint-stock 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 as of
January 1, 1997.
Sec. 301.7701-7 [Removed]
Par. 10. Section 301.7701-7 is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 11. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 602.101 [Amended]
Par. 12. In Sec. 602.101, paragraph (c) is amended by adding a
new
entry in numerical order to the table to read as follows:
Sec. 602.101 OMB control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current
OMB
CFR part or section where identified and described control
No.
------------------------------------------------------------------------
* * * * *
301.7701-3.................................................
1545-1486
* * * * *
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 10, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 96-31997 Filed 12-17-96; 8:45 am]
BILLING CODE 4830-01-U