FROM THE OFFICE OF PUBLIC AFFAIRS

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Today, the Treasury Department and the IRS issued a Notice announcing it will withdraw the so-called “extraordinary transaction” rule of proposed regulations issued on November 29, 1999. The rule would have would have operated to change the classification of a foreign entity for tax purposes if certain transactions occurred within a year of the date the entity elected disregarded-entity status. Most commentators on the proposed regulations criticized the approach as overly broad and expressed concern that it would undermine the increased certainty and simplification promoted by the entity classification regulations issued in 1996.

"Withdrawing the proposed extraordinary transaction rule preserves the certainty in tax results that taxpayers  need to organize their international business operations," stated Treasury Assistant Secretary for Tax Policy Pamela Olson. "We are continuing to examine certain categories of transactions to ensure that the substantive rules of particular statutory and treaty provisions reach appropriate results notwithstanding changes in entity classification. To the extent we conclude they do not, we intend to propose changes to the rules that are narrow and focused on correcting inappropriate results."

The Notice also states that portions of the proposed regulations other than the extraordinary transaction rule have received minimal comments and that the Treasury Department and IRS intend to finalize those portions of the proposed regulations promptly.

Related Documents:

• Notice 2003-46