[Federal Register: January 30, 2006 (Volume 71, Number 19)]
[Rules and Regulations]
[Page 4815-4818]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ja06-6]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9246]
RIN 1545-BD37
Clarification of Definitions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations defining the terms
corporation and domestic in circumstances in which a business entity is
created or organized in more than one jurisdiction. These regulations
affect business entities that are created or organized under the laws
of more than one jurisdiction.
DATES: Effective Date: These regulations are effective January 30,
2006.
Applicability Dates: For the dates of applicability of these
regulations, see Sec. Sec. 301.7701-2(e)(3) and 301.7701-5(c).
FOR FURTHER INFORMATION CONTACT: Thomas Beem, (202) 622-3860 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On August 12, 2004, the IRS and Treasury issued temporary
regulations (TD 9153), 69 FR 49809, and a notice of proposed rulemaking
(REG-124872-04), 69 FR 49840, regarding the classification of business
entities that are created or organized under the laws of more than one
jurisdiction (dually chartered entities).
Under the provisions of the temporary and proposed regulations,
classification of a dually chartered entity involves two independent
determinations: (1) Whether the entity is a corporation; and (2)
whether the entity is domestic or foreign. The entity is a corporation
under Sec. 301.7701-2T(b)(9) if its form of organization in any one of
the jurisdictions in which it is created or organized would cause it to
be treated as a corporation under Sec. 301.7701-2(b). The entity is
domestic under Sec. 301.7701-5T if it is organized as any kind of
entity in the United States or under the law of the United States or of
any State. The temporary regulations were effective for all entities
existing on or after August 12, 2004.
The public hearing concerning the proposed regulations was canceled
because no requests to speak were received. However, the IRS and
Treasury received several written comments on the temporary and
proposed regulations, which are discussed below.
Explanation of Provisions
A. Dates of Application
The preamble to the temporary and proposed regulations notes that
the IRS and Treasury consider the regulations to be a clarification of
the entity classification rules as they existed prior to the issuance
of the temporary and proposed regulations (pre-existing regulations).
This belief is based on the view that, even absent these regulations, a
proper application of the pre-existing regulations produces the same
result as
[[Page 4816]]
the rules of the temporary and proposed regulations. Some commentators
suggest that this discussion in the preamble to the temporary and
proposed regulations indicates that the regulations apply prior to
August 12, 2004, and thus the rules are retroactive in their effect.
Also, all of the commentators note that while the temporary and
proposed rules are a reasonable interpretation of the statute and the
pre-existing regulations, other reasonable interpretations of the pre-
existing regulations are also possible and that some taxpayers
classified their dually chartered entities under those other
interpretations. Therefore, the commentators question whether it is
appropriate to view the temporary and proposed regulations as a
clarification of the existing regulations. Further, the commentators
state that where taxpayers have reasonably relied on an alternative
interpretation of the existing regulations, the immediate application
of the temporary regulations cause an unexpected change in the
classification of those taxpayers' dually chartered entities, often
with adverse tax consequences. Moreover, the commentators point out
that the tax costs of converting a dually chartered entity from this
unexpected classification to the taxpayer's desired classification
could be significant and could, in some instances, effectively prevent
the taxpayer from undertaking the conversion. For these reasons, all
the commentators object to the effective date provisions of the
temporary regulations and they request that the final regulations
provide either a transition period before the rules take effect, or a
rule that exempts dually chartered entities that were in existence on
August 12, 2004, from the application of the rules.
Neither the temporary regulations nor these final regulations are
retroactive. The earliest date that any entity is subject to these
regulations is August 12, 2004. For periods prior to the date these
final regulations apply (i.e., prior to August 12, 2004), the
classification of dually chartered entities is governed by the pre-
existing regulations. Further, based upon the comments discussed above,
but without any inference intended as to the proper interpretation of
the pre-existing regulations, the IRS and Treasury conclude that, while
the final regulations generally are effective as of August 12, 2004, a
transition rule is appropriate. The transition rule provides that for
dually chartered entities existing on August 12, 2004, the provisions
of this final regulation apply as of May 1, 2006. The IRS and Treasury
recognize that taxpayers eligible for the transition rule may have
completed transactions after August 12, 2004, relying upon the
temporary regulations and therefore these taxpayers may rely upon the
final regulations as of August 12, 2004.
B. Effect on Dually Chartered Entities Not Organized Anywhere as Per Se
Corporations
Several commentators state that it is unclear whether Sec.
301.7701-2T(b)(9) applies in the case of a dually chartered entity not
created or organized in any jurisdiction in a manner that would cause
it to be treated as a per se corporation. A per se corporation is an
entity described in Sec. 301.7701-2(b)(1), (3), (4), (5), (6), (7), or
(8), and thus is not an eligible entity as defined in Sec. 301.7701-
3(a). A per se corporation is, therefore, ineligible to elect its
classification.
Even though a dually chartered entity is not created or organized
anywhere in a manner that would cause it to be classified as a per se
corporation, it is still necessary to classify the entity. For example,
a dually chartered entity may be organized in one jurisdiction in
manner that would result in a default classification as a corporation
and in another jurisdiction in a manner that would result in a default
classification as a partnership. Absent an election, a rule is
necessary to resolve the conflicting default classifications.
Therefore, the regulation and examples have been modified to clarify
that the rules apply even in circumstances in which the entity is not
organized anywhere in a manner that would make it a per se corporation.
Several commentators state that even if a dually chartered entity
is not created or organized in any jurisdiction as a per se
corporation, Sec. 301.7701-2T(b)(9) could be interpreted as making the
entity a per se corporation in some circumstances and thus prohibiting
the entity from electing its classification. According to these
commentators, this occurs because the literal language of the
regulation only considers an entity's default classification at the
time of its formation and ignores any entity classification election
under Sec. 301.7701-3 that would otherwise apply to the entity at the
time the entity classification determination is made. The regulations
are not intended to operate in that manner. Therefore, a sentence is
added to Sec. 301.7701-2(b)(9) of the final regulations to clarify
that a dually chartered entity that is an eligible entity in each
jurisdiction in which it is created or organized will continue to be
considered an eligible entity under Sec. 301.7701-3(a). In addition,
the examples were modified to illustrate this provision.
The proposed regulations under section 7701 are adopted as modified
by this Treasury decision and the preceding temporary regulations are
removed.
Special Analyses
It has been determined that this Treasury decision is 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 553(b) of the Administrative Procedure 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 provisions of the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, the temporary and proposed regulations that preceded
these regulations were submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comments on its impact on small
business.
Drafting Information
The principal author of these regulations is Thomas Beem of the
Office of Associate Chief Counsel (International). However, other
personnel from IRS and Treasury 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.
Amendments to the Regulations
0
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. In Sec. 301.7701-1, paragraph (d) is revised to read as
follows:
Sec. 301.7701-1 Classification of organizations for Federal tax
purposes.
* * * * *
(d) Domestic and foreign business entities. See Sec. 301.7701-5
for the rules that determine whether a business entity is domestic or
foreign.
* * * * *
[[Page 4817]]
Sec. 301.7701-1T [Removed]
0
Par. 3. Section 301.7701-1T is removed.
0
Par. 4. In Sec. 301.7701-2, paragraphs (b)(9) and (e)(3) are revised
to read as follows:
Sec. 301.7701-2 Business entities; definitions.
* * * * *
(b)(9) Business entities with multiple charters. (i) An entity
created or organized under the laws of more than one jurisdiction if
the rules of this section would treat it as a corporation with
reference to any one of the jurisdictions in which it is created or
organized. Such an entity may elect its classification under Sec.
301.7701-3, subject to the limitations of those provisions, only if it
is created or organized in each jurisdiction in a manner that meets the
definition of an eligible entity in Sec. 301.7701-3(a). The
determination of a business entity's corporate or non-corporate
classification is made independently from the determination of whether
the entity is domestic or foreign. See Sec. 301.7701-5 for the rules
that determine whether a business entity is domestic or foreign.
(ii) Examples. The following examples illustrate the rule of this
paragraph (b)(9):
Example 1. (i) Facts. X is an entity with a single owner
organized under the laws of Country A as an entity that is listed in
paragraph (b)(8)(i) of this section. Under the rules of this
section, such an entity is a corporation for Federal tax purposes
and under Sec. 301.7701-3(a) is unable to elect its classification.
Several years after its formation, X files a certificate of
domestication in State B as a limited liability company (LLC). Under
the laws of State B, X is considered to be created or organized in
State B as an LLC upon the filing of the certificate of
domestication and is therefore subject to the laws of State B. Under
the rules of this section and Sec. 301.7701-3, an LLC with a single
owner organized only in State B is disregarded as an entity separate
from its owner for Federal tax purposes (absent an election to be
treated as an association). Neither Country A nor State B law
requires X to terminate its charter in Country A as a result of the
domestication, and in fact X does not terminate its Country A
charter. Consequently, X is now organized in more than one
jurisdiction.
(ii) Result. X remains organized under the laws of Country A as
an entity that is listed in paragraph (b)(8)(i) of this section, and
as such, it is an entity that is treated as a corporation under the
rules of this section. Therefore, X is a corporation for Federal tax
purposes because the rules of this section would treat X as a
corporation with reference to one of the jurisdictions in which it
is created or organized. Because X is organized in Country A in a
manner that does not meet the definition of an eligible entity in
Sec. 301.7701-3(a), it is unable to elect its classification.
Example 2. (i) Facts. Y is an entity that is incorporated under
the laws of State A and has two shareholders. Under the rules of
this section, an entity incorporated under the laws of State A is a
corporation for Federal tax purposes and under Sec. 301.7701-3(a)
is unable to elect its classification. Several years after its
formation, Y files a certificate of continuance in Country B as an
unlimited company. Under the laws of Country B, upon filing a
certificate of continuance, Y is treated as organized in Country B.
Under the rules of this section and Sec. 301.7701-3, an unlimited
company organized only in Country B that has more than one owner is
treated as a partnership for Federal tax purposes (absent an
election to be treated as an association). Neither State A nor
Country B law requires Y to terminate its charter in State A as a
result of the continuance, and in fact Y does not terminate its
State A charter. Consequently, Y is now organized in more than one
jurisdiction.
(ii) Result. Y remains organized in State A as a corporation, an
entity that is treated as a corporation under the rules of this
section. Therefore, Y is a corporation for Federal tax purposes
because the rules of this section would treat Y as a corporation
with reference to one of the jurisdictions in which it is created or
organized. Because Y is organized in State A in a manner that does
not meet the definition of an eligible entity in Sec. 301.7701-
3(a), it is unable to elect its classification.
Example 3. (i) Facts. Z is an entity that has more than one
owner and that is recognized under the laws of Country A as an
unlimited company organized in Country A. Z is organized in Country
A in a manner that meets the definition of an eligible entity in
Sec. 301.7701-3(a). Under the rules of this section and Sec.
301.7701-3, an unlimited company organized only in Country A with
more than one owner is treated as a partnership for Federal tax
purposes (absent an election to be treated as an association). At
the time Z was formed, it was also organized as a private limited
company under the laws of Country B. Z is organized in Country B in
a manner that meets the definition of an eligible entity in Sec.
301.7701-3(a). Under the rules of this section and Sec. 301.7701-3,
a private limited company organized only in Country B is treated as
a corporation for Federal tax purposes (absent an election to be
treated as a partnership). Thus, Z is organized in more than one
jurisdiction. Z has not made any entity classification elections
under Sec. 301.7701-3.
(ii) Result. Z is organized in Country B as a private limited
company, an entity that is treated (absent an election to the
contrary) as a corporation under the rules of this section. However,
because Z is organized in each jurisdiction in a manner that meets
the definition of an eligible entity in Sec. 301.7701-3(a), it may
elect its classification under Sec. 301.7701-3, subject to the
limitations of those provisions.
Example 4. (i) Facts. P is an entity with more than one owner
organized in Country A as a general partnership. Under the rules of
this section and Sec. 301.7701-3, an eligible entity with more than
one owner in Country A is treated as a partnership for federal tax
purposes (absent an election to be treated as an association). P
files a certificate of continuance in Country B as an unlimited
company. Under the rules of this section and Sec. 301.7701-3, an
unlimited company in Country B with more than one owner is treated
as a partnership for federal tax purposes (absent an election to be
treated as an association). P is not required under either the laws
of Country A or Country B to terminate the general partnership in
Country A, and in fact P does not terminate its Country A
partnership. P is now organized in more than one jurisdiction. P has
not made any entity classification elections under Sec. 301.7701-3.
(ii) Result. P's organization in both Country A and Country B
would result in P being classified as a partnership. Therefore,
since the rules of this section would not treat P as a corporation
with reference to any jurisdiction in which it is created or
organized, it is not a corporation for federal tax purposes.
* * * * *
(e) * * *
(3)(i) General rule. Except as provided in paragraph (e)(3)(ii) of
this section, the rules of paragraph (b)(9) of this section apply as of
August 12, 2004, to all business entities existing on or after that
date.
(ii) Transition rule. For business entities created or organized
under the laws of more than one jurisdiction as of August 12, 2004, the
rules of paragraph (b)(9) of this section apply as of May 1, 2006.
These entities, however, may rely on the rules of paragraph (b)(9) of
this section as of August 12, 2004.
* * * * *
Sec. 301.7701-2T [Removed]
0
Par. 5. Section 301.7701-2T is removed.
0
Par. 6. Section 301.7701-5 is revised to read as follows:
Sec. 301.7701-5 Domestic and foreign business entities.
(a) Domestic and foreign business entities. A business entity
(including an entity that is disregarded as separate from its owner
under Sec. 301.7701-2(c)) is domestic if it is created or organized as
any type of entity (including, but not limited to, a corporation,
unincorporated association, general partnership, limited partnership,
and limited liability company) in the United States, or under the law
of the United States or of any State. Accordingly, a business entity
that is created or organized both in the United States and in a foreign
jurisdiction is a domestic entity. A business entity (including an
entity that is disregarded as separate from its owner under Sec.
301.7701-2(c)) is foreign if it is not domestic. The
[[Page 4818]]
determination of whether an entity is domestic or foreign is made
independently from the determination of its corporate or non-corporate
classification. See Sec. Sec. 301.7701-2 and 301.7701-3 for the rules
governing the classification of entities.
(b) Examples. The following examples illustrate the rules of this
section:
Example 1. (i) Facts. Y is an entity that is created or
organized under the laws of Country A as a public limited company.
It is also an entity that is organized as a limited liability
company (LLC) under the laws of State B. Y is classified as a
corporation for Federal tax purposes under the rules of Sec. Sec.
301.7701-2, and 301.7701-3.
(ii) Result. Y is a domestic corporation because it is an entity
that is classified as a corporation and it is organized as an entity
under the laws of State B.
Example 2. (i) Facts. P is an entity with more than one owner
organized under the laws of Country A as an unlimited company. It is
also an entity that is organized as a general partnership under the
laws of State B. P is classified as a partnership for Federal tax
purposes under the rules of Sec. Sec. 301.7701-2, and 301.7701-3.
(ii) Result. P is a domestic partnership because it is an entity
that is classified as a partnership and it is organized as an entity
under the laws of State B.
(c) Effective date.--(1) General rule. Except as provided in
paragraph (c)(2) of this section, the rules of this section apply as of
August 12, 2004, to all business entities existing on or after that
date.
(2) Transition rule. For business entities created or organized
under the laws of more than one jurisdiction as of August 12, 2004, the
rules of this section apply as of May 1, 2006. These entities, however,
may rely on the rules of this section as of August 12, 2004.
Sec. 301.7701-5T [Removed]
0
Par. 7. Section 301.7701-5T is removed.
Approved: January 17, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 06-817 Filed 1-27-06; 8:45 am]
BILLING CODE 4830-01-P