[Federal Register Volume 65, Number 251 (Friday, December 29, 2000)]
[Rules and Regulations]
[Pages 82926-82927]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32190]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8915]
RIN 1545-AX71


Tiered Structures--Electing Small Business Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations amending the 
temporary regulations under section 444 of the Internal Revenue Code 
(Code) relating to the election of a taxable year other than the 
required taxable year. The temporary regulations provide that solely 
with respect to an S corporation shareholder, an electing small 
business trust (ESBT) and a trust that is described in section 401(a) 
or section 501(c)(3) and is exempt from taxation under section 501(a) 
is not a deferral entity for purposes of Sec. 1.444-2T. The temporary 
regulations affect S corporations, ESBTs that own S corporation stock, 
and trusts that are described in section 401(a) or section 501(c)(3) 
and exempt from taxation under section 501(a) that own S corporation 
stock. The text of these temporary regulations serves as the text of 
the proposed regulations set forth in the notice of proposed rulemaking 
published elsewhere in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective December 29, 
2000.
    Applicability Dates: For dates of applicability, see Sec. 1.444-4T 
of these regulations.

FOR FURTHER INFORMATION CONTACT: Bradford Poston and James A. Quinn 
(202) 622-3060 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR Part 1) relating to the election of a taxable year other than the 
required taxable year under section 444. Section 444(d)(3) and 
Sec. 1.444-2T generally prohibit an S corporation that is a member of a 
tiered structure from making an election under section 444 for taxable 
years beginning after December 31, 1986. An S corporation is considered 
to be a member of a tiered structure if the S corporation owns any 
portion of a deferral entity, or a deferral entity owns any portion of 
an S corporation. Section 1.444-2T(b)(2) defines deferral entity to 
include any entity that is a trust with the exception of certain 
grantor trusts (including qualified subchapter S trusts within the 
meaning of section 1361(d)(1)(A)).
    Section 1302 of the Small Business Job Protection Act of 1996, 
Public Law 104-188 (110 Stat. 1755) (August 20, 1996), modified 
sections 641 and 1361 of the Internal Revenue Code (Code) to permit an 
electing small business trust (ESBT) to be an S corporation shareholder 
and also modified section 1361 to allow an organization (including a 
trust) that is described in section 401(a) or section 501(c)(3) and 
that is

[[Page 82927]]

exempt from taxation under section 501(a) to be a shareholder of an S 
corporation. The temporary regulations under section 444 are also being 
issued as proposed regulations published elsewhere in this issue of the 
Federal Register.

Explanation of Provisions

    The temporary regulations modify the temporary regulations under 
section 444 to provide that an ESBT and a trust that is described in 
section 401(a) or section 501(c)(3) that is exempt from taxation under 
section 501(a) is not a deferral entity for purposes of Sec. 1.444-2T. 
Therefore, an S corporation with a section 444 election may have an 
ESBT or a trust that is described in section 401(a) or section 
501(c)(3) that is exempt from taxation under section 501(a) as a 
shareholder. An ESBT is not a deferral entity within the meaning of 
Sec. 1.444-2T because under section 641(c) the portion of the ESBT 
consisting of stock in one or more S corporations is taxed to the 
deemed owner under subpart E, part I, subchapter J of the Code or is 
subject to taxation at the trust level without a deduction for amounts 
distributed or required to be distributed from that portion of the 
trust. A trust described in section 401(a) (other than an employee 
stock ownership plan described in section 4975(e)(7)), or a trust 
described in section 501(c)(3) that is exempt from taxation under 
section 501(a) is not a deferral entity within the meaning of 
Sec. 1.444-2T because with respect to such trust all items of income, 
loss, or deduction taken into account under section 1366(a) and any 
gain or loss on the disposition of the stock in the S corporation is 
treated as unrelated business taxable income of such trust under 
section 512(e)(1) and is subject to taxation under section 511. A trust 
described in section 401(a) that is an employee stock ownership plan 
described in section 4975(e)(7) is not a deferral entity within the 
meaning of Sec. 1.444-2T because such trust does not defer taxation but 
rather is exempt from taxation under section 501(a) and is not treated 
as having unrelated business taxable income pursuant to section 
512(e)(3).
    The temporary regulations are effective as of December 29, 2000. 
However taxpayers may voluntarily apply these temporary regulations to 
taxable years of S corporations beginning after December 31, 1996, for 
S corporations that have ESBTs as shareholders, and for taxable years 
beginning after December 31, 1997, for S corporations that have trusts 
described in section 401(a) or section 501(c)(3) that are exempt from 
taxation under section 501(a) as shareholders.

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 the 
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 Code, these temporary 
regulations will be submitted to the Small Business Administration for 
comment on the regulation's impact on small business.

Drafting Information

    The principal authors of these regulations are Bradford Poston and 
James A. Quinn of the Office of the Associate Chief Counsel 
(Passthroughs and Special Industries). However, other personnel from 
the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.444-4T is also issued under 26 U.S.C. 444(g). * * *
    Par. 2. Section 1.444-4T is added under the undesignated 
centerheading ``Accounting Periods'' to read as follows:


Sec. 1.444-4T  Tiered structure (temporary).

    (a) Electing small business trusts. For purposes of Sec. 1.444-2T, 
solely with respect to an S corporation shareholder, the term deferral 
entity does not include a trust that is treated as an electing small 
business trust under section 1361(e). An S corporation with an electing 
small business trust as a shareholder may make an election under 
section 444. This paragraph (a) is applicable beginning December 29, 
2000, however taxpayers may voluntarily apply it to taxable years of S 
corporations beginning after December 31, 1996.
    (b) Certain tax-exempt trusts. For purposes of Sec. 1.444-2T, 
solely with respect to an S corporation shareholder, the term deferral 
entity does not include a trust that is described in section 401(a) or 
section 501(c)(3) that is exempt from taxation under section 501(a). An 
S corporation with a trust that is described in section 401(a) or 
section 501(c)(3) that is exempt from taxation under section 501(a) as 
a shareholder may make an election under section 444. This paragraph 
(b) is applicable beginning December 29, 2000, however taxpayers may 
voluntarily apply it to taxable years of S corporations beginning after 
December 31, 1997.

    Approved: December 13, 2000.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-32190 Filed 12-28-00; 8:45 am]
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