[Federal Register Volume 66, Number 9 (Friday, January 12, 2001)]
[Proposed Rules]
[Pages 2854-2856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-251]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-101739-00]
RIN 1545-AX75


Clarification of Entity Classification Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document proposes regulations under section 7701 that 
address the Federal tax classification of a business entity wholly 
owned by a foreign government and provide that a nonbank entity that is 
wholly owned by a foreign bank cannot be disregarded as an entity 
separate from its owner (disregarded entity) for purposes of applying 
the special rules of the Internal Revenue Code applicable to banks. 
This document also proposes regulations under section 892 that provide 
that a partnership can be a controlled commercial entity for purposes 
of section 892(a)(2)(B). In addition, this document provides notice of 
a public hearing on the proposed regulations.

DATES: Written comments and outline of topics to be discussed at the 
public hearing scheduled for May 16, 2001, must be received by April 
25, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-101739-00), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-101739-00), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option of 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at: http://www.irs.gov/tax__regs/regslist.html. The 
public hearing will be held in room 6718, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Camille B. 
Evans, (202) 622-3860 (not a toll-free number); concerning submissions 
and the hearing, Sonya M. Cruse, (202) 622-7180 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Background and Purpose

    On December 18, 1996, the IRS and the Treasury Department published 
the elective regime under section 7701 known as the check-the-box 
regulations. 61 FR 66584. Generally, the check-the-box regulations 
allow any business entity to elect to be treated for Federal tax 
purposes as a corporation, a partnership (if it has two or more 
members), or a disregarded entity (if it has a single owner). This 
document proposes to amend the current Procedure and Administration 
Regulations (26 CFR Part 301) to address the treatment of an entity 
wholly owned by a foreign government (as defined in Sec. 1.892-2T) and 
a nonbank entity wholly owned by a foreign bank.
    This document also proposes to provide that a partnership can be a 
controlled commercial entity under section 892.

[[Page 2855]]

Explanation of Provisions

A. Sec. 301.7701-2

    Section 301.7701-2(b) of the check-the-box regulations specifies 
that certain business entities are classified as per se corporations 
for Federal tax purposes (i.e., those business entities that are not 
permitted to elect a noncorporate Federal tax classification). Section 
301.7701-2(b)(6) classifies a business entity wholly owned by a State 
or any of its political subdivisions as a per se corporation. However, 
the regulations do not specify that the phrase State or any political 
subdivision thereof includes a foreign government.
    The IRS and Treasury believe that it is appropriate to treat a 
foreign government similarly to a State in this context. Thus, to 
achieve parallel tax treatment under the check-the-box regulations of a 
business entity wholly owned by a State or any of its political 
subdivisions and a business entity wholly owned by a foreign 
government, these proposed regulations provide that a business entity 
wholly owned by a foreign government cannot elect to be treated as a 
disregarded entity.
    The check-the-box regulations also provide a special rule for the 
treatment of nonbank entities that are wholly owned by banks. In 
particular, Sec. 301.7701-2(c)(2)(ii) provides that a bank cannot treat 
a wholly owned nonbank entity as a disregarded entity for purposes of 
applying the special rules of the Internal Revenue Code (Code) 
applicable to banks. The term bank for this purpose is defined in 
section 581 to include only domestic entities. Section 301.7701-
2(c)(2)(ii) does not explicitly restrict foreign banks from treating 
their wholly owned nonbank entities as disregarded entities for all tax 
purposes (because foreign banks are not defined as banks under section 
581).
    As with the rule described for foreign governments, the IRS and 
Treasury believe that nonbank entities wholly owned by domestic banks 
and foreign banks should be treated similarly in this context. These 
regulations incorporate a reference to section 585(a)(2)(B) (which 
includes certain foreign banks that are engaged in a U.S. trade or 
business in the definition of the term bank) in Sec. 301.7701-
2(c)(2)(ii). As a result, neither domestic banks nor foreign banks 
engaged in a U.S. trade or business can treat wholly owned nonbank 
entities as disregarded entities for purposes of applying the special 
rules of the Code applicable to banks.

B. Sec. 1.892-5(a)

    Section 1.892-5T(a) currently provides that for purposes of 
defining the term controlled commercial entity, the term entity 
encompasses corporations and trusts (including pension trusts described 
in Sec. 1.892-2T(c)) and estates. To ensure that investments in the 
United States by a foreign government through separate juridical 
entities are treated similarly, these proposed regulations under 
Sec. 1.892-5(a) provide that, for purposes of section 892(a)(2)(B), the 
term entity also includes a partnership.

Proposed Effective Dates

    The regulations that address the Federal tax classification of 
business entities wholly owned by a foreign government under 
Sec. 301.7701-2 are proposed to apply on or after the earlier of 
January 14, 2002 or the date these regulations are published as final 
regulations in the Federal Register to such business entities 
regardless of any prior entity classification, and the regulations that 
address the definition of the term entity for purposes of section 
892(a)(2)(B) are proposed to apply on or after the earlier of January 
14, 2002 or the date these regulations are published as final 
regulations in the Federal Register. The regulations relating to a 
nonbank entity that is wholly owned by a foreign bank are proposed to 
apply to taxable years beginning after January 12, 2001.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Code, these regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (preferably a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they may be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for May 16, 2001, beginning at 
10 a.m., in room 6718, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Because of access restrictions, visitors 
will not be admitted beyond the Internal Revenue Building lobby more 
than fifteen (15) minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit timely written comments and an outline of the topics to be 
discussed and the time to be devoted to each topic (preferably a signed 
original and eight (8) copies) by April 25, 2001.
    A period of ten (10) minutes will be allotted to each person for 
making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Camille B. Evans 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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entry for ``Sections 1.892-1T through 1.892-7T'' and 
adding the following entries in numerical order:

    Authority: 26 U.S.C. 7805 * * *

Section 1.892-1T also issued under 26 U.S.C. 892(c).
Section 1.892-2T also issued under 26 U.S.C. 892(c).

[[Page 2856]]

Section 1.892-3T also issued under 26 U.S.C. 892(c).
Section 1.892-4T also issued under 26 U.S.C. 892(c).
Section 1.892-5 also issued under 26 U.S.C. 892(c).
Section 1.892-5T also issued under 26 U.S.C. 892(c).
Section 1.892-6T also issued under 26 U.S.C. 892(c).
Section 1.892-7T also issued under 26 U.S.C. 892(c). * * *

    Par. 2. Section 1.892-5 is added to read as follows:


Sec. 1.892-5  Controlled commercial entity.

    (a) through (a)(2) [Reserved]. For further information, see 
Sec. 1.892-5T(a) through (a)(2).
    (3) For purposes of section 892(a)(2)(B), the term entity means and 
includes a corporation, a partnership, a trust (including a pension 
trust described in Sec. 1.892-2T(c)) and an estate.
    (4) Effective date. This section applies on or after the earlier of 
January 14, 2002 or the date these regulations are published as final 
regulations in the Federal Register.
    (b) through (d) [Reserved]. For further information, see 
Secs. 1.892-5T(b) through (d).
    Par. 3. Section 1.892-5T is amended by:
    1. Removing the flush language immediately following paragraph 
(a)(2).
    2. Adding paragraph (a)(3).
    The addition reads as follows:


Sec. 1.892-5T  Controlled commercial entity (temporary regulations).

    (a) * * *
    (3) [Reserved]. For further information, see Sec. 1.892-5(a)(3).
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 4. The authority citation for part 301 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 5. Section 301.7701-2 is amended by:
    1. Revising paragraphs (b)(6) and (c)(2)(ii).
    2. Revising the first sentence of paragraph (e).
    The revisions read as follows:


Sec. 301.7701-2  Business entities; definitions.

* * * * *
    (b) * * *
    (6) A business entity wholly owned by a State or any political 
subdivision thereof, or a business entity wholly owned by a foreign 
government (as defined in Sec. 1.892-2T);
* * * * *
    (c) * * *
    (2) * * *
    (ii) Special rule for certain business entities. If the single 
owner of a business entity is a bank (as defined in section 581, or, in 
the case of a foreign bank, as defined in section 585(a)(2)(B) without 
regard to the second sentence thereof), then the special rules of the 
Internal Revenue Code applicable to banks will continue to apply to the 
single owner as if the wholly owned entity were a separate entity.
* * * * *
    (e) Effective date. Except as otherwise provided in this paragraph 
(e), the rules of this section apply as of January 1, 1997, except that 
paragraph (b)(6) applies on or after the earlier of January 14, 2002 or 
the date these regulations are published as final regulations in the 
Federal Register to a business entity wholly owned by a foreign 
government regardless of any prior entity classification, and paragraph 
(c)(2)(ii) of this section applies to taxable years beginning after 
January 12, 2001. * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 01-251 Filed 1-11-01; 8:45 am]
BILLING CODE 4830-01-P