[Federal Register Volume 66, Number 11 (Wednesday, January 17, 2001)]
[Proposed Rules]
[Pages 3959-3960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-272]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-110659-00]
RIN 1545-AY16


Amendment, Check the Box Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance relating to elective changes in entity classification. The 
proposed regulations apply to subsidiary corporations that elect to 
change their classification for Federal tax purposes from a corporation 
to either a partnership or disregarded entity.

DATES: Written or electronic comments, or requests for a public hearing 
must be received by February 2, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-110659-00), room 5226, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-
110659-00), 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 on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov /tax--regs/
regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
David J. Sotos, (202) 622-3050; concerning submissions of comments, or 
to request a hearing, Sonya Cruse, (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    On November 29, 1999, Treasury and the IRS published final 
regulations (TD 8844) describing the transactions that are deemed to 
occur when an entity elects to change its classification for Federal 
tax purposes. Those regulations did not address certain requirements of 
section 332 as applied to the deemed liquidation incident to an 
association's election to be classified as a partnership or to be 
disregarded as an entity separate from its owner. This amendment to the 
final regulations addresses those requirements.
    On January 20, 2000, Treasury and the IRS issued final regulations 
relating to qualified subchapter S subsidiaries. In order to permit the 
deemed transaction resulting from a QSub election to comply with the 
requirement of section 332 that a plan of liquidation have been adopted 
at the time of a liquidating distribution, the final regulations 
provide that a plan of liquidation is deemed adopted immediately before 
the deemed liquidation incident to the QSub election, unless a formal 
plan of liquidation that contemplates the filing of a QSub election is 
adopted on an earlier date. The preamble to the QSub regulations 
provided that Treasury and the IRS intend to amend the section 7701 
regulations regarding elective changes in entity classification to 
provide a similar rule concerning the timing of the plan of 
liquidation.

Explanation of Provisions

A. In General

    Section 301.7701-3(g)(1) describes how elective changes in the 
classification of an entity will be treated for tax purposes. Section 
301.7701-3(g)(1)(ii) provides that an elective conversion of an 
association to a partnership is deemed to have the following form: the 
association distributes all of its assets and liabilities to its 
shareholders in liquidation of the association, and immediately 
thereafter, the shareholders contribute all of the distributed assets 
and liabilities to a newly formed partnership. Section 301.7701-
3(g)(1)(iii) provides that an elective conversion of an association to 
an entity that is disregarded as an entity separate from its owner is 
deemed to have the following form: the association distributes all of 
its assets and liabilities to its single owner in liquidation of the 
association.
    Section 332 may be relevant to the deemed liquidation of an 
association if it has a corporate owner. Under section 332, no gain or 
loss is recognized on the receipt by a corporation of property 
distributed in complete liquidation of another corporation if the 
requirements of section 332(b) are satisfied. Those requirements 
include the adoption of a plan of liquidation at a time when the 
corporation receiving the distribution owns stock of the liquidating 
corporation meeting the requirements of section 1504(a)(2) (i.e., 80 
percent of vote and value). The elective changes from association to a 
partnership and to a disregarded entity result in a constructive 
liquidation of the association for Federal tax purposes. Formally 
adopting a plan of liquidation for the entity, however, is potentially 
incompatible with an elective change under Sec. 301.7701-3, which 
allows the local law entity to remain in existence while liquidating 
only for Federal tax purposes. Accordingly, to provide tax treatment of 
an association's deemed liquidation that is compatible with the 
requirements of section 332, the proposed regulations state that, for 
purposes of satisfying the requirement of adoption of a plan of 
liquidation under section 332(b), a plan of liquidation is deemed 
adopted immediately before the deemed liquidation incident to an 
elective change in entity classification, unless a formal plan of 
liquidation that contemplates the filing of the elective change in 
entity classification is adopted on an earlier date.

[[Page 3960]]

B. Proposed Effective Dates

    These regulations are proposed to apply to elections occurring on 
or after the date final regulations are published in the Federal 
Register; however, it is also proposed that taxpayers may elect to 
apply the amendments retroactively.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. It also has been determined that section 533(b) of the 
Administrative Procedures 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. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. 
Alternatively, taxpayers may submit comments electronically via the 
Internet by selecting the ``Tax Regs'' option on the IRS Home Page, or 
by submitting comments directly to the IRS Internet Site at http://
www.irs.ustreas.gov/tax--regs/comments.html. All comments will be 
available for public inspection and copying. The Treasury Department 
and IRS specifically request comments on the clarity of the proposed 
regulations and how they may be made easier to understand. A public 
hearing may be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal authors of these proposed regulations are David J. 
Sotos, and Jeanne M. Sullivan of Associate Chief Counsel (Passthroughs 
& Special Industries). However, other personnel from the Treasury 
Department and IRS 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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read 
in part as follows:

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

    Par. 2. Section 301.7701-3 is amended as follows:
    1. Redesignating the text of paragraph (g)(2) as paragraph 
(g)(2)(i) and adding a heading for paragraph (g)(2)(i).
    2. Adding a new paragraph (g)(2)(ii).
    3. Revising the first sentence of paragraph (g)(4).
    The addition and revision read as follows:


Sec. 301.7701-3  Classification of certain business entities.

* * * * *
    (g) * * *
    (2) Effect of elective changes--(i) In general. * * *
* * * * *
    (ii) Adoption of plan of liquidation. For purposes of satisfying 
the requirement of adoption of a plan of liquidation under section 332, 
unless a formal plan of liquidation that contemplates the election to 
be classified as a partnership or to be disregarded as an entity 
separate from its owner is adopted on an earlier date, the making, by 
an association, of an election under paragraph (c)(1)(i) of this 
section to be classified as a partnership or to be disregarded as an 
entity separate from its owner is considered to be the adoption of a 
plan of liquidation immediately before the deemed liquidation described 
in paragraph (g)(1)(ii) or (iii) of this section. This paragraph 
(g)(2)(ii) applies to elections effective on or after the date these 
regulations are published as final regulations in the Federal Register. 
Taxpayers may apply this paragraph (g)(2)(ii) retroactively to 
elections filed before these regulations are published as final 
regulations in the Federal Register if the corporate owner claiming 
treatment under section 332 and its subsidiary making the election take 
consistent positions with respect to the Federal tax consequences of 
the election.
* * * * *
    (4) Effective date. Except as otherwise provided in paragraph 
(g)(2)(ii) of this section, this paragraph (g) applies to elections 
that are filed on or after November 29, 1999. * * *
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue Service.
[FR Doc. 01-272 Filed 1-16-01; 8:45 am]
BILLING CODE 4830-01-U