[Federal Register Volume 69, Number 63 (Thursday, April 1, 2004)]
[Proposed Rules]
[Pages 17117-17119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7088]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-106681-02]
RIN 1545-BA59


Modification of Check the Box

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations that clarify that 
qualified REIT subsidiaries, qualified subchapter S subsidiaries, and 
single owner eligible entities that are disregarded as entities 
separate from their owners are treated as separate entities for 
purposes of any Federal tax liability for which the entity is liable. 
This document also provides notice of a public hearing.

DATES: Written or electronic comments must be received by June 30, 
2004. Outlines of topics to be discussed at the public hearing 
scheduled for July 22, 2004, at 10 a.m., must be received by July 1, 
2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106681-02), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
106681-02), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
electronic comments directly to the IRS Internet site at http://www.irs.gov/regs. The public hearing will be held in the Auditorium, 
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
James M. Gergurich, (202) 622-3070; concerning submissions and the 
hearing, Treena Garrett, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Under the Internal Revenue Code and its regulations, three types of 
entities may be disregarded as entities separate from their owners: 
qualified REIT subsidiaries (within the meaning of section 856(i)(2)), 
qualified subchapter S subsidiaries (within the meaning of section 
1361(b)(3)(B)), and single owner eligible entities (within the meaning 
of Sec.  301.7701-3(a)) (each, a disregarded entity).
    Section 856(i)(1) provides that a qualified REIT subsidiary (QRS) 
shall not be treated as a separate corporation. Under section 
856(i)(2), a QRS is defined as any corporation 100 percent of the stock 
of which is held by a real estate investment trust (REIT), unless the 
REIT and the corporation jointly elect under section 856(l) that the 
corporation shall be treated as a taxable REIT subsidiary. Such 
election may be revoked at any time with the consent of both the 
corporation and the REIT.
    Section 1361(b)(3)(A) similarly provides that a qualified 
subchapter S corporation (QSub) shall not be treated as a separate 
corporation. Under section 1361(b)(3)(B), a QSub is defined as any 
eligible domestic corporation that is wholly owned by an S corporation 
and that the S corporation elects to treat as a QSub.
    In addition, under Sec.  301.7701-3(b)(1) and (2), an eligible 
entity with a single owner may be disregarded as an entity separate 
from its owner. Section 301.7701-3(b)(1)(ii) provides that a domestic 
eligible entity with a single owner is disregarded unless the entity 
makes an election to be classified as an association (and thus a 
corporation under Sec.  301.7701-2(b)(2)). Section 301.7701-3(b)(2)(C) 
provides that a foreign eligible entity with a single owner that does 
not have limited liability is disregarded unless the entity elects to 
be classified as a corporation. Under Sec.  301.7701-3(c), a single 
owner eligible entity that has elected to be treated as a corporation 
and a foreign eligible entity with a single owner that has limited 
liability (that would otherwise be treated as a corporation

[[Page 17118]]

under Sec.  301.7701-3(b)(2)(i)(B)) may elect, subject to certain 
limitations, to be disregarded.

Explanation of Provisions

    As described above, a taxable entity may become disregarded in a 
variety of circumstances. For example, if a REIT acquires all of the 
stock of a corporation, the corporation will become a QRS that is not 
treated as a separate corporation. Likewise, an S corporation may elect 
to treat a wholly owned eligible domestic corporation as a QSub that is 
not treated as a separate corporation. It is also possible for a 
disregarded entity to be the survivor of a merger of a taxable entity 
(for example, a corporation) and the disregarded entity. Although a 
disregarded entity generally is not liable for Federal tax liabilities 
of its owner with respect to taxable periods during which it is 
disregarded, the disregarded entity may be liable for Federal taxes 
with respect to taxable periods during which it was not disregarded or 
because it is the successor or transferee of a taxable entity.
    The proposed regulations do not address the question of whether the 
disregarded entity is, in fact, either liable for Federal taxes or 
entitled to a refund or credit of Federal tax. Rather, the regulations 
clarify that if a disregarded entity is liable for Federal taxes, the 
disregarded entity will be treated as an entity separate from its owner 
for purposes of those liabilities, such that assessment may be made 
against the disregarded entity, the assets of the disregarded entity 
may be subject to lien and levy, and the disregarded entity may consent 
to extend the period of limitations on assessment. In addition, the 
regulations clarify that if a disregarded entity is entitled to a 
refund or credit of Federal tax, the disregarded entity will be treated 
as an entity separate from its owner for purposes of that refund or 
credit.

Proposed Effective Date

    These regulations are proposed to apply on or after April 1, 2004.

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 
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. 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 its impact on small business.

Comments and Public Hearing

    Before this proposed regulation is adopted as a final regulation, 
consideration will be given to any written (a signed original and (8) 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department request comments on the clarity of the 
proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for July 22, 2004, at 10 a.m., 
in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC. Due to building security procedures, visitors must 
enter at the Constitution Avenue entrance. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name on the building access list to 
attend the hearing, see the FOR FURTHER INFORMATION CONTACT portion of 
this preamble. The rules of 26 CFR 601.601(a)(3) apply to the hearing. 
Persons who wish to present oral comments must submit written or 
electronic comments by June 30, 2004 and an outline of the topics to be 
discussed and the time to be devoted to each topic (a signed original 
and eight (8) copies) by July 1, 2004. A period of 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 James M. Gergurich of 
the Office of the Associate Chief Counsel (Passthroughs & Special 
Industries), IRS. However, other personnel from the IRS and Treasury 
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 TAX

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

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

    Par. 2. Section 1.856-9 is added to read as follows:


Sec.  1.856-9  Treatment of certain qualified REIT subsidiaries.

    (a) In general. A qualified REIT subsidiary, even though it is 
otherwise not treated as a corporation separate from the REIT, is 
treated as a separate corporation for purposes of:
    (1) Federal tax liabilities of the qualified REIT subsidiary with 
respect to any taxable period for which the qualified REIT subsidiary 
was treated as a separate corporation.
    (2) Federal tax liabilities of any other entity for which the 
qualified REIT subsidiary is liable.
    (3) Refunds or credits of Federal tax.
    (b) Examples. The following examples illustrate the application of 
paragraph (a) of this section:

    Example 1. X, a calendar year taxpayer, is a domestic 
corporation 100 percent of the stock of which is acquired by Y, a 
real estate investment trust, in 2002. X was not a member of a 
consolidated group at any time during its taxable year ending in 
December 2001. Consequently, X is treated as a qualified REIT 
subsidiary under the provisions of section 856(i). In 2004, the 
Internal Revenue Service (``IRS'') seeks to extend the period of 
limitations on assessment for X's 2001 taxable year. Because X was 
treated as a separate corporation for its 2001 taxable year, X is 
the proper party to sign the consent to extend the period of 
limitations.

    Example 2. The facts are the same as in Example 1, except that 
upon Y's acquisition of X, Y and X jointly elect under section 
856(l) to treat X as a taxable REIT subsidiary of Y. In 2003, Y and 
X jointly revoke that election. Consequently, X is treated as a 
qualified REIT subsidiary under the provisions of section 856(i). In 
2004, the IRS determines that X miscalculated and underreported its 
income tax liability for 2001. Because X was treated as a separate 
corporation for its 2001 taxable year, the deficiency may be 
assessed against X and, in the event that X fails to pay the 
liability after notice and demand, a general tax lien will arise 
against all of X's property and rights to property.


[[Page 17119]]


    Example 3. X is a qualified REIT subsidiary of Y under the 
provisions of section 856(i). In 2001, Z, a domestic corporation 
that reports its taxes on a calendar year basis, merges into X in a 
state law merger. Z was not a member of a consolidated group at any 
time during its taxable year ending in December 2000. Under the 
applicable state law, X is the successor to Z and is liable for all 
of Z's debts. In 2004, the IRS seeks to extend the period of 
limitations on assessment for Z's 2000 taxable year. Because X is 
the successor to Z and is liable for Z's 2000 taxes that remain 
unpaid, X is the proper party to sign the consent to extend the 
period of limitations.

    (c) Effective date. This section applies on or after April 1, 2004.
    Par. 3. Section 1.1361-4 is amended as follows:
    1. In paragraph (a)(1), the first sentence is amended by adding the 
language ``and (a)(6)'' immediately following the language ``Except as 
otherwise provided in paragraph (a)(3)''.
    2. Paragraph (a)(6) is added.
    The addition reads as follows:


Sec.  1.1361-4  Effect of Qsub election.

    (a) * * *
    (6) Treatment of certain QSubs--(i) In general. A QSub, even though 
it is otherwise not treated as a corporation separate from the S 
corporation, is treated as a separate corporation for purposes of:
    (A) Federal tax liabilities of the QSub with respect to any taxable 
period for which the QSub was treated as a separate corporation.
    (B) Federal tax liabilities of any other entity for which the QSub 
is liable.
    (C) Refunds or credits of Federal tax.
    (ii) Examples. The following examples illustrate the application of 
paragraph (a)(6)(i) of this section:

    Example 1. X has owned all of the outstanding stock of Y, a 
domestic corporation that reports its taxes on a calendar year 
basis, since 2001. X and Y do not report their taxes on a 
consolidated basis. For 2003, X makes a timely S election and 
simultaneously makes a QSub election for Y. In 2004, the Internal 
Revenue Service (``IRS'') seeks to extend the period of limitations 
on assessment for Y's 2001 taxable year. Because Y was treated as a 
separate corporation for its 2001 taxable year, Y is the proper 
party to sign the consent to extend the period of limitations.

    Example 2. The facts are the same as in Example 1, except that 
in 2004, the IRS determines that Y miscalculated and underreported 
its income tax liability for 2001. Because Y was treated as a 
separate corporation for its 2001 taxable year, the deficiency for 
Y's 2001 taxable year may be assessed against Y and, in the event 
that Y fails to pay the liability after notice and demand, a general 
tax lien will arise against all of Y's property and rights to 
property.

    Example 3. X is a QSub of Y. In 2001, Z, a domestic corporation 
that reports its taxes on a calendar year basis, merges into X in a 
state law merger. Z was not a member of a consolidated group at any 
time during its taxable year ending in December 2000. Under the 
applicable state law, X is the successor to Z and is liable for all 
of Z's debts. In 2003, the IRS seeks to extend the period of 
limitations on assessment for Z's 2000 taxable year. Because X is 
the successor to Z and is liable for Z's 2000 taxes that remain 
unpaid, X is the proper party to execute the consent to extend the 
period of limitations on assessment.

    (iii) Effective date. This paragraph (a)(6) applies on or after 
April 1, 2004.

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 as follows:
    1. Paragraph (c)(2)(iii) is added.
    2. Paragraph (e) is revised.
    The additions and revisions read as follows:


Sec.  301.7701-2  Business entities; definitions.

* * * * *
    (c) * * *
    (2) * * *
    (iii) Tax liabilities of certain disregarded entities--(A) In 
general. An entity that is otherwise disregarded as separate from its 
owner is treated as an entity separate from its owner for purposes of:
    (1) Federal tax liabilities of the entity with respect to any 
taxable period for which the entity was not disregarded.
    (2) Federal tax liabilities of any other entity for which the 
entity is liable.
    (3) Refunds or credits of Federal tax.
    (B) Examples. The following examples illustrate the application of 
paragraph (c)(2)(iii)(A) of this section:

    Example 1. In 2001, X, a domestic corporation that reports its 
taxes on a calendar year basis, merges into Z, a domestic LLC wholly 
owned by Y that is disregarded as an entity separate from Y, in a 
state law merger. X was not a member of a consolidated group at any 
time during its taxable year ending in December 2000. Under the 
applicable state law, Z is the successor to X and is liable for all 
of X's debts. In 2004, the Internal Revenue Service (``IRS'') seeks 
to extend the period of limitations on assessment for X's 2000 
taxable year. Because Z is the successor to X and is liable for X's 
2000 taxes that remain unpaid, Z is the proper party to sign the 
consent to extend the period of limitations.

    Example 2. The facts are the same as in Example 1, except that 
in 2002, the IRS determines that X miscalculated and underreported 
its income tax liability for 2000. Because Z is the successor to X 
and is liable for X's 2000 taxes that remain unpaid, the deficiency 
may be assessed against Z and, in the event that Z fails to pay the 
liability after notice and demand, a general tax lien will arise 
against all of Z's property and rights to property.

* * * * *
    (e) Effective date. (1) Except as otherwise provided in this 
paragraph (e), the rules of this section apply as of January 1, 1997, 
except that paragraph (b)(6) of this section applies on or after 
January 14, 2002, 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. The reference to the Finnish, Maltese, and Norwegian 
entities in paragraph (b)(8)(i) of this section is applicable on 
November 29, 1999. The reference to the Trinidadian entity in paragraph 
(b)(8)(i) of this section applies to entities formed on or after 
November 29, 1999. Any Maltese or Norwegian entity that becomes an 
eligible entity as a result of paragraph (b)(8)(i) of this section in 
effect on November 29, 1999, may elect by February 14, 2000, to be 
classified for Federal tax purposes as an entity other than a 
corporation retroactive to any period from and including January 1, 
1997. Any Finnish entity that becomes an eligible entity as a result of 
paragraph (b)(8)(i) of this section in effect on November 29, 1999, may 
elect by February 14, 2000, to be classified for Federal tax purposes 
as an entity other than a corporation retroactive to any period from 
and including September 1, 1997.
    (2) Paragraph (c)(2)(iii) of this section applies on or after April 
1, 2004.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-7088 Filed 3-31-04; 8:45 am]
BILLING CODE 4830-01-U