[Federal Register Volume 69, Number 138 (Tuesday, July 20, 2004)]
[Rules and Regulations]
[Pages 43317-43318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16232]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9139]
RIN 1545-BD24


Deemed Election To Be an Association Taxable as a Corporation for 
a Qualified Electing S Corporation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulation.

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SUMMARY: This document contains a temporary regulation that deems 
certain eligible entities that file timely S corporation elections to 
have elected to be classified as associations taxable as corporations. 
This regulation affects certain eligible entities filing timely 
elections to be S corporations on or after July 20, 2004. The text of 
this temporary regulation also serves as the text of the proposed 
regulations set forth in a notice of proposed rulemaking (REG-131786-
03) on this subject published elsewhere in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective July 20, 2004.

FOR FURTHER INFORMATION CONTACT: Rebekah A. Myers, (202) 622-3050 (not 
a toll free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 301.7701-3(a) provides that an eligible entity with two or 
more owners may elect to be classified as an association (and thus a 
corporation under Sec.  301.7701-2(b)(2)) or a partnership, and an 
eligible entity with a single owner may elect to be classified as an 
association or to be disregarded as an entity separate from its owner. 
Section 301.7701-3(b) provides that, unless the entity elects 
otherwise, a domestic eligible entity is a partnership if it has two or 
more owners or is disregarded as an entity separate from its owner if 
it has a single owner.

[[Page 43318]]

Section 301.7701-3(c) describes the time and place for filing an entity 
classification election. Section 301.7701-3(c)(1)(i) provides that an 
eligible entity may elect to be classified as other than its default 
classification or to change its classification by filing Form 8832, 
``Entity Classification Election'', with the service center designated 
on the form.
    A taxpayer whose default classification is a partnership or a 
disregarded entity may seek to be classified as an S corporation. In 
these cases, the taxpayer must elect to be classified as an association 
under Sec.  301.7701-3(c)(1)(i) by filing Form 8832 and must elect to 
be an S corporation under section 1362(a) by filing Form 2553, 
``Election by a Small Business Corporation.'' In some cases, an entity 
may timely file the Form 2553 but fail to file the Form 8832. The 
entity must then submit a letter ruling request for an extension of 
time under Sec.  301.9100 to file a late entity classification 
election. The temporary regulation provides relief for these entities. 
In other cases, the Form 2553 and the Form 8832 are filed late, and the 
entity must submit a ruling request under Sec.  301.9100 to file a late 
entity classification election and under section 1362(b)(5) to file a 
late S corporation election. Rev. Proc. 2004-48, I.R.B. 2004-32, 
provides relief for these entities.

Explanation of Provisions

    Requiring eligible entities to file two elections in order to be 
classified as S corporations creates a burden on those entities and on 
the Internal Revenue Service (IRS). The temporary regulation simplifies 
these paperwork requirements by eliminating, in certain cases, the 
requirement that the entity elect to be classified as an association. 
Instead, an eligible entity that makes a timely and valid election to 
be classified as an S corporation will be deemed to have elected to be 
classified as an association taxable as a corporation.
    The temporary regulation amends Sec.  301.7701-3(c)(1)(v) to 
provide that, if an eligible entity makes a timely and valid election 
to be an S corporation under section 1362(a)(1), it is treated as 
having made an election to be classified as an association under Sec.  
301.7701-3. However, if the eligible entity's election is not timely 
and valid, the default classification rules provided in Sec.  301.7701-
3(b) will apply to the entity unless the Service provides late S 
corporation election relief or inadvertent invalid election relief. If 
the late or invalid election is not perfected, the default rules will 
maintain the passthrough taxation treatment by classifying the entity 
as a partnership or a disregarded entity.

Effective Date

    The regulations apply to elections to be an S corporation filed on 
or after July 20, 2004. However, eligible entities that timely filed S 
elections before July 20, 2004, may also rely on the provisions of the 
regulation.

Special Analysis

    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. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analysis section of the preamble to the Notice of 
proposed rulemaking on this subject published elsewhere in this issue 
of the Federal Register.

Drafting Information

    The principal author of this regulation is Rebekah A. Myers, Office 
of 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 301

    Employment taxes, Estate and excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of 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. Section 301.7701-3 is amended by adding paragraphs (c)(1)(v)(C) 
and (h)(3) to read as follows:


Sec.  301.7701-3  Classification of certain business entities.

    (c) * * *
    (1) * * *
    (v) * * *
    (C) S corporations. [Reserved] For further guidance, see Sec.  
301.7701-3T(c)(1)(v)(C).
* * * * *
    (h) * * *
    (3) Deemed elections for S corporations. [Reserved] For further 
guidance, see Sec.  301.7701-3T(h)(3).

0
Par. 3. Section 301.7701-3T is revised to read as follows:


Sec.  301.7701-3T  Classification of certain business entities 
(temporary).

    (a) through (c)(1)(v)(B) [Reserved] For further guidance, see Sec.  
301.7701-3(a) through (c)(1)(v)(B).
    (c)(1)(v) (C) S corporations. An eligible entity that timely elects 
to be an S corporation under section 1362(a)(1) is treated as having 
made an election under this section to be classified as an association, 
provided that (as of the effective date of the election under section 
1362(a)(1)) the entity meets all other requirements to qualify as a 
small business corporation under section 1361(b). Subject to Sec.  
301.7701-3(c)(1)(iv), the deemed election to be classified as an 
association will apply as of the effective date of the S corporation 
election and will remain in effect until the entity makes a valid 
election, under Sec.  301.7701-3(c)(1)(i), to be classified as other 
than an association.
    (c)(2) through (h)(2)(iii) [Reserved] For further guidance, see 
Sec.  301.7701-3(c)(2) through (h)(2)(iii).
    (3) Deemed elections for S corporations. Paragraph (c)(1)(v)(C) of 
this section applies to timely S corporation elections under section 
1362(a) filed on or after July 20, 2004. Eligible entities that filed 
timely S elections before July 20, 2004, may also rely on the 
provisions of the regulation.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: July 6, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 04-16232 Filed 7-19-04; 8:45 am]
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