[Federal Register Volume 69, Number 155 (Thursday, August 12, 2004)]
[Rules and Regulations]
[Pages 49809-49811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18478]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9153]
RIN 1545-BD43


Clarification of Definitions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations providing 
clarification of the definitions of a corporation and a domestic entity 
in circumstances where the business entity is considered to be created 
or organized in more than one jurisdiction. These regulations will 
affect business entities that are created or organized under the laws 
of more than one jurisdiction. The final regulations consist of 
technical revisions to reflect the issuance of the temporary 
regulations and to correct a cross-reference in Sec.  301.7701-3. The 
text of the temporary regulations also serves as the text of the 
proposed regulations set forth in the notice of proposed rulemaking on 
this subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective August 12, 2004.
    Applicability Dates: For the dates of applicability of these 
regulations, see Sec.  301.7701-2T(f) and Sec.  301.7701-5T(c).

FOR FURTHER INFORMATION CONTACT: Thomas Beem, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Several jurisdictions have recently enacted provisions (generally 
referred to as either continuance or domestication statutes) that make 
it possible for a business entity to be treated as created or organized 
under the laws of more than one jurisdiction at the same time (a dually 
chartered entity). A dually chartered entity and the interest holders 
in the entity must determine for Federal tax purposes (1) the entity's 
classification (e.g., corporation or partnership) and (2) whether the 
entity is foreign or domestic. The regulations contained in this 
document are intended to clarify the rules for these determinations.
    Section 7701(a)(3) of the Internal Revenue Code of 1986 (Code) 
provides that the term corporation includes associations, joint stock 
companies, and insurance companies. The definition of a corporation 
under the tax statutes has not changed since the Revenue Act of 1918, 
Public Law 65-254 (40 Stat. 1057, section 1). Final regulations (TD 
8697) providing rules for the classification of business entities were 
published in the Federal Register on December 18, 1996 (61 FR 66584 
(1996)). Those entity classification rules identify certain entities 
that are always treated as corporations and are not eligible to elect 
their entity classification.
    Section 7701(a)(4) of the Code provides that the term domestic when 
applied to a corporation or partnership means ``created or organized in 
the United States or under the law of the United States or of any State 
unless, in the case of a partnership, the Secretary provides otherwise 
by regulations.'' Section 7701(a)(5) of the Code provides that the term 
foreign when applied to a corporation or partnership means a 
``corporation or partnership that is not domestic.'' This definition is 
significantly different than the definition of foreign entity that 
preceded it. The Revenue Act of 1918 used the term foreign to mean a 
corporation or partnership ``created or organized outside the United 
States.'' Thus, under that definition, a dually chartered entity that 
was organized in the United States and in a foreign jurisdiction would 
have met the definitions of both a domestic entity and a foreign 
entity, creating uncertainty as to the entity's status. The Revenue Act 
of 1924, Public Law 68-176 (43 Stat. 253) eliminated that potential for 
uncertainty by providing the definition of a foreign entity that is 
currently reflected in section 7701(a)(5). This definition of a foreign 
entity as ``a corporation or partnership that is not domestic'' makes 
it impossible for an entity to meet the definitions of both a domestic 
entity and a foreign entity for Federal tax purposes at the same time. 
As a result, a dually chartered entity that is organized both in the 
United States and in a foreign jurisdiction is a domestic entity.
    Final regulations providing further guidance on the definitions of 
domestic and foreign business entities were published in the Federal 
Register on November 17, 1960 (25 FR 10928 (1960)).

Explanation of Provisions

    Under the existing rules, the characterization of a business entity 
for Federal tax purposes is established in two separate and independent 
steps. The first involves a determination of whether the entity is a 
corporation or a non-corporate entity (e.g., a partnership). The second 
involves a determination of whether the entity is foreign or domestic.
    The determination of whether a business entity is classified as a 
corporation is made by applying the definition in Sec.  301.7701-2(b). 
If the entity is not a corporation under that definition, then it is a 
partnership if it has more than one owner and it is a disregarded 
entity if it has only a single owner. The temporary regulations in this 
document clarify that this same definition applies to dually chartered 
entities. Thus, to determine whether a dually chartered entity is a 
corporation,

[[Page 49810]]

it must first be determined if the entity's organization in any of the 
jurisdictions in which it is organized would cause it to be treated as 
a corporation under the rules of Sec.  301.7701-2(b). If the entity 
would be treated as a corporation as a result of its formation in any 
of the jurisdictions in which it is organized, it is treated as a 
corporation for Federal tax purposes even though its organization in 
the other jurisdiction or jurisdictions would not have caused it to be 
treated as a corporation.
    Once the classification of a business entity has been determined, a 
determination will generally need to be made regarding whether it is a 
domestic or foreign entity. It is a domestic entity if it is created or 
organized in the United States or under the laws of the United States 
or of any state. It is a foreign entity only if it is not domestic. The 
temporary regulations in this document revise Sec.  301.7701-5 to 
clarify that a dually chartered entity is domestic if it is organized 
as any form of entity in the United States, regardless of how it is 
organized in any foreign jurisdiction. An entity that is classified as 
a corporation because of its form of organization in a foreign country 
is considered a domestic corporation if it is also organized as some 
form of entity in the United States, regardless of what form the entity 
takes in the United States (e.g., corporation, limited liability 
company, or partnership).
    These temporary regulations also remove from Sec.  301.7701-5 the 
definitions of resident foreign corporation, nonresident foreign 
corporation, resident partnership and nonresident partnership because 
these terms have become obsolete due to statutory changes since the 
final regulations were published in 1960.
    These regulations clarify current law and do not change the outcome 
that would result under a proper application of the existing rules as 
they apply to dually chartered entities. For example, the temporary 
regulations are consistent with the result in Rev. Rul. 88-25 (1988-1 
C.B. 116). These regulations are also not intended to affect the result 
under existing rules regarding whether an organization is a separate 
entity for Federal tax purposes (e.g., whether, in a particular case, 
two sets of organizational documents constitute different facets of a 
single entity or the foundations of two separate entities). In 
addition, if a business entity undertakes a continuance, domestication, 
or other transaction that, upon application of these rules, changes its 
entity classification or changes its foreign or domestic status, the 
tax effects of that transaction are determined under the regular tax 
principles that apply to such changes. Finally, the regulations 
contained in this document do not determine an entity's place of 
residence for the purpose of applying the provisions of a tax treaty.
    Section 7701(a)(4) of the Code provides regulatory authority to 
define a domestic partnership other than based on where the partnership 
is created or organized. The Treasury and the IRS are continuing to 
explore whether, and under what circumstances, a different definition 
may be appropriate. If any change to the definition of a domestic 
partnership were to be proposed, it would apply only to partnerships 
created or organized after the issuance of regulations or other 
guidance substantially describing the change in definition.

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. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analyses section of the preamble to the notice of 
proposed rulemaking published in the proposed rules section in this 
issue of the Federal Register. Pursuant to section 7806(f) of the Code, 
these temporary regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact.

Drafting Information

    The principal author of these regulations is Thomas Beem of the 
Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and Treasury Department 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.

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. In Sec.  301.7701-1, paragraph (d) is revised to read as 
follows:


Sec.  301.7701-1  Classification of organizations for federal tax 
purposes.

* * * * *
    (d) Domestic and foreign business entities. [Reserved]. For further 
guidance, see Sec.  301.7701-1T.
* * * * *

0
Par 3. Section 301.7701-1T is added to read as follows:


Sec.  301.7701-1T  Classification of organizations for federal tax 
purposes (temporary).

    (a) through (c) [Reserved]. For further guidance, see Sec.  
301.7701-1(a) through (c).
    (d) Domestic and foreign entities. See Sec.  301.7701-5T for the 
rules that determine whether a business entity is domestic or foreign.
    (e) through (f) [Reserved].

0
Par. 4. In Sec.  301.7701-2, paragraph (b)(9) is added to read as 
follows:


Sec.  301.7701-2  Business entities; definitions.

* * * * *
    (b) * * *
    (9) [Reserved]. For further guidance, see Sec.  301.7701-2T(b)(9).
* * * * *

0
Par. 5. Section 301.7701-2T is added to read as follows:


Sec.  301.7701-2T  Business entities; definitions (temporary).

    (a) through (b)(8) [Reserved] For further guidance, see Sec.  
301.7701-2 (a) through (b)(8).
    (b)(9) Entities with multiple charters. (i) An entity created or 
organized under the laws of more than one jurisdiction if the rules of 
this section would treat it as a corporation as a result of its 
formation in any one of the jurisdictions in which it is created or 
organized. (The determination of a business entity's classification is 
made independently of the determination whether the entity is domestic 
or foreign. See Sec.  301.7701-5T for the rules that determine whether 
a business entity is domestic or foreign.)
    (ii) Examples. The following examples illustrate the rule of this 
paragraph (b)(9):

    Example 1. (i) Facts. X is an entity with a single owner 
organized under the laws of Country A as an entity that is 
specifically mentioned in paragraph (b)(8)(i) of this section. Under 
the rules of this section, such an entity generally is a corporation 
for Federal tax purposes. Several years after its formation, X files 
a certificate of domestication in State B as a limited liability 
company (LLC). Under the laws of State B,

[[Page 49811]]

X is considered to be created or organized in State B as a LLC upon 
the filing of the certificate of domestication and is therefore 
subject to the laws of State B. Under the rules of this section and 
Sec.  301.7701-3, a LLC with a single owner organized only in State 
B is disregarded as an entity separate from its owner for Federal 
tax purposes (absent an election to be treated as an association). 
Neither Country A nor State B law requires X to terminate its 
charter in Country A as a result of the domestication, and in fact X 
does not terminate its charter in Country A. Consequently, X is now 
organized in more than one jurisdiction.
    (ii) Result. X remains organized under the laws of Country A as 
an entity that is specifically mentioned in Sec.  301.7701-
2(b)(8)(i), and as such, it is an entity that generally is treated 
as a corporation under the rules of this section. Therefore, X is a 
corporation for Federal tax purposes because the rules of this 
section would treat X as a corporation as a result of its formation 
in one of the jurisdictions in which it is created or organized.
    Example 2. (i) Facts. Y is an entity that is incorporated under 
the laws of State A and that has two shareholders. Under the rules 
of this section, an entity incorporated under the laws of State A is 
a corporation for Federal tax purposes. Several years after its 
formation, Y files a certificate of continuance in Country B as an 
unlimited company. Under the laws of Country B, upon filing a 
certificate of continuance, Y is treated as organized in Country B. 
Under the rules of this section and Sec.  301.7701-3, an unlimited 
company organized only in Country B that has more than one owner is 
treated as a partnership for Federal tax purposes (absent an 
election to be treated as an association). Neither State A nor 
Country B law requires Y to terminate its charter in State A as a 
result of the continuance, and in fact Y does not terminate its 
charter in State A. Consequently, Y is now organized in more than 
one jurisdiction.
    (ii) Result. Y remains organized in State A as a corporation, an 
entity that is treated as a corporation under the rules of this 
section. Therefore, Y is a corporation for Federal tax purposes 
because the rules of this section would treat Y as a corporation as 
a result of its formation in one of the jurisdictions in which it is 
created or organized.
    Example 3. (i) Facts. Z is an entity that has more than one 
owner and that is recognized under the laws of Country A as an 
unlimited company organized in Country A. Under the rules of this 
section and Sec.  301.7701-3, an unlimited company organized only in 
Country A with more than one owner is treated as a partnership for 
Federal tax purposes (absent an election to be treated as an 
association). At the time Z was formed, it was also organized as a 
public limited company under the laws of Country B. Under the rules 
of this section, a public limited company organized only in Country 
B generally is treated as a corporation for Federal tax purposes.
    (ii) Result. Z is organized in Country B as a public limited 
company, an entity that generally is treated as a corporation under 
the rules of this section. Therefore, Z is a corporation for Federal 
tax purposes because the rules of this section would treat Z as a 
corporation as a result of its formation in one of the jurisdictions 
in which it is created or organized.

    (c) through (e) [Reserved]. For further guidance, see Sec.  
301.7701-2(c) through (e).
    (f) Special effective date. The rules of this section apply as of 
August 12, 2004 to all business entities existing on or after that 
date.

0
Par. 6. In Sec.  301.7701-3, the last sentence of paragraph (b)(3)(i) 
is revised to read as follows:


Sec.  301.7701-3  Classification of certain business entities.

* * * * *
    (b) * * *
    (3) * * * (i) * * *For special rules regarding the classification 
of such entities prior to the effective date of this section, see 
paragraph (h)(2) of this section.
* * * * *

0
Par. 7. Section 301.7701-5 is revised to read as follows:


Sec.  301.7701-5  Domestic and foreign business entities. [Reserved]. 
For further guidance, see Sec.  301.7701-5T.

0
Par. 8. Section 301.7701-5T is added to read as follows:


Sec.  301.7701-5T  Domestic and foreign business entities (temporary).

    (a) Domestic and foreign entities. A business entity (including an 
entity that is disregarded as separate from its owner) is domestic if 
it is created or organized as any type of entity (including, but not 
limited to, a corporation, unincorporated association, general 
partnership, limited partnership, and limited liability company) in the 
United States, or under the law of the United States or of any State. 
Accordingly, a business entity that is created or organized both in the 
United States and in a foreign jurisdiction is a domestic entity. A 
business entity (including an entity that is disregarded as separate 
from its owner) is foreign if it is not domestic. (The determination of 
whether an entity is domestic is made independently of the 
determination of its classification for Federal tax purposes. See 
Sec. Sec.  301.7701-2, 301.7701-2T, and 301.7701-3 for the rules 
governing the classification of entities.)
    (b) Examples. The following examples illustrate the rules of this 
section:

    Example 1. (i) Facts. Y is an entity that is created or 
organized under the laws of Country A as a public limited company. 
It is also an entity that is organized as a limited liability 
company (LLC) under the laws of State B. Y has been classified as a 
corporation for Federal tax purposes under the rules of Sec. Sec.  
301.7701-2, 301.7701-2T, and 301.7701-3.
    (ii) Result. Y is a domestic corporation because it is an entity 
that is classified as a corporation and it is organized as an entity 
under the laws of State B.
    Example 2. (i) Facts. P is an entity with more than one owner 
organized under the laws of Country A as an unlimited company. It is 
also an entity that is organized as a general partnership under the 
laws of State B. P has been classified as a partnership for Federal 
tax purposes under the rules of Sec. Sec.  301.7701-2, 301.7701-2T, 
and 301.7701-3.
    (ii) Result. P is a domestic partnership because it is an entity 
that is classified as a partnership and it is organized as an entity 
under the laws of State B.

    (c) Effective date. The rules of this section apply as of August 
12, 2004 to all business entities existing on or after that date.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

    Approved: July 21, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-18478 Filed 8-11-04; 8:45 am]
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