[Federal Register Volume 70, Number 37 (Friday, February 25, 2005)]
[Rules and Regulations]
[Pages 9220-9222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3587]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9183]
RIN 1545-BA59


Modification of Check the Box

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final 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. 
These regulations affect disregarded entities that are liable for 
Federal taxes with respect to tax periods during which they were not 
disregarded or because they are successors or transferees of taxable 
entities.

DATES: Effective Date: These regulations are effective April 1, 2004.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.856-9(c), 1.1361-4(a)(6)(iii), and 301.7701-2(e).

FOR FURTHER INFORMATION CONTACT: Martin Sch[auml]ffer, (202) 622-3070 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR parts 1 and 301. The 
amendments to 26 CFR part 1 are under sections 856 and 1361 of the 
Internal Revenue Code (Code). Section 856(i) was added by the Tax 
Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085). Section 1361(b)(3) 
was added by the Small Business Job Protection Act of 1996 (Pub. L. 
104-188, 110 Stat. 1755). The amendments to 26 CFR part 301 are to 
Sec.  301.7701-2, first promulgated by TD 8697, 61 FR 66584 (December 
18, 1996). On April 1, 2004, a notice of proposed rulemaking (REG-
106681-02) relating to the taxation of disregarded entities was 
published in the Federal Register (69 FR 17117). A notice of correction 
was published in the Federal Register (69 FR 22463) on April 26, 2004. 
No comments were received from the public in response to the notice of 
proposed rulemaking. No public hearing was requested, and accordingly, 
no hearing was held. This Treasury decision adopts the language of the 
proposed regulations with only minor clarifying changes.

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 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. Pursuant to section 7805(f) of the Code, the proposed 
regulations preceding these regulations were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is James M. Gergurich of 
the Office of the Associate Chief Counsel (Passthroughs & Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

[[Page 9221]]

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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


0
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) for 2002 and later 
periods. 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) for 
2003 and later periods. 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.
    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.

0
Par. 3. Section 1.1361-4 is amended as follows:
0
1. In paragraph (a)(1) introductory text, the first sentence is amended 
by removing the language ``paragraph (a)(3)'' and adding ``paragraphs 
(a)(3) and (a)(6)'' in its place.
0
2. Paragraph (a)(6) is added.
    The additions read 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 generally 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

0
Par. 4. The authority citation for part 301 continues to read, in part, 
as follows:

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


0
Par. 5. Section 301.7701-2 is amended as follows:
0
1. Paragraph (c)(2)(iii) is added.
0
2. Paragraph (e) is revised.
    The addition and revision 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

[[Page 9222]]

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. However, paragraph (d)(3)(i)(D) of 
this section applies on or after October 22, 2003.
    (2) Paragraph (c)(2)(iii) of this section applies on or after April 
1, 2004.

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


    Approved: February 15, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-3587 Filed 2-24-05; 8:45 am]
BILLING CODE 4830-01-P