[Federal Register Volume 71, Number 19 (Monday, January 30, 2006)]
[Rules and Regulations]
[Pages 4815-4818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-817]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9246]
RIN 1545-BD37


Clarification of Definitions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations defining the terms 
corporation and domestic in circumstances in which a business entity is 
created or organized in more than one jurisdiction. These regulations 
affect business entities that are created or organized under the laws 
of more than one jurisdiction.

DATES: Effective Date: These regulations are effective January 30, 
2006.
    Applicability Dates: For the dates of applicability of these 
regulations, see Sec. Sec.  301.7701-2(e)(3) and 301.7701-5(c).

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

SUPPLEMENTARY INFORMATION:

Background

    On August 12, 2004, the IRS and Treasury issued temporary 
regulations (TD 9153), 69 FR 49809, and a notice of proposed rulemaking 
(REG-124872-04), 69 FR 49840, regarding the classification of business 
entities that are created or organized under the laws of more than one 
jurisdiction (dually chartered entities).
    Under the provisions of the temporary and proposed regulations, 
classification of a dually chartered entity involves two independent 
determinations: (1) Whether the entity is a corporation; and (2) 
whether the entity is domestic or foreign. The entity is a corporation 
under Sec.  301.7701-2T(b)(9) if its form of organization in any one of 
the jurisdictions in which it is created or organized would cause it to 
be treated as a corporation under Sec.  301.7701-2(b). The entity is 
domestic under Sec.  301.7701-5T if it is organized as any kind of 
entity in the United States or under the law of the United States or of 
any State. The temporary regulations were effective for all entities 
existing on or after August 12, 2004.
    The public hearing concerning the proposed regulations was canceled 
because no requests to speak were received. However, the IRS and 
Treasury received several written comments on the temporary and 
proposed regulations, which are discussed below.

Explanation of Provisions

A. Dates of Application

    The preamble to the temporary and proposed regulations notes that 
the IRS and Treasury consider the regulations to be a clarification of 
the entity classification rules as they existed prior to the issuance 
of the temporary and proposed regulations (pre-existing regulations). 
This belief is based on the view that, even absent these regulations, a 
proper application of the pre-existing regulations produces the same 
result as

[[Page 4816]]

the rules of the temporary and proposed regulations. Some commentators 
suggest that this discussion in the preamble to the temporary and 
proposed regulations indicates that the regulations apply prior to 
August 12, 2004, and thus the rules are retroactive in their effect.
    Also, all of the commentators note that while the temporary and 
proposed rules are a reasonable interpretation of the statute and the 
pre-existing regulations, other reasonable interpretations of the pre-
existing regulations are also possible and that some taxpayers 
classified their dually chartered entities under those other 
interpretations. Therefore, the commentators question whether it is 
appropriate to view the temporary and proposed regulations as a 
clarification of the existing regulations. Further, the commentators 
state that where taxpayers have reasonably relied on an alternative 
interpretation of the existing regulations, the immediate application 
of the temporary regulations cause an unexpected change in the 
classification of those taxpayers' dually chartered entities, often 
with adverse tax consequences. Moreover, the commentators point out 
that the tax costs of converting a dually chartered entity from this 
unexpected classification to the taxpayer's desired classification 
could be significant and could, in some instances, effectively prevent 
the taxpayer from undertaking the conversion. For these reasons, all 
the commentators object to the effective date provisions of the 
temporary regulations and they request that the final regulations 
provide either a transition period before the rules take effect, or a 
rule that exempts dually chartered entities that were in existence on 
August 12, 2004, from the application of the rules.
    Neither the temporary regulations nor these final regulations are 
retroactive. The earliest date that any entity is subject to these 
regulations is August 12, 2004. For periods prior to the date these 
final regulations apply (i.e., prior to August 12, 2004), the 
classification of dually chartered entities is governed by the pre-
existing regulations. Further, based upon the comments discussed above, 
but without any inference intended as to the proper interpretation of 
the pre-existing regulations, the IRS and Treasury conclude that, while 
the final regulations generally are effective as of August 12, 2004, a 
transition rule is appropriate. The transition rule provides that for 
dually chartered entities existing on August 12, 2004, the provisions 
of this final regulation apply as of May 1, 2006. The IRS and Treasury 
recognize that taxpayers eligible for the transition rule may have 
completed transactions after August 12, 2004, relying upon the 
temporary regulations and therefore these taxpayers may rely upon the 
final regulations as of August 12, 2004.

B. Effect on Dually Chartered Entities Not Organized Anywhere as Per Se 
Corporations

    Several commentators state that it is unclear whether Sec.  
301.7701-2T(b)(9) applies in the case of a dually chartered entity not 
created or organized in any jurisdiction in a manner that would cause 
it to be treated as a per se corporation. A per se corporation is an 
entity described in Sec.  301.7701-2(b)(1), (3), (4), (5), (6), (7), or 
(8), and thus is not an eligible entity as defined in Sec.  301.7701-
3(a). A per se corporation is, therefore, ineligible to elect its 
classification.
    Even though a dually chartered entity is not created or organized 
anywhere in a manner that would cause it to be classified as a per se 
corporation, it is still necessary to classify the entity. For example, 
a dually chartered entity may be organized in one jurisdiction in 
manner that would result in a default classification as a corporation 
and in another jurisdiction in a manner that would result in a default 
classification as a partnership. Absent an election, a rule is 
necessary to resolve the conflicting default classifications. 
Therefore, the regulation and examples have been modified to clarify 
that the rules apply even in circumstances in which the entity is not 
organized anywhere in a manner that would make it a per se corporation.
    Several commentators state that even if a dually chartered entity 
is not created or organized in any jurisdiction as a per se 
corporation, Sec.  301.7701-2T(b)(9) could be interpreted as making the 
entity a per se corporation in some circumstances and thus prohibiting 
the entity from electing its classification. According to these 
commentators, this occurs because the literal language of the 
regulation only considers an entity's default classification at the 
time of its formation and ignores any entity classification election 
under Sec.  301.7701-3 that would otherwise apply to the entity at the 
time the entity classification determination is made. The regulations 
are not intended to operate in that manner. Therefore, a sentence is 
added to Sec.  301.7701-2(b)(9) of the final regulations to clarify 
that a dually chartered entity that is an eligible entity in each 
jurisdiction in which it is created or organized will continue to be 
considered an eligible entity under Sec.  301.7701-3(a). In addition, 
the examples were modified to illustrate this provision.
    The proposed regulations under section 7701 are adopted as modified 
by this Treasury decision and the preceding temporary regulations are 
removed.

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 
these regulations do not impose a collection of information on small 
entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply. Pursuant to section 7805(f) of the Internal 
Revenue Code, the temporary and proposed regulations that preceded 
these regulations were submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comments on its impact on small 
business.

Drafting Information

    The principal author of these regulations is Thomas Beem of the 
Office of Associate Chief Counsel (International). However, other 
personnel from IRS and Treasury 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. See Sec.  301.7701-5 
for the rules that determine whether a business entity is domestic or 
foreign.
* * * * *

[[Page 4817]]

Sec.  301.7701-1T  [Removed]

0
Par. 3. Section 301.7701-1T is removed.

0
Par. 4. In Sec.  301.7701-2, paragraphs (b)(9) and (e)(3) are revised 
to read as follows:


Sec.  301.7701-2  Business entities; definitions.

* * * * *
    (b)(9) Business 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 with 
reference to any one of the jurisdictions in which it is created or 
organized. Such an entity may elect its classification under Sec.  
301.7701-3, subject to the limitations of those provisions, only if it 
is created or organized in each jurisdiction in a manner that meets the 
definition of an eligible entity in Sec.  301.7701-3(a). The 
determination of a business entity's corporate or non-corporate 
classification is made independently from the determination of whether 
the entity is domestic or foreign. See Sec.  301.7701-5 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 listed in 
paragraph (b)(8)(i) of this section. Under the rules of this 
section, such an entity is a corporation for Federal tax purposes 
and under Sec.  301.7701-3(a) is unable to elect its classification. 
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, X is considered to be created or organized in 
State B as an 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, an 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 Country A 
charter. 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 listed in paragraph (b)(8)(i) of this section, and 
as such, it is an entity that 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 with reference to one of the jurisdictions in which it 
is created or organized. Because X is organized in Country A in a 
manner that does not meet the definition of an eligible entity in 
Sec.  301.7701-3(a), it is unable to elect its classification.
    Example 2. (i) Facts. Y is an entity that is incorporated under 
the laws of State A and 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 and under Sec.  301.7701-3(a) 
is unable to elect its classification. 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 
State A charter. 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 
with reference to one of the jurisdictions in which it is created or 
organized. Because Y is organized in State A in a manner that does 
not meet the definition of an eligible entity in Sec.  301.7701-
3(a), it is unable to elect its classification.
    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. Z is organized in Country 
A in a manner that meets the definition of an eligible entity in 
Sec.  301.7701-3(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 private limited 
company under the laws of Country B. Z is organized in Country B in 
a manner that meets the definition of an eligible entity in Sec.  
301.7701-3(a). Under the rules of this section and Sec.  301.7701-3, 
a private limited company organized only in Country B is treated as 
a corporation for Federal tax purposes (absent an election to be 
treated as a partnership). Thus, Z is organized in more than one 
jurisdiction. Z has not made any entity classification elections 
under Sec.  301.7701-3.
    (ii) Result. Z is organized in Country B as a private limited 
company, an entity that is treated (absent an election to the 
contrary) as a corporation under the rules of this section. However, 
because Z is organized in each jurisdiction in a manner that meets 
the definition of an eligible entity in Sec.  301.7701-3(a), it may 
elect its classification under Sec.  301.7701-3, subject to the 
limitations of those provisions.
    Example 4. (i) Facts. P is an entity with more than one owner 
organized in Country A as a general partnership. Under the rules of 
this section and Sec.  301.7701-3, an eligible entity with more than 
one owner in Country A is treated as a partnership for federal tax 
purposes (absent an election to be treated as an association). P 
files a certificate of continuance in Country B as an unlimited 
company. Under the rules of this section and Sec.  301.7701-3, an 
unlimited company in Country B with more than one owner is treated 
as a partnership for federal tax purposes (absent an election to be 
treated as an association). P is not required under either the laws 
of Country A or Country B to terminate the general partnership in 
Country A, and in fact P does not terminate its Country A 
partnership. P is now organized in more than one jurisdiction. P has 
not made any entity classification elections under Sec.  301.7701-3.
    (ii) Result. P's organization in both Country A and Country B 
would result in P being classified as a partnership. Therefore, 
since the rules of this section would not treat P as a corporation 
with reference to any jurisdiction in which it is created or 
organized, it is not a corporation for federal tax purposes.

* * * * *
    (e) * * *
    (3)(i) General rule. Except as provided in paragraph (e)(3)(ii) of 
this section, the rules of paragraph (b)(9) of this section apply as of 
August 12, 2004, to all business entities existing on or after that 
date.
    (ii) Transition rule. For business entities created or organized 
under the laws of more than one jurisdiction as of August 12, 2004, the 
rules of paragraph (b)(9) of this section apply as of May 1, 2006. 
These entities, however, may rely on the rules of paragraph (b)(9) of 
this section as of August 12, 2004.
* * * * *


Sec.  301.7701-2T  [Removed]

0
Par. 5. Section 301.7701-2T is removed.

0
Par. 6. Section 301.7701-5 is revised to read as follows:


Sec.  301.7701-5  Domestic and foreign business entities.

    (a) Domestic and foreign business entities. A business entity 
(including an entity that is disregarded as separate from its owner 
under Sec.  301.7701-2(c)) 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 under Sec.  
301.7701-2(c)) is foreign if it is not domestic. The

[[Page 4818]]

determination of whether an entity is domestic or foreign is made 
independently from the determination of its corporate or non-corporate 
classification. See Sec. Sec.  301.7701-2 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 is classified as a 
corporation for Federal tax purposes under the rules of Sec. Sec.  
301.7701-2, 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 is classified as a partnership for Federal tax 
purposes under the rules of Sec. Sec.  301.7701-2, 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.--(1) General rule. Except as provided in 
paragraph (c)(2) of this section, the rules of this section apply as of 
August 12, 2004, to all business entities existing on or after that 
date.
    (2) Transition rule. For business entities created or organized 
under the laws of more than one jurisdiction as of August 12, 2004, the 
rules of this section apply as of May 1, 2006. These entities, however, 
may rely on the rules of this section as of August 12, 2004.


Sec.  301.7701-5T  [Removed]

0
Par. 7. Section 301.7701-5T is removed.

    Approved: January 17, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 06-817 Filed 1-27-06; 8:45 am]
BILLING CODE 4830-01-P