[Federal Register Volume 75, Number 177 (Tuesday, September 14, 2010)]
[Proposed Rules]
[Pages 55699-55709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-22793]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG-119921-09]
RIN 1545-BI69
Series LLCs and Cell Companies
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations regarding the
classification for Federal tax purposes of a series of a domestic
series limited liability company (LLC), a cell of a domestic cell
company, or a foreign series or cell that conducts an insurance
business. The proposed regulations provide that, whether or not a
series of a domestic series LLC, a cell of a domestic cell company, or
a foreign series or cell that conducts an insurance business is a
juridical person for local law purposes, for Federal tax purposes it is
treated as an entity formed under local law. Classification of a series
or cell that is treated as a separate entity for Federal tax purposes
generally is determined under the same rules that govern the
classification of other types of separate entities. The proposed
regulations provide examples illustrating the application of the rule.
The proposed regulations will affect domestic series LLCs; domestic
cell companies; foreign series, or cells that conduct insurance
businesses; and their owners.
DATES: Written or electronic comments and requests for a public hearing
must be received by December 13, 2010.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-119921-09), Room
5203, Internal Revenue Service, PO Box 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-
119921-09), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically, via the Federal
eRulemaking portal at http://www.regulations.gov (IRS REG-119921-09).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Joy Spies, (202) 622-3050; concerning submissions of comments,
Oluwafunmilayo (Funmi) Taylor, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
1. Introduction
A number of States have enacted statutes providing for the creation
of entities that may establish series, including limited liability
companies (series LLCs). In general, series LLC statutes provide that a
limited liability company may establish separate series. Although
series of a series LLC generally are not treated as separate entities
for State law purposes and, thus, cannot have members, each series has
``associated'' with it specified members, assets, rights, obligations,
and investment objectives or business purposes. Members' association
with one or more particular series is comparable to direct ownership by
the members in such series, in that their rights, duties, and powers
with respect to the series are direct and specifically identified. If
the conditions enumerated in the relevant statute are satisfied, the
debts, liabilities, and obligations of one series generally are
enforceable only against the assets of that series and not against
assets of other series or of the series LLC.
Certain jurisdictions have enacted statutes providing for entities
similar to the series LLC. For example, certain statutes provide for
the chartering of a legal entity (or the establishment of cells) under
a structure commonly known as a protected cell company, segregated
account company or segregated portfolio company (cell company). A cell
company may establish multiple accounts, or cells, each of which has
its own name and is identified with a specific participant, but
generally is not treated under local law as a legal entity distinct
from the cell company. The assets of each cell are statutorily
protected from the creditors of any other cell and from the creditors
of the cell company.
Under current law, there is little specific guidance regarding
whether for Federal tax purposes a series (or cell) is treated as an
entity separate from other series or the series LLC (or other cells or
the cell company, as the case may be), or whether the company and all
of its series (or cells) should be treated as a single entity.
Notice 2008-19 (2008-5 IRB 366) requested comments on proposed
guidance concerning issues that arise if arrangements entered into by a
cell constitute insurance for Federal income tax purposes. The notice
also requested comments on the need for guidance concerning similar
segregated arrangements that do not involve insurance. The IRS received
a number of comments requesting guidance for similar arrangements not
involving insurance, including series LLCs and cell companies. These
comments generally recommended that series and cells should be treated
as separate entities for Federal tax purposes if they are established
under a statute with provisions similar to the series LLC statutes
currently in effect in several States. The IRS and Treasury Department
generally agree with these comments. See Sec. 601.601(d)(2)(ii)(b).
2. Entity Classification for Federal Tax Purposes
A. Regulatory Framework
Sections 301.7701-1 through 301.7701-4 of the Procedure and
Administration Regulations provide the framework for determining an
organization's entity classification for Federal tax purposes.
Classification of an organization depends on whether the organization
is treated as: (i) A separate entity under Sec. 301.7701-1, (ii) a
``business entity'' within the meaning of Sec. 301.7701-2(a) or a
trust under Sec. 301.7701-4, and (iii) an ``eligible entity'' under
Sec. 301.7701-3.
Section 301.7701-1(a)(1) provides that the determination of whether
an
[[Page 55700]]
entity is separate from its owners for Federal tax purposes is a matter
of Federal tax law and does not depend on whether the organization is
recognized as an entity under local law. Section 301.7701-1(a)(2)
provides that a joint venture or other contractual arrangement may
create a separate entity for Federal tax purposes if the participants
carry on a trade, business, financial operation, or venture and divide
the profits therefrom. However, a joint undertaking merely to share
expenses does not create a separate entity for Federal tax purposes,
nor does mere co-ownership of property where activities are limited to
keeping property maintained, in repair, and rented or leased. Id.
Section 301.7701-1(b) provides that the tax classification of an
organization recognized as a separate entity for tax purposes generally
is determined under Sec. Sec. 301.7701-2, 301.7701-3, and 301.7701-4.
Thus, for example, an organization recognized as an entity that does
not have associates or an objective to carry on a business may be
classified as a trust under Sec. 301.7701-4.
Section 301.7701-2(a) provides that a business entity is any entity
recognized for Federal tax purposes (including an entity with a single
owner that may be disregarded as an entity separate from its owner
under Sec. 301.7701-3) that is not properly classified as a trust or
otherwise subject to special treatment under the Internal Revenue Code
(Code). A business entity with two or more members is classified for
Federal tax purposes as a corporation or a partnership. See Sec.
301.7701-2(a). A business entity with one owner is classified as a
corporation or is disregarded. See Sec. 301.7701-2(a). If the entity
is disregarded, its activities are treated in the same manner as a sole
proprietorship, branch, or division of the owner. However, Sec.
301.7701-2(c)(2)(iv) and (v) provides for an otherwise disregarded
entity to be treated as a corporation for certain Federal employment
tax and excise tax purposes.
Section 301.7701-3(a) generally provides that an eligible entity,
which is a business entity that is not a corporation under Sec.
301.7701-2(b), may elect its classification for Federal tax purposes.
B. Separate Entity Classification
The threshold question for determining the tax classification of a
series of a series LLC or a cell of a cell company is whether an
individual series or cell should be considered an entity for Federal
tax purposes. The determination of whether an organization is an entity
separate from its owners for Federal tax purposes is a matter of
Federal tax law and does not depend on whether the organization is
recognized as an entity under local law. Section 301.7701-1(a)(1). In
Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), the
Supreme Court noted that, so long as a corporation was formed for a
purpose that is the equivalent of business activity or the corporation
actually carries on a business, the corporation remains a taxable
entity separate from its shareholders. Although entities that are
recognized under local law generally are also recognized for Federal
tax purposes, a State law entity may be disregarded if it lacks
business purpose or any business activity other than tax avoidance. See
Bertoli v. Commissioner, 103 T.C. 501 (1994); Aldon Homes, Inc. v.
Commissioner, 33 T.C. 582 (1959).
The Supreme Court in Commissioner v. Culbertson, 337 U.S. 733
(1949), and Commissioner v. Tower, 327 U.S. 280 (1946), set forth the
basic standard for determining whether a partnership will be respected
for Federal tax purposes. In general, a partnership will be respected
if, considering all the facts, the parties in good faith and acting
with a business purpose intended to join together to conduct an
enterprise and share in its profits and losses. This determination is
made considering not only the stated intent of the parties, but also
the terms of their agreement and their conduct. Madison Gas & Elec. Co.
v. Commissioner, 633 F. 2d 512, 514 (7th Cir. 1980); Luna v.
Commissioner, 42 T.C. 1067, 1077-78 (1964).
Conversely, under certain circumstances, arrangements that are not
recognized as entities under State law may be treated as separate
entities for Federal tax purposes. Section 301.7701-1(a)(2). For
example, courts have found entities for tax purposes in some co-
ownership situations where the co-owners agree to restrict their
ability to sell, lease or encumber their interests, waive their rights
to partition property, or allow certain management decisions to be made
other than by unanimous agreement among co-owners. Bergford v.
Commissioner, 12 F. 3d 166 (9th Cir. 1993); Bussing v. Commissioner, 89
T.C. 1050 (1987); Alhouse v. Commissioner, T.C. Memo. 1991-652.
However, the Internal Revenue Service (IRS) has ruled that a co-
ownership does not rise to the level of an entity for Federal tax
purposes if the owner employs an agent whose activities are limited to
collecting rents, paying property taxes, insurance premiums, repair and
maintenance expenses, and providing tenants with customary services.
Rev. Rul. 75-374 (1975-2 CB 261). See also Rev. Rul. 79-77 (1979-1 CB
448), (see Sec. 601.601(d)(2)(ii)(b)).
Rev. Proc. 2002-22 (2002-1 CB 733), (see Sec.
601.601(d)(2)(ii)(b)), specifies the conditions under which the IRS
will consider a request for a private letter ruling that an undivided
fractional interest in rental real property is not an interest in a
business entity under Sec. 301.7701-2(a). A number of factors must be
present to obtain a ruling under the revenue procedure, including a
limit on the number of co-owners, a requirement that the co-owners not
treat the co-ownership as an entity (that is, that the co-ownership may
not file a partnership or corporate tax return, conduct business under
a common name, execute an agreement identifying any or all of the co-
owners as partners, shareholders, or members of a business entity, or
otherwise hold itself out as a partnership or other form of business
entity), and a requirement that certain rights with respect to the
property (including the power to make certain management decisions)
must be retained by co-owners. The revenue procedure provides that an
organization that is an entity for State law purposes may not be
characterized as a co-ownership under the guidance in the revenue
procedure.
The courts and the IRS have addressed the Federal tax
classification of investment trusts with assets divided among a number
of series. In National Securities Series-Industrial Stocks Series v.
Commissioner, 13 T.C. 884 (1949), acq., 1950-1 CB 4, several series
that differed only in the nature of their assets were created within a
statutory open-end investment trust. Each series regularly issued
certificates representing shares in the property held in trust and
regularly redeemed the certificates solely from the assets and earnings
of the individual series. The Tax Court stated that each series of the
trust was taxable as a separate regulated investment company. See also
Rev. Rul. 55-416 (1955-1 CB 416), (see Sec. 601.601(d)(2)(ii)(b)).
But, see Union Trusteed Funds v. Commissioner, 8 T.C. 1133 (1947),
(series funds organized by a State law corporation could not be treated
as if each fund were a separate corporation).
In 1986, Congress added section 851(g) to the Code. Section 851(g)
contains a special rule for series funds and provides that, in the case
of a regulated investment company (within the meaning of section
851(a)) with more than one fund, each fund generally is treated as a
separate corporation. For these purposes, a fund is a segregated
portfolio of assets the beneficial
[[Page 55701]]
interests in which are owned by holders of interests in the regulated
investment company that are preferred over other classes or series with
respect to these assets.
C. Insurance Company Classification
Section 7701(a)(3) and Sec. 301.7701-2(b)(4) provide that an
arrangement that qualifies as an insurance company is a corporation for
Federal income tax purposes. Sections 816(a) and 831(c) define an
insurance company as any company more than half the business of which
during the taxable year is the issuing of insurance or annuity
contracts or the reinsuring of risks underwritten by insurance
companies. See also Sec. 1.801-3(a)(1), (``[T]hough its name, charter
powers, and subjection to State insurance laws are significant in
determining the business which a company is authorized and intends to
carry on, it is the character of the business actually done in the
taxable year which determines whether a company is taxable as an
insurance company under the Internal Revenue Code.''). Thus, an
insurance company includes an arrangement that conducts insurance
business, whether or not the arrangement is a State law entity.
3. Overview of Series LLC Statutes and Cell Company Statutes
A. Domestic Statutes
Although Sec. 301.7701-1(a)(1) provides that State classification
of an entity is not controlling for Federal tax purposes, the
characteristics of series LLCs and cell companies under their governing
statutes are an important factor in analyzing whether series and cells
generally should be treated as separate entities for Federal tax
purposes.
Series LLC statutes have been enacted in Delaware, Illinois, Iowa,
Nevada, Oklahoma, Tennessee, Texas, Utah and Puerto Rico. Delaware
enacted the first series LLC statute in 1996. Del. Code Ann. Tit. 6,
section 18-215 (the Delaware statute). Statutes enacted subsequently by
other States are similar, but not identical, to the Delaware statute.
All of the statutes provide a significant degree of separateness for
individual series within a series LLC, but none provides series with
all of the attributes of a typical State law entity, such as an
ordinary limited liability company. Individual series generally are not
treated as separate entities for State law purposes. However, in
certain States (currently Illinois and Iowa), a series is treated as a
separate entity to the extent provided in the series LLC's articles of
organization.
The Delaware statute provides that a limited liability company may
establish, or provide for the establishment of, one or more designated
series of members, managers, LLC interests or assets. Under the
Delaware statute, any such series may have separate rights, powers, or
duties with respect to specified property or obligations of the LLC or
profits and losses associated with specified property or obligations,
and any such series may have a separate business purpose or investment
objective. Additionally, the Delaware statute provides that the debts,
liabilities, obligations, and expenses of a particular series are
enforceable against the assets of that series only, and not against the
assets of the series LLC generally or any other series of the LLC, and,
unless the LLC agreement provides otherwise, none of the debts,
liabilities, obligations, and expenses of the series LLC generally or
of any other series of the series LLC are enforceable against the
assets of the series, provided that the following requirements are met:
(1) The LLC agreement establishes or provides for the establishment of
one or more series; (2) records maintained for any such series account
for the assets of the series separately from the other assets of the
series LLC, or of any other series of the series LLC; (3) the LLC
agreement so provides; and (4) notice of the limitation on liabilities
of a series is set forth in the series LLC's certificate of formation.
Unless otherwise provided in the LLC agreement, a series
established under Delaware law has the power and capacity to, in its
own name, contract, hold title to assets, grant liens and security
interests, and sue and be sued. A series may be managed by the members
of the series or by a manager. Any event that causes a manager to cease
to be a manager with respect to a series will not, in itself, cause the
manager to cease to be a manager of the LLC or of any other series of
the LLC.
Under the Delaware statute, unless the LLC agreement provides
otherwise, any event that causes a member to cease to be associated
with a series will not, in itself, cause the member to cease to be
associated with any other series or with the LLC, or cause termination
of the series, even if there are no remaining members of the series.
Additionally, the Delaware statute allows a series to be terminated and
its affairs wound up without causing the dissolution of the LLC.
However, all series of the LLC terminate when the LLC dissolves.
Finally, under the Delaware statute, a series generally may not make a
distribution to the extent that the distribution will cause the
liabilities of the series to exceed the fair market value of the
series' assets.
The series LLC statutes of Illinois, 805 ILCS 180/37-40 (the
Illinois statute), and Iowa, I.C.A. Sec. 489.1201 (the Iowa statute)
provide that a series with limited liability will be treated as a
separate entity to the extent set forth in the articles of
organization. The Illinois statute provides that the LLC and any of its
series may elect to consolidate their operations as a single taxpayer
to the extent permitted under applicable law, elect to work
cooperatively, elect to contract jointly, or elect to be treated as a
single business for purposes of qualification to do business in
Illinois or any other State.
In addition, under the Illinois statute, a series' existence begins
upon filing of a certificate of designation with the Illinois secretary
of state. A certificate of designation must be filed for each series
that is to have limited liability. The name of a series with limited
liability must contain the entire name of the LLC and be
distinguishable from the names of the other series of the LLC. If
different from the LLC, the certificate of designation for each series
must list the names of the members if the series is member-managed or
the names of the managers if the series is manager-managed. The Iowa
and Illinois statutes both provide that, unless modified by the series
LLC provisions, the provisions generally applicable to LLCs and their
managers, members, and transferees are applicable to each series.
Some States have enacted series provisions outside of LLC statutes.
For example, Delaware has enacted series limited partnership provisions
(6 Del. C. Sec. 17-218). In addition, Delaware's statutory trust
statute permits a statutory trust to establish series (12 Del. C. Sec.
3804). Both of these statutes contain provisions that are nearly
identical to the corresponding provisions of the Delaware series LLC
statute with respect to the ability of the limited partnership or trust
to create or establish separate series with the same liability
protection enjoyed by series of a Delaware series LLC.
All of the series LLC statutes contain provisions that grant series
certain attributes of separate entities. For example, individual series
may have separate business purposes, investment objectives, members,
and managers. Assets of a particular series are not subject to the
claims of creditors of other series of the series LLC or of the series
LLC itself, provided that certain recordkeeping and notice requirements
are observed. Finally, most series LLC statutes provide that an event
that causes a member to cease to be
[[Page 55702]]
associated with a series does not cause the member to cease to be
associated with the series LLC or any other series of the series LLC.
However, all of the State statutes limit the powers of series of
series LLCs. For example, a series of a series LLC may not convert into
another type of entity, merge with another entity, or domesticate in
another State independent from the series LLC. Several of the series
LLC statutes do not expressly address a series' ability to sue or be
sued, hold title to property, or contract in its own name. Ordinary
LLCs and series LLCs generally may exercise these rights. Additionally,
most of the series LLC statutes provide that the dissolution of a
series LLC will cause the termination of each of its series.
B. Statutes with Respect to Insurance
The insurance codes of a number of States include statutes that
provide for the chartering of a legal entity commonly known as a
protected cell company, segregated account company, or segregated
portfolio company. See, for example, Vt. Stat. Ann. tit. 8, chap.141,
Sec. Sec. 6031-6038 (sponsored captive insurance companies and
protected cells of such companies); S.C. Code Ann. tit. 38, chap. 10,
Sec. Sec. 38-10-10 through 39-10-80 (protected cell insurance
companies). Under those statutes, as under the series LLC statutes
described above, the assets of each cell are segregated from the assets
of any other cell. The cell may issue insurance or annuity contracts,
reinsure such contracts, or facilitate the securitization of
obligations of a sponsoring insurance company. Rev. Rul. 2008-8 (2008-1
CB 340), (see Sec. 601.601(d)(2)(ii)(b)), analyzes whether an
arrangement entered into between a protected cell and its owner
possesses the requisite risk shifting and risk distribution to qualify
as insurance for Federal income tax purposes. Under certain domestic
insurance codes, the sponsor may be organized under a corporate or
unincorporated entity statute.
Series or cell company statutes in a number of foreign
jurisdictions allow series or cells to engage in insurance businesses.
See, for example, The Companies (Guernsey) Law, 2008 Part XXVII
(Protected Cell Companies), Part XXVIII (Incorporated Cell Companies);
The Companies (Jersey) law, 1991, Part 18D; Companies Law, Part XIV
(2009 Revision) (Cayman Isl.) (Segregated Portfolio Companies); and
Segregated Accounts Companies Act (2000) (Bermuda).
Explanation of Provisions
1. In General
The proposed regulations provide that, for Federal tax purposes, a
domestic series, whether or not a juridical person for local law
purposes, is treated as an entity formed under local law.
With one exception, the proposed regulations do not apply to series
or cells organized or established under the laws of a foreign
jurisdiction. The one exception is that the proposed regulations apply
to a foreign series that engages in an insurance business.
Whether a series that is treated as a local law entity under the
proposed regulations is recognized as a separate entity for Federal tax
purposes is determined under Sec. 301.7701-1 and general tax
principles. The proposed regulations further provide that the
classification of a series that is recognized as a separate entity for
Federal tax purposes is determined under Sec. 301.7701-1(b), which
provides the rules for classifying organizations that are recognized as
entities for Federal tax purposes.
The proposed regulations define a series organization as a
juridical entity that establishes and maintains, or under which is
established and maintained, a series. A series organization includes a
series limited liability company, series partnership, series trust,
protected cell company, segregated cell company, segregated portfolio
company, or segregated account company.
The proposed regulations define a series statute as a statute of a
State or foreign jurisdiction that explicitly provides for the
organization or establishment of a series of a juridical person and
explicitly permits (1) members or participants of a series organization
to have rights, powers, or duties with respect to the series; (2) a
series to have separate rights, powers, or duties with respect to
specified property or obligations; and (3) the segregation of assets
and liabilities such that none of the debts and liabilities of the
series organization (other than liabilities to the State or foreign
jurisdiction related to the organization or operation of the series
organization, such as franchise fees or administrative costs) or of any
other series of the series organization are enforceable against the
assets of a particular series of the series organization. For purposes
of this definition, a ``participant'' of a series organization includes
an officer or director of the series organization who has no ownership
interest in the series or series organization, but has rights, powers,
or duties with respect to the series.
The proposed regulations define a series as a segregated group of
assets and liabilities that is established pursuant to a series statute
by agreement of a series organization. A series includes a cell,
segregated account, or segregated portfolio, including a cell,
segregated account, or segregated portfolio that is formed under the
insurance code of a jurisdiction or is engaged in an insurance
business. However, the term ``series'' does not include a segregated
asset account of a life insurance company, which consists of all assets
the investment return and market value of which must be allocated in an
identical manner to any variable life insurance or annuity contract
invested in any of the assets. See Sec. 1.817-5(e). Such an account is
accorded special treatment under subchapter L. See generally section
817(a) through (c).
Certain series statutes provide that the series liability
limitation provisions do not apply if the series organization or series
does not maintain records adequately accounting for the assets
associated with each series separately from the assets of the series
organization or any other series of the series organization. The IRS
and the Treasury Department considered whether a failure to elect or
qualify for the liability limitations under the series statute should
affect whether a series is a separate entity for Federal tax purposes.
However, limitations on liability of owners of an entity for debts and
obligations of the entity and the rights of creditors to hold owners
liable for debts and obligations of the entity generally do not alter
the characterization of the entity for Federal tax purposes. Therefore,
the proposed regulations provide that an election, agreement, or other
arrangement that permits debts and liabilities of other series or the
series organization to be enforceable against the assets of a
particular series, or a failure to comply with the recordkeeping
requirements for the limitation on liability available under the
relevant series statute, will not prevent a series from meeting the
definition of ``series'' in the proposed regulations. For example, a
series generally will not cease to be an entity under the proposed
regulations simply because it guarantees the debt of another series
within the series organization.
The proposed regulations treat a series as created or organized
under the laws of the same jurisdiction in which the series is
established. Because a series may not be a separate juridical entity
for local law purposes, this rule
[[Page 55703]]
provides the means for establishing the jurisdiction of the series for
Federal tax purposes.
Under Sec. 301.7701-1(b), Sec. 301.7701-2(b) applies to a series
that is recognized as a separate entity for Federal tax purposes.
Therefore, a series that is itself described in Sec. 301.7701-2(b)(1)
through (8) would be classified as a corporation regardless of the
classification of the series organization.
The proposed regulations also provide that, for Federal tax
purposes, ownership of interests in a series and of the assets
associated with a series is determined under general tax principles. A
series organization is not treated as the owner of a series or of the
assets associated with a series merely because the series organization
holds legal title to the assets associated with the series. For
example, if a series organization holds legal title to assets
associated with a series because the statute under which the series
organization was organized does not expressly permit a series to hold
assets in its own name, the series will be treated as the owner of the
assets for Federal tax purposes if it bears the economic benefits and
burdens of the assets under general Federal tax principles. Similarly,
for Federal tax purposes, the obligor for the liability of a series is
determined under general tax principles.
In general, the same legal principles that apply to determine who
owns interests in other types of entities apply to determine the
ownership of interests in series and series organizations. These
principles generally look to who bears the economic benefits and
burdens of ownership. See, for example, Rev. Rul. 55-39 (1955-1 CB
403), (see Sec. 601.601(d)(2)(ii)(b)). Furthermore, common law
principles apply to the determination of whether a person is a partner
in a series that is classified as a partnership for Federal tax
purposes under Sec. 301.7701-3. See, for example, Commissioner v.
Culbertson, 337 U.S. 733 (1949); Commissioner v. Tower, 327 U.S. 280
(1946).
The IRS and the Treasury Department considered other approaches to
the classification of series for Federal tax purposes. In particular,
the IRS and the Treasury Department considered whether series should be
disregarded as entities separate from the series organization for
Federal tax purposes. This approach would be supported by the fact that
series are not generally considered entities for local law purposes
(except, for example, potentially under the statutes of Illinois and
Iowa, where a series may be treated as a separate entity to the extent
set forth in the articles of organization). Additionally, while the
statutes enabling series organizations grant series significant
autonomy, under no current statute do series possess all of the
attributes of independence that entities recognized under local law
generally possess. For example, series generally cannot convert into
another type of entity, merge with another entity, or domesticate in
another jurisdiction independent of the series organization. In
addition, the dissolution of a series organization generally will
terminate all of its series.
The IRS and the Treasury Department believe that, notwithstanding
that series differ in some respects from more traditional local law
entities, domestic series generally should be treated for Federal tax
purposes as entities formed under local law. Because Federal tax law,
and not local law, governs the question of whether an organization is
an entity for Federal tax purposes, it is not dispositive that domestic
series generally are not considered entities for local law purposes.
Additionally, the IRS and the Treasury Department believe that,
overall, the factors supporting separate entity status for series
outweigh the factors in favor of disregarding series as entities
separate from the series organization and other series of the series
organization. Specifically, managers and equity holders are
``associated with'' a series, and their rights, duties, and powers with
respect to the series are direct and specifically identified. Also,
individual series may (but generally are not required to) have separate
business purposes and investment objectives. The IRS and the Treasury
Department believe these factors are sufficient to treat domestic
series as entities formed under local law.
Although some statutes creating series organizations permit an
individual series to enter into contracts, sue, be sued, and/or hold
property in its own name, the IRS and the Treasury Department do not
believe that the failure of a statute to explicitly provide these
rights should alter the treatment of a domestic series as an entity
formed under local law. These attributes primarily involve procedural
formalities and do not appear to affect the substantive economic rights
of series or their creditors with respect to their property and
liabilities. Even in jurisdictions where series may not possess these
attributes, the statutory liability shields would still apply to the
assets of a particular series, provided the statutory requirements are
satisfied.
Furthermore, the rule provided in the proposed regulations would
provide greater certainty to both taxpayers and the IRS regarding the
tax status of domestic series and foreign series that conduct insurance
businesses. In effect, taxpayers that establish domestic series are
placed in the same position as persons that file a certificate of
organization for a State law entity. The IRS and the Treasury
Department believe that the approach of the proposed regulations is
straightforward and administrable, and is preferable to engaging in a
case-by-case determination of the status of each series that would
require a detailed examination of the terms of the relevant statute.
Finally, the IRS and the Treasury Department believe that a rule
generally treating domestic series as local law entities would be
consistent with taxpayers' current ability to create similar structures
using multiple local law entities that can elect their Federal tax
classification pursuant to Sec. 301.7701-3.
The IRS and the Treasury Department believe that domestic series
should be classified as separate local law entities based on the
characteristics granted to them under the various series statutes.
However, except as specifically stated in the proposed regulations, a
particular series need not actually possess all of the attributes that
its enabling statute permits it to possess. The IRS and the Treasury
Department believe that a domestic series should be treated as a
separate local law entity even if its business purpose, investment
objective, or ownership overlaps with that of other series or the
series organization itself. Separate State law entities may have common
or overlapping business purposes, investment objectives and ownership,
but generally are still treated as separate local law entities for
Federal tax purposes.
The proposed regulations do not address the entity status for
Federal tax purposes of a series organization. Specifically, the
proposed regulations do not address whether a series organization is
recognized as a separate entity for Federal tax purposes if it has no
assets and engages in no activities independent of its series.
Until further guidance is issued, the entity status of a foreign
series that does not conduct an insurance business will be determined
under applicable law. Foreign series raise novel Federal income tax
issues that continue to be considered and addressed by the IRS and the
Treasury Department.
[[Page 55704]]
2. Classification of a Series That Is Treated as a Separate Entity for
Federal Tax Purposes
If a domestic series or a foreign series engaged in an insurance
business is treated as a separate entity for Federal tax purposes, then
Sec. 301.7701-1(b) applies to determine the proper tax classification
of the series. However, the proposed regulations do not provide how a
series should be treated for Federal employment tax purposes. If a
domestic series is treated as a separate entity for Federal tax
purposes, then the series generally is subject to the same treatment as
any other entity for Federal tax purposes. For example, a series that
is treated as a separate entity for Federal tax purposes may make any
Federal tax elections it is otherwise eligible to make independently of
other series or the series organization itself, and regardless of
whether other series (or the series organization) do not make certain
elections or make different elections.
3. Entity Status of Series Organizations
The proposed regulations do not address the entity status or filing
requirements of series organizations for Federal tax purposes. A series
organization generally is an entity for local law purposes. An
organization that is an entity for local law purposes generally is
treated as an entity for Federal tax purposes. However, an organization
characterized as an entity for Federal income tax purposes may not have
an income or information tax filing obligation. For example, Sec.
301.6031(a)-(1)(a)(3)(i) provides that a partnership with no income,
deductions, or credits for Federal income tax purposes for a taxable
year is not required to file a partnership return for that year.
Generally, filing fees of a series organization paid by series of the
series organization would be treated as expenses of the series and not
as expenses of the series organization. Thus, a series organization
characterized as a partnership for Federal tax purposes that does not
have income, deductions, or credits for a taxable year need not file a
partnership return for the year.
4. Continuing Applicability of Tax Law Authority to Series
Notwithstanding that a domestic series or a foreign series engaged
in an insurance business is treated as an entity formed under local law
under the proposed regulations, the Commissioner may under applicable
law, including common law tax principles, characterize a series or a
portion of a series other than as a separate entity for Federal tax
purposes. Series covered by the proposed regulations are subject to
applicable law to the same extent as other entities. Thus, a series may
be disregarded under applicable law even if it satisfies the
requirements of the proposed regulations to be treated as an entity
formed under local law. For example, if a series has no business
purpose or business activity other than tax avoidance, it may be
disregarded under appropriate circumstances. See Bertoli v.
Commissioner, 103 T.C. 501 (1994); Aldon Homes, Inc. v. Commissioner,
33 T.C. 582 (1959). Furthermore, the anti-abuse rule of Sec. 1.701-2
is applicable to a series or series organization that is classified as
a partnership for Federal tax purposes.
5. Applicability to Organizations That Qualify as Insurance Companies
Notice 2008-19 requested comments on proposed guidance setting
forth conditions under which a cell of a protected cell company would
be treated as an insurance company separate from any other entity for
Federal income tax purposes. Those who commented on the notice
generally supported the proposed guidance, and further commented that
it should extend to non-insurance arrangements as well, including
series LLCs. Rather than provide independent guidance for insurance
company status setting forth what is essentially the same standard, the
proposed regulations define the term series to include a cell,
segregated account, or segregated portfolio that is formed under the
insurance code of a jurisdiction or is engaged in an insurance business
(other than a segregated asset account of a life insurance company).
Although the proposed regulations do not apply to a series
organized or established under the laws of a foreign jurisdiction, an
exception is provided for certain series conducting an insurance
business. Under this exception, a series that is organized or
established under the laws of a foreign jurisdiction is treated as an
entity if the arrangements and other activities of the series, if
conducted by a domestic company, would result in its being classified
as an insurance company. Thus, a foreign series would be treated as an
entity if more than half of the series' business is the issuing or
reinsuring of insurance or annuity contracts. The IRS and the Treasury
Department believe it is appropriate to provide this rule even though
the proposed regulations otherwise do not apply to a foreign series
because an insurance company is classified as a per se corporation
under section 7701(a)(3) regardless of how it otherwise would be
treated under Sec. Sec. 301.7701-1, 301.7701-2, or 301.7701-3.
The IRS and the Treasury Department are aware that insurance-
specific guidance may still be needed to address the issues identified
in Sec. 3.02 of Notice 2008-19 and insurance-specific transition
issues that may arise for protected cell companies that previously
reported in a manner inconsistent with the regulations. See Sec.
601.601(d)(2)(ii)(b).
6. Effect of Local Law Classification on Tax Collection
The IRS and Treasury Department understand that there are
differences in local law governing series (for example, rights to hold
title to property and to sue and be sued are expressly addressed in
some statutes but not in others) that may affect how creditors of
series, including State taxing authorities, may enforce obligations of
a series. Thus, the proposed regulations provide that, to the extent
Federal or local law permits a creditor to collect a liability
attributable to a series from the series organization or other series
of the series organization, the series organization and other series of
the series organization may also be considered the taxpayer from whom
the tax assessed against the series may be collected pursuant to
administrative or judicial means. Further, when a creditor is permitted
to collect a liability attributable to a series organization from any
series of the series organization, a tax liability assessed against the
series organization may be collected directly from a series of the
series organization by administrative or judicial means.
7. Employment Tax and Employee Benefits Issues
A. In General
The domestic statutes authorizing the creation of series
contemplate that a series may operate a business. If the operating
business has workers, it will be necessary to determine how the
business satisfies any employment tax obligations, whether it has the
ability to maintain any employee benefit plans and, if so, whether it
complies with the rules applicable to those plans. Application of the
employment tax requirements will depend principally on whether the
workers are employees, and, if so, who is considered the employer for
Federal income and employment tax purposes. In general, an employment
relationship exists when the person for whom services are performed has
the right to control and direct the individual who performs the
[[Page 55705]]
services, not only as to the result to be accomplished by the work but
also as to the details and means by which that result is accomplished.
See Sec. Sec. 31.3121(d)-1(c)(2), 31.3306(i)-1(b), and 31.3401(c)-
1(b).
B. Employment Tax
An entity must be a person in order to be an employer for Federal
employment tax purposes. See sections 3121(b), 3306(a)(1), 3306(c), and
3401(d) and Sec. 31.3121(d)-2(a). However, status as a person, by
itself, is not enough to make an entity an employer for Federal
employment tax purposes. The entity must also satisfy the criteria to
be an employer under Federal employment tax statutes and regulations
for purposes of the determination of the proper amount of employment
taxes and the party liable for reporting and paying the taxes.
Treatment of a series as a separate person for Federal employment tax
purposes would create the possibility that the series could be an
``employer'' for Federal employment tax purposes, which would raise
both substantive and administrative issues.
The series structure would make it difficult to determine whether
the series or the series organization is the employer under the
relevant criteria with respect to the services provided. For example,
if workers perform all of their services under the direction and
control of individuals who own the interests in a series, but the
series has no legal authority to enter into contracts or to sue or be
sued, could the series nonetheless be the employer of the workers? If
workers perform services under the direction and control of the series,
but they are paid by the series organization, would the series
organization, as the nominal owner of all the series assets, have
control over the payment of wages such that it would be liable as the
employer under section 3401(d)?
The structure of a series organization could also affect the type
of employment tax liability. For example, if a series were recognized
as a distinct person for Federal employment tax purposes, a worker
providing services as an employee of one series and as a member of
another series or the series organization would be subject to FICA tax
on the wages paid for services as an employee and self-employment tax
on the member income. Note further that, if a domestic series were
classified as a separate entity that is a business entity, then, under
Sec. 301.7701-3, the series would be classified as either a
partnership or a corporation. While a business entity with one owner is
generally classified as a corporation or is disregarded for Federal tax
purposes, such an entity cannot be disregarded for Federal employment
tax purposes. See Sec. 301.7701-2(c)(2)(iv).
Once the employer is identified, additional issues arise, including
but not limited to the following: How would the wage base be determined
for employees, particularly if they work for more than one series in a
common line of business? How would the common paymaster rules apply?
Who would be authorized to designate an agent under section 3504 for
reporting and payment of employment taxes, and how would the
authorization be accomplished? How would the statutory exceptions from
the definitions of employment and wages apply given that they may be
based on the identity of the employer? Which entity would be eligible
for tax credits that go to the employer such as the Work Opportunity
Tax Credit under section 51 or the tip credit under section 45B? If a
series organization handles payroll for a series and is also the
nominal owner of the series assets, would the owners or the managers of
the series organization be responsible persons for the Trust Fund
Recovery Penalty under section 6672?
Special administrative issues might arise if the series were to be
treated as the employer for Federal employment tax purposes but not for
State law purposes. For example, if the series were the employer for
Federal employment tax purposes and filed a Form W-2, ``Wage and Tax
Statement,'' reporting wages and employment taxes withheld, but the
series were not recognized as a juridical person for State law
purposes, then administrative problems might ensue unless separate
Forms W-2 were prepared for State and local tax purposes. Similarly,
the IRS and the States might encounter challenges in awarding the FUTA
credit under section 3302 to the appropriate entity and certifying the
amount of State unemployment tax paid.
In light of these issues, the proposed regulations do not currently
provide how a series should be treated for Federal employment tax
purposes.
C. Employee Benefits
Various issues arise with respect to the ability of a series to
maintain an employee benefit plan, including issues related to those
described above with respect to whether a series may be an employer.
The proposed regulations do not address these issues. However, to the
extent that a series can maintain an employee benefit plan, the
aggregation rules under section 414(b), (c), (m), (o) and (t), as well
as the leased employee rules under section 414(n), would apply. In this
connection, the IRS and Treasury Department expect to issue regulations
under section 414(o) that would prevent the avoidance of any employee
benefit plan requirement through the use of the separate entity status
of a series.
8. Statement Containing Identifying Information About Series
As the series organization or a series of the series organization
may be treated as a separate entity for Federal tax and related
reporting purposes but may not be a separate entity under local law,
the IRS and Treasury Department believe that a new statement may need
to be created and required to be filed annually by the series
organization and each series of the series organization to provide the
IRS with certain identifying information to ensure the proper
assessment and collection of tax. Accordingly, these regulations
propose to amend the Procedure and Administration Regulations under
section 6011 to include this requirement and a cross-reference to those
regulations is included under Sec. 301.7701-1. The IRS and Treasury
Department are considering what information should be required by these
statements. Information tentatively being considered includes (1) the
name, address, and taxpayer identification number of the series
organization and each of its series and status of each as a series of a
series organization or as the series organization; (2) the jurisdiction
in which the series organization was formed; and (3) an indication of
whether the series holds title to its assets or whether title is held
by another series or the series organization and, if held by another
series or the series organization, the name, address, and taxpayer
identification number of the series organization and each series
holding title to any of its assets. The IRS and Treasury Department are
also considering the best time to require taxpayers to file the
statement. For example, the IRS and Treasury Department are considering
whether the statement should be filed when returns, such as income tax
returns and excise tax returns, are required to be filed or whether it
should be a stand-alone statement filed separately by a set date each
year, as with information returns such as Forms 1099. A cross-reference
to these regulations was added to the Procedure and Administration
regulations under section 6071 for the time to file returns and
statements. The proposed regulations under section 6071 provide that
the statement will be a stand-alone statement due March 15th of each
year. In addition, the IRS and
[[Page 55706]]
Treasury Department are considering revising Form SS-4, ``Application
for Employer Identification Number,'' to include questions regarding
series organizations.
Proposed Effective Date
These regulations generally apply on the date final regulations are
published in the Federal Register. Generally, when final regulations
become effective, taxpayers that are treating series differently for
Federal tax purposes than series are treated under the final
regulations will be required to change their treatment of series. In
this situation, a series organization that previously was treated as
one entity with all of its series may be required to begin treating
each series as a separate entity for Federal tax purposes. General tax
principles will apply to determine the consequences of the conversion
from one entity to multiple entities for Federal tax purposes. See, for
example, section 708 for rules relating to partnership divisions in the
case of a series organization previously treated as a partnership for
Federal tax purposes converting into multiple partnerships upon
recognition of the series organization's series as separate entities.
While a division of a partnership may be tax-free, gain may be
recognized in certain situations under section 704(c)(1)(B) or section
737. Sections 355 and 368(a)(1)(D) provide rules that govern certain
divisions of a corporation. The division of a series organization into
multiple corporations may be tax-free to the corporation and to its
shareholders; however, if the corporate division does not satisfy one
or more of the requirements in section 355, the division may result in
taxable events to the corporation, its shareholders, or both.
The regulations include an exception for series established prior
to publication of the proposed regulations that treat all series and
the series organization as one entity. If the requirements for this
exception are satisfied, after issuance of the final regulations the
series may continue to be treated together with the series organization
as one entity for Federal tax purposes. Specifically, these
requirements are satisfied if (1) The series was established prior to
September 14, 2010; (2) The series (independent of the series
organization or other series of the series organization) conducted
business or investment activity or, in the case of a foreign series,
more than half the business of the series was the issuing of insurance
or annuity contracts or the reinsuring of risks underwritten by
insurance companies, on and prior to September 14, 2010; (3) If the
series was established pursuant to a foreign statute, the series'
classification was relevant (as defined in Sec. 301.7701-3(d)), and
more than half the business of the series was the issuing of insurance
or annuity contracts or the reinsuring of risks underwritten by
insurance companies for all taxable years beginning with the taxable
year that includes September 14, 2010; (4) No owner of the series
treats the series as an entity separate from any other series of the
series organization or from the series organization for purposes of
filing any Federal income tax returns, information returns, or
withholding documents for any taxable year; (5) The series and series
organization had a reasonable basis (within the meaning of section
6662) for their claimed classification; and (6) Neither the series nor
any owner of the series nor the series organization was notified in
writing on or before the date final regulations are published in the
Federal Register that classification of the series was under
examination (in which case the series' classification will be
determined in the examination).
This exception will cease to apply on the date any person or
persons who were not owners of the series organization (or series)
prior to September 14, 2010 own, in the aggregate, a 50 percent or
greater interest in the series organization (or series). For this
purpose, the term interest means (i) in the case of a partnership, a
capital or profits interest and (ii) in the case of a corporation, an
equity interest measured by vote or value. This transition rule does
not apply to any determination other than the entity status of a
series, for example, tax ownership of a series or series organization
or qualification of a series or series organization conducting an
insurance business as a controlled foreign corporation.
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.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that the regulations will not have a significant
economic impact on a substantial number of small entities. The
regulations require that series and series organizations file a
statement to provide the IRS with certain identifying information to
ensure the proper assessment and collection of tax. The regulations
affect domestic series LLCs, domestic cell companies, and foreign
series and cells that conduct insurance businesses, and their owners.
Based on information available at this time, the IRS and the Treasury
Department believe that many series and series organizations are large
insurance companies or investment firms and, thus, are not small
entities. Although a number of small entities may be subject to the
information reporting requirement of the new statement, any economic
impact will be minimal. The information that the IRS and the Treasury
Department are considering requiring on the proposed statement should
be known by or readily available to the series or the series
organization. Therefore, it should take minimal time and expense to
collect and report this information. For example, the IRS and the
Treasury Department are considering requiring the following
information: (1) The name, address, and taxpayer identification number
of the series organization and each of its series and status of each as
a series of a series organization or as the series organization; (2)
The jurisdiction in which the series organization was formed; and (3)
An indication of whether the series holds title to its assets or
whether title is held by another series or the series organization and,
if held by another series or the series organization, the name,
address, and taxpayer identification number of the series organization
and each series holding title to any of its assets. The IRS and the
Treasury Department request comments on the accuracy of the statement
that the regulations in this document will not have a significant
economic impact on a substantial number of small entities. Pursuant to
section 7805(f) of the Code, this notice of proposed rulemaking has
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small businesses.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS.
Alternatively, taxpayers may submit comments electronically directly to
the Federal eRulemaking portal at http://www.regulations.gov.
The IRS and the Treasury Department request comments on the
proposed
[[Page 55707]]
regulations. In addition, the IRS and the Treasury Department request
comments on the following issues:
(1) Whether a series organization should be recognized as a
separate entity for Federal tax purposes if it has no assets and
engages in no activities independent of its series;
(2) The appropriate treatment of a series that does not terminate
for local law purposes when it has no members associated with it;
(3) The entity status for Federal tax purposes of foreign cells
that do not conduct insurance businesses and other tax consequences of
establishing, operating, and terminating all foreign cells;
(4) How the Federal employment tax issues discussed and similar
technical issues should be resolved;
(5) How series and series organizations will be treated for State
employment tax purposes and other state employment-related purposes and
how that treatment should affect the Federal employment tax treatment
of series and series organizations (comments from the states would be
particularly helpful);
(6) What issues could arise with respect to the provision of
employee benefits by a series organization or series; and
(7) The requirement for the series organization and each series of
the series organization to file a statement and what information should
be included on the statement.
All comments will be available for public inspection and copying. A
public hearing may be scheduled if requested in writing by a person who
timely submits comments. If a public hearing is scheduled, notice of
the date, time and place for the hearing will be published in the
Federal Register.
Drafting Information
The principal author of these proposed regulations is Joy Spies,
IRS Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and the 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 301 is proposed to be amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 is amended by
adding entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6011-6 also issued under 26 U.S.C. 6011(a). * * *
Section 301.6071-2 also issued under 26 U.S.C. 6071(a). * * *
Par. 2. Section 301.6011-6 is added to read as follows:
Sec. 301.6011-6 Statements of series and series organizations.
(a) Statement required. Each series and series organization (as
defined in paragraph (b) of this section) shall file a statement for
each taxable year containing the identifying information with respect
to the series or series organization as prescribed by the Internal
Revenue Service for this purpose and shall include the information
required by the statement and its instructions.
(b) Definitions--(1) Series. The term series has the same meaning
as in Sec. 301.7701-1(a)(5)(viii)(C).
(2) Series organization. The term series organization has the same
meaning as in Sec. 301.7701-1(a)(5)(viii)(A).
(c) Effective/applicability date. This section applies to taxable
years beginning after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
Par. 3. Section 301.6071-2 is added to read as follows:
Sec. 301.6071-2 Time for filing statements of series and series
organizations.
(a) In general. Statements required by Sec. 301.6011-6 must be
filed on or before March 15 of the year following the period for which
the return is made.
(b) Effective/applicability date. This section applies to taxable
years beginning after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
Par. 4. Section 301.7701-1 is amended by:
1. Adding paragraph (a)(5).
2. Revising paragraphs (e) and (f).
The additions and revisions read as follows:
Sec. 301.7701-1 Classification of organizations for Federal tax
purposes.
(a) * * *
(5) Series and series organizations--(i) Entity status of a
domestic series. For Federal tax purposes, except as provided in
paragraph (a)(5)(ix) of this section, a series (as defined in paragraph
(a)(5)(viii)(C) of this section) organized or established under the
laws of the United States or of any State, whether or not a juridical
person for local law purposes, is treated as an entity formed under
local law.
(ii) Certain foreign series conducting an insurance business. For
Federal tax purposes, except as provided in paragraph (a)(5)(ix) of
this section, a series organized or established under the laws of a
foreign jurisdiction is treated as an entity formed under local law if
the arrangements and other activities of the series, if conducted by a
domestic company, would result in classification as an insurance
company within the meaning of section 816(a) or section 831(c).
(iii) Recognition of entity status. Whether a series that is
treated as a local law entity under paragraph (a)(5)(i) or (ii) of this
section is recognized as a separate entity for Federal tax purposes is
determined under this section and general tax principles.
(iv) Classification of series. The classification of a series that
is recognized as a separate entity for Federal tax purposes is
determined under paragraph (b) of this section.
(v) Jurisdiction in which series is organized or established. A
series is treated as created or organized under the laws of a State or
foreign jurisdiction if the series is established under the laws of
such jurisdiction. See Sec. 301.7701-5 for rules that determine
whether a business entity is domestic or foreign.
(vi) Ownership of series and the assets of series. For Federal tax
purposes, the ownership of interests in a series and of the assets
associated with a series is determined under general tax principles. A
series organization is not treated as the owner for Federal tax
purposes of a series or of the assets associated with a series merely
because the series organization holds legal title to the assets
associated with the series.
(vii) Effect of Federal and local law treatment. To the extent
that, pursuant to the provisions of this paragraph (a)(5), a series is
a taxpayer against whom tax may be assessed under Chapter 63 of Title
26, then any tax assessed against the series may be collected by the
Internal Revenue Service from the series in the same manner the
assessment could be collected by the Internal Revenue Service from any
other taxpayer. In addition, to the extent Federal or local law permits
a debt attributable to the series to be collected from the series
organization or other series of the series organization, then,
notwithstanding any
[[Page 55708]]
other provision of this paragraph (a)(5), and consistent with the
provisions of Federal or local law, the series organization and other
series of the series organization may also be considered the taxpayer
from whom the tax assessed against the series may be administratively
or judicially collected. Further, when a creditor is permitted to
collect a liability attributable to a series organization from any
series of the series organization, a tax liability assessed against the
series organization may be collected directly from a series of the
series organization by administrative or judicial means.
(viii) Definitions--(A) Series organization. A series organization
is a juridical entity that establishes and maintains, or under which is
established and maintained, a series (as defined in paragraph
(a)(5)(viii)(C) of this section). A series organization includes a
series limited liability company, series partnership, series trust,
protected cell company, segregated cell company, segregated portfolio
company, or segregated account company.
(B) Series statute. A series statute is a statute of a State or
foreign jurisdiction that explicitly provides for the organization or
establishment of a series of a juridical person and explicitly
permits--
(1) Members or participants of a series organization to have
rights, powers, or duties with respect to the series;
(2) A series to have separate rights, powers, or duties with
respect to specified property or obligations; and
(3) The segregation of assets and liabilities such that none of the
debts and liabilities of the series organization (other than
liabilities to the State or foreign jurisdiction related to the
organization or operation of the series organization, such as franchise
fees or administrative costs) or of any other series of the series
organization are enforceable against the assets of a particular series
of the series organization.
(C) Series. A series is a segregated group of assets and
liabilities that is established pursuant to a series statute (as
defined in paragraph (a)(5)(viii)(B) of this section) by agreement of a
series organization (as defined in paragraph (a)(5)(viii)(A) of this
section). A series includes a series, cell, segregated account, or
segregated portfolio, including a cell, segregated account, or
segregated portfolio that is formed under the insurance code of a
jurisdiction or is engaged in an insurance business. However, the term
series does not include a segregated asset account of a life insurance
company. See section 817(d)(1); Sec. 1.817-5(e). An election,
agreement, or other arrangement that permits debts and liabilities of
other series or the series organization to be enforceable against the
assets of a particular series, or a failure to comply with the record
keeping requirements for the limitation on liability available under
the relevant series statute, will be disregarded for purposes of this
paragraph (a)(5)(viii)(C).
(ix) Treatment of series and series organizations under Subtitle
C--Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23,
23A, 24 and 25 of the Internal Revenue Code). [Reserved.]
(x) Examples. The following examples illustrate the principles of
this paragraph (a)(5):
Example 1. Domestic Series LLC. (i) Facts. Series LLC is a
series organization (within the meaning of paragraph (a)(5)(viii)(A)
of this section). Series LLC has three members (1, 2, and 3). Series
LLC establishes two series (A and B) pursuant to the LLC statute of
state Y, a series statute within the meaning of paragraph
(a)(5)(viii)(B) of this section. Under general tax principles,
Members 1 and 2 are the owners of Series A, and Member 3 is the
owner of Series B. Series A and B are not described in Sec.
301.7701-2(b) or paragraph (a)(3) of this section and are not trusts
within the meaning of Sec. 301.7701-4.
(ii) Analysis. Under paragraph (a)(5)(i) of this section, Series A
and Series B are each treated as an entity formed under local law. The
classification of Series A and Series B is determined under paragraph
(b) of this section. The default classification under Sec. 301.7701-3
of Series A is a partnership and of Series B is a disregarded entity.
Example 2. Foreign Insurance Cell. (i) Facts. Insurance CellCo
is a series organization (within the meaning of paragraph
(a)(5)(viii)(A) of this section) organized under the laws of foreign
Country X. Insurance CellCo has established one cell, Cell A,
pursuant to a Country X law that is a series statute (within the
meaning of paragraph (a)(5)(viii)(B) of this section). More than
half the business of Cell A during the taxable year is the issuing
of insurance or annuity contracts or the reinsuring of risks
underwritten by insurance companies. If the activities of Cell A
were conducted by a domestic company, that company would qualify as
an insurance company within the meaning of sections 816(a) and
831(c).
(ii) Analysis. Under paragraph (a)(5)(ii) of this section, Cell A
is treated as an entity formed under local law. Because Cell A is an
insurance company, it is classified as a corporation under Sec.
301.7701-2(b)(4).
* * * * *
(e) State. For purposes of this section and Sec. Sec. 301.7701-2
and 301.7701-4, the term State includes the District of Columbia.
(f) Effective/applicability dates--(1) In general. Except as
provided in paragraphs (f)(2) and (f)(3) of this section, the rules of
this section are applicable as of January 1, 1997.
(2) Cost sharing arrangements. The rules of paragraph (c) of this
section are applicable on January 5, 2009.
(3) Series and series organizations--(i) In general. Except as
otherwise provided in this paragraph (f)(3), paragraph (a)(5) of this
section applies on and after the date final regulations are published
in the Federal Register.
(ii) Transition rule--(A) In general. Except as provided in
paragraph (f)(3)(ii)(B) of this section, a taxpayer's treatment of a
series in a manner inconsistent with the final regulations will be
respected on and after the date final regulations are published in the
Federal Register, provided that--
(1) The series was established prior to September 14, 2010;
(2) The series (independent of the series organization or other
series of the series organization) conducted business or investment
activity, or, in the case of a series established pursuant to a foreign
statute, more than half the business of the series was the issuing of
insurance or annuity contracts or the reinsuring of risks underwritten
by insurance companies, on and prior to September 14, 2010.
(3) If the series was established pursuant to a foreign statute,
the series' classification was relevant (as defined in Sec. 301.7701-
3(d)), and more than half the business of the series was the issuing of
insurance or annuity contracts or the reinsuring of risks underwritten
by insurance companies for all taxable years beginning with the taxable
year that includes September 14, 2010;
(4) No owner of the series treats the series as an entity separate
from any other series of the series organization or from the series
organization for purposes of filing any Federal income tax returns,
information returns, or withholding documents in any taxable year;
(5) The series and series organization had a reasonable basis
(within the meaning of section 6662) for their claimed classification;
and
(6) Neither the series nor any owner of the series nor the series
organization was notified in writing on or before the date final
regulations are published in the Federal Register that classification
of the series was under examination (in which case the series'
classification will be determined in the examination).
(B) Exception to transition rule. Paragraph (f)(3)(ii)(A) of this
section
[[Page 55709]]
will not apply on and after the date any person or persons who were not
owners of the series organization (or series) prior to September 14,
2010 own, in the aggregate, a fifty percent or greater interest in the
series organization (or series). For purposes of the preceding
sentence, the term interest means--
(1) In the case of a partnership, a capital or profits interest;
and
(2) In the case of a corporation, an equity interest measured by
vote or value.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2010-22793 Filed 9-13-10; 8:45 am]
BILLING CODE 4830-01-P