Clarification of Definitions, 4815-4818 [06-817]
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Federal Register / Vol. 71, No. 19 / Monday, January 30, 2006 / Rules and Regulations
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value method, effective for the current
taxable year. For purposes of determining the
tax book value of its section 168 property, the
taxpayer’s depreciation deduction is
determined by applying the method,
convention, and recovery period rules of the
alternative depreciation system under section
168(g)(2) as in effect in 2005 to the taxpayer’s
original cost basis in such property. In 2006,
the taxpayer acquires and places in service in
the United States new section 168 property.
The tax book value of this section 168
property is determined under the rules of
section 168(g)(2) applicable to property
placed in service in 2006.
Example 2. Assume the same facts as in
Example 1, except that the taxpayer revokes
the alternative tax book value method
election effective for taxable year 2010.
Additionally, in 2011, the taxpayer acquires
new section 168 property and places it in
service in the United States. If the taxpayer
elects to use the alternative tax book value
method effective for taxable year 2012, the
taxpayer must determine the tax book value
of its section 168 property as though the prior
election still applied. Thus, the tax book
value of property placed in service prior to
2005 would be determined by applying the
method, convention, and recovery period
rules of the alternative depreciation system
under section 168(g)(2) applicable to
property placed in service in 2005. The tax
book value of section 168 property placed in
service during any taxable year after 2004
would be determined by applying the
method, convention, and recovery period
rules of the alternative depreciation system
under section 168(g)(2) applicable to
property placed in service in such taxable
year.
(2) Timing and scope of election. (i)
Except as provided in this paragraph
(i)(2), a taxpayer may elect to use the
alternative tax book value method with
respect to any taxable year beginning on
or after March 26, 2004. However,
pursuant to § 1.861–8T(c)(2), a taxpayer
that has elected the fair market value
method must obtain the consent of the
Commissioner prior to electing the
alternative tax book value method. Any
election made pursuant to this
paragraph (i)(2) shall apply to all
members of an affiliated group of
corporations as defined in §§ 1.861–
11(d) and 1.861–11T(d). Any election
made pursuant to this paragraph (i)(2)
shall apply to all subsequent taxable
years of the taxpayer unless revoked by
the taxpayer. Revocation of such an
election, other than in conjunction with
an election to use the fair market value
method, for a taxable year prior to the
sixth taxable year for which the election
applies requires the consent of the
Commissioner.
(ii) Example. The provisions of this
paragraph (i)(2) are illustrated in the
following example:
Example. Corporation X, a calendar year
taxpayer, elects on its original, timely filed
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tax return for the taxable year ending
December 31, 2007, to use the alternative tax
book value method for its 2007 year. The
alternative tax book value method applies to
Corporation X’s 2007 year and all subsequent
taxable years. Corporation X may not,
without the consent of the Commissioner,
revoke its election and determine tax book
value using a method other than the
alternative tax book value method with
respect to any taxable year beginning before
January 1, 2012. However, Corporation X
may automatically elect to change from the
alternative tax book value method to the fair
market value method for any open year.
(3) Certain other adjustments.
[Reserved.]
(4) Effective date. This paragraph (i)
applies to taxable years beginning on or
after March 26, 2004.
(j) [Reserved]. For further guidance,
see § 1.861–9T(j).
I Par. 3. Section 1.861–9T is amended
as follows:
I 1. Revise the second sentence in
paragraph (g)(1)(ii) introductory text.
I 2. Revise paragraph (i).
The revisions read as follows:
4815
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
§§ 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:
DEPARTMENT OF THE TREASURY
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 § 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 § 301.7701–2(b).
The entity is domestic under
§ 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.
Internal Revenue Service
Explanation of Provisions
26 CFR Part 301
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
§ 1.861–9T Allocation and apportionment
of interest expense (temporary).
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(g) * * *
(1) * * *
(ii) * * * For rules concerning the
application of an alternative method of
valuing assets for purposes of the tax
book value method, see § 1.861–9(i).
* * *
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(i) [Reserved]. For further guidance,
see § 1.861–9(i).
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*
Approved: January 20, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury.
[FR Doc. 06–766 Filed 1–27–06; 8:45 am]
BILLING CODE 4830–01–P
[TD 9246]
RIN 1545–BD37
Clarification of Definitions
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
SUMMARY: This document contains final
regulations defining the terms
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Federal Register / Vol. 71, No. 19 / Monday, January 30, 2006 / Rules and Regulations
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
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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 § 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 § 301.7701–2(b)(1),
(3), (4), (5), (6), (7), or (8), and thus is
not an eligible entity as defined in
§ 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, § 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
§ 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 § 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
§ 301.7701–3(a). In addition, the
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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
Accordingly, 26 CFR part 301 is
amended as follows:
I
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation
for part 301 continues to read, in part,
as follows:
I
Authority: 26 U.S.C. 7805 * * *
I Par. 2. In § 301.7701–1, paragraph (d)
is revised to read as follows:
§ 301.7701–1 Classification of
organizations for Federal tax purposes.
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*
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*
*
(d) Domestic and foreign business
entities. See § 301.7701–5 for the rules
that determine whether a business
entity is domestic or foreign.
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§ 301.7701–1T
[Removed]
Par. 3. Section 301.7701–1T is
removed.
I Par. 4. In § 301.7701–2, paragraphs
(b)(9) and (e)(3) are revised to read as
follows:
I
§ 301.7701–2
definitions.
Business entities;
*
*
*
*
(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 § 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 § 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 § 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):
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*
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 § 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 § 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
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§ 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 § 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 § 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 § 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
§ 301.7701–3(a). Under the rules of this
section and § 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 § 301.7701–
3(a). Under the rules of this section and
§ 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 § 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 § 301.7701–
3(a), it may elect its classification under
§ 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 § 301.7701–3, an eligible
entity with more than one owner in Country
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4817
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
§ 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
§ 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.
*
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*
(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.
*
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*
*
*
§ 301.7701–2T
[Removed]
I Par. 5. Section 301.7701–2T is
removed.
I Par. 6. Section 301.7701–5 is revised
to read as follows:
§ 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 § 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 § 301.7701–2(c)) is
foreign if it is not domestic. The
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Federal Register / Vol. 71, No. 19 / Monday, January 30, 2006 / Rules and Regulations
determination of whether an entity is
domestic or foreign is made
independently from the determination
of its corporate or non-corporate
classification. See §§ 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:
DEPARTMENT OF DEFENSE
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
§§ 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 §§ 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.
AGENCY:
(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.
§ 301.7701–5T
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]
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32 CFR Part 392
[DoD Instruction 5134.04]
Director of Small and Disadvantaged
Business Utilization
ACTION:
Department of Defense.
Final rule.
SUMMARY: This document removes
regulations from Title 32 of the Code of
Federal Regulations concerning the
Director of Small and Disadvantaged
Business Utilization. This part has
served the purpose for which it was
intended in the CFR and is no longer
necessary.
EFFECTIVE DATE:
January 30, 2006.
FOR FURTHER INFORMATION CONTACT:
L.M.
Bynum (703) 696–4970.
The
revised DoD Instruction 5134.04 is
available at https://www.dtic.mil/whs/
directives/corres/html/513404.htm.
SUPPLEMENTARY INFORMATION:
List of Subjects in 32 CFR Part 392
Organizations.
PART 392—[REMOVED]
Accordingly, by the authority of 10
U.S.C. 301, 32 CFR part 392 is removed.
I
Dated: January 24, 2006.
L.M. Bynum,
Alternate OSD Federal Register Liaison
Officer, Department of Defense.
[FR Doc. 06–814 Filed 1–27–06; 8:45 am]
BILLING CODE 5001–06–M
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
[Removed]
I
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33 CFR Part 165
[COTP Honolulu 06–002]
RIN 1625–AA87
Security Zone; Pearl Harbor and
Adjacent Waters, Honolulu, HI
Coast Guard, DHS.
Temporary final rule.
AGENCY:
ACTION:
SUMMARY: This temporary rule
establishes a 500-yard moving security
zone around the U.S. Forces vessel
SBX–1 during transit and float-off
operations in the waters adjacent to
Pearl Harbor, HI. The SBX–1 will transit
aboard the M/V BLUE MARLIN and will
be floated-off and escorted into Pearl
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Harbor. This security zone is necessary
to protect the SBX–1 from hazards
associated with other vessels or persons
approaching too close during the transit,
float-off, and escort operations. Entry of
persons or vessels into this temporary
security zone is prohibited unless
authorized by the Captain of the Port
(COTP).
DATES: This rule is effective from 12
a.m. (HST) on January 13, 2006 to 11:59
p.m. (HST) on January 31, 2006.
ADDRESSES: Documents indicated in this
preamble as being available in the
docket are part of docket COTP
Honolulu 06–002 and are available for
inspection or copying at Coast Guard
Sector Honolulu between 7 a.m. and
3:30 p.m., Monday through Friday,
except Federal holidays.
FOR FURTHER INFORMATION CONTACT:
Lieutenant (Junior Grade) Quincey
Adams, U.S. Coast Guard Sector
Honolulu at (808) 842–2600.
SUPPLEMENTARY INFORMATION:
Regulatory Information
We did not publish a notice of
proposed rulemaking (NPRM) for this
regulation. Under 5 U.S.C. 553(b)(B), the
Coast Guard finds that good cause exists
for not publishing an NPRM. The Coast
Guard was not given the final voyage
plan in time to initiate full rulemaking,
and the need for this temporary security
zone was not determined until less than
30 days before the SBX–1 will require
the zone’s protection. Publishing an
NPRM and delaying the effective date
would be contrary to the public interest
since the transit would occur before the
rulemaking process was complete,
thereby jeopardizing the security of the
people and property associated with the
operation. Under 5 U.S.C. 553(d)(3), the
Coast Guard finds that good cause exists
for making this rule effective less than
30 days after publication in the Federal
Register. The COTP finds this good
cause to be the immediate need for a
security zone to allay the waterborne
security threats surrounding the SBX–
1’s transit.
Background and Purpose
On January 9, 2006, U.S. Forces vessel
SBX–1 entered the Honolulu Captain of
the Port Zone while attached to the
loading platform of M/V BLUE
MARLIN. COTP Honolulu Order 06–001
established a security zone to protect its
float-off and transit into Pearl Harbor, HI
(165.T14–131 Security Zone; Pearl
Harbor and adjacent waters, Honolulu,
HI).
That temporary final rule expired on
January 12, 2006 at 11:59 p.m. The Navy
contacted the Coast Guard that day to
E:\FR\FM\30JAR1.SGM
30JAR1
]]>Agencies
[Federal Register Volume 71, Number 19 (Monday, January 30, 2006)]
[Rules and Regulations]
[Pages 4815-4818]
From the Federal Register Online via the Government Printing 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.
-----------------------------------------------------------------------
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
