[Federal Register Volume 62, Number 208 (Tuesday, October 28, 1997)]
[Proposed Rules]
[Pages 55768-55773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28165]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-105162-97]
RIN-1545-AV16
Treatment of Changes in Elective Entity Classification
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations addressing
elective changes in entity classification. The proposed regulations
describe how elective changes in classification will be treated for
federal tax purposes. The proposed regulations would affect business
entities and their members. This document also contains a notice of
public hearing on these proposed regulations.
DATES: Written comments must be received by January 26, 1998. Requests
to speak (with outlines of oral comments) at the public hearing
scheduled for February 24, 1997, must be submitted by January 26, 1998.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-105162-97), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG-105162-97), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may
submit comments electronically via the Internet by selecting the ``Tax
Regs'' option of the IRS Home Page, or by submitting comments directly
to the IRS Internet site at: http://www.irs.ustreas.gov/prod/tax_regs/
comments.html. The public hearing will be held in room 2615, Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
[[Page 55769]]
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jeff
Erickson, (202) 622-3070 (not a toll-free number); concerning
international issues, Philip Tretiak or Ronald M. Gootzeit, (202) 622-
3860 (not a toll free number); concerning submissions and the hearing,
Evangelista Lee, (202) 622-7190 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document proposes to amend the current Income Tax Regulations
(26 CFR Parts 1 and 301) relating to the classification of entities for
federal tax purposes. On December 18, 1996, the IRS and Treasury
published final regulations under section 7701 (final regulations),
replacing the former classification rules with an elective regime. See
TD 8697 (1997-2 I.R.B. 11).
Under the final regulations, a business entity that is not
specifically classified as a corporation in the final regulations (an
eligible entity) can elect its classification for federal tax purposes
under certain circumstances. An eligible entity with at least two
members can elect to be classified as a partnership or as an
association taxable as a corporation. An eligible entity with a single
member can elect to be classified as an association or as an entity
that is disregarded as an entity separate from its owner. An eligible
entity may also elect to change its classification, except that an
election may not be made more than once in any sixty month period. An
eligible entity that does not make an election is classified under
certain default provisions.
Explanation of Provisions
Characterization of Elective Changes in Classification
The proposed regulations describe how elective changes in an
entity's classification will be treated for federal tax purposes. Under
the final regulations, there are four possible changes in
classification by election: (i) a partnership elects to be an
association; (ii) an association elects to be a partnership; (iii) an
association elects to be a disregarded entity; and (iv) a disregarded
entity elects to be an association. There are two other possible ways
in which an entity's classification could change (a partnership
converts to a disregarded entity or a disregarded entity converts to a
partnership) but these changes occur only as a result of a change in
the number of members, not as the result of an elective change.
The proposed regulations do not address the form of these two
possible types of changes.
The proposed regulations provide a specific characterization for
each of the four possible elective changes. In each case, the
characterization provided in the proposed regulations attempts to
minimize the tax consequences of the change in classification and
achieve administrative simplicity. The proposed regulations provide
that if an association elects to be classified as a partnership, the
association is deemed to liquidate by distributing its assets and
liabilities to its shareholders. Then, the shareholders are deemed to
contribute all of the distributed assets and liabilities to the
partnership. This characterization of an elective change from an
association to a partnership is consistent with Rev. Rul. 63-107 (1963-
1 C.B. 71).
If a partnership elects to be classified as an association, the
partnership is deemed to contribute all of its assets and liabilities
to the association in exchange for stock in the association. Then, the
partnership is deemed to liquidate by distributing stock in the
association to its partners. The proposed regulations do not affect the
holdings in Rev. Rul. 84-111 (1984-2 C.B. 88), in which the IRS ruled
that it would respect the particular form undertaken by the taxpayers
when a partnership converts to a corporation.
If an association elects to be disregarded as an entity separate
from its owner, the association is deemed to liquidate by distributing
its assets and liabilities to its sole owner. Conversely, if an
eligible entity that is disregarded as an entity separate from its
owner elects to be classified as an association, the owner of the
eligible entity is deemed to contribute all of the assets and
liabilities of that entity to the association in exchange for stock of
the association.
The proposed regulations also provide that the tax treatment of an
elective change in classification is determined under all relevant
provisions of the Internal Revenue Code and general principles of tax
law, including the step transaction doctrine. This provision in the
proposed regulations is intended to ensure that the tax consequences of
an elective change will be identical to the consequences that would
have occurred if the taxpayer had actually taken the steps described in
the proposed regulations. The IRS and Treasury request comments on the
application of general principles of tax law to the transactions that
are deemed to occur on an elective change in classification.
Change in Number of Members of Entity
The proposed regulations address the effect of a change in the
number of members on the classification of an entity. Under the
proposed regulations, if there is a change in the number of members of
an association, the classification of the entity is not affected. If an
eligible entity classified as a partnership subsequently has only one
member (and is still treated as an entity under local law), the entity
will be disregarded as an entity separate from its owner. If a single
member entity that is disregarded as an entity separate from its owner
subsequently has more than one member, the entity is classified as a
partnership as of the date the entity has more than one member. The
classifications provided in the proposed regulations can be changed by
election, assuming that the entity is not subject to the sixty month
limitation on elections.
Timing of Elective Changes in Classification
The proposed regulations provide that an election to change the
classification of an entity is treated as occurring at the start of the
day for which the election is effective. Any transactions that are
deemed to occur as a result of the change in classification are treated
as occurring immediately before the close of the day before the
effective date of the election. For example, if an election is made to
convert from an association to a partnership effective on January 1,
the entity is treated as a partnership on January 1, and the deemed
transactions specified in the proposed regulations are treated as
occurring immediately before the close of December 31. As a result, the
last day of the association s taxable year will be December 31 and the
first day of the partnership's taxable year will be January 1.
Treatment of Foreign Eligible Entities
Any eligible entity, including a foreign eligible entity whose
classification is not relevant for federal tax purposes, may elect to
change its classification. The IRS and Treasury request comments on the
appropriateness of allowing such a foreign eligible entity to make a
classification election, and comments on what the federal tax
consequences of such an election should be (e.g., with respect to the
basis of property held by the entity).
Foreign Per Se Entities
The final regulations provide a list of the names of certain
foreign business entities that are treated as corporations for federal
tax purposes. In most cases,
[[Page 55770]]
the name by which an entity will be known is provided by the statutory
corporate law of the relevant jurisdiction. In certain cases, however,
the corporate law does not provide a statutory name. In these
jurisdictions, taxpayers and practitioners often fill the statutory
void with a name derived from a number of the statutory characteristics
of the entity. In an effort to make the list of foreign per se
corporations more accessible, the final regulations use the commonly
used non-statutory term in certain cases where the statute does not
provide a defined name. To minimize any uncertainty, however, the
provisions of Sec. 301.7701-2(b)(8) (iii) and (iv) were included in the
final regulations to address this issue. In response to comments from
taxpayers, these subsections of the final regulations are clarified to
provide guidance on the terms used in the final regulations.
Furthermore, the regulations clarify that the term Berhad used with
regard to Malaysia does not include a Sendirian Berhad (the equivalent
of a private limited company). The regulations also clarify that, in
relation to Mexico, the term Sociedad Anonima includes a Sociedad
Anonima that chooses to apply the variable capital provision of Mexican
corporate law (Sociedad Anonima de Capital Variable). The fact that
capital may be varied does not make this a different type of entity
from a Sociedad Anonima that does not choose to apply the variable
capital provision. These clarifications are not intended to change the
interpretation of the final regulations.
The proposed regulations also clarify the treatment of the Finnish,
Maltese, and Norwegian entities specified in the final regulations.
Effective January 1, 1996, Maltese and Norwegian corporate law
recognized a distinction between public and private companies, and the
proposed regulations reflect this change. The proposed regulations also
provide that the rules of the final regulations with regard to the
Maltese and Norwegian entities may be applied (when these proposed
regulations are finalized) as though the entities specified in the
proposed regulations had been included in the final regulations issued
on December 18, 1996. Thus, a Maltese or Norwegian entity that is no
longer treated as a per se corporation under the regulations would be
able to make an election within 75 days of the date these proposed
regulations are finalized, and such election could be effective as of
January 1, 1997. Finnish law, since September 1, 1997, has recognized a
similar distinction between public and private companies. It is
proposed that a Finnish entity that is no longer treated as a per se
corporation under the regulations would be able to make an election
within 75 days of the date these proposed regulations are finalized,
and such election could be effective as of September 1, 1997.
Special Basis Adjustments Under Section 743
Section 743 provides that the basis of partnership property is not
adjusted as the result of a transfer of an interest in the partnership
by sale or exchange unless the partnership has made an election under
section 754. If a section 754 election is made, the transferee partner
is treated as having a special basis adjustment with respect to
partnership property. This adjustment constitutes an adjustment to the
basis of partnership property with respect to the transferee partner
only. Some uncertainty has remained as to the treatment of this special
basis adjustment upon the contribution of the partnership property to a
corporation in a section 351 exchange, and because the proposed
regulations provide for a deemed contribution by the partnership to a
corporation in an elective conversion to an association, the proposed
regulations address this uncertainty.
The proposed regulations provide that a corporate transferee's
basis in property transferred by a partnership in a transfer described
in section 351 includes any special basis adjustment under section 743.
The special basis adjustment is also taken into account in determining
the partner's basis in the stock received in the exchange. For example,
assume a partnership owns Property X, which has a common basis of $100
for the partnership and in which Partner A has a $5 special basis
adjustment under section 743(b). Subsequently, the partnership validly
elects to be classified as an association. The partnership is deemed to
contribute all of its assets and liabilities to the association in
exchange for stock in the association, and immediately thereafter, the
partnership liquidates by distributing the stock of the association to
its partners. If the transfer of the assets to the association would be
a transfer described in section 351, then under the proposed
regulations, the association's basis in Property X includes Partner A's
$5 special basis adjustment. Thus, the association has a $105 basis in
Property X (Partner A's $5 special basis adjustment plus the
partnership's $100 common basis). Partner A's basis in the
association's stock will reflect the $5 special basis adjustment
previously on Property X.
The proposed regulations also provide, however, that the amount of
gain, if any, recognized by the partnership on the transfer is
determined without reference to any special basis adjustment. The
partner with the special basis adjustment can then use the special
basis adjustment to reduce its share of any gain recognized by the
partnership. This approach of determining gain at the partnership level
and allowing the partner to use the special basis adjustment as an
offset is similar to the treatment of a sale of property with a special
basis adjustment.
Proposed Effective Date
Except as otherwise specified, these regulations are proposed to
apply as of the date the final regulations are published in the Federal
Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 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 on small entities a collection of information
requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does
not apply. Therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to the
IRS. All comments will be available for public inspection and copying.
A public hearing has been scheduled for February 24, 1997, at 10
a.m., in room 2615, Internal Revenue Building, 1111 Constitution Avenue
NW., Washington, DC. Because of access restrictions, visitors will not
be admitted beyond the Internal Revenue Building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
[[Page 55771]]
Persons that wish to present oral comments at the hearing must
submit timely written comments and an outline of the topics to be
discussed and the time to be devoted to each topic by (preferably a
signed original and eight (8) copies) January 26, 1998.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Ann M. Veninga,
Office of Chief Counsel (Passthroughs and Special Industries) and
Philip Tretiak, Office of Associate Chief Counsel (International).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as
follows.
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.743-2 is added under the undesignated
centerheading ``Transfer of Interests in a Partnership'' to read as
follows:
Sec. 1.743-2 Transfer of property to a corporation.
(a) Basis in transferred property. A corporations adjusted tax
basis in property transferred to the corporation by a partnership in a
transfer described in section 351 is determined with reference to any
special basis adjustment to the property under section 743(b) (other
than any special basis adjustment that reduces a partner's gain under
paragraph (b) of this section).
(b) Partnership gain. The amount of gain, if any, recognized by a
partnership on a transfer of property by the partnership to a
corporation in a transfer described in section 351 is determined
without reference to any special basis adjustment to the transferred
property under section 743(b). The amount of gain, if any, recognized
by the partnership on the transfer that is allocated to a partner with
a special basis adjustment in the transferred property is adjusted to
reflect the partner's special basis adjustment in the transferred
property.
(c) Basis in stock. The partnership's adjusted tax basis in stock
received from a corporation in a transfer described in section 351 is
determined without reference to the special basis adjustment in
property transferred to the corporation in the section 351 exchange. A
partner with a special basis adjustment in property transferred to the
corporation, however, has a special basis adjustment in the stock
received by the partnership in the section 351 exchange in an amount
equal to the partner's special basis adjustment in the transferred
property, reduced by any special basis adjustment that reduced the
partner's gain under paragraph (b) of this section.
(d) Effective date. This section applies to transfers that occur on
or after the date final regulations are published in the Federal
Register.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 3. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 301.6109-1 is amended as follows:
1. Paragraph (d)(2)(ii) is removed and reserved.
2. Paragraph (h) is redesignated as paragraph (i) and the first
sentence of newly designated paragraph (i)(1) is amended by removing
the language ``paragraph (h)'' and adding ``paragraph (i)'' in its
place.
3. A new paragraph (h) is added.
The addition reads as follows:
Sec. 301.6109-1 Identifying numbers.
* * * * *
(h) Special rules for certain entities under Sec. 301.7701-3--(1)
General rule. Any entity that has an employer identification number
(EIN) will retain that EIN if its federal tax classification changes
under Sec. 301.7701-3.
(2) Special rules for entities that are disregarded as entities
separate from their owners--(i) When an entity becomes disregarded as
an entity separate from its owner. Except as otherwise provided in
regulations or other guidance, a single owner entity that is
disregarded as an entity separate from its owner under Sec. 301.7701-3,
must use its owner's taxpayer identifying number (TIN) for federal tax
purposes.
(ii) When an entity that was disregarded as an entity separate from
its owner becomes recognized as a separate entity. If a single owner
entity's classification changes so that it is recognized as a separate
entity for federal tax purposes, and that entity had an EIN, then the
entity must use that EIN and not the TIN of the single owner. If the
entity did not already have its own EIN, then the entity must acquire
an EIN and not use the TIN of the single owner.
(3) Effective date. This paragraph (h) applies to changes in
classification that occur on or after the date on which these
regulations are published as final regulations in the Federal Register.
Par. 5. Section 301.7701-2 is amended as follows:
1. Paragraph (b)(8)(i) is amended by revising the entries for
Finland, Malta, and Norway.
2. Paragraph (b)(8)(ii)(A) is redesignated as paragraph
(b)(8)(ii)(A)(1) and the language ``and'' at the end of the paragraph
is removed.
3. Paragraph (b)(8)(ii)(B) is redesignated as paragraph
(b)(8)(ii)(A)(2) and the period at the end of the paragraph is removed
and the language ``; and '' is added in its place.
4. Paragraph (b)(8)(ii) heading and introductory text are
redesignated as paragraph (b)(8)(ii)(A) heading and introductory text,
and a new paragraph heading is added for paragraph (b)(8)(ii).
5. Paragraphs (b)(8)(ii)(A)(3) and (b)(8)(ii)(B) are added.
6. Paragraphs (b)(8)(iii), (b)(8)(iv), and (e) are revised.
The revisions and additions read as follows:
Sec. 301.7701-2 Business entities; definitions.
* * * * *
(b) * * *
(8) * * *
(i) * * *
Finland, Julkinen Osakeyhtio/Publikt Aktiebolag
* * * * *
Malta, Public Limited Company
* * * * *
Norway, Allment Aksjeselskap
* * * * *
(ii) Clarification of list of corporations in paragraph (b)(8)(i)
of this section--(A) Exceptions in certain cases. * * *
* * * * *
(3) With regard to Malaysia, a Sendirian Berhad.
[[Page 55772]]
(B) Inclusions in certain cases. With regard to Mexico, the term
Sociedad Anonima includes a Sociedad Anonima that chooses to apply the
variable capital provision of Mexican corporate law (Sociedad Anonima
de Capital Variable).
(iii) Public companies. For purposes of paragraph (b)(8)(i) of this
section, with regard to Cyprus, Hong Kong, Jamaica, and Trinidad and
Tobago, the term Public Limited Company includes any Limited Company
that is not defined as a private company under the corporate laws of
those jurisdictions. In all other cases, where the term Public Limited
Company is not defined, that term shall include any Limited Company
defined as a public company under the corporate laws of the relevant
jurisdiction.
(iv) Limited companies. For purposes of this paragraph (b)(8), any
reference to a Limited Company includes, as the case may be, companies
limited by shares and companies limited by guarantee.
* * * * *
(e) Effective date. Except as otherwise provided in this paragraph
(e), the rules of this section apply as of January 1, 1997. The
reference to the Finnish, Maltese, and Norwegian entities in paragraph
(b)(8)(i) of this section is applicable on the date the final
regulations are published in the Federal Register. Any Maltese or
Norwegian entity that becomes an eligible entity as a result of
paragraph (b)(8)(i) of this section in effect on the date final
regulations are published in the Federal Register may elect (within 75
days of the date final regulations are published in the Federal
Register) to be classified for federal tax purposes as an entity other
than a corporation retroactive to any period from and including January
1, 1997. Any Finnish entity that becomes an eligible entity as a result
of paragraph (b)(8)(i) of this section in effect on the date final
regulations are published in the Federal Register may elect (within 75
days of the date final regulations are published in the Federal
Register) to be classified for federal tax purposes as an entity other
than a corporation retroactive to any period from and including
September 1, 1997.
Par. 6. Section 301.7701-3 is amended as follows:
1. A sentence is added at the end of paragraph (c)(1)(iv).
2. Paragraph (c)(2)(iii) is added.
3. A heading is added to paragraph (d)(1).
4. Paragraph (f) is redesignated as paragraph (h) and newly
designated paragraph (h)(1) is revised.
5. Paragraphs (f) and (g) are added.
The revision and additions read as follows:
Sec. 301.7701-3 Classification of certain business entities.
* * * * *
(c) * * *
(1) * * *
(iv) Limitation. * * * An election by a newly-formed eligible
entity that is effective on the date of formation is not considered a
change for purposes of this paragraph (c)(1)(iv).
* * * * *
(2) * * *
(iii) Changes in classification. For purposes of paragraph
(c)(2)(i) of this section, if an election under paragraph (c)(1)(i) of
this section is made to change the classification of an entity, each
person who was an owner on the date that any transactions under
paragraph (g) of this section are deemed to occur, and who is not an
owner at the time the election is filed, must also sign the election.
This paragraph (c)(2)(iii) applies to elections filed on or after the
date final regulations are published in the Federal Register.
(d) Special rules for foreign eligible entities--(1) Definition of
relevance. * * *
* * * * *
(f) Changes in number of members of an entity--(1) Associations.
The classification of an eligible entity as an association is not
affected by any change in the number of members of the entity.
(2) Partnerships and single member entities. An eligible entity
classified as a partnership is disregarded as an entity separate from
its owner as of the date the entity has only one member. A single
member entity disregarded as an entity separate from its owner is
classified as a partnership as of the date the entity has more than one
member.
(3) Effect on sixty month limitation. A change in the number of
members of an entity does not result in the creation of a new entity
for purposes of the sixty month limitation on elections under paragraph
(c)(1)(iv) of this section.
(4) Examples. The following examples illustrate the application of
this paragraph (f):
Example 1. (i) On April 1, 1998, A and B, U.S. persons, form X,
a foreign eligible entity. X is treated as an association under the
default provisions of paragraph (b)(2)(i) of this section, and X
does not make an election to be classified as a partnership. A
subsequently purchases all of B's interest in X.
(ii) Under paragraph (f)(1) of this section, X continues to be
classified as an association. X, however, can subsequently elect to
be disregarded as an entity separate from A. The sixty month
limitation of paragraph (c)(1)(iv) of this section does not prevent
X from making an election because X has not made a prior election
under paragraph (c)(1)(i) of this section.
Example 2. (i) On April 1, 1998, A and B, U.S. persons, form X,
a foreign eligible entity. X is treated as an association under the
default provisions of paragraph (b)(2)(i) of this section, and X
does not make an election to be classified as a partnership. On
January 1, 1999, X elects to be classified as a partnership
effective on that date. Under the sixty month limitation of
paragraph (c)(1)(iv) of this section, X cannot elect to be
classified as an association until January 1, 2004 (i.e., sixty
months after the effective date of the election to be classified as
a partnership).
(ii) On June 1, 1999, A purchases all of B's interest in X.
After A's purchase of B's interest, X can no longer be classified as
a partnership because X has only one member. Under paragraph (f)(2)
of this section, X is disregarded as a separate entity as of the
date A becomes the only member of X. X, however, is not treated as a
new entity for purposes of paragraph (c)(1)(iv) of this section. As
a result, the sixty month limitation of paragraph (c)(1)(iv) of this
section continues to apply to X and X cannot elect to be classified
as an association until January 1, 2004 (i.e., sixty months after
January 1, 1999, the effective date of the election by X to be
classified as a partnership).
(5) Effective date. This paragraph (f) applies as of the date the
final regulations are published in the Federal Register.
(g) Elective changes in classification--(1) Deemed treatment of
elective change--(i) Partnership to association. If an eligible entity
classified as a partnership elects under paragraph (c)(1)(i) of this
section to be classified as an association, the following is deemed to
occur: The partnership contributes all of its assets and liabilities to
the association in exchange for stock in the association, and
immediately thereafter, the partnership liquidates by distributing the
stock of the association to its partners.
(ii) Association to partnership. If an eligible entity classified
as an association elects under paragraph (c)(1)(i) of this section to
be classified as a partnership, the following is deemed to occur: The
association distributes all of its assets and liabilities to its
shareholders in liquidation of the association, and immediately
thereafter, the shareholders contribute all of the distributed assets
and liabilities to a newly formed partnership.
(iii) Association to disregarded entity. If an eligible entity
classified as an association elects under paragraph (c)(1)(i) of this
section to be disregarded as an entity separate from its owner, the
following is deemed to occur: The association distributes all of its
assets
[[Page 55773]]
and liabilities to its single owner in liquidation of the association.
(iv) Disregarded entity to an association. If an eligible entity
that is disregarded as an entity separate from its owner elects under
paragraph (c)(1)(i) of this section to be classified as an association,
the following is deemed to occur: The owner of the eligible entity
contributes all of the assets and liabilities of the entity to the
association in exchange for stock of the association.
(2) Effect of elective changes. The tax treatment of a change in
the classification of an entity for federal tax purposes by election
under paragraph (c)(1)(i) of this section is determined under all
relevant provisions of the Internal Revenue Code and general principles
of tax law, including the step transaction doctrine.
(3) Timing of election. An election under paragraph (c)(1)(i) of
this section that changes the classification of an eligible entity for
federal tax purposes is treated as occurring at the start of the day
for which the election is effective. Any transactions that are deemed
to occur under this paragraph (g) as a result of a change in
classification are treated as occurring immediately before the close of
the day before the election is effective. For example, if an election
is made to change the classification of an entity from an association
to a partnership effective on January 1, the deemed transactions
specified in paragraph (g)(1)(ii) of this section (including the
liquidation of the association) are treated as occurring immediately
before the close of December 31 and must be reported by the owners of
the entity on December 31. As a result, the last day of the
association's taxable year will be December 31 and the first day of the
partnership's taxable year will be January 1.
(4) Effective date. This paragraph (g) applies to elections that
are filed on or after the date the final regulations are published in
the Federal Register.
(h) Effective date--(1) In general. Except as otherwise provided in
this section, the rules of this section are applicable as of January 1,
1997.
* * * * *
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 97-28165 Filed 10-27-97; 8:45 am]
BILLING CODE 4830-01-U
