Simplification of Entity Classification Rules

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 8697]

RIN 1545-AT91

Simplification of Entity Classification Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that classify certain

business organizations under an elective regime. These regulations

replace the existing classification rules.

DATES: These regulations are effective as of January 1, 1997.

For dates of applicability of these regulations, see Effective

Dates under Supplementary Information.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Mark D.

Harris, (202) 622-3050; concerning foreign organizations, William H.

Morris or Ronald M. Gootzeit, (202) 622-3880 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations

have been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under

control number 1545-1486. Responses to these collections of information

are required to obtain a benefit (to choose an entity's classification

by election).

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

The estimates of the reporting burden in these final regulations

are reflected in the burden estimates in Form 8832 (Entity

Classification Election).

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,

DC 20224, and to the Office of Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and

Regulatory Affairs, Washington, DC 20503.

Books or records relating to these collections of information must

be retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

On April 3, 1995, Notice 95-14 (1995-1 C.B. 297), relating to

classification of business organizations under section 7701 of the

Code, was published in the Internal Revenue Bulletin. A notice of

public hearing was published in the Federal Register on May 10, 1995

(60 FR 24813). Written comments were received and a public hearing was

held on July 20, 1995.

On May 13, 1996, the IRS and Treasury issued a notice of proposed

rulemaking (61 FR 21989 [PS-43-95, 1996-24 I.R.B. 20]) under section

7701. The regulations proposed to replace the existing regulations for

classifying certain business organizations with an elective regime.

Comments responding to the notice were received, and a public hearing

was held on August 21, 1996. After considering the comments that were

received in response to the notice of proposed rulemaking and the

statements made at the public hearing, the proposed regulations are

adopted as revised by this Treasury decision. The revisions are

discussed below.

Explanation of Provisions

Section 7701(a)(2) of the Code defines a partnership to include a

syndicate, group, pool, joint venture, or other unincorporated

organization, through or by means of which any business, financial

operation, or venture is carried on, and that is not a trust or estate

or a corporation. Section 7701(a)(3) defines a corporation to include

associations, joint-stock companies, and insurance companies.

The existing regulations for classifying business organizations as

associations (which are taxable as corporations under section

7701(a)(3)) or as partnerships under section 7701(a)(2) are based on

the historical differences under local law between partnerships and

corporations. Treasury and the IRS believe that those rules have become

increasingly formalistic. This document replaces those rules with a

much simpler approach that generally is elective.

[[Page 66585]]

As stated in the preamble to the proposed regulations, in light of

the increased flexibility under an elective regime for the creation of

organizations classified as partnerships, Treasury and the IRS will

continue to monitor carefully the uses of partnerships in the

international context and will take appropriate action when

partnerships are used to achieve results that are inconsistent with the

policies and rules of particular Code provisions or of U.S. tax

treaties.

A. Summary of the Regulations

Section 301.7701-1 provides an overview of the rules applicable in

determining an organization's classification for federal tax purposes.

The first step in the classification process is to determine whether

there is a separate entity for federal tax purposes. The regulations

explain that certain joint undertakings that are not entities under

local law may nonetheless constitute separate entities for federal tax

purposes; however, not all entities formed under local law are

recognized as separate entities for federal tax purposes. Whether an

organization is treated as an entity for federal tax purposes is a

matter of federal tax law, and does not affect the rights and

obligations of its owners under local law. For example, if a domestic

limited liability company with a single individual owner is disregarded

as an entity separate from its owner under Sec. 301.7701-3, its

individual owner is subject to federal income tax as if the company's

business was operated as a sole proprietorship.

An organization that is recognized as a separate entity for federal

tax purposes is either a trust or a business entity (unless a provision

of the Code expressly provides for special treatment, such as the

Qualified Settlement Fund rules (Sec. 1.468B) or the Real Estate

Mortgage Investment Conduit (REMIC) rules, see section 860A(a)). The

regulations provide that trusts generally do not have associates or an

objective to carry on business for profit. The distinctions between

trusts and business entities, although restated, are not changed by

these regulations.

Section 301.7701-2 clarifies that business entities that are

classified as corporations for federal tax purposes include

corporations denominated as such under applicable law, as well as

associations, joint-stock companies, insurance companies, organizations

that conduct certain banking activities, organizations wholly owned by

a State, organizations that are taxable as corporations under a

provision of the Code other than section 7701(a)(3), and certain

organizations formed under the laws of a foreign jurisdiction

(including a U.S. possession, territory, or commonwealth).

The regulations in Sec. 301.7701-2 include a special grandfather

rule, under which an entity described in the list of foreign entities

treated as per se corporations will nevertheless be classified as other

than a corporation. The regulations also list certain situations where

a grandfathered entity would lose its grandfathered status.

Any business entity that is not required to be treated as a

corporation for federal tax purposes (referred to in the regulation as

an eligible entity) may choose its classification under the rules of

Sec. 301.7701-3. Those rules provide that an eligible entity with at

least two members can be classified as either a partnership or an

association, and that an eligible entity with a single member can be

classified as an association or can be disregarded as an entity

separate from its owner. However, if the single owner of a business

entity is a bank (as defined in section 581), then the special rules

applicable to banks will continue to apply to the single owner as if

the wholly owned entity were a separate entity.

In order to provide most eligible entities with the classification

they would choose without requiring them to file an election, the

regulations provide default classification rules that aim to match

taxpayers' expectations (and thus reduce the number of elections that

will be needed). The regulations adopt a passthrough default for

domestic entities, under which a newly formed eligible entity will be

classified as a partnership if it has at least two members, or will be

disregarded as an entity separate from its owner if it has a single

owner. The default for foreign entities is based on whether the members

have limited liability. Thus a foreign eligible entity will be

classified as an association if all members have limited liability. A

foreign eligible entity will be classified as a partnership if it has

two or more members and at least one member does not have limited

liability; the entity will be disregarded as an entity separate from

its owner if it has a single owner and that owner does not have limited

liability. Finally, the default classification for an existing entity

is the classification that the entity claimed immediately prior to the

effective date of these regulations. An entity's default classification

continues until the entity elects to change its classification by means

of an affirmative election.

An eligible entity may affirmatively elect its classification on

Form 8832, Entity Classification Election. The regulations require that

the election be signed by each member of the entity or any officer,

manager, or member of the entity who is authorized to make the election

and who represents to having such authorization under penalties of

perjury. An election will not be accepted unless it includes all of the

required information, including the entity's taxpayer identifying

number (TIN).

Taxpayers are reminded that a change in classification, no matter

how achieved, will have certain tax consequences that must be reported.

For example, if an organization classified as an association elects to

be classified as a partnership, the organization and its owners must

recognize gain, if any, under the rules applicable to liquidations of

corporations.

B. Discussion of Comments on the General Approach and Scope of the

Regulations

Several comments requested clarification with regard to the rules

for determining when an owner of an interest in an organization will be

respected as a bona fide owner for federal tax purposes. Some

commentators were concerned, for example, that certain owners would be

required to maintain certain net worth requirements. Other

commentators, relying on Rev. Rul. 93-4, 1993-1 C.B. 225, suggested

that if two wholly-owned subsidiaries of a common parent were the

owners of an organization, those owners would not be respected as bona

fide owners and the organization would be treated as having only one

owner (the common parent). Although the determination of whether an

organization has more than one owner is based on all the facts and

circumstances, the fact that some or all of the owners of an

organization are under common control does not require the common

parent to be treated as the sole owner. Consistent with this approach,

Rev. Rul. 93-4 treated two wholly owned subsidiaries as associates and

then classified the foreign entity based on the four corporate

characteristics under section 7701. While these four factors will no

longer apply with the adoption of the regulations, determining whether

the subsidiaries are associates continues to be an issue.

The IRS has received a number of comments asking for clarification

of the tax treatment of entities that are wholly owned by an Indian

tribe and incorporated under tribal law. Treasury and the IRS are

currently studying this

[[Page 66586]]

issue and will, if necessary, issue separate guidance regarding this

issue.

Most commentators agreed that inclusion of the list of foreign

business entities treated as corporations per se was appropriate.

However, several commentators requested clarification about certain

foreign business entities on the per se list. Other commentators

requested clarification whether and how the list of such corporations

might be updated in the future. The regulations are clarified with

respect to entities formed in the following jurisdictions: Aruba,

Canada, People's Republic of China, Republic of China (Taiwan), India,

Indonesia, Netherlands Antilles, and Sweden. Any further modifications

will be announced in a notice of proposed rulemaking and will be

prospective only.

Commentators also raised the issue of how to determine if a joint

venture or other contractual arrangement that is considered a separate

entity under these regulations is considered a foreign or domestic

entity. This issue is outside the scope of these regulations and thus

is not addressed in the final regulations.

Some commentators raised issues relating to the application of the

grandfather rule for certain existing entities organized under foreign

statutes included on the list of per se corporations. In particular,

commentators requested clarification regarding existing entities that

would be listed on the per se list. Commentators have asked whether an

existing entity on the per se list which had claimed non-corporate

status could retain that status, and, if so, whether it could

subsequently elect to be treated as a corporation. Commentators also

asked for clarification as to the effect of a deemed termination under

section 708(b)(1)(B) or a division under section 708(b)(2)(B) on a

grandfathered per se entity.

In response to these comments, the grandfather rules clarify that

an entity on the list which was previously disregarded as a separate

entity (i.e., treated as a branch) or was treated as a partnership may

continue to be treated as such when the regulations become effective.

Moreover, entities on the list which continue to treat themselves as

branches or partnerships after the effective date of the regulations

may subsequently elect to be treated as corporations. However, after

such election they may not subsequently elect to be treated as a

partnership or a branch. Finally, any termination under section

708(b)(1)(B) (except in the case of a sale or exchange of interests in

an entity described in Sec. 301.7701-2(d)(2) where the sale or exchange

is to a related person within the meaning of sections 267(b) and 707(b)

and occurs no later than 12 months after the date the entity is formed)

or division under section 708(b)(2)(B) will end the grandfathered

status of any entity on the per se list, and therefore the successor

entity (or entities) will thereafter be permanently treated as a

corporation.

Other commentators suggested that the requirement that an existing

entity included on the per se list must have claimed passthrough

treatment for all prior periods is burdensome and precludes grandfather

treatment for entities that restructured in the past and recognized the

resulting tax consequences. In response to these comments, the

regulations are modified to indicate that an existing entity can

continue to be treated as a non-corporate entity if it was in existence

on May 8, 1996, and was reasonably treated as a non-corporate entity on

that date (or formed thereafter pursuant to a written binding contract

in effect on May 8, 1996, in which the parties agreed to engage

(directly or indirectly) in an active and substantial business

operation in the jurisdiction in which the entity is formed, and which

would otherwise meet the grandfather rules if the date the entity is

formed is substituted for May 8, 1996). If the entity changed its

claimed tax status within the sixty months prior to May 8, 1996, the

entity and its members must have recognized the tax consequences that

resulted from that change in tax status. Moreover, the regulations

clarify that the grandfather treatment applies if no person for whom

the entity's classification was relevant on May 8, 1996, treats the

entity as a corporation for purposes of filing such person's federal

income tax returns, information returns, and withholding documents for

the period including May 8, 1996.

One commentator suggested that it was unclear when the

classification of a foreign entity is ``relevant'' for federal tax

purposes. This determination is important, as it affects whether the

grandfather rule, the default rule for existing entities, or the

default rule for a newly formed foreign entity applies. In general, an

entity's classification is relevant when its classification affects the

liability of any person for federal tax or information purposes. The

date that the classification of a foreign entity is relevant is the

date an event occurs that causes an obligation to file a return or

statement for which the classification of the entity must be

determined.

C. Discussion of Comments Relating to the Elective Regime

Most of the commentators agreed that the default rules included in

the proposed regulations generally would match taxpayers' expectations.

However, some commentators expressed concern over the application of

the default rule for newly formed foreign eligible entities which would

treat such entities as associations if no member had unlimited

liability. Specifically, certain commentators noted that under the

definition of unlimited liability in the proposed regulations, certain

contractual joint ventures which, under current law, would generally be

classified as partnerships, would be treated as associations under the

default rule. The members of these contractual joint ventures are not

jointly and severally liable for all debts of the entity; rather, each

member has unlimited liability for a certain proportion of the debts of

the entity. To simplify the default rules, the regulations are modified

to provide that a newly formed foreign eligible entity will--(1) be

treated as a partnership if it has at least two members and at least

one member does not have limited liability; (2) be treated as an

association if all members of the entity have limited liability; and

(3) be disregarded as an entity separate from its owner if it has a

single owner that does not have limited liability.

The regulations are modified to provide that a member does not have

limited liability if the member, by virtue of being a member, has

personal liability for all or any portion of the debts of the entity.

Certain commentators asked for clarification of the default rule in

the case where the relevant statute or law of a particular country

provides for limited or unlimited liability. Generally, the regulations

specify that only the statute or law is relevant. Where, however, the

underlying statute allows the entity to specify in its organizational

documents whether the members will have limited liability, the

organizational documents may be relevant.

Some commentators requested that taxpayers be allowed to make

classification elections with their first tax returns. The regulations

retain the requirement that elections be made at the beginning of the

taxable year. Treasury and the IRS continue to believe that it is

appropriate to determine an entity's classification at the time that it

begins its operations. Taxpayers can specify the date on which an

election will be effective, provided that date is not more than 75

[[Page 66587]]

days prior to the date on which the election is filed (irrespective of

when the interest was acquired) and not more than 12 months after the

date the election was filed. If a taxpayer specifies an effective date

more than 75 days prior to the date on which the election is filed, the

election will be effective 75 days prior to the date on which the

election was filed. If a taxpayer specifies an effective date more than

12 months from the filing date, the election will be effective 12

months after the date the election was filed. No election, whenever

filed, will be effective before January 1, 1997.

One commentator expressed concern about the ability to make

protective elections where there is uncertainty, for example, about an

entity's status as a business entity. Such protective elections are not

prohibited under the regulations.

The regulations limit the ability of an entity to make multiple

classification elections by prohibiting more than one election to

change an entity's classification during any sixty month period. One

commentator suggested that the regulations be amended to waive

application of this rule in certain circumstances, particularly when

there has been a substantial change in ownership of the entity. In

response to this comment, the regulations permit the Commissioner to

waive the application of the sixty month limitation by letter ruling.

However, waivers will not be granted unless there has been more than a

fifty percent ownership change. The sixty month limitation only applies

to a change in classification by election; the limitation does not

apply if the organization's business is actually transferred to another

entity.

Several commentators requested clarification concerning the

classification of a foreign entity when the classification of the

entity becomes relevant for federal tax purposes after a period during

which the classification of the entity was not relevant. Generally,

such an entity will retain its prior classification. However, if the

classification of a foreign eligible entity which was previously

relevant for federal tax purposes ceases to be relevant for sixty

consecutive months, the entity's classification will be determined

initially under the default classification when the classification of

the foreign eligible entity again becomes relevant.

Some commentators requested clarification regarding the rule

permitting elections to be signed by any authorized officer, manager,

or member of the electing entity. The regulations retain this rule, as

it provides taxpayers with flexibility in complying with the election

requirements. The determination of whether a person is authorized to

make an election is based on local law. Thus, the election can be made

by anyone authorized to act on behalf of the entity.

Several commentators asked for guidance regarding the necessary

signatures on the classification election. The regulations are modified

to provide that if the election is made by all of the members, each

person who is an owner at the time the election is made must consent to

the election. However, if an election is to be effective for any period

prior to the date it is filed, each person who was an owner between the

date the election is to be effective and the date the election is filed

(even if by an authorized person), and who is not an owner at the time

the election is filed, must also consent to the election.

Several commentators requested that the classification election be

coordinated with the election under section 856(c)(1) to be a real

estate investment trust (REIT). Because the latter election is required

to be made with the REIT's first tax return, the regulations are

modified to provide that an election by an eligible entity to be a REIT

will be treated as a deemed election to be classified as an

association, effective for the entire period during which REIT status

is claimed.

Some commentators suggested that the regulations should not require

an entity or its direct or indirect owners to attach a copy of the

entity's election to their federal tax returns. Specifically, some

commentators were concerned that the failure of one owner to attach a

copy of the election to the owner's return would void an otherwise

valid election. The regulations retain the requirement that taxpayers

must attach a copy of the election to their returns, but clarify that

failure to do so will not invalidate an otherwise valid election.

Although the failure to attach a copy will not adversely affect an

otherwise valid election, taxpayers are reminded that each member of

the entity is required to file returns that are consistent with the

entity's election. Failure to attach the election form to a federal tax

or information return as directed in the regulations may give rise to

penalties against the non-filing party. Other applicable penalties may

also apply to parties who file federal tax or information returns

inconsistent with the entity's election.

One commentator asked for guidance on the treatment of conversions

by election from partnership to corporation and from corporation to

partnership. This issue is outside the scope of these classification

rules and thus is not addressed in these regulations. Treasury and the

IRS, however, are actively considering issuing guidance on the

treatment of such conversions.

D. Effective Dates

The regulations are effective as of January 1, 1997. The

regulations provide a special transition rule for existing entities.

The IRS will not challenge the prior classification of an existing

eligible entity, or an existing entity described on the per se list,

for periods prior to January 1, 1997, if--(1) the entity had a

reasonable basis (within the meaning of section 6662) for its claimed

classification; (2) the entity and all members of the entity recognized

the federal tax consequences of any change in the entity's

classification within the sixty months prior to January 1, 1997; and

(3) neither the entity nor any member had been notified in writing on

or before May 8, 1996, that the classification of the entity was under

examination (in which case the entity's classification will be

determined in the examination).

Some commentators were concerned that an entity organized after May

8, 1996, would be excluded from this transition rule for existing

entities. Because Sec. 301.7701-3(f)(2) applies to entities that were

in existence prior to January 1, 1997, no change is necessary to

provide relief for entities organized after May 8, 1996.

Some commentators were concerned about entities that claimed to be

trusts for the period prior to January 1, 1997, but are subsequently

determined to be business entities. In that case, the entity's claimed

classification for purposes of applying the provisions of the special

transition rule will be the business entity classification claimed by

the entity after it has been determined to be a business entity.

Effect on Other Documents

The Service has published a number of revenue rulings and revenue

procedures interpreting the section 7701 regulations. The Service is

currently reviewing these revenue rulings and revenue procedures to

determine which are affected by the publication of these regulations.

See accompanying Notice 97-1. Special Analyses

It has been determined that this Treasury decision 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

[[Page 66588]]

U.S.C. chapter 5) does not apply to these regulations. It is hereby

certified that these regulations do not have a significant economic

impact on a substantial number of small entities. This certification is

based upon the fact that the automatic classification rules of

Sec. 301.7701-2(b) and the default classification rules of

Sec. 301.7701-3(b) will operate in such a manner that only a limited

number of entities will need to make an election under Sec. 301.7701-

3(c) to determine their classification. Therefore, a Regulatory

Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to section 7805(f) of the Internal

Revenue Code, the notice of proposed rulemaking preceding these final

regulations has been submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Drafting Information

The principal authors of these regulations are Armando Gomez and

Mark D. Harris of the Office of Assistant Chief Counsel (Passthroughs

and Special Industries) and William H. Morris and Ronald M. Gootzeit of

the 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.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 301, and 602 are 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 1.581-1 is revised to read as follows:

Sec. 1.581-1 Banks.

(a) In order to be a bank as defined in section 581, an institution

must be a corporation for federal tax purposes. See Sec. 301.7701-2(b)

of this chapter for the definition of a corporation.

(b) This section is effective as of January 1, 1997.

Par. 3. Section 1.581-2 is amended as follows:

1. Paragraph (a) is removed.

2. Paragraphs (b) and (c) are redesignated as paragraphs (a) and

(b), respectively.

3. Newly designated paragraph (a) is amended by revising the second

and last sentences.

The revisions read as follows:

Sec. 1.581-2 Mutual savings banks, building and loan associations, and

cooperative banks.

(a) * * * See section 593 for special rules concerning reserves for

bad debts. * * * See also section 594 and Sec. 1.594-1 for special

rules governing the taxation of a mutual savings bank conducting a life

insurance business.

* * * * *

Par. 4. In Sec. 1.761-1, paragraph (a) is revised to read as

follows:

Sec. 1.761-1 Terms defined.

(a) Partnership. The term partnership means a partnership as

determined under Secs. 301.7701-1, 301.7701-2, and 301.7701-3 of this

chapter.

* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

Par. 5. The authority citation for part 301 continues to read in

part as follows:

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

Par. 6. Section 301.6109-1 is amended as follows:

1. Paragraph (b)(2)(iii) is amended by removing the language

``and'' at the end of the paragraph.

2. Paragraph (b)(2)(iv) is amended by removing the period at the

end of the paragraph, and replacing it with the language ``; and''.

3. Paragraph (b)(2)(v) is added.

4. The text of paragraph (d)(2) is redesignated as paragraph

(d)(2)(i).

5. A paragraph heading is added for newly designated paragraph

(d)(2)(i).

6. Paragraph (d)(2)(ii) is added.

The revisions and additions read as follows:

Sec. 301.6109-1 Identifying numbers.

* * * * *

(b) * * *

(2) * * *

(v) A foreign person that makes an election under Sec. 301.7701-

3(c).

* * * * *

(d) * * *

(2) Employer identification number--(i) In general. * * *

(ii) Special rule for entities electing to change their federal tax

classification under Sec. 301.7701-3(c). Any entity that has an

employer identification number and then elects under Sec. 301.7701-3(c)

to change its federal tax classification will retain that employer

identification number.

* * * * *

Par. 7. Sections 301.7701-1, 301.7701-2, and 301.7701-3 are revised

to read as follows:

Sec. 301.7701-1 Classification of organizations for federal tax

purposes.

(a) Organizations for federal tax purposes--(1) In general. The

Internal Revenue Code prescribes the classification of various

organizations for federal tax purposes. 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.

(2) Certain joint undertakings give rise to entities for federal

tax purposes. 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. For example, a separate entity exists for

federal tax purposes if co- owners of an apartment building lease space

and in addition provide services to the occupants either directly or

through an agent. Nevertheless, a joint undertaking merely to share

expenses does not create a separate entity for federal tax purposes.

For example, if two or more persons jointly construct a ditch merely to

drain surface water from their properties, they have not created a

separate entity for federal tax purposes. Similarly, mere co-ownership

of property that is maintained, kept in repair, and rented or leased

does not constitute a separate entity for federal tax purposes. For

example, if an individual owner, or tenants in common, of farm property

lease it to a farmer for a cash rental or a share of the crops, they do

not necessarily create a separate entity for federal tax purposes.

(3) Certain local law entities not recognized. An entity formed

under local law is not always recognized as a separate entity for

federal tax purposes. For example, an organization wholly owned by a

State is not recognized as a separate entity for federal tax purposes

if it is an integral part of the State. Similarly, tribes incorporated

under section 17 of the Indian Reorganization

[[Page 66589]]

Act of 1934, as amended, 25 U.S.C. 477, or under section 3 of the

Oklahoma Indian Welfare Act, as amended, 25 U.S.C. 503, are not

recognized as separate entities for federal tax purposes.

(4) Single owner organizations. Under Secs. 301.7701-2 and

301.7701-3, certain organizations that have a single owner can choose

to be recognized or disregarded as entities separate from their owners.

(b) Classification of organizations. The classification of

organizations that are recognized as separate entities is determined

under Secs. 301.7701-2, 301.7701-3, and 301.7701-4 unless a provision

of the Internal Revenue Code (such as section 860A addressing Real

Estate Mortgage Investment Conduits (REMICs)) provides for special

treatment of that organization. For the classification of organizations

as trusts, see Sec. 301.7701-4. That section provides that trusts

generally do not have associates or an objective to carry on business

for profit. Sections 301.7701-2 and 301.7701-3 provide rules for

classifying organizations that are not classified as trusts.

(c) Qualified cost sharing arrangements. A qualified cost sharing

arrangement that is described in Sec. 1.482-7 of this chapter and any

arrangement that is treated by the Commissioner as a qualified cost

sharing arrangement under Sec. 1.482-7 of this chapter is not

recognized as a separate entity for purposes of the Internal Revenue

Code. See Sec. 1.482-7 of this chapter for the proper treatment of

qualified cost sharing arrangements.

(d) Domestic and foreign entities. For purposes of this section and

Secs. 301.7701-2 and 301.7701-3, an entity is a domestic entity if it

is created or organized in the United States or under the law of the

United States or of any State; an entity is foreign if it is not

domestic. See sections 7701(a)(4) and (a)(5).

(e) State. For purposes of this section and Sec. 301.7701-2, the

term State includes the District of Columbia.

(f) Effective date. The rules of this section are effective as of

January 1, 1997.

Sec. 301.7701-2 Business entities; definitions.

(a) Business entities. For purposes of this section and

Sec. 301.7701-3, 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 under Sec. 301.7701-4 or

otherwise subject to special treatment under the Internal Revenue Code.

A business entity with two or more members is classified for federal

tax purposes as either a corporation or a partnership. A business

entity with only one owner is classified as a corporation or is

disregarded; if the entity is disregarded, its activities are treated

in the same manner as a sole proprietorship, branch, or division of the

owner.

(b) Corporations. For federal tax purposes, the term corporation

means--

(1) A business entity organized under a Federal or State statute,

or under a statute of a federally recognized Indian tribe, if the

statute describes or refers to the entity as incorporated or as a

corporation, body corporate, or body politic;

(2) An association (as determined under Sec. 301.7701-3);

(3) A business entity organized under a State statute, if the

statute describes or refers to the entity as a joint-stock company or

joint-stock association;

(4) An insurance company;

(5) A State-chartered business entity conducting banking

activities, if any of its deposits are insured under the Federal

Deposit Insurance Act, as amended, 12 U.S.C. 1811 et seq., or a similar

federal statute;

(6) A business entity wholly owned by a State or any political

subdivision thereof;

(7) A business entity that is taxable as a corporation under a

provision of the Internal Revenue Code other than section 7701(a)(3);

and

(8) Certain foreign entities--(i) In general. Except as provided in

paragraphs (b)(8)(ii) and (d) of this section, the following business

entities formed in the following jurisdictions:

American Samoa, Corporation

Argentina, Sociedad Anonima

Australia, Public Limited Company

Austria, Aktiengesellschaft

Barbados, Limited Company

Belgium, Societe Anonyme

Belize, Public Limited Company

Bolivia, Sociedad Anonima

Brazil, Sociedade Anonima

Canada, Corporation and Company

Chile, Sociedad Anonima

People's Republic of China, Gufen Youxian Gongsi

Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu

Colombia, Sociedad Anonima

Costa Rica, Sociedad Anonima

Cyprus, Public Limited Company

Czech Republic, Akciova Spolecnost

Denmark, Aktieselskab

Ecuador, Sociedad Anonima or Compania Anonima

Egypt, Sharikat Al-Mossahamah

El Salvador, Sociedad Anonima

Finland, Osakeyhtio/Aktiebolag

France, Societe Anonyme

Germany, Aktiengesellschaft

Greece, Anonymos Etairia

Guam, Corporation

Guatemala, Sociedad Anonima

Guyana, Public Limited Company

Honduras, Sociedad Anonima

Hong Kong, Public Limited Company

Hungary, Reszvenytarsasag

Iceland, Hlutafelag

India, Public Limited Company

Indonesia, Perseroan Terbuka

Ireland, Public Limited Company

Israel, Public Limited Company

Italy, Societa per Azioni

Jamaica, Public Limited Company

Japan, Kabushiki Kaisha

Kazakstan, Ashyk Aktsionerlik Kogham

Republic of Korea, Chusik Hoesa

Liberia, Corporation

Luxembourg, Societe Anonyme

Malaysia, Berhad

Malta, Partnership Anonyme

Mexico, Sociedad Anonima

Morocco, Societe Anonyme

Netherlands, Naamloze Vennootschap

New Zealand, Limited Company

Nicaragua, Compania Anonima

Nigeria, Public Limited Company

Northern Mariana Islands, Corporation

Norway, Aksjeselskap

Pakistan, Public Limited Company

Panama, Sociedad Anonima

Paraguay, Sociedad Anonima

Peru, Sociedad Anonima

Philippines, Stock Corporation

Poland, Spolka Akcyjna

Portugal, Sociedade Anonima

Puerto Rico, Corporation

Romania, Societe pe Actiuni

Russia, Otkrytoye Aktsionernoy Obshchestvo

Saudi Arabia, Sharikat Al-Mossahamah

Singapore, Public Limited Company

Slovak Republic, Akciova Spolocnost

South Africa, Public Limited Company

Spain, Sociedad Anonima

Surinam, Naamloze Vennootschap

Sweden, Publika Aktiebolag

Switzerland, Aktiengesellschaft

Thailand, Borisat Chamkad (Mahachon)

Trinidad and Tobago, Public Limited Company

Tunisia, Societe Anonyme

Turkey, Anonim Sirket

Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu

United Kingdom, Public Limited Company

United States Virgin Islands, Corporation

Uruguay, Sociedad Anonima

Venezuela, Sociedad Anonima or Compania Anonima

(ii) Exceptions in certain cases. The following entities will not

be treated as corporations under paragraph (b)(8)(i) of this section:

(A) With regard to Canada, any corporation or company formed under

any federal or provincial law which provides that the liability of all

of the members of such corporation or company will be unlimited; and

[[Page 66590]]

(B) With regard to India, a company deemed to be a public limited

company solely by operation of Section 43A(1) (relating to corporate

ownership of the company), section 43A(1A) (relating to annual average

turnover), or section 43A(1B) (relating to ownership interests in other

companies) of the Companies Act, 1956 (or any combination of these),

provided that the organizational documents of such deemed public

limited company continue to meet the requirements of section 3(1)(iii)

of the Companies Act, 1956.

(iii) Public companies. With regard to Cyprus, Hong Kong, Jamaica,

and Trinidad and Tobago, the term public limited company includes any

limited company which is not a private limited company under the laws

of those jurisdictions.

(iv) Limited companies. Any reference to a limited company (whether

public or private) in paragraph (b)(8)(i) of this section includes, as

the case may be, companies limited by shares and companies limited by

guarantee.

(v) Multilingual countries. Different linguistic renderings of the

name of an entity listed in paragraph (b)(8)(i) of this section shall

be disregarded. For example, an entity formed under the laws of

Switzerland as a Societe Anonyme will be a corporation and treated in

the same manner as an Aktiengesellschaft.

(c) Other business entities. For federal tax purposes--

(1) The term partnership means a business entity that is not a

corporation under paragraph (b) of this section and that has at least

two members.

(2) Wholly owned entities--(i) In general. A business entity that

has a single owner and is not a corporation under paragraph (b) of this

section is disregarded as an entity separate from its owner.

(ii) Special rule for certain business entities. If the single

owner of a business entity is a bank (as defined in section 581), then

the special rules applicable to banks will continue to apply to the

single owner as if the wholly owned entity were a separate entity.

(d) Special rule for certain foreign business entities--(1) In

general. Except as provided in paragraph (d)(3) of this section, a

foreign business entity described in paragraph (b)(8)(i) of this

section will not be treated as a corporation under paragraph (b)(8)(i)

of this section if--

(i) The entity was in existence on May 8, 1996;

(ii) The entity's classification was relevant (as defined in

Sec. 301.7701-3(d)) on May 8, 1996;

(iii) No person (including the entity) for whom the entity's

classification was relevant on May 8, 1996, treats the entity as a

corporation for purposes of filing such person's federal income tax

returns, information returns, and withholding documents for the taxable

year including May 8, 1996;

(iv) Any change in the entity's claimed classification within the

sixty months prior to May 8, 1996, occurred solely as a result of a

change in the organizational documents of the entity, and the entity

and all members of the entity recognized the federal tax consequences

of any change in the entity's classification within the sixty months

prior to May 8, 1996;

(v) A reasonable basis (within the meaning of section 6662) existed

on May 8, 1996, for treating the entity as other than a corporation;

and

(vi) Neither the entity nor any member was notified in writing on

or before May 8, 1996, that the classification of the entity was under

examination (in which case the entity's classification will be

determined in the examination).

(2) Binding contract rule. If a foreign business entity described

in paragraph (b)(8)(i) of this section is formed after May 8, 1996,

pursuant to a written binding contract (including an accepted bid to

develop a project) in effect on May 8, 1996, and all times thereafter,

in which the parties agreed to engage (directly or indirectly) in an

active and substantial business operation in the jurisdiction in which

the entity is formed, paragraph (d)(1) of this section will be applied

to that entity by substituting the date of the entity's formation for

May 8, 1996.

(3) Termination of grandfather status--(i) In general. An entity

that is not treated as a corporation under paragraph (b)(8)(i) of this

section by reason of paragraph (d)(1) or (d)(2) of this section will be

treated permanently as a corporation under paragraph (b)(8)(i) of this

section from the earliest of:

(A) The effective date of an election to be treated as an

association under Sec. 301.7701-3;

(B) A termination of the partnership under section 708(b)(1)(B)

(regarding sale or exchange of 50 percent or more of the total interest

in an entity's capital or profits within a twelve month period); or

(C) A division of the partnership under section 708(b)(2)(B).

(ii) Special rule for certain entities. For purposes of paragraph

(d)(2) of this section, paragraph (d)(3)(i)(B) of this section shall

not apply if the sale or exchange of interests in the entity is to a

related person (within the meaning of sections 267(b) and 707(b)) and

occurs no later than twelve months after the date of the formation of

the entity.

(e) Effective date. The rules of this section are effective as of

January 1, 1997.

Sec. 301.7701-3 Classification of certain business entities.

(a) In general. A business entity that is not classified as a

corporation under Sec. 301.7701-2(b) (1), (3), (4), (5), (6), (7), or

(8) (an eligible entity) can elect its classification for federal tax

purposes as provided in this section. An eligible entity with at least

two members can elect to be classified as either an association (and

thus a corporation under Sec. 301.7701-2(b)(2)) or a partnership, and

an eligible entity with a single owner can elect to be classified as an

association or to be disregarded as an entity separate from its owner.

Paragraph (b) of this section provides a default classification for an

eligible entity that does not make an election. Thus, elections are

necessary only when an eligible entity chooses to be classified

initially as other than the default classification or when an eligible

entity chooses to change its classification. An entity whose

classification is determined under the default classification retains

that classification (regardless of any changes in the members'

liability that occurs at any time during the time that the entity's

classification is relevant as defined in paragraph (d) of this section)

until the entity makes an election to change that classification under

paragraph (c)(1) of this section. Paragraph (c) of this section

provides rules for making express elections. Paragraph (d) of this

section provides special rules for foreign eligible entities. Paragraph

(e) of this section provides special rules for classifying entities

resulting from partnership terminations and divisions under section

708(b). Paragraph (f) of this section sets forth the effective date of

this section and a special rule relating to prior periods.

(b) Classification of eligible entities that do not file an

election--(1) Domestic eligible entities. Except as provided in

paragraph (b)(3) of this section, unless the entity elects otherwise, a

domestic eligible entity is--

(i) A partnership if it has two or more members; or

(ii) Disregarded as an entity separate from its owner if it has a

single owner.

(2) Foreign eligible entities--(i) In general. Except as provided

in paragraph (b)(3) of this section, unless the entity elects

otherwise, a foreign eligible entity is--

[[Page 66591]]

(A) A partnership if it has two or more members and at least one

member does not have limited liability;

(B) An association if all members have limited liability; or

(C) Disregarded as an entity separate from its owner if it has a

single owner that does not have limited liability.

(ii) Definition of limited liability. For purposes of paragraph

(b)(2)(i) of this section, a member of a foreign eligible entity has

limited liability if the member has no personal liability for the debts

of or claims against the entity by reason of being a member. This

determination is based solely on the statute or law pursuant to which

the entity is organized, except that if the underlying statute or law

allows the entity to specify in its organizational documents whether

the members will have limited liability, the organizational documents

may also be relevant. For purposes of this section, a member has

personal liability if the creditors of the entity may seek satisfaction

of all or any portion of the debts or claims against the entity from

the member as such. A member has personal liability for purposes of

this paragraph even if the member makes an agreement under which

another person (whether or not a member of the entity) assumes such

liability or agrees to indemnify that member for any such liability.

(3) Existing eligible entities--(i) In general. Unless the entity

elects otherwise, an eligible entity in existence prior to the

effective date of this section will have the same classification that

the entity claimed under Secs. 301.7701-1 through 301.7701-3 as in

effect on the date prior to the effective date of this section; except

that if an eligible entity with a single owner claimed to be a

partnership under those regulations, the entity will be disregarded as

an entity separate from its owner under this paragraph (b)(3)(i). For

special rules regarding the classification of such entities for periods

prior to the effective date of this section, see paragraph (f)(2) of

this section.

(ii) Special rules. For purposes of paragraph (b)(3)(i) of this

section, a foreign eligible entity is treated as being in existence

prior to the effective date of this section only if the entity's

classification was relevant (as defined in paragraph (d) of this

section) at any time during the sixty months prior to the effective

date of this section. If an entity claimed different classifications

prior to the effective date of this section, the entity's

classification for purposes of paragraph (b)(3)(i) of this section is

the last classification claimed by the entity. If a foreign eligible

entity's classification is relevant prior to the effective date of this

section, but no federal tax or information return is filed or the

federal tax or information return does not indicate the classification

of the entity, the entity's classification for the period prior to the

effective date of this section is determined under the regulations in

effect on the date prior to the effective date of this section.

(c) Elections--(1) Time and place for filing--(i) In general.

Except as provided in paragraphs (c)(1) (iv) and (v) of this section,

an eligible entity may elect to be classified other than as provided

under paragraph (b) of this section, or to change its classification,

by filing Form 8832, Entity Classification Election, with the service

center designated on Form 8832. An election will not be accepted unless

all of the information required by the form and instructions, including

the taxpayer identifying number of the entity, is provided on Form

8832. See Sec. 301.6109-1 for rules on applying for and displaying

Employer Identification Numbers.

(ii) Further notification of elections. An eligible entity required

to file a federal tax or information return for the taxable year for

which an election is made under paragraph (c)(1)(i) of this section

must attach a copy of its Form 8832 to its federal tax or information

return for that year. If the entity is not required to file a return

for that year, a copy of its Form 8832 must be attached to the federal

income tax or information return of any direct or indirect owner of the

entity for the taxable year of the owner that includes the date on

which the election was effective. An indirect owner of the entity does

not have to attach a copy of the Form 8832 to its return if an entity

in which it has an interest is already filing a copy of the Form 8832

with its return. If an entity, or one of its direct or indirect owners,

fails to attach a copy of a Form 8832 to its return as directed in this

section, an otherwise valid election under paragraph (c)(1)(i) of this

section will not be invalidated, but the non-filing party may be

subject to penalties, including any applicable penalties if the federal

tax or information returns are inconsistent with the entity's election

under paragraph (c)(1)(i) of this section.

(iii) Effective date of election. An election made under paragraph

(c)(1)(i) of this section will be effective on the date specified by

the entity on Form 8832 or on the date filed if no such date is

specified on the election form. The effective date specified on Form

8832 can not be more than 75 days prior to the date on which the

election is filed and can not be more than 12 months after the date on

which the election is filed. If an election specifies an effective date

more than 75 days prior to the date on which the election is filed, it

will be effective 75 days prior to the date it was filed. If an

election specifies an effective date more than 12 months from the date

on which the election is filed, it will be effective 12 months after

the date it was filed. If an election specifies an effective date

before January 1, 1997, it will be effective as of January 1, 1997.

(iv) Limitation. If an eligible entity makes an election under

paragraph (c)(1)(i) of this section to change its classification (other

than an election made by an existing entity to change its

classification as of the effective date of this section), the entity

cannot change its classification by election again during the sixty

months succeeding the effective date of the election. However, the

Commissioner may permit the entity to change its classification by

election within the sixty months if more than fifty percent of the

ownership interests in the entity as of the effective date of the

subsequent election are owned by persons that did not own any interests

in the entity on the filing date or on the effective date of the

entity's prior election.

(v) Deemed elections--(A) Exempt organizations. An eligible entity

that has been determined to be, or claims to be, exempt from taxation

under section 501(a) is treated as having made an election under this

section to be classified as an association. Such election will be

effective as of the first day for which exemption is claimed or

determined to apply, regardless of when the claim or determination is

made, and will remain in effect unless an election is made under

paragraph (c)(1)(i) of this section after the date the claim for exempt

status is withdrawn or rejected or the date the determination of exempt

status is revoked.

(B) Real estate investment trusts. An eligible entity that files an

election under section 856(c)(1) to be treated as a real estate

investment trust is treated as having made an election under this

section to be classified as an association. Such election will be

effective as of the first day the entity is treated as a real estate

investment trust.

(vi) Examples. The following examples illustrate the rules of this

paragraph (c)(1):

Example 1. On July 1, 1998, X, a domestic corporation, purchases

a 10% interest in Y, an eligible entity formed under Country A law

in 1990. The entity's classification was not relevant to any person

for federal tax or information purposes prior to X's acquisition of

an interest in Y. Thus, Y is not considered to be in existence on

the effective date of this section for purposes of paragraph (b)(3)

of this section. Under the applicable Country A

[[Page 66592]]

statute, all members of Y have limited liability as defined in

paragraph (b)(2)(ii) of this section. Accordingly, Y is classified

as an association under paragraph (b)(2)(i)(B) of this section

unless it elects under this paragraph (c) to be classified as a

partnership. To be classified as a partnership as of July 1, 1998, Y

must file a Form 8832 by September 13, 1998. See paragraph (c)(1)(i)

of this section. Because an election cannot be effective more than

75 days prior to the date on which it is filed, if Y files its Form

8832 after September 13, 1998, it will be classified as an

association from July 1, 1998, until the effective date of the

election. In that case, it could not change its classification by

election under this paragraph (c) during the sixty months succeeding

the effective date of the election.

Example 2. (i) Z is an eligible entity formed under Country B

law and is in existence on the effective date of this section within

the meaning of paragraph (b)(3) of this section. Prior to the

effective date of this section, Z claimed to be classified as an

association. Unless Z files an election under this paragraph (c), it

will continue to be classified as an association under paragraph

(b)(3) of this section.

(ii) Z files a Form 8832 pursuant to this paragraph (c) to be

classified as a partnership, effective as of the effective date of

this section. Z can file an election to be classified as an

association at any time thereafter, but then would not be permitted

to change its classification by election during the sixty months

succeeding the effective date of that subsequent election.

(2) Authorized signatures--(i) In general. An election made under

paragraph (c)(1)(i) of this section must be signed by--

(A) Each member of the electing entity who is an owner at the time

the election is filed; or

(B) Any officer, manager, or member of the electing entity who is

authorized (under local law or the entity's organizational documents)

to make the election and who represents to having such authorization

under penalties of perjury.

(ii) Retroactive elections. For purposes of paragraph (c)(2)(i) of

this section, if an election under paragraph (c)(1)(i) of this section

is to be effective for any period prior to the time that it is filed,

each person who was an owner between the date the election is to be

effective and the date the election is filed, and who is not an owner

at the time the election is filed, must also sign the election.

(d) Special rules for foreign eligible entities--(1) For purposes

of this section, a foreign eligible entity's classification is relevant

when its classification affects the liability of any person for federal

tax or information purposes. For example, a foreign entity's

classification would be relevant if U.S. income was paid to the entity

and the determination by the withholding agent of the amount to be

withheld under chapter 3 of the Internal Revenue Code (if any) would

vary depending upon whether the entity is classified as a partnership

or as an association. Thus, the classification might affect the

documentation that the withholding agent must receive from the entity,

the type of tax or information return to file, or how the return must

be prepared. The date that the classification of a foreign eligible

entity is relevant is the date an event occurs that creates an

obligation to file a federal tax return, information return, or

statement for which the classification of the entity must be

determined. Thus, the classification of a foreign entity is relevant,

for example, on the date that an interest in the entity is acquired

which will require a U.S. person to file an information return on Form

5471.

(2) Special rule when classification is no longer relevant.--If the

classification of a foreign eligible entity which was previously

relevant for federal tax purposes ceases to be relevant for sixty

consecutive months, the entity's classification will initially be

determined under the default classification when the classification of

the foreign eligible entity again becomes relevant. The date that the

classification of a foreign entity ceases to be relevant is the date an

event occurs that causes the classification to no longer be relevant,

or, if no event occurs in a taxable year that causes the classification

to be relevant, then the date is the first day of that taxable year.

(e) Coordination with section 708(b). Except as provided in

Sec. 301.7701-2(d)(3) (regarding termination of grandfather status for

certain foreign business entities), an entity resulting from a

transaction described in section 708(b)(1)(B) (partnership termination

due to sales or exchanges) or section 708(b)(2)(B) (partnership

division) is a partnership.

(f) Effective date--(1) In general. The rules of this section are

effective as of January 1, 1997.

(2) Prior treatment of existing entities. In the case of a business

entity that is not described in Sec. 301.7701-2(b) (1), (3), (4), (5),

(6), or (7), and that was in existence prior to January 1, 1997, the

entity's claimed classification(s) will be respected for all periods

prior to January 1, 1997, if--

(i) The entity had a reasonable basis (within the meaning of

section 6662) for its claimed classification;

(ii) The entity and all members of the entity recognized the

federal tax consequences of any change in the entity's classification

within the sixty months prior to January 1, 1997; and

(iii) Neither the entity nor any member was notified in writing on

or before May 8, 1996, that the classification of the entity was under

examination (in which case the entity's classification will be

determined in the examination).

Par. 8. Section 301.7701-4 is amended as follows:

1. The last sentence of paragraphs (b), (c)(1), (c)(2) Example 1,

and (c)(2) Example 3 are revised.

2. Paragraph (f) is added.

The revisions and addition read as follows:

Sec. 301.7701-4 Trusts.

* * * * *

(b) Business trusts. * * * The fact that any organization is

technically cast in the trust form, by conveying title to property to

trustees for the benefit of persons designated as beneficiaries, will

not change the real character of the organization if the organization

is more properly classified as a business entity under Sec. 301.7701-2.

(c) * * *

(1) * * * An investment trust with multiple classes of ownership

interests ordinarily will be classified as a business entity under

Sec. 301.7701-2; however, an investment trust with multiple classes of

ownership interests, in which there is no power under the trust

agreement to vary the investment of the certificate holders, will be

classified as a trust if the trust is formed to facilitate direct

investment in the assets of the trust and the existence of multiple

classes of ownership interests is incidental to that purpose.

(2) * * *

Example 1. * * * As a consequence, the existence of multiple

classes of trust ownership is not incidental to any purpose of the

trust to facilitate direct investment, and, accordingly, the trust

is classified as a business entity under Sec. 301.7701-2.

* * * * *

Example 3. * * * Accordingly, the trust is classified as a

business entity under Sec. 301.7701-2.

* * * * *

(f) Effective date. The rules of this section generally apply to

taxable years beginning after December 31, 1960. Paragraph (e)(5) of

this section contains rules of applicability for paragraph (e) of this

section. In addition, the last sentences of paragraphs (b), (c)(1), and

(c)(2), Example 1 and Example 3 of this section, are effective as of

January 1, 1997.

Par. 9. Section 301.7701-6 is revised to read as follows:

[[Page 66593]]

Sec. 301.7701-6 Definitions; person, fiduciary.

(a) Person. The term person includes an individual, a corporation,

a partnership, a trust or estate, a joint-stock company, an

association, or a syndicate, group, pool, joint venture, or other

unincorporated organization or group. The term also includes a

guardian, committee, trustee, executor, administrator, trustee in

bankruptcy, receiver, assignee for the benefit of creditors,

conservator, or any person acting in a fiduciary capacity.

(b) Fiduciary--(1) In general. Fiduciary is a term that applies to

persons who occupy positions of peculiar confidence toward others, such

as trustees, executors, and administrators. A fiduciary is a person who

holds in trust an estate to which another has a beneficial interest, or

receives and controls income of another, as in the case of receivers. A

committee or guardian of the property of an incompetent person is a

fiduciary.

(2) Fiduciary distinguished from agent. There may be a fiduciary

relationship between an agent and a principal, but the word agent does

not denote a fiduciary. An agent having entire charge of property, with

authority to effect and execute leases with tenants entirely on his own

responsibility and without consulting his principal, merely turning

over the net profits from the property periodically to his principal by

virtue of authority conferred upon him by a power of attorney, is not a

fiduciary within the meaning of the Internal Revenue Code. In cases

when no legal trust has been created in the estate controlled by the

agent and attorney, the liability to make a return rests with the

principal.

(c) Effective date. The rules of this section are effective as of

January 1, 1997.

Sec. 301.7701-7 [Removed]

Par. 10. Section 301.7701-7 is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 11. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Sec. 602.101 [Amended]

Par. 12. In Sec. 602.101, paragraph (c) is amended by adding a new

entry in numerical order to the table to read as follows:

Sec. 602.101 OMB control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control No.

------------------------------------------------------------------------

* * * * *

301.7701-3................................................. 1545-1486

* * * * *

------------------------------------------------------------------------

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 10, 1996.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 96-31997 Filed 12-17-96; 8:45 am]

BILLING CODE 4830-01-U