Td 8697

REV. RUL. 97–1 TABLE 2
Adjusted AFR for January 1997
Period for Compounding
Annual

Semiannual

Quarterly

Monthly

Short-term
adjusted AFR

3.64%

3.61%

3.59%

3.58%

Mid-term
adjusted AFR

4.45%

4.40%

4.38%

4.36%

Long-term
adjusted AFR

5.35%

5.28%

5.25%

5.22%

REV. RUL. 97–1 TABLE 3
Rates Under Section 382 for January 1997
Adjusted federal long-term rate for the current month
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)

5.35%
5.60%

REV. RUL. 97–1 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for January 1997
Appropriate percentage for the 70% present value low-income housing credit
Appropriate percentage for the 30% present value low-income housing credit

8.48%
3.64%

REV. RUL. 97–1 TABLE 5
Rate Under Section 7520 for January 1997
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest

7.4%

REV. RUL. 97–1 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 1997
Deemed rate of return for transfers during 1997 to pooled income funds that have been in existence for less than 3 taxable years.

Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.

26 CFR 301.7701–3: Classification of certain
business entities.

T.D. 8697
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602

Section 7701.—Definitions
26 CFR 301.7701–13A: Post-1969 domestic building and loan association.
Are holders of the guaranteed payment rights
that are created by the Small Business Administration (SBA) under its participating security program
treated as owning SBA debt? See Rev. Rul. 97–3,
page 5.

Simplification of Entity
Classification Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.

11

7.2%

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.
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

12

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
§ 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 (§ 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 § 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 § 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.a

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 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.

13

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
§ 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
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

14

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

15

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 § 301.7701–2(b) and the default
classification rules of § 301.7701–3(b)
will operate in such a manner that only
a limited number of entities will need to
make an election under § 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.
*

*

*

*

*

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:
§ 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
§ 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:

to change its federal tax classification
will retain that employer identification
number.

§ 1.581–2 Mutual savings banks, building and loan associations, and cooperative banks.

Par.
7. Sections
301.7701–1,
301.7701–2, and 301.7701–3 are revised
to read as follows:

(a) * * * See section 593 for special
rules concerning reserves for bad debts.
* * * See also section 594 and
§ 1.594–1 for special rules governing
the taxation of a mutual savings bank
conducting a life insurance business.

§ 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 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.

*

*

*

*

*

*

Par. 4. In § 1.761–1, paragraph (a) is
revised to read as follows:
§ 1.761–1 Terms defined.
(a) Partnership. The term partnership
means a partnership as determined under
§§ 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:
§ 301.6109–1 Identifying numbers.
*

*

*

*

*

(b) * * *
(2) * * *
(v) A foreign person that makes an
election under § 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 § 301.7701–3(c). Any entity that
has an employer identification number
and then elects under § 301.7701–3(c)

*

*

16

*

*

503, are not recognized as separate
entities for federal tax purposes.
(4) Single owner organizations. Under §§ 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 §§ 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
§ 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 § 1.482–7 of
this chapter and any arrangement that is
treated by the Commissioner as a qualified cost sharing arrangement under
§ 1.482–7 of this chapter is not recognized as a separate entity for purposes
of the Internal Revenue Code. See
§ 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
§§ 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 § 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.
§ 301.7701–2 Business entities; definitions.
(a) Business entities. For purposes of
this section and § 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 § 301.7701–3) that is not

properly classified as a trust under
§ 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 § 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
AlMossahamah
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

17

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
(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 § 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
§ 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.
§ 301.7701–3 Classification of certain
business entities.
(a) In general. A business entity that
is not classified as a corporation under
§ 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
§ 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

18

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—
(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 §§ 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 § 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

19

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 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 § 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 § 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.

20

The revisions and addition read as
follows:
§ 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 § 301.7701–2.
(c) * * * (1) * * * An investment
trust with multiple classes of ownership
interests ordinarily will be classified as
a business entity under § 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
§ 301.7701–2.
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Example 3. * * * Accordingly, the
trust is classified as a business entity
under § 301.7701–2.
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(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:
§ 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, commit-

tee, 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.
§ 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.
§ 602.101 [Amended]
Par. 12. In § 602.101, paragraph (c)
is amended by adding a new entry in
numerical order to the table to read as
follows:
§ 602.101 OMB Control numbers.
*

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*

(c) * * *

21

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CFR part or section where
identified or described

Current OMB
control No.

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301.7701–3 . . . . . . . . . . . . . . . . 1545–1486
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 10, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 17, 1996, 8:45 a.m., and published in
the issue of the Federal Register for December 18,
1996, 61 F.R. 66584)

Section 7520.—Valuation Tables
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.

Section 7872.—Treatment of Loans
With Below-Market Interest Rates
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of January 1997. See Rev. Rul. 97–1, page
10.