Rp 2010-32

time of the lien release described below, the servicer
of the loan knew or had reason to know that the fair
market value of X10 had been positive at origination.
(ii) At the time when the loan was originated and
the liens were created, the fair market values of the

ten properties securing the loan were as shown in the
center column below. Except for property X >, the
10
appraised values at that time were the same. Immediately before and after the lien release, the fair market
values of properties X > through X > were as shown
2

in the right-hand column below. (Except for property
X >, the information in this table is the same as that
10
in Facts (ii) of Example 2.)

10

Real Property Interest

Fair market value at origination

Fair market value at lien release

X

1

$20 million

n/a

2

$5 million

$3.25 million

3

$25 million

$16.25 million

$60 million

$39 million

Greater than zero

Greater than zero

X
X

X through X
4

X

9

10

(iii) After Date 1 B exercised its right to demand
,
a release of the lien on property X10 (the outparcel). B
did not make any payment on the loan in connection
with the lien release.
(2) Analysis.
(i) Under § 1.860G–2(a)(8), R’s release of the
lien on property X10 causes the loan to cease to be a
qualified mortgage unless the release takes place in a
transaction that satisfies either paragraph (a)(8)(i) or
paragraph (a)(8)(ii) of § 1.860G–2. The lien release
on property X10 does not satisfy § 1.860G–2(a)(8)(ii)
because it is not pursuant to a defeasance. The lien
release on property X10 satisfies § 1.860G–2(a)(8)(i)
only if the transaction in which it occurs meets the
requirements of both § 1.860G–2(a)(8)(i)(A) and
§ 1.860G–2(a)(8)(i)(B).
(ii) The transaction in which the lien was released
resulted from the exercise of an option that is unilateral within the meaning of § 1.1001–3(c)(3). Thus,
the transaction is not a significant modification as defined in § 1.860G–2(b)(2) and therefore is described
in § 1.860G–2(a)(8)(i)(A). In addition, however, to
satisfy § 1.860G–2(a)(8)(i)(B), the loan must continue to be principally secured by an interest in real
property as determined by § 1.860G–2(b)(7).
(iii) The release of the lien on X does not satisfy
10
the 80-percent test in § 1.860G–2(b)(7)(ii) or the alternative test in § 1.860G–2(b)(7)(iii).
(iv) The unilateral right to release the lien on
property X without paying down the loan is not a
10
grandfathered transaction described in section 5.02
of this revenue procedure because B issued the loan
after December 6, 2010.
(v) The release of the lien on property X10 is
within the scope of section 5.03 of this revenue
procedure only if it is pursuant to a “qualified paydown transaction.” Under the loan documents, the
allocated loan amount of property X10 may be zero,
but that amount does not satisfy section 5.04(2) of
this revenue procedure. Although property X10 was
assigned no value for underwriting purposes, the servicer knew or had reason to know that, at origination,
it had a value greater than $0. Therefore, the amount
required by section 5.04(2) of this revenue procedure
is greater than zero.
(vi) Because the transaction does not meet
the requirements either of section 5 of this revenue procedure or of § 1.860G–2(b)(7)(ii)-(iii),
§ 1.860G–2(a)(8)(i)(B) is not satisfied, and
§ 1.860G-(a)(8) causes the loan to cease being a qualified mortgage on the date that the lien is released.

2010–36 I.R.B.

SECTION 8. EFFECTIVE DATE
This revenue procedure applies to releases of liens on interests in real property
securing mortgage loans held by REMICs
that are effected on or after September 16,
2009.
SECTION 9. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Richard LaFalce of the Office of Associate Chief Counsel (Financial
Institutions and Products). For further
information, contact Mr. LaFalce at (202)
622–3930 (not a toll-free call).

26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of
correct tax liability.
(Also Part I, §§ 301.7701–1, 301.7701–2,
301.7701–3.)

Rev. Proc. 2010–32
SECTION 1. PURPOSE
The Treasury Department and the Internal Revenue Service (IRS) have become aware that taxpayers are concerned
about the validity of elections made by
certain foreign eligible entities under
§ 301.7701–3(c) of the Procedure and Administration Regulations to be classified
for federal tax purposes as a partnership or
disregarded as an entity separate from its
owner (a disregarded entity). The Treasury
Department and IRS understand that these
concerns arise due to uncertainty regarding
the number of owners for federal tax purposes of the foreign eligible entity on the
effective date of the election. To alleviate

320

these concerns and simplify tax administration, this revenue procedure provides
that, if the requirements of this revenue
procedure are satisfied, the IRS will treat
an election under § 301.7701–3(c) to
classify a foreign eligible entity that is a
qualified entity (as defined in section 3.02
of this revenue procedure) as a partnership
or disregarded entity as an election to be
treated as a partnership or disregarded
entity (as appropriate) rather than as an
association taxable as a corporation.
SECTION 2. BACKGROUND
.01 Section 301.7701–1(a)(1) states that
the Internal Revenue Code (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.
.02 Section 301.7701–1(b) provides
that 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
Code provides for special treatment of that
organization.
.03 Section 301.7701–2(a) defines the
term “business entity” as 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 (“a disregarded
entity”)) that is not properly classified as a
trust under § 301.7701–4 or otherwise subject to special treatment under the 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 classi-

September 7, 2010

fied 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.
.04 Section 301.7701–3(a) provides
that 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. 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. Elections
are necessary only if an eligible entity
does not want its default classification or
if an eligible entity chooses to change its
classification.
.05 Section 301.7701–3(b)(2)(i) provides that, except for certain existing
entities described in § 301.7701–3(b)(3),
unless a foreign eligible entity elects otherwise, the 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 member that does not have limited
liability.
.06 Section 301.7701–3(c)(1)(i) provides that an eligible entity may elect to
be classified other than as provided under
§ 301.7701–3(b) by filing Form 8832,
Entity Classification Election, with the
appropriate IRS Service Center. Under
§ 301.7701–3(c)(1)(iii), this election 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 cannot be more than 75 days
prior to the date on which the election is
filed and cannot be more than 12 months
after the date on which the election is filed.
.07 Section 301.7701–3(c)(1)(ii) provides that an eligible entity required to file
a federal tax or information return for the
taxable year for which an election is made
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

September 7, 2010

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.
.08 Section 301.7701–3(c)(1)(iv) provides in part that, 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 60 months succeeding the effective date of the election.
An election by a newly formed eligible
entity that is effective on the date of formation is not considered a change for
purposes of this paragraph (c)(1)(iv).
.09 Section 301.7701–3(c)(2)(i) provides that an election made under
§301.7701–3(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.
SECTION 3. SCOPE
.01 In General. This revenue procedure
provides guidance on the classification for
federal tax purposes of a business entity
that is a qualified entity (as defined in section 3.02 of this revenue procedure) and is
in lieu of the letter ruling process ordinarily used to obtain relief for a late change
of entity classification election filed pursuant to §§ 301.7701–3(c), 301.9100–1,
and 301.9100–3. Accordingly, user fees
do not apply to corrective actions under
this revenue procedure.
.02 Qualified Entity. For purpose of this
revenue procedure, a business entity is a
“qualified entity” if the following conditions are satisfied:
(1) The business entity is an eligible
entity under § 301.7701–3(a);
(2) The business entity is foreign under § 301.7701–5(a);
(3) The classification of the business entity, either by default under
§ 301.7701–3(b)(2)(i)(B) for a newly
formed or newly relevant eligible entity, or
by election under § 301.7701–3(c) for an

321

existing relevant entity, would be or was
an association taxable as a corporation;
(4) As
permitted
under
§301.7701–3(c), the business entity filed
an otherwise valid Form 8832 electing to
be treated for federal tax purposes,
(a) As a partnership based on the
reasonable assumption that it had two or
more owners as of the effective date of the
election; or
(b) As a disregarded entity based
on the reasonable assumption that it had a
single owner as of the effective date of the
election;
(5) For federal tax purposes, either:
(a) The business entity and its actual and purported owners (or owner) have
treated the entity consistently with the
election on the otherwise valid Form 8832
on all filed information and tax returns; or
(b) No information or tax returns
have been required to be filed since the
effective date for the election made on the
otherwise valid Form 8832; and
(6) The period of limitations on assessments (as established under section
6501(a) of the Code) has not ended for
any taxable year of the business entity or
its actual and purported owners (or owner)
affected by the election made on the otherwise valid Form 8832.
.03 Entities That Fail to Qualify for Relief Under This Revenue Procedure.
A business entity that does not qualify for relief under this revenue procedure
may request relief through the letter ruling process in accordance with Rev. Proc.
2010–1, 2010–1 I.R.B. 1 (or its successor).
SECTION 4. APPLICATION
.01 If a qualified entity files an otherwise valid Form 8832 to be classified as a
partnership for federal tax purposes but it
is later determined that the qualified entity
had a single owner for federal tax purposes
as of the effective date of the election, the
IRS will treat the Form 8832 as an election
to classify the qualified entity as a disregarded entity for federal tax purposes provided that:
(1) The qualified entity’s actual single
owner and purported owners as of the effective date of the election file original or
amended returns consistent with the treatment of the entity as a disregarded entity
for any taxable year that would have been
affected if the election had been made to

2010–36 I.R.B.

treat the qualified entity as a disregarded
entity for federal tax purposes;
(2) All required amended returns are
filed before the close of the period of limitations on assessments under § 6501(a) for
any relevant taxable year; and
(3) A corrected Form 8832 is filed
with the appropriate Internal Revenue
Service Center and a copy of the corrected Form 8832 is attached to the
single owner’s amended return for the
taxable year during which the original
election was made as required under
§ 301.7701–3(c)(1)(ii). The statement
“FILED PURSUANT TO REVENUE
PROCEDURE 2010–32” must be included across the top of the corrected
Form 8832. Additionally, the corrected
Form 8832 must satisfy the requirements
of § 301.7701–3(c)(2)(i).
.02 If a qualified entity files an otherwise valid Form 8832 electing to be classified as a disregarded entity for federal tax
purposes but it is later determined that the
qualified entity had two or more owners

2010–36 I.R.B.

for federal tax purposes as of the effective
date of the election, the IRS will treat the
Form 8832 as an election to classify the
qualified entity as a partnership for federal
tax purposes provided that:
(1) The qualified entity files information returns and its actual owners file original or amended returns consistent with
the treatment of the entity as a partnership
for any taxable year that would have been
affected if the original election had been
made to treat the qualified entity as a partnership for federal tax purposes;
(2) All required information and
amended returns are filed before the close
of the period of limitations on assessments
under § 6501(a) for the relevant taxable
year; and
(3) A corrected Form 8832 is filed
with the appropriate Internal Revenue Service Center and a copy of the corrected
Form 8832 is attached to the owners’
amended returns for the taxable year during which the original election was made
as required under § 301.7701–3(c)(1)(ii).

322

The statement “FILED PURSUANT TO
REVENUE PROCEDURE 2010–32”
must be included across the top of the
corrected Form 8832. Additionally, the
corrected Form 8832 must satisfy the requirements of § 301.7701–3(c)(2)(i).
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective on
September 7, 2010. Any qualified entity
that meets the requirements of this revenue
procedure as of September 7, 2010, may
seek relief under this revenue procedure.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Bryan A. Rimmke of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this revenue
procedure, contact Mr. Rimmke at (202)
622–3050 (not a toll-free call).

September 7, 2010