Magazine article The CPA Journal

Treasury Proposes an Entity Classification Bombshell

Magazine article The CPA Journal

Treasury Proposes an Entity Classification Bombshell

Article excerpt

On March 29, the Department of the Treasury released a notice soliciting public opinions about a proposal to replace the current rules used to classify unincorporated entities. The proposal would simply allow any unincorporated entity (such as a partnership or limited liability company) with two or more owners to elect whether to be taxed as a corporation or a partnership.

The proposal would replace the 4O-year old regulations issued under IRC Sec. 7701 that define the difference between partnerships and corporations based on the presence of three or more of the following factors: limited liability, free transferability of ownership interests, centralized management, and continuity of life. The notice acknowledges this approach was based on the historical differences between corporations and partnerships, which are significantly eroded with the introduction of LLCs and LLPs.

The proposal would allow entities to prospectively elect their tax classification. Nonelecting entities would be treated as partnerships until the election is made. A change in election would be treated as a corporate liquidation followed by contributions to a partnership or a partnership liquidation followed by an incorporation, depending on which direction the new election goes, with all the tax effects incumbent in such a change. …

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