More than two decades ago, the Service announced its intention to consider simplifying the entity classification rules in Notice 95-14. It stated:
“The Internal Revenue Service and the Treasury Department are considering simplifying the classification regulations to allow taxpayers to treat domestic unincorporated business organizations as partnerships or as associations on an elective basis. The Service and Treasury also are considering adopting similar rules for foreign business organizations. Comments are requested regarding this and other possible approaches to simplifying the regulations.”
The Service asked for public comments on simplification of entity tax classification. It scheduled a public hearing on the matter for July 20, 1995.
In May 1996, proposed entity classification regulations were issued by Treasury. About seven months later, on December 17, 1996, Treasury finalized the regulations. The regulations are found in Treasury Regulation Section 301.7701.
The regulations were clearly designed to accomplish the IRS’s stated goal – simplifying entity tax classification. The regulations, commonly referred to as the “Check-the-Box” regulations, successfully brought an end to much of the long existing battle between taxpayers and the Service over entity tax classification. The regulations generally became effective on January 1, 1997. In a little over a month from now, they will be 25-years old.
The regulations, despite judicial challenge (e.g., Littriello v. United States, 2005-USTC ¶50,385 (WD Ky. 2005), aff’d, 484 F3d 372 (6th Cir. 2007), cert. denied, 128 S. Ct. 1290 2008)), have persevered, making the entity classification landscape free of many tax authority challenges and providing taxpayers with some objectivity and more importantly, much needed certainty. That said, despite the simplification brought into the world of entity tax classification by the Check-the-Box regulations, for which tax practitioners applauded the government, several new hazards were created. Whether these new hazards were intentional or unintentional is subject to debate. Unfortunately, not all of these hazards are obvious to taxpayers and their advisors. If taxpayers and their advisors are not extremely careful in this area, disastrous unintended tax consequences may exist. Accordingly, a good understanding of the regulations and the consequences of making, not making or changing an entity tax classification decision is paramount.
Last month, I presented a White Paper that I authored on the regulations at the NYU 81st Institute on Federal Taxation in New York City, and I will be presenting it again for NYU in San Diego on November 17, 2022. The paper provides exhaustive coverage of the regulations and covers numerous nuances and traps that exist for unwary taxpayers and their advisors. An issue which is often overlooked by practitioners is whether using the regulations to change entity status for income tax purposes is always a good idea. While I discuss the issue in some detail in the paper, the sub-issue of whether a taxpayer should use the regulations to change the tax status of a limited liability company (“LLC”) taxed as a partnership to a corporation taxed under Subchapter S needs discussion. I explore that sub-issue below.
The NYU 76th Institute on Federal Taxation (IFT) is taking place in New York City on October 22-27, 2017, and in San Francisco on November 12-17, 2017. This year, I will be presenting my latest White Paper, The Built-in Gains Tax Revisited. My presentation will include a discussion about the history of the tax; application and impact of the tax; ways to avoid or potentially minimize the tax; the complexities of Code Section 1374 and the regulations promulgated thereunder; valuation issues; planning opportunities; traps that exist for the unwary; relevant cases and rulings; and practical tax practitioner guidance.
The IFT is one of the country's leading tax conferences, geared specifically for CPAs and attorneys who regularly are involved in federal tax matters. The speakers on our panel include some of the most preeminent tax attorneys in the United States, including Jerry August, Terry Cuff, Wells Hall, Karen Hawkins, Stephen Looney, Stephen Kuntz, Mark Peltz and Bobby Philpott. I am proud to be a part of IFT.
This will be my fifth year as an IFT presenter, and I am speaking as part of the Closely Held Business panel on October 26 (NYC) and November 16 (San Francisco). As in previous years, the IFT will cover a wide range of fascinating topics, including tax controversy, executive compensation and employee benefits, international taxation, corporate taxation, real estate taxation, partnership taxation, taxation of closely-held businesses, trusts and estates, and ethics.
I hope you will join us this year for what will be a terrific tax institute. Looking forward to seeing you in either New York or San Francisco!
View the complete agenda and register at the NYU 76th IFT website.
Please join me at the NYU Summer Institute in Taxation this July in New York City. This year, I will be presenting "Entity Classification – Another Look at the Check-the-Box Regulations" on Day 2 (July 27) of the Institute’s Advanced Income Tax and Wealth Planning Conference, where I will discuss recent developments, flexibility and planning opportunities created by the regulations, traps that exist for the unwary, and practical tax practitioner guidance.
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Larry J. Brant
Larry J. Brant is a Shareholder and the Chair of the Tax & Benefits practice group at Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.