Proposed entity classification regs. greatly simplify rules

Article Abstract:

The IRS has issued Proposed Regulations known as the check-the-box rules to provide clarification as to which organizations should be automatically classified as corporations. Under the present regulations, more specifically IRC Sec. 7701, a burdensome four-factor test based on the historical differences under state law between partnerships and corporations have to be used. However, with the introduction of Proposed Regulations 301.7701-1 up to 301.7701-3, there will no longer be a need for entities to take the four-factor test and to artificially mold their organizations to get the desired classification. According to the proposed regulations, an organization must first be determined if it is an entity for federal tax purposes before it is classified as a corporation or a partnership. The regulations cover foreign and domestic organizations, and include rules for single-member entities.

Corporations

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Partnership debt reduction need not result in income

Article Abstract:

Recent pronouncements of the IRS indicate that it has softened its stance on the mutual exclusivity of the two general types of exceptions to income recognition on the cancellation of debt (COD). These exceptions, which cover cases involving taxpayers that are bankrupt or insolvent and cases where debt reduction is equal to property price reduction, were allowed by Congress and the courts to help mitigate the harsh effects of COD income recognition. In its recent pronouncements, the IRS has veered away from its strict adherence to the mutual exclusivity principle and has allowed partnerships that are bankrupt or insolvent to avail of the purchase price reduction exception. Moreover, the IRS has also permitted the recognition of purchase price reduction exceptions outside the scope of Section 108(e)(5) so that it covers cases when debt is held from parties other than the original seller.

Finance, taxation, & monetary policy

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