SINGLE-MEMBER LLCS GAIN FEDERAL TAX BLESSING ON JANUARY 1

The IRS issued final entity-classification regulations on December 17. Popularly known as "check-the-box" regulations, this guidance from the Treasury Department and the IRS permits owners of an unincorporated entity to merely elect whether to be taxed as an "association taxable as corporation" or treated as a flow-through entity. The regulations become effective January 1, 1997.

The regulations revolutionize entity classification which has been governed for nearly forty years by arcane rules setting out a number of corporate characteristics. The existence of the corporate characteristics in a given entity was identified; then the factors were tallied. If there were more corporate characteristics present than absent, the entity was classified as an association taxable as a corporation.

The new rules assume that a noncorporate entity will be taxable as a partnership, or if singly owned, the existence of the entity is ignored. (Of course, publicly traded partnerships are still taxed as corporations.) A singly owned noncorporate entity such as an LLC is ignored and items of income, loss, deduction, and credit are attributed directly to the owner of the LLC.

The regulations identify certain foreign entities as noncorporate entities for these purposes and contemplate that the list of foreign entities will be changed from time to time by later pronouncements.

Source: T.D. 8697, Fed. Reg. ___ (12/18/96), containing amendments to Treas. Reg. sections 1.581-1 and -2,1.761-1, 301.6109-1, 301.7701-1 through -4, and -6. *