CCA 1032036: A China Business Trust may be an eligible business entity for classification purposes

Plain-English summary

Chief Counsel Advice discusses whether a China Business Trust is a business entity eligible to elect its federal tax classification. It explains that a business entity is an entity recognized for federal tax purposes that is not properly classified as a trust or subject to special treatment. The advice also quotes the regulation explaining that a trust formed to carry on a profit-making business may be classified as an association or partnership instead of an ordinary trust. It invites further discussion rather than stating a formal ruling.

Ruling snapshot

• Question: Is the China Business Trust a business entity eligible to elect its federal tax classification?
• Outcome: Advice given
• Key authorities: IRC § 7701; Treas. Reg. §§ 301.7701-2, 301.7701-4.

Full text (IRS public release)

ID: CCA-126848-10 Number: 201032036
Release Date: 8/13/2010
Office: ----------
UILC: 7701.02-00

From: ----------------
Sent: January 26, 2010 8:48 am
To: ------------------
Cc:
Subject: RE: A question regarding Disclosures to China (6105)

Here is some background on your question about whether the China Business Trust is a
Business entity eligible to elect its classification.

Section 301.7701-2(a) provides that a business entity is any entity recognized for
federal tax purposes that is not properly classified as a trust under Section 301.7701-4
or otherwise subject to special treatment.

Section 301.7701-4 provides:

(b) Business trusts. There are other arrangements which are known as trusts because
the legal title to property is conveyed to trustees for the benefit of beneficiaries, but
which are not classified as trusts for purposes of the Internal Revenue Code
because they are not simply arrangements to protect or conserve the property for
the beneficiaries. These trusts, which are often known as business or commercial
trusts, generally are created by the beneficiaries simply as a device to carry on a profit-
making business which normally would have been carried on through business
organizations that are classified as corporations or partnerships under the Internal
Revenue Code. However, the fact that the corpus of the trust is not supplied by the
beneficiaries is not sufficient reason in itself for classifying the arrangement as an
ordinary trust rather than as an association or partnership. The fact that any
organization is technically cast in the trust form, by conveying title to property to
trustees for the benefit of persons designated as beneficiaries, will not change
the real character of the organization if the organization is more properly
classified as a business entity under § 301.7701-2.

Call me when you get in and we can talk about this more.

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