CCA 1312033: a foreign entity's classification affected whether TEFRA applied

Plain-English summary

Chief Counsel advised that filing Form 1120F did not by itself establish that a foreign partner was treated as a C corporation for TEFRA purposes. Under the check-the-box regulations, an eligible foreign entity could elect to be classified as a partnership, corporation, or disregarded entity. If it made no election, default rules applied based on its ownership and liability characteristics. The agent needed to determine whether the entity filed Form 8832 and what classification it elected to decide whether the partnership was subject to TEFRA.

Ruling snapshot

• Question: How did a foreign entity's check-the-box classification affect whether TEFRA procedures applied?
• Outcome: Advice given, the entity's election or default classification determined the TEFRA result.
• Key authorities: IRC § 7701; check-the-box regulations; Forms 8832, 1065, and 1120F

Full text (IRS public release)

ID: CCA_2012032311223038 Number: 201312033
Release Date: 3/22/2013
Office: -----------
UILC: 7701.02-00

From: ---------------
Sent: Friday, March 23, 2012 11:23:13 AM
To: ----------------------
Cc: ----------------------------------------------------------------
Subject: RE: Check the Box Regulations and TEFRA

Hi all

The discussion below is correct, the only point I may take issue with is the statement at
the end that "It should be noted that most foreign entities would be considered a
corporation in the regulations and would be considered a c corporation for TEFRA
determination (NOT eligible to check the box)." ------------------ would know better than
I would about the number of foreign entities that would default into a partnership or DE,
but I wouldn't think it is not insignificant.

From: ----------------------------------------------------------------
Sent: Thursday, March 22, 2012 12:59 PM
To: -------------------
Cc: -------------------------------------------
Subject: Check the Box Regulations and TEFRA

With the creation of the check the box regulations, the filing of the 1120F as a partner in
the partnership does not guarantee that the partner will be treated as a C corporation for
purposes of TEFRA. The final "check-the-box" regulations became effective January 1,
1997. The regulations replace the existing rules for classifying business organizations
with a simpler elective classification system.

In general, eligible entities that are not corporations, as defined in the regulations, may
elect to be treated for federal tax purposes as a partnership, a corporation or an entity
disregarded separate from its owner. In general eligible entities include Limited Liability
Companies and Partnerships. If an eligible entity does not elect an entity classification
then default rules take affect.

Unless an election is made on Form 8832, a Foreign “Eligible” Entity defaults as follows:

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1. A partnership if it has two or more members and at least one member does not have
limited liability. In this situation, you would expect the entity to file a Form 1065 .

2. An association taxable as a corporation if all members have limited liability. In this
   situation, the entity may file a Form 1120F (Not TEFRA unless another partner causes
   failure of small partnership election)
3. Disregarded as an entity separate from its owner if it has a single owner that does not
   have limited liability. In this situation, the entity may file a Form 1120F. (TEFRA would
   apply)

To determine whether a partner, of a partnership, filing as an 1120F triggers TEFRA,
the agent must determine whether the entity made an entity classification election by
filing Form 8832. If a Form 8832 is filed and the entity elected to be treated as a
corporation, then TEFRA is not triggered, unless of course another partner causes the
partnership to fail the small partnership exception. If the 1120F elected to be
disregarded for Federal Tax purposes or to be treated as a partnership, the partnership
in question will be subject to the TEFRA procedures.

It should be noted that most foreign entities would be considered a corporation in the
regulations and would be considered a c corporation for TEFRA determination (NOT
eligible to check the box). Default rules should only take affect if no election is made
and the entity filed a non corporate return without electing entity classification.

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