AICPA comments on "check-the-box" prop. regs.

• Author: Green, Colleen M.
• Position: IRS proposed regulations

At an IRS hearing, the AICPA expressed concerns about proposed regulations issued in November 1999 under Sec. 7701, imposing new limits on the "check-the-box" regime.

The proposed regulations, which focus on certain transactions occurring before or after a foreign entity elects to reclassify its status as disregarded, generally would operate to invalidate this election for tax purposes when an "extraordinary transaction" (such as a sale of an ownership interest), occurs either one day before or 12 months after the election. The IRS issued these regulations in response to perceived abuses occurring under the income source rules (Secs. 861-865), the foreign tax credit limit (Sec. 904), the disposition of ownership interests under Subpart F (Secs. 951-964) and outbound transfers (Sec. 367).

New Rules Unnecessary

The AICPA views these regulations as an attempt "to modify the generally applicable entity classification rules in order to address perceived problems relating to specific substantive rules." Because the Service already has a battery of anti-abuse rules at its disposal, the Code's relevant substantive provisions should be changed if additional measures are needed to combat inappropriate use of the check-the-box rules. As an example, the Sec. 865 regulations contain anti-abuse rules for losses, suggesting that the proposed regulations would be redundant.

According to the AICPA, the proposed regulations undermine the objectives of the original check-the-box regime of simplicity, certainty and administrative ease. For example, a taxpayer does not have to make a check-the-box election to achieve the same results by undertaking formal transactions and incurring additional legal, commercial and foreign tax costs. Consequently, these regulations appear to be in direct conflict with the underlying rationale of the check-the-box regime, essentially forcing taxpayers to divert resources toward unproductive activities in an effort to avoid punitive rules.

Given the ever-changing business environment, these regulations could create uncertainty. For instance, top management of a company could make restructuring decisions without consulting their tax advisers. Business reasons would clearly dominate a decision to divest ownership of a lower-tier entity, yet the transaction could be subject to punitive rules if a check-the-box election had been recently made. Thus, an election by a foreign eligible entity to be disregarded would not be final and...