Final check-the-box rules terminate certain grandfathered status.

• Author: Maddux, Kelly Pedigo

Treasury issued final regulations in October 2003 (TD 9093) to amend the check-the-box rules under Regs. Secs. 301.7701-2 and -3. The changes revoke the grandfathered partnership status of otherwise "per se" entities that undergo a 50% ownership change after Nov. 29, 1999.

The final regulations also clarify when an eligible entity is considered "relevant" for purposes of applying the "60-month rule," providing that a foreign eligible entity for which an entity classification election is made and which is not otherwise relevant for Federal tax purposes is deemed relevant only on the effective date specified on Form 8832, Entity Classification Election. In addition, the new regulations modify the classification rules for certain foreign eligible entities that have never been relevant or are no longer relevant for Federal tax purposes.

The regulations finalize 1999 proposed regulations and adopt them without substantive change, except that Treasury decided to withdraw Prop. Regs. Sec. 301.7701-3(h) (as announced in Notice 2003-46). These changes were effective Oct. 22, 2003.

Grandfathered Foreign Per Se Entities

The check-the-box regulations allow certain foreign business entities that (1) were in existence and treated as partnerships before the check-the-box regulations were proposed and (2) would otherwise be classified as per se corporations under Regs. Sec. 301.7701-2(b)(8)(i), to remain classified as partnerships if the conditions in Regs. Sec. 301.77012(d)(1) are met. These roles also provide that the occurrence of certain events results in a termination of grandfathered status; see Regs. Sec. 301.7701-2(d)(3)(i). According to Regs. Sec. 301.77012(d)(3)(i)(D), an entity's grandfathered status also terminates on the date in which one or more persons who were not owners of the entity on Nov. 29, 1999 own, in the aggregate, a 50% or greater interest in the entity. Because this rule was not applicable until Oct. 22, 2003, if persons that were not owners of a grandfathered entity on Nov. 29, 1999, obtained a greater-than-50% ownership interest in one between Nov. 29, 1999, and Oct. 22, 2003, the entity's grandfathered status did not cease until the later date.

Relevance of Classification

Regs. Sec. 301.7701-3(d)(3) provides that, if the classification of a foreign eligible...