Is all calm, now that check-the-box is final?

• Author: Benson, David M.
• Position: Entity classification tax regulations

Representatives of the AICPA, on request from Kenneth J. Kies, Chief of Staff of the Joint Committee on Taxation (JCT), met on Dec. 11, 1996, with congressional staffers and a Treasury official to discuss, among other things, the overall impact of the entity classification regulations (finalized on Dec. 19, 1996) known as "check-the-box." Although most practitioners and affected taxpayers are thrilled by this simplification development, some doubt remains as to whether this is the last word on the subject.

While there is reason to rejoice at the IRS's actions, a few practitioners may continue to feel that, due to questions that have been raised as to the legitimacy of the regulations, there remains a burdensome obligation (for both practitioners and their clients) to continue to structure an entity's organizational documents and activities in such a way that they would meet the old Morrissey and Kintner standards when Federal passthrough treatment is desired--even though the default classification under the new regulations might allow partnership (or branch) status.

In his letter requesting the meeting with the AICPA, Mr. Kies indicated that the JCT staff had ". . . undertaken a review of the recent developments...governing entity classification and taxation of the income of partnerships." He noted that "[o]ver the past few years, the tax rules governing the form in which business income is taxed have been changed significantly by developments other than Federal tax legislation." In the meeting, Mr. Kies stated his opinion that, while the check-the-box rules could be viewed as a natural consequence of the IRS's position on limited liability companies (LLCs), the IRS should have consulted with Congress before issuing the string of LLC-related rulings, and that the Treasury Department and the IRS "made a mistake" by not consulting more with Congress before going ahead with the new regulations. He clearly questioned whether or not Treasury had legal authority to promote such a change in entity classification through regulations. The AICPA noted that this was not a significant concern of its members, but urged Mr. Kies to address the issue quickly if the JCT believes there is a problem. Informally, Mr. Kies also questioned the validity of the partnership anti-abuse regulations issued under Sec. 701.

Further, the JCT seemed to fear that the two-tier system of corporate taxation was unraveling due to the increased ease in achieving partnership...