Disregarded entities and tax liabilities.

The IRS has issued proposed regulations (REG-106681-02) on qualified real estate investment trust (REIT) subsidiaries, qualified subchapter S subsidiaries (QSubs) and single-owner eligible entities disregarded as entities separate from their owners. The regulations would clarify that these disregarded entities are to be treated as separate entities for purposes of any Federal tax liability for which they may be liable.

Background: Under the Code and regulations, three types of entities may be disregarded as separate from their owners: qualified REIT subsidiaries (under Sec. 856(i)(2)), QSubs (under Sec. 1361(b)(3)(B)) and single-owner eligible entities (under Regs. Sec. 301.7701-3(a)). A disregarded entity generally is not liable for the Federal tax liabilities of its owner for tax periods during which it is disregarded. However, a disregarded entity may be liable for Federal taxes for tax periods during which it was not disregarded or because it is the successor or transferee of a taxable entity.

Proposed rules: The proposed regulations would clarify that a disregarded entity liable for Federal taxes will be treated as an entity separate from its owner for purposes of those liabilities. As a result, an assessment could be made against the disregarded entity; its assets could be subject to lien and levy; and it could consent to extend the period of limitations on assessment. Also, a disregarded entity could be entitled to a refund or credit. The regulations would apply after March 31, 2004.