Fine-tuning the check-the-box regime.

On August 21, 1996, Tax Executives Institute testified at a public hearing sponsored by the Internal Revenue Service on proposed regulations under section 7701 of the Internal Revenue Code, relating to the simplification of the Code's entity classification rules. The Institute's testimony was presented by Joseph S. Tann, Jr. of Ameritech Corporation, chair of the Institute's International Tax Committee, and highlights the position set forth in TEI's August 9, 1996, written comments on the proposed regulations, as well as TEI's earlier comments on the proposed "check-the-box" entity classification regime. (The Institute's comments are reprinted elsewhere in this issue. Mr. Tann's prepared statement is reprinted below.

Good morning. My name is Joseph S. Tann, Jr., and I am Manager of Tax Planning & Research for Ameritech Corporation. I am here today as Chair of the International Tax Committee for Tax Executives Institute, which represents tax professionals from the 2,700 largest companies in the United States and Canada.

Prefatory Comments

TEI commends the IRS for proposing a bold, elective approach to resolving the manner in which business entities are classified for tax purposes. The regulations provide an opportunity for clarity, certainty, and simplicity without significant technical compromise or revenue loss.

TEI has previously expressed a strong belief for including foreign entities in any entity classification regulations. Taxpayers and the IRS need a classification system that yields clear and predictable results, and this need is not confined to the U.S. but extends beyond U.S. borders. As a practical matter business entities are generally able to obtain the tax-law result they want albeit at the cost of scarce taypayer and IRS resources better directed to other matters. TEI applauds the IRS for including foreign entities in the proposed regulations and urges the issuance of final regulations as soon as possible.

The remainder of my comments will focus on the Per Se List, which is unique to foreign entity classification, and the proposed effective date of the final regulations.

Per Se List

With respect to the Per Se List, I have an observation and a couple of comments. First my observation. While the Per Se List, which is the foreign analogue to state-law corporations, may serve to limit the reach of elective entity classification to current law flexibility, the certainty -- and related better resource allocation -- promised by this elective regime may not reach its full potential if certain practical issues are not timely addressed.

A sample of these issues include: Will the list be updated periodically? If not, is its underlying purpose of parity undermined? If so, how often and what criteria will be employed in determining classification? Will future additions or deletions be subject to a notice-and-comment period? What mechanism, if any, will be employed to monitor relevant changes in foreign law? Will transition rules accompany list changes to accommodate reliance on the list? TEI is prepared to assist with these issues and would welcome your invitation to do so.

The first of my comments relates to the special exception from Per Se status for certain foreign entities in existence on May 8 that claimed partnership sttus for all prior periods of such existence. The "all prior periods" requirement must be clarified to:

* First, permit otherwise qualifying entities that changed from corporation to partnership status prior to May 8 to continue to claim partnership status. We suggest that the Preamble treatment of existing entities as new entities under the relevancy test supports our view that a corporation-to-partnership conversion creates a new entity for purposes of the "all prior periods" requirement.

* Second, the scope of the requirement should be limited to those prior periods that are relevant for federal tax purposes.

Further clarification of the special exception is also required to apply the pass-through treatment to one-member entities permitted under current law.

My second comment relates to Per Se entities revised, after May 8 and before the date the regulations are final. The limbo in which these entities would otherwise be entrapped should be eliminated by crafting a transition rule akin to a binding contract exception. Under this exception, the date the entity's revised organizational documents are filed may be an appropriate "binding contract" date. For example, a Swiss S.A. that applies for a revision of its organizational documents to create a U.S. tax partnership on May 1, 1996 ane receives approval on May 30, 1996 should qualify for the special exception on the basis of the May 1, 1996 application.

Effective Date Transition Rule

My comments regarding the "all prior periods" requirement with respect to the Per Se List special exception applies equally to the transition rule permitting exisiting entities to continue to claim its pre-final regulations classification.

TEI's additional comments concerning the proposed regulations are set forth in our written submission. I would be pleased to respond to your questions.