Andrew Mitchel LLC

International Tax Blog - New and Interesting International Tax Issues

AM 2021-002 – Relevance & Check-the-Box Elections


Yesterday the IRS published AM 2021-002.  This AM concludes that a foreign eligible entity is classified pursuant to Treas. Reg. §301.7701-3(b)(2) (“the default classification provision”) during the period in which its classification is not relevant.  The AM states that this determination is made when the classification of the entity first becomes relevant, but the classification applies during the non-relevant period.

The AM also concludes that the 60-month limitation rule does not apply if the election to change the classification is effective on the first date the classification is relevant.

The example in the AM dealt with an entity (“X”) whose default classification was flow-thru (partnership or disregarded entity) because its owners did not have limited liability with respect to X.  X became relevant on “Date 3” in two different circumstances.  First, the owner became a US person on Date 3, causing X to be relevant for US tax purposes.  Second, the effective date of the check-the-box election was on Date 3, causing X to be relevant for US tax purposes.

In both scenarios, X elects to be classified as an association (i.e., a corporation).  The AM concludes that under both scenarios X was a flow-thru entity from the date it was organized until the close of the day before Date 3.  Then, at the beginning of Date 3, X was classified as a corporation.  The owner of X was treated as contributing the assets and liabilities of X to X in exchange for X stock immediately before the close of the day before Date 3.

This would appear to be good news for certain taxpayers who have engaged in pre-immigration tax planning by making check-the-box elections with effective dates prior to becoming US persons.  If the owners of the foreign entity had limited liability with respect to the entity, it would default to be classified as a corporation from the date it was formed until the date it became relevant.  An election to classify the entity as a flow-thru entity would make the entity relevant on the effective date of the election.  In addition, the election would trigger a deemed liquidation of the corporate entity on the date prior to the effective date of the election.  Such a deemed liquidation would trigger a step-up in the basis of appreciated assets that were deemed distributed.

Tags: 331/332 Liquidations, 7701-3 Check-the-Box Elections, Form 8832