SECTION 2. BACKGROUND

Section 301.7701–3 of the Procedure and Administrative Regulations allows an eligible entity to elect to be classified as an association taxable as a corporation for federal tax purposes. Under § 301.7701–3(a), an eligible entity is a business entity not classified as a corporation under § 301.7701–2(b)(1), (3), (4), (5), (6), (7), or (8). A state law partnership is an eligible entity. Consequently, a state law limited partnership may elect to be classified as an association taxable as a corporation for federal tax purposes.

Section 1362(a) of the Internal Revenue Code allows an eligible corporation to elect to be taxable as an S corporation. For a corporation to be eligible to elect under § 1362(a), the corporation must be a small business corporation. Section 1361(b)(1)(D) requires that a small business corporation have no more than a single class of stock. A general partnership

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interest includes rights and obligations not included in a limited partnership interest. If these obligations and rights result in general and limited partnership interests in a limited partnership having nonpro rata distribution rights, such interests are different classes of stock for purposes of § 1361(b)(1)(D).

Given the factual difficulties involved in determining whether the differences between the rights and obligations of general and limited partnership interests give rise to a second class of stock, the issue of whether a state law limited partnership complies with the single class of stock requirement is under extensive study. Accordingly, advanced rulings will not be provided on the issue until the Service resolves it through publication of a revenue ruling, revenue procedure, regulations, or otherwise.