SECTION 2. BACKGROUND

Section 5 of Rev. Proc. 2000–3 sets forth those areas under extensive study in which rulings or determination letters will not be issued until the Service resolves the issue through publication of a revenue ruling, revenue procedure, regulations, or otherwise.

Section 301.7701–1(a)(1) provides that whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the entity is recognized as an entity under local law.

Section 301.7701–1(a)(2) provides that a joint undertaking or other contractual arrangement may create a separate entity for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom. If such an entity is a business entity (i.e., is not a trust) with two or more members, the entity is classified for federal tax purposes either as a partnership or a corporation.

Section 1031(a)(1) provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. Sections 1031(a)(2)(B) and 1031(a)(2)(D) provide exceptions from the application of section 1031(a)(1) for stock and interests in a partnership, respectively.

The Service recently has become aware, in part through several requests for

advance rulings, that taxpayers are taking the position that certain arrangements where taxpayers acquire undivided fractional interests in real property do not constitute separate entities for federal tax purposes and therefore the fractional interests may be the subject of tax-free exchanges under section 1031(a)(1). The Service intends to study further the facts and circumstances relevant to the determination of whether such arrangements are separate entities for federal tax purposes.