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Introduction

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Internal Revenue Bulletin 2003-48 · 2026-10-03 edition · updated 2026-10-04 · United States

Section 171.—Amortizable for use by department stores employing 739, for appropriate application to inBond Premium the retail inventory and last-in, first-out ventories of department stores employing

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 472.—Last-in, First-out Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department stores. The September 2003 Bureau of Labor Statistics price indexes are accepted

for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, September 30, 2003.

Rev. Rul. 2003–121

The following Department Store Inventory Price Indexes for September 2003 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B.

739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, September 30, 2003.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups - soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups Sept. 2002 Sept. 2003

Percent Change from Sept. 2002

to Sept. 2003 ¹

  1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484.6 482.6 -0.4

  2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574.2 559.7 -2.5

  3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658.0 651.9 -0.9

  4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 886.9 847.3 -4.5

  5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618.5 611.8 -1.1

  6. Women’s Underwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548.2 517.8 -5.5

  7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343.2 355.5 3.6

  8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . 549.2 584.6 6.4

  9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . 385.7 377.3 -2.2

  10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561.1 542.3 -3.4

  11. Men’s Furnishings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593.8 579.8 -2.4

  12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446.2 448.2 0.4

  13. Jewelry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 896.7 875.9 -2.3

  14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809.1 788.2 -2.6

  15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 971.4 980.4 0.9

  16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625.9 620.7 -0.8

  17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.1 588.6 -2.1

  18. Housewares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748.9 717.2 -4.2

  19. Major Appliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222.2 210.3 -5.4

  20. Radio and Television. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.7 44.7 -6.3

  21. Recreation and Education 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.4 81.9 -4.1

  22. Home Improvements 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.9 123.9 -0.8

  23. Automotive Accessories 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.0 111.7 -0.3

Groups 1–15: Soft Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578.4 568.8 -1.7

Groups 16–20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407.9 391.4 -4.0

2003-48 I.R.B. 1153 December 1, 2003

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups Sept. 2002 Sept. 2003

Percent Change from Sept. 2002

to Sept. 2003 ¹

Groups 21–23: Misc. Goods 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96.0 93.5 -2.6

Store Total 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515.8 504.3 -2.2

1Absence of a minus sign before the percentage change in this column signifies a price increase. 2Indexes on a January 1986 = 100 base. 3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco and contract departments.

DRAFTING INFORMATION

The principal author of this revenue ruling is Denise Carmichael of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Carmichael at (202) 622–6888 (not a toll-free call).

Section 702.—Income and Credits of Partner

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 704.—Partner’s Distributive Share

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 706.—Taxable Years of Partner and Partnership

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 708.—Continuation of Partnership

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 812.—Definition of Company’s Share and Policyholders’ Share

Life insurance companies; computa- tion of required interest. This ruling provides that a life insurance company calculates “required interest” under section 812(b)(2)(A) of the Code using the mean of the amount of the reserve at the beginning of the taxable year and the amount of the reserve at the end of such year.

Rev. Rul. 2003–120

ISSUE

What is the amount of reserves used to calculate “required interest” under section 812(b)(2)(A) of the Internal Revenue Code?

FACTS

IC is a life insurance company subject to tax under Part I of subchapter L of the Internal Revenue Code (§§ 801–818). For purposes of determining its life insurance company taxable income, IC computes the amount of the section 807(c)(1) life insurance reserves under section 807(d)(2), using the greater of the applicable Federal interest rate or the prevailing State assumed rate. For purposes of this revenue ruling,

assume that the applicable Federal interest rate for the contracts is 6.0% and that the applicable Federal interest rate exceeds the prevailing State assumed rate for the contracts.

On January 1, 200x, the opening balance of IC’s life insurance reserves (determined under section 807(d)(2)) equaled $1,000,000x. On December 31, 200x, the closing balance of IC’s life insurance reserves for the contracts totaled $1,224,434x.

LAW AND ANALYSIS

To prevent a life insurance company from realizing a double benefit for tax-preferred investment income (tax-exempt interest and dividends providing a dividendsreceived deduction) used to fund the company’s liabilities to policyholders, sections 807 and 805 require the company to adjust certain income and deduction items for the policyholders’ share of such tax preferred income.

To determine the increase or decrease in reserves for a taxable year, a life insurance company reduces its end-of-year reserves by the “policyholders’ share” of tax-exempt interest. Section 807(a) and (b). The company’s deduction under section 805(a)(2) for a net increase in reserves, therefore, is reduced by the policyholders’ share of tax exempt interest. Conversely, if there is a net decrease in reserves, the company’s gross income under section 803(a)(2) is increased by the policyholders’ share of tax exempt interest. The adjustments effectively deny the company any exclusion for the policyholders’ share of tax-exempt interest.

December 1, 2003 1154 2003-48 I.R.B.

Section 805(a)(4) prevents a double benefit with regard to dividends eligible for the dividends-received deduction by limiting a life insurance company’s deduction for dividends (other than “100 percent dividends” as defined in section 805(a)(4)(C)) received by the company. The deduction is limited to the “company’s share” of the dividends received. See section 805(a)(4)(A)(ii). No dividends-received deduction is allowed for the policyholders’ share of dividends received.

Section 812 provides the mechanism to calculate the life insurance company’s and policyholders’ respective shares of net investment income. For purposes of section 805(a)(4), the company’s share is the percentage obtained by dividing (1) the company’s share of the net investment income for the taxable year, by (2) the net investment income for the year. Section 812(a)(1). The policyholders’ share is the excess of 100 percent over the company’s percentage share. Section 812(a)(2).

The first step in applying section 812 is to determine, under section 812(d), the amount of the life insurance company’s “gross investment income” for the taxable year. Next, “net investment income” for the taxable year is calculated under section 812(c). Except as otherwise provided in section 812(c)(2) with regard to income attributable to assets held in a segregated asset account for variable contracts, the net investment income for a taxable year equals 90% of gross investment income for the year. Under section 812(b)(1), the life insurance company’s share of net investment income is the excess (if any) of the net investment income for the taxable year over the sum of the “policy interest” for the taxable year and the “gross investment income’s proportionate share of policyholder dividends” for the taxable year. The policyholders’ share of net investment income, therefore, is the portion of net investment income equal to the lesser of (1) the sum of policy interest and gross investment income’s proportionate share of policyholder dividends for the taxable year or (2) the total net investment income.

Section 812(b)(2) provides that policy interest equals the sum of—

(A) required interest (at the greater of the prevailing State assumed rate or the applicable Federal interest rate) on section 807(c) reserves (other than unearned premiums and unpaid losses under section 807(c)(2)); (B) the deductible portion of excess interest;

(C) the deductible portion of any amount (whether or not a policyholder dividend) that is not taken into account under section 812(b)(2)(A) or (B) and that is credited either to (i) a policyholder’s fund under a pension plan contract for employees (other than retired employees), or (ii) a deferred annuity contract before the annuity stating date; and

(D) interest on amounts left on deposit with the company.

If neither the prevailing State assumed interest rate nor the applicable Federal interest rate is used in determining the reserve for a contract, required interest is calculated using another appropriate interest rate.

Although required interest is a significant component of policy interest, section 812(b)(2) provides no guidance (other than the interest rates) regarding the method of calculating required interest. The legislative history that accompanied the enactment of section 812 in 1984, however, states that “the formula used for purposes of determining the policyholders’ share is based generally on the proration formula used under prior law in computing gain or loss from operations ( i.e., by reference to ‘required interest’).” See H. Rep. No. 432, Pt. 2, 98 th Cong., 2d Sess. 1430–31 (1984); S. Prt. 169, Vol. I, 98 th Cong. 2d Sess. 557–59 (1984).

Under section 809(a)(2) of pre-1984 law, a life insurance company’s required interest for any taxable year equaled the sum of the products obtained by multiplying (i) each rate of interest required, or assumed by the taxpayer, in calculating the reserves described in section 810(c) of pre-1984 law [now section 807(c)], by (ii) the means of the amount of the reserves

computed at that rate at the beginning and the end of the taxable year. See also section 1.809–2(d) of the Income Tax Regulations. 1 As the formula in section 812 is based generally on the proration formula used under former section 809(a)(2), required interest under section 812(b)(2)(A) is calculated using mean reserves. Accordingly, required interest under section 812(b)(2)(A) equals the sum of products obtained by multiplying (i) the mean of the beginning-of-year and end-of-year reserves under section 807(c)(1)–(6) (other than section 807(c)(2)) by (ii) the applicable interest rate (the prevailing State assumed interest rate, the applicable Federal interest rate, or another appropriate interest rate).

The opening balance of IC’s section 807(c)(1) life insurance reserves is $1,000,000x and the closing balance of the reserves is $1,224,434x. The mean of the reserves is $1,112,217x . Therefore, the required interest on the life insurance reserves is $66,733x [$1,112,217x 6% = $66,733x].

HOLDING

Required interest under § 812(b)(2)(A) is calculated using the mean of the amount of the reserve at the beginning of the taxable year and the amount of the reserve at the end of such year.

DRAFTING INFORMATION

The principal author of this revenue ruling is Stephen Hooe of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Mr. Hooe at (202) 622–7595 (not a toll-free call).

Section 851.—Definition of Regulated Investment Company

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

1 If provisions of pre-1984 law are incorporated into a current life insurance company tax provision, the regulations under the pre-1984 law may serve as an interpretative guide to the provision in the absence of any contrary guidance in the legislative history. See H. Rep. 432, at 1401; S. Prt. 169, at 524.

2003-48 I.R.B. 1155 December 1, 2003

Section 852.—Taxation of Regulated Investment Companies and Their Shareholders

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 1275.—Other Definitions and Special Rules

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 6001.—Notice or Regulations Requiring Records, Statements, and Special Returns

26 CFR 1.706–1: Taxable Years of partner and part- nership.

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 6031.—Return of Partnership Income

26 CFR 1.6031(a)–1T: Return of partnership income.

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 6229.—Period of Limitations for Making Assessments

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 6231.—Definitions and Special Rules

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 6233.—Extension to Entities Filing Partnership Returns, etc.

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 6698.—Failure to File Partnership Return

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 6722.—Failure to Furnish Correct Payee Statements

May a partner in a partnership that invests in taxexempt obligations make monthly allocations of partnership items under section 706(a)? See Rev. Proc. 2003-84, page 1159.

Section 7701.—Definitions

26 CFR 301.7701–3: Classification of certain busi- ness entities.

T.D. 9093

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Special Rules for Certain Foreign Business Entities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations providing rules regarding the application of the general entity classification rules to certain foreign business entities, in particular providing a rule that terminates the grandfathered status of certain foreign business entities upon a 50 percent change of ownership and a special rule that clarifies and further modifies the rules relating to whether the classification of certain foreign eligible entities is relevant for Federal tax purposes.

EFFECTIVE DATES: These regulations are effective as of October 22, 2003.

FOR FURTHER INFORMATION CONTACT: Ronald M. Gootzeit, (202) 622–3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On December 18, 1996, Treasury and IRS published in the Federal Reg- ister (T.D. 8697, 1997–1 C.B. 215 [61 FR 66584]) final regulations relating to the classification of business entities under section 7701 (check-the-box regulations). On November 29, 1999, Treasury and the IRS published in the Federal Register a notice of proposed rulemaking (REG–110385–99, 1999–2 C.B. 670 [64 FR 66591] proposing to amend §§301.7701–2 and 301.7701–3 of the current check-the-box regulations (proposed regulations). A public hearing on the proposed regulations was held on January 31, 2000. In addition, written comments were received. Most of the written and oral comments related to proposed §301.7701–3(h), which provided a rule that would have operated to change the classification of a foreign disregarded entity if a so-called “extraordinary transaction” occurred one day before or within one year after the election to treat the entity as disregarded. On June 26, 2003, Treasury and the IRS issued Notice 2003–46, 2003–28 I.R.B. 53, announcing the intention to withdraw this extraordinary transaction rule of proposed §301.7701–3(h) and to finalize the remaining provisions of the proposed regulations.

With the publication of a notice of withdrawal (REG-110385–99, published as Announcement 2003–78) elsewhere in this issue of the Bulletin, proposed §301.7701–3(h) is withdrawn. This Treasury decision adopts without substantive change the remaining provisions of the proposed regulations. The final regulations thus adopt the following provisions from the proposed regulations: (1) the rule that terminates the grandfathered status of certain foreign business entities when there has been a 50 percent change of ownership of such entity; (2) the provision clarifying that a foreign eligible entity with respect to which an entity classification election is made and which is not

December 1, 2003 1156 2003-48 I.R.B.

One commentator requested that the provisions be revised to clarify that it is the Federal tax classification of the foreign eligible entity, and not the entity itself, that is deemed to be relevant. Treasury and the IRS have adopted this clarifying change in these final regulations.

One commentator requested that the regulations clarify why the classification of a foreign eligible entity, not otherwise relevant, that files Form 8832, “Entity Classification Election”, is deemed relevant only on the date the entity classification election is effective. The commentator neither suggested what the period of deemed relevance should be if not limited to one day nor suggested a principle for when the deemed relevance should terminate such that the 60-month rule would be triggered. In the interest of certainty and administrability of the application of the 60-month rule, Treasury and the IRS have retained the limitation of deemed relevance to the day on which the entity’s classification is effective.

One commentator requested further guidance on when and under what circumstances the classification of a foreign eligible entity that was previously relevant ceases to be relevant under the 60-month rule. Treasury and the IRS believe §301.7701–3(d)(1) and (3) provide sufficient guidance on when an entity’s classification becomes relevant and, accordingly, when an entity’s classification ceases to be relevant.

One commentator suggested that the regulations be revised to provide that an election by a non-relevant foreign entity to continue its current classification may be filed at any time within the 60-month period starting on the day after the date of the most recent election for that entity, and that such election will start a new 60-month period. Section 301.7701–3(c) provides that an eligible entity may elect to be classified other than as provided under the default classification rules of §301.7701–3(b), or to change its election. Allowing an eligible entity whose classification is not relevant to renew its election for purposes of the 60-month rule would frustrate the policies underlying that rule. Accordingly, the suggestion was not adopted.

One commentator requested clarification and examples regarding the determination of the classification of a foreign

otherwise relevant for Federal tax purposes is deemed so relevant only on the effective date specified on a Form 8832, “ Entity Classification Election ”; and (3) the modifications to the classification rules for certain foreign eligible entities that have never been relevant or are no longer relevant for Federal tax purposes.

Explanation of Provisions

A. Grandfathered Foreign Per Se Entities

The check-the-box regulations allow certain foreign business entities that were in existence and treated as partnerships prior to the date the check-the-box regulations were proposed (PS–43–95, 1996–1 C.B. 865 [61 FR 21989]) and that would otherwise be classified as per se corporations under §301.7701–2(b)(8)(i) to remain classified as partnerships if the conditions enumerated in §301.7701–2(d)(1) are satisfied. These rules also provide that the occurrence of certain events results in a termination of this grandfathered status. See §301.7701–2(d)(3)(i). The final regulations adopt the rule in the proposed regulations at §301.7701–2(d)(3)(i) that provides an additional event resulting in the termination of an entity’s grandfathered status. Under this rule, an entity’s grandfathered status is terminated on the date when one or more persons who were not owners of the entity as of November 29, 1999, own in the aggregate a 50 percent or greater interest in the entity. Consistent with the proposed regulations, the final regulations provide that this rule will apply as of the date the final regulations are published in the federal register; therefore, if persons that were not owners of a grandfathered entity on November 29, 1999, obtain a greater than 50 percent ownership interest between November 29, 1999, and October 22, 2003, the grandfathered entity will cease to have that status on October 22, 2003.

Several commentators requested clarification as to whether this rule takes into account changes in direct ownership only or also changes in indirect ownership, and they suggested that the rule should take into account only changes in direct ownership. Treasury and the IRS believe that for purposes of grandfathered foreign per se entities a rule that took only direct changes

of ownership into account could be easily circumvented in inappropriate cases. Therefore, this rule has not been modified in these final regulations. Some commentators requested that the rule be limited to significant changes in ownership within a specified period of time. For example, one commentator suggested that the rule be limited to situations where persons obtained a 50 percent or greater ownership interest within a 12-month period. The final regulations do not adopt this suggestion because Treasury and the IRS believe that an entity should retain grandfathered status only if there have been no significant changes in the ownership of that entity.

B. Relevance of Classification

The check-the-box regulations provide that if the classification of a foreign eligible entity that was previously relevant for Federal tax purposes ceases to be relevant for 60 consecutive months and then subsequently becomes relevant again, the entity’s classification at the start of the subsequent period of relevance will be determined under the default classification rules (60-month rule).

These final regulations adopt the two rules in the proposed regulations that relate to the application of the 60-month rule. First, these final regulations adopt the rule providing that the classification of a foreign eligible entity that files an entity classification election is deemed to be relevant for Federal tax purposes on the effective date of the election for purposes of the 60-month rule. Second, these final regulations adopt the rule providing that the classification of a foreign eligible entity whose classification has never been relevant for Federal tax purposes will initially be determined pursuant to the default classification provisions of §301.7701–3(b)(2) at the time the classification of the entity first becomes relevant.

Commentators generally agreed with and supported the approach taken in the proposed regulations with respect to the relevance issues, and several commentators requested that these provisions be retroactive when finalized. These final regulations do not adopt the suggestion that these provisions be applied retroactively because Treasury and the IRS believe that it is not in the interest of sound tax administration.

2003-48 I.R.B. 1157 December 1, 2003

this section, the classification for Federal tax purposes of a foreign eligible entity that files Form 8832, “Entity Classifi- cation Election”, shall be deemed to be relevant only on the date the entity classification election is effective.

(B) Exception . If the classification of a foreign eligible entity is relevant within the meaning of paragraph (d)(1)(i) of this section, then the rule in paragraph (d)(1)(ii)(A) of this section shall not apply.

(2) Entities the classification of which has never been relevant . If the classification of a foreign eligible entity has never been relevant (as defined in paragraph (d)(1) of this section), then the entity’s classification will initially be determined pursuant to the provisions of paragraph (b)(2) of this section when the classification of the entity first becomes relevant (as defined in paragraph (d)(1)(i) of this section).

(3) Special rule when classification is no longer relevant . If the classification of a foreign eligible entity is not relevant (as defined in paragraph (d)(1) of this section) for 60 consecutive months, then the entity’s classification will initially be determined pursuant to the provisions of paragraph (b)(2) of this section when the classification of the foreign eligible entity becomes relevant (as defined in paragraph (d)(1)(i) of this section). The date that the classification of a foreign entity is not relevant is the date an event occurs that causes the classification to no longer be relevant, or, if no event occurs in a taxable year that causes the classification to be relevant, then the date is the first day of that taxable year.

(4) Effective date . Paragraphs (d)(1)(ii), (d)(2), and (d)(3) of this section apply on or after October 22, 2003.

Robert E. Wenzel, Deputy Commissioner for Services and Enforcement .

Approved October 8, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury .

(Filed by the Office of the Federal Register on October 21, 2003, 8:45 a.m., and published in the issue of the Federal Register for October 22, 2003, 68 F.R. 60286)

eligible entity whose classification was never relevant or whose classification has not been relevant for 60 months and therefore has lapsed under the 60-month rule. In either case (assuming in the latter case that no election is made following the lapse of the classification), the entity’s classification initially will be determined under the default classification rules of §301.7701–3(b)(2) when the classification of the entity becomes relevant. Under the general rules of §301.7701–3(c), an eligible entity may elect at such time to be classified other than as provided under the default classification rules, and may elect at some later time to change its classification. Treasury and the IRS do not believe at this time that further guidance or examples are needed to illustrate these general rules.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these final regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required.

Drafting Information

The principal authors of these regulations are Aaron A. Farmer and Ronald M. Gootzeit, Office of Associate Chief Counsel (International). However, other personnel from the Treasury and the IRS participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Par. 1. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.7701–2 is amended by:

  1. Removing the language “or” at the end of paragraph (d)(3)(i)(B).

  2. Removing the period at the end of paragraph (d)(3)(i)(C) and adding “; or” in its place.

  3. Adding paragraph (d)(3)(i)(D).

  4. Adding a sentence at the end of paragraph (e).

The additions read as follows:

§301.7701–2 Business entities; definitions.

        • (d) - - (3) - - (i) - - (D) The date any person or persons, who were not owners of the entity as of November 29, 1999, own in the aggregate a 50 percent or greater interest in the entity.
        • (e) Effective date . - * * However, paragraph (d)(3)(i)(D) of this section applies on or after October 22, 2003.

Par. 3. Section 301.7701–3 is amended as follows:

  1. The text of paragraph (d)(1) following the paragraph heading is redesignated as paragraph (d)(1)(i), and a paragraph heading is added for paragraph (d)(1)(i).

  2. Paragraph (d)(1)(ii) is added.

  3. Paragraph (d)(2) is revised.

  4. Paragraphs (d)(3) and (d)(4) are added.

The revision and additions read as follows:

§301.7701–3 Classification of certain business entities.

        • (d) Special rules for foreign eligible entities —(1) Definition of relevance —(i) General rule . - * *

(ii) Deemed relevance —(A) General rule . For purposes of this section, except as provided in paragraph (d)(1)(ii)(B) of

December 1, 2003 1158 2003-48 I.R.B.

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Internal Revenue Bulletin 2003-48

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