Entity classification election
Encyclopedia
For United States income tax purposes, a business entity may elect to be treated either as a corporation
or as other than a corporation. This entity classification election is made by filing Internal Revenue Service Form
8832. Absent filing the form, a default classification applies. U.S. corporations and foreign entities of the type that can be publicly traded must be treated as corporations. The election is effective for Federal and most state income tax
purposes.
If an entity is not classified as a corporation for U.S. tax purposes, it is treated as a partnership
if it has more than one owner, or is disregarded if it has a single owner (i.e. is treated as part of the single owner).
The classification of either a U.S. or non-U.S. entity for U.S. tax purposes has no effect for non-U.S. tax purposes.
The list of foreign entities classified as corporations for federal tax purposes (so called per se corporations, not eligible to make an entity classification election) includes, as of September 2009:
Unless an election is made on Form 8832, a domestic eligible entity will be classified by default as:
Unless an election is made on Form 8832, a foreign eligible entity will be classified by default as:
The effect of these rules is that a U.S. limited liability company
(LLC) or limited liability partnership
(LLP) is treated by default as a partnership (or disregarded entity if it has only one owner), whereas a foreign LLP is treated by default as a corporation (if, as is generally the case, all its members have limited liability).
If an entity has been operating under one classification for some time, but then elects to change its classification, there may be tax consequences. The initial regulations were unclear on this point, so the IRS issued Revenue Rulings 99-5 and 99-6 in 1999 to address questions surrounding the conversion of an LLC to a partnership and vice-versa.
and tax deferral
strategies. Specifically, they expanded the opportunity for "hybrid branch" or "hybrid entity" strategies, which take advantage of differences in the classification of an entity as a corporation or not in multiple jurisdictions, in order to engage in cross-border tax arbitrage. The possibility that the check-the-box rules would greatly expand the potential for such strategies had been pointed out prior to implementation, and at one point some commentators suggested disallowing foreign entities from electing their classification at all; however, in the end, the IRS, while acknowledging such concerns, issued regulations which gave foreign and domestic entities largely similar powers to elect their own classification.
US owners of foreign subsidiaries benefit from the ability to have those foreign subsidiaries treated as disregarded entities. Under the United States' Internal Revenue Code
Subpart F, payments between related Controlled Foreign Corporation
s (CFCs), or from American companies to related CFCs, may be "treated as Subpart F income" (subject to current taxation as if they were profits in the hands of the ultimate American owner of the corporate structure), in an effort to limit the ability of American citizens and corporations to defer US tax
on the income of foreign corporations they control. However, payments between an American-owned foreign entity which is taxed as a corporation, and a foreign subsidiary of that entity which itself has elected to be treated as a disregarded entity, are not treated as Subpart F income. This arrangement may be used to shift income between the two non-American jurisdictions and avoid local taxes in one or the other, e.g. through thin capitalization
. Another category of US taxpayers who benefit from check-the-box regulations consists of US flow-through entities
(S corporation
s and partnerships) with foreign subsidiaries. If the foreign subsidiary is treated as a corporation, the taxes it pays to the foreign government do not create a foreign tax credit
for the US owner under Section 902. However, with a check-the-box election to be treated as a disregarded entity, the foreign taxes are treated as having been directly imposed on the US owner, thus giving rise to the tax credit.
For US owners with foreign subsidiaries, choosing to have a subsidiary treated as a disregarded entity is not always the most beneficial tax-planning choice, however. For example, if a US taxpayer owns a disregarded foreign entity, its income will be taxed at the owner's ordinary US income tax rates, less the foreign tax already paid. This may result in every marginal dollar being taxed at the highest rate. However, if the foreign entity had elected to be taxed as a corporation (or been classified as such by default), paid a low rate tax in the foreign country, then repatriated its income to the US by paying qualified dividends to its owner, the total proportion of tax paid on income might actually be less, as qualified dividends are only taxed at 15%. However, this treatment is only available for dividends from corporations in certain countries, and is set to sunset in 2010 under the Tax Increase Prevention and Reconciliation Act of 2005
.
Foreign owners of US corporations also benefit from the ability to have entities normally treated as flow-through instead be taxed as corporations by the IRS. In what is sometimes known as a "domestic reverse hybrid" strategy, a non-US corporation may set up a US holding company which elects to be treated as a corporation for US tax purposes, but which its home country tax law sees as a flow-through entity
. The US holding company receives a loan from its home country parent which it invests in a US operating subsidiary; the US holding company receives dividends from the US operation subsidiary and pays interest to the non-US parent. US tax law thus sees a US company making a dividend payment to another US company (which is thus not subject to withholding tax, unlike a dividend paid to a foreign company) which then pays interest to a foreign company, while the home country tax law will see a US company paying dividends directly to its home country parent. Under typical treaties for the relief of double taxation
, neither government has the right to tax the payment, because each sees it as a type of payment which only the other has the right to tax.
An entity which had a preponderance of the first four factors (the last two, in practice, were shared by all business entities) was treated as a corporation, otherwise as a partnership or an association. In practice, however, this test was easily manipulated.
The "check-the-box" regulations (Treasury Decision 8697) were adopted in 1996 in order to simplify the issue of entity classification. A grandfather clause
allowed entities in existence on May 8, 1996 to continue using their previous classification, even if they would no longer be eligible to elect that classification under the new rules. There were three conditions for this grandfathering:
The initial regulations also included a list of foreign entities which would always be classified as corporations ("per-se corporations") and which could not elect to be disregarded. The proposed regulations included naamloze vennootschap
formed under the laws of Aruba or the Netherlands Antilles in that list, but they were removed from the final list; conversely, Canadian corporations were added to the list.
In 1998, the IRS issued Notice 98-11, 1998-1 C.B. 433 in an attempt to combat the use of "check-the-box" in international tax planning (see below); however, the notice met opposition, and was withdrawn by Notice 98-35, 1998-2 C.B. 34. Another proposal, around 1999, would have left the basic check-the-box regime in place, but allowed the IRS to disregard entity classification elections made in connection with "extraordinary transactions" (where the tax liability changes "significantly" as a result of the election). An "extraordinary transaction" was defined as one in which there was a sale, exchange, transfer, or other disposition of a 10-percent or greater interest in a foreign entity; the proposed regulations provided that an election to be classified as a disregarded entity could be ignored, and thus the entity continue to be taxed as a corporation, if the election occurred within twelve months following the day before an extraordinary transaction. However, various tax professionals opposed the changes, arguing that the threshold for defining an extraordinary transaction was far too low, and that existing internal revenue regulations, as well as common law doctrines such as the principle of substance over form
and the step transaction doctrine
, were already sufficient to combat any abuses of the check-the-box rules.
President Barack Obama
attempted to revive the IRS' 1998 notice in his proposed 2010 budget. Specifically, the proposal stated:
The proposal was eventually dropped again due to criticism from businesses, and it was not included again in the 2011 budget proposal either.
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
or as other than a corporation. This entity classification election is made by filing Internal Revenue Service Form
IRS tax forms
IRS tax forms are used for taxpayers and tax-exempt organizations to report financial information to the Internal Revenue Service of the United States. They are used to report income, calculate taxes to be paid to the federal government of the United States, and disclose other information as...
8832. Absent filing the form, a default classification applies. U.S. corporations and foreign entities of the type that can be publicly traded must be treated as corporations. The election is effective for Federal and most state income tax
State income tax
State and local income taxes are imposed in addition to Federal income tax. State income tax is allowed as a deduction in computing Federal income tax, subject to limitations for individuals. Some localities impose an income tax, often based on state income tax calculations. Forty-three states...
purposes.
If an entity is not classified as a corporation for U.S. tax purposes, it is treated as a partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
if it has more than one owner, or is disregarded if it has a single owner (i.e. is treated as part of the single owner).
The classification of either a U.S. or non-U.S. entity for U.S. tax purposes has no effect for non-U.S. tax purposes.
Eligibility to make an election
An entity which is eligible to make an election is referred to as an eligible entity. Generally, a corporation organized under U.S. federal or state statute (and referred to as a corporation, body corporate or body politic by that statute) is not an eligible entity. However, the following types of business entity are treated as eligible entities:- An eligible entity that previously elected to be an association taxable as a corporation by filing Form 8832. An entity that elects to be classified as a corporation by filing Form 8832 can make another election to change its classification, subject to the 60-month limitation rule.
- A foreign eligible entity that became an association taxable as a corporation under the foreign default rule described above.
- A foreign corporation that is not identified as a corporation under Treasury regulationsTreasury regulationsTreasury Regulations are the tax regulations issued by the United States Internal Revenue Service , a bureau of the United States Department of the Treasury. These regulations are the Treasury Department’s official interpretations of the Internal Revenue Code and are one source of U.S...
§301.7701-2(b)(8). If a foreign corporation is not identified on the list included in these regulations, it qualifies as an eligible entity.
The list of foreign entities classified as corporations for federal tax purposes (so called per se corporations, not eligible to make an entity classification election) includes, as of September 2009:
- American Samoa, Corporation
- Argentina, Sociedad Anonima
- Australia, Public Limited CompanyPublic limited companyA public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....
- Austria, AktiengesellschaftAktiengesellschaftAktiengesellschaft is a German term that refers to a corporation that is limited by shares, i.e. owned by shareholders, and may be traded on a stock market. The term is used in Germany, Austria and Switzerland...
- Barbados, Limited Company
- Belgium, Societe Anonyme
- Belize, Public Limited Company
- Bolivia, Sociedad Anonima
- Brazil, Sociedade Anonima
- Bulgaria, Aktsionerno Druzhestvo.
- Canada, Corporation and Company
- Chile, Sociedad Anonima
- People's Republic of China, Gufen Youxian Gongsi
- Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu
- Colombia, Sociedad Anonima
- Costa Rica, Sociedad Anonima
- Cyprus, Public Limited Company
- Czech Republic, Akciova Spolecnost
- Denmark, AktieselskabAktieselskabAn aktieselskab is the Danish name for a stock-based corporation. An aktieselskab can be both publicly traded and private.-Liability:...
- Ecuador, Sociedad Anonima or Compania Anonima
- Egypt, Sharikat Al-Mossahamah
- El Salvador, Sociedad Anonima
- Estonia, Aktsiaselts
- European Economic Area/European Union, Societas Europaea
- Finland, Julkinen Osakeyhtio/Publikt Aktiebolag
- France, Societe Anonyme
- Germany, AktiengesellschaftAktiengesellschaftAktiengesellschaft is a German term that refers to a corporation that is limited by shares, i.e. owned by shareholders, and may be traded on a stock market. The term is used in Germany, Austria and Switzerland...
- Greece, Anonymos Etairia
- Guam, Corporation
- Guatemala, Sociedad Anonima
- Guyana, Public Limited Company
- Honduras, Sociedad Anonima
- Hong Kong, Public Limited Company
- Hungary, Reszvenytarsasag
- Iceland, Hlutafelag
- India, Public Limited Company
- Indonesia, Perseroan Terbuka
- Ireland, Public Limited Company
- Israel, Public Limited Company
- Italy, Societa per Azioni
- Jamaica, Public Limited Company
- Japan, Kabushiki Kaisha (kabushiki gaisha)
- Kazakhstan, Ashyk Aktsionerlik Kogham
- Republic of Korea, Chusik Hoesa
- Latvia, Akciju Sabiedriba
- Liberia, Corporation
- Liechtenstein, Aktiengesellschaft
- Lithuania, Akcine Bendroves
- Luxembourg, Societe Anonyme
- Malaysia, Berhad
- Malta, Public Limited Company
- Mexico, Sociedad Anonima
- Morocco, Societe Anonyme
- Netherlands, Naamloze VennootschapNaamloze Vennootschapis the Dutch term for a public limited liability company. The company is owned by shareholders, and the company's shares are not registered to certain owners, so that they may be traded on the public stock market....
- New Zealand, Limited Company
- Nicaragua, Compania Anonima
- Nigeria, Public Limited Company
- Northern Mariana Islands, Corporation
- Norway, Allment AksjeselskapAksjeselskapAksjeselskap is the Norwegian term for a stock-based company. It is usually abbreviated AS or A/S, especially when used in company names. An AS is always a limited company, i.e. the owners cannot be held liable for any debt beyond the stock capital...
- Pakistan, Public Limited Company
- Panama, Sociedad Anonima
- Paraguay, Sociedad Anonima
- Peru, Sociedad Anonima
- Philippines, Stock Corporation
- Poland, Spolka Akcyjna
- Portugal, Sociedade Anonima
- Puerto Rico, Corporation
- Romania, Societate pe Actiuni
- Russia, Otkrytoye Aktsionernoy Obshchestvo (Открытое акционерное общество)
- Saudi Arabia, Sharikat Al-Mossahamah
- Singapore, Public Limited Company
- Slovak Republic, Akciova Spolocnost
- Slovenia, Delniska Druzba
- South Africa, Public Limited Company
- Spain, Sociedad Anonima
- Surinam, Naamloze Vennootschap
- Sweden, Publika AktiebolagAktiebolagAktiebolag is the Swedish term for "limited company" or "corporation". When used in company names, it is abbreviated "AB" or "Ab"...
- Switzerland, Aktiengesellschaft
- Thailand, Borisat Chamkad (Mahachon)
- Trinidad and Tobago, Limited Company
- Tunisia, Societe Anonyme
- Turkey, Anonym Sirket
- Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu
- United Kingdom, Public Limited Company
- United States Virgin Islands, Corporation
- Uruguay, Sociedad Anonima
- Venezuela, Sociedad Anonima or Compania Anonima
Default classification
An eligible entity is classified for federal tax purposes under the default rules described below unless it files Form 8832 or Form 2553, Election by a Small Business Corporation, to elect a classification or change its current classification. The IRS uses the information entered on the form to establish the entity's filing and reporting requirements for federal tax purposes. Certain domestic and foreign entities that were in existence before January 1, 1997, and have an established federal tax classification generally do not need to make an election to continue that classification. If an existing entity decides to change its classification, it may do so subject to the 60-month limitation rule.Unless an election is made on Form 8832, a domestic eligible entity will be classified by default as:
- A partnership if it has two or more members.
- Disregarded as an entity separate from its owner if it has a single owner. A change in the number of members of an eligible entity classified as an association (defined below) does not affect the entity's classification. However, an eligible entity classified as a partnership will become a disregarded entity when the entity's membership is reduced to one member and a disregarded entity will be classified as a partnership when the entity has more than one member.
Unless an election is made on Form 8832, a foreign eligible entity will be classified by default as:
- A partnership if it has two or more members and at least one member does not have limited liabilityLimited liabilityLimited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
. - An association taxable as a corporation if all members have limited liability.
- Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.
The effect of these rules is that a U.S. limited liability company
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
(LLC) or limited liability partnership
Limited liability partnership
A limited liability partnership is a partnership in which some or all partners have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important...
(LLP) is treated by default as a partnership (or disregarded entity if it has only one owner), whereas a foreign LLP is treated by default as a corporation (if, as is generally the case, all its members have limited liability).
If an entity has been operating under one classification for some time, but then elects to change its classification, there may be tax consequences. The initial regulations were unclear on this point, so the IRS issued Revenue Rulings 99-5 and 99-6 in 1999 to address questions surrounding the conversion of an LLC to a partnership and vice-versa.
Use in international tax planning
The "check-the-box" regulations paved the way for various new tax avoidanceTax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
and tax deferral
Tax deferral
Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period. In theory, the net taxes paid should be the same. Taxes can sometimes be deferred indefinitely, or may be taxed at a lower rate in the future, particularly for deferral of income taxes...
strategies. Specifically, they expanded the opportunity for "hybrid branch" or "hybrid entity" strategies, which take advantage of differences in the classification of an entity as a corporation or not in multiple jurisdictions, in order to engage in cross-border tax arbitrage. The possibility that the check-the-box rules would greatly expand the potential for such strategies had been pointed out prior to implementation, and at one point some commentators suggested disallowing foreign entities from electing their classification at all; however, in the end, the IRS, while acknowledging such concerns, issued regulations which gave foreign and domestic entities largely similar powers to elect their own classification.
US owners of foreign subsidiaries benefit from the ability to have those foreign subsidiaries treated as disregarded entities. Under the United States' Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
Subpart F, payments between related Controlled Foreign Corporation
Controlled Foreign Corporation
Controlled foreign corporation rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of entities that is not currently taxed to the owners of the entity. The basic mechanism and...
s (CFCs), or from American companies to related CFCs, may be "treated as Subpart F income" (subject to current taxation as if they were profits in the hands of the ultimate American owner of the corporate structure), in an effort to limit the ability of American citizens and corporations to defer US tax
Tax deferral
Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period. In theory, the net taxes paid should be the same. Taxes can sometimes be deferred indefinitely, or may be taxed at a lower rate in the future, particularly for deferral of income taxes...
on the income of foreign corporations they control. However, payments between an American-owned foreign entity which is taxed as a corporation, and a foreign subsidiary of that entity which itself has elected to be treated as a disregarded entity, are not treated as Subpart F income. This arrangement may be used to shift income between the two non-American jurisdictions and avoid local taxes in one or the other, e.g. through thin capitalization
Thin capitalisation
A company said to be thinly capitalised when its capital is made up of a much greater proportion of debt than equity, i.e. its gearing, or leverage, is too high...
. Another category of US taxpayers who benefit from check-the-box regulations consists of US flow-through entities
Flow-through entity
A flow-through entity is a legal entity where income "flows through" to investors or owners; that is, the income of the entity is treated as the income of the investors or owners. Flow-through entities are also known as pass-through entities or fiscally-transparent entities...
(S corporation
S Corporation
An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
s and partnerships) with foreign subsidiaries. If the foreign subsidiary is treated as a corporation, the taxes it pays to the foreign government do not create a foreign tax credit
Foreign tax credit
Income tax systems that tax residents on worldwide income generally offer a foreign tax credit to mitigate the potential for double taxation. The credit may also be granted in those systems taxing residents on income that may have been taxed in another jurisdiction...
for the US owner under Section 902. However, with a check-the-box election to be treated as a disregarded entity, the foreign taxes are treated as having been directly imposed on the US owner, thus giving rise to the tax credit.
For US owners with foreign subsidiaries, choosing to have a subsidiary treated as a disregarded entity is not always the most beneficial tax-planning choice, however. For example, if a US taxpayer owns a disregarded foreign entity, its income will be taxed at the owner's ordinary US income tax rates, less the foreign tax already paid. This may result in every marginal dollar being taxed at the highest rate. However, if the foreign entity had elected to be taxed as a corporation (or been classified as such by default), paid a low rate tax in the foreign country, then repatriated its income to the US by paying qualified dividends to its owner, the total proportion of tax paid on income might actually be less, as qualified dividends are only taxed at 15%. However, this treatment is only available for dividends from corporations in certain countries, and is set to sunset in 2010 under the Tax Increase Prevention and Reconciliation Act of 2005
Tax Increase Prevention and Reconciliation Act of 2005
The Tax Increase Prevention and Reconciliation Act of 2005 was enacted on May 17, 2006.This bill prevents several tax provisions from sunseting in the near future. The two most notable pieces of the bill are the extension of the reduced tax rates on capital gains and dividends and extension of the...
.
Foreign owners of US corporations also benefit from the ability to have entities normally treated as flow-through instead be taxed as corporations by the IRS. In what is sometimes known as a "domestic reverse hybrid" strategy, a non-US corporation may set up a US holding company which elects to be treated as a corporation for US tax purposes, but which its home country tax law sees as a flow-through entity
Flow-through entity
A flow-through entity is a legal entity where income "flows through" to investors or owners; that is, the income of the entity is treated as the income of the investors or owners. Flow-through entities are also known as pass-through entities or fiscally-transparent entities...
. The US holding company receives a loan from its home country parent which it invests in a US operating subsidiary; the US holding company receives dividends from the US operation subsidiary and pays interest to the non-US parent. US tax law thus sees a US company making a dividend payment to another US company (which is thus not subject to withholding tax, unlike a dividend paid to a foreign company) which then pays interest to a foreign company, while the home country tax law will see a US company paying dividends directly to its home country parent. Under typical treaties for the relief of double taxation
Double taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
, neither government has the right to tax the payment, because each sees it as a type of payment which only the other has the right to tax.
History
Prior to 1996, entities both domestic and foreign were classified as corporations or not based on the so-called "multi-factor test", which looked at:- limited liability;
- continuity of life;
- free transferability of interests;
- centralized management;
- associates;
- objective to carry on business for joint profit
An entity which had a preponderance of the first four factors (the last two, in practice, were shared by all business entities) was treated as a corporation, otherwise as a partnership or an association. In practice, however, this test was easily manipulated.
The "check-the-box" regulations (Treasury Decision 8697) were adopted in 1996 in order to simplify the issue of entity classification. A grandfather clause
Grandfather clause
Grandfather clause is a legal term used to describe a situation in which an old rule continues to apply to some existing situations, while a new rule will apply to all future situations. It is often used as a verb: to grandfather means to grant such an exemption...
allowed entities in existence on May 8, 1996 to continue using their previous classification, even if they would no longer be eligible to elect that classification under the new rules. There were three conditions for this grandfathering:
- the entity had a reasonable basis (within the meaning of section 6662) for its claimed classification;
- the entity and all owners recognized the federal tax consequences of any change in classification within 60 months prior to January 1, 1997; and
- neither the entity nor its owners had been advised that the entity was under examination on or before May 8, 1996.
The initial regulations also included a list of foreign entities which would always be classified as corporations ("per-se corporations") and which could not elect to be disregarded. The proposed regulations included naamloze vennootschap
Naamloze Vennootschap
is the Dutch term for a public limited liability company. The company is owned by shareholders, and the company's shares are not registered to certain owners, so that they may be traded on the public stock market....
formed under the laws of Aruba or the Netherlands Antilles in that list, but they were removed from the final list; conversely, Canadian corporations were added to the list.
In 1998, the IRS issued Notice 98-11, 1998-1 C.B. 433 in an attempt to combat the use of "check-the-box" in international tax planning (see below); however, the notice met opposition, and was withdrawn by Notice 98-35, 1998-2 C.B. 34. Another proposal, around 1999, would have left the basic check-the-box regime in place, but allowed the IRS to disregard entity classification elections made in connection with "extraordinary transactions" (where the tax liability changes "significantly" as a result of the election). An "extraordinary transaction" was defined as one in which there was a sale, exchange, transfer, or other disposition of a 10-percent or greater interest in a foreign entity; the proposed regulations provided that an election to be classified as a disregarded entity could be ignored, and thus the entity continue to be taxed as a corporation, if the election occurred within twelve months following the day before an extraordinary transaction. However, various tax professionals opposed the changes, arguing that the threshold for defining an extraordinary transaction was far too low, and that existing internal revenue regulations, as well as common law doctrines such as the principle of substance over form
Substance over form
Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant and accurate picture of transactions and events"...
and the step transaction doctrine
Step transaction doctrine
The step transaction doctrine is a judicial doctrine in the United States that combines a series of formally separate steps, resulting in tax treatment as a single integrated event. The doctrine is often used in combination with other doctrines, such as substance over form. The doctrine is applied...
, were already sufficient to combat any abuses of the check-the-box rules.
President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
attempted to revive the IRS' 1998 notice in his proposed 2010 budget. Specifically, the proposal stated:
The proposal was eventually dropped again due to criticism from businesses, and it was not included again in the 2011 budget proposal either.