Monday, January 16, 2012

Another Exception To Disregarded Entity Treatment

A new exception now has been added to the list.
Under final regulations issued under Section 881, the IRS can treat a disregarded entity in a financing structure as a person separate from its owner (that is, as a non-disregarded entity), in determining whether a financing arrangement exists that should be recharacterized under the multiple-party financing rules of Code §7701(l) and Treas. Regs. §1.881-3.

These rules allow the IRS to disregard the participation of one or more intermediate entities in a financing arrangement and recharacterize the financing arrangement as a transaction directly between other parties. It will often be applied where intermediate entities are employed by taxpayers to obtain treaty or other tax benefits that would not be available if a financing transaction was directly conducted between the ultimate lender and borrower.

T.D. 9562, 12/08/2011; Reg. § 1.881-3

1 comment:

  1. There are now several instances in which Disregarded Entities are not really disregarded for tax purposes.

    There are also various proposals which would increase the number of exceptions/modifications to the general rule that a garded Entities is a “tax nothing.”

    It is important for practitioners to keep this assortment of disclaimers in mind in advising clients with respect to tax planning using Disregarded Entities.

    The erosion of the check-the-box regulations and other Disregarded Entities provisions continues to be a trap for the unwary.

    For more on the various Exception to Disregarded Entities see Disregarded Entities: To Be Or Not To Be?