Check-The-Box Elections As A Time Machine


It is a well known fact that a check-the-box election under regulation section 301.7701-3 can be made retroactive for a period of 75 days. This period may span more than one taxable year or the period may be all in one tax period. When effectively used, the ability to apply the entity classification effects of a transaction 75 days prior to the date of filing of the check-the-box election can have results similar to a rescission or a time machine. That is, the ability to go back in time.

So what, you may ask. Well. We have a very recent example of this technique and how it can be potentially used to the detriment of the fisc. Notice 2014-45 (reproduced in the Appendix below) is a follow up to Notice 2014-44, discussed here previously. In the prior notice, a transaction was described (a section 332 liquidation) that was not to be treated as a disposition under section 901(m). That notice was to be effective as of July 21.

Well. Although not described in Notice 2014-45, what must have happened is that after Notice 2014-44 was issued, the IRS and Treasury learned of taxpayers who used the 75-day period of the check-the-box election to cause a section 332 liquidation to be treated as occurring before the effective date of Notice 2014-44. Hence, the need to issue Notice 2014-45.

This is not the first time that planning such as this has occurred. I have written about this here before. The technique has been used other times to defeat the effective date of a regulation or other guidance. The government was previously alerted to the potential problems with the 75-day retroactive election period generally but no action on a global basis was taken.

Perhaps now would be a good time to review the so called time machine effects of the check-the-box election unless the government wants to have to respond like it just did with Notice 2014-45 on future occasions.


Notice 2014-45

On July 21, 2014, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury Department) released Notice 2014-44, to be published in IRB 2014-32 on August 11, 2014, which describes regulations that the IRS and the Treasury Department will issue to address the application of section 901(m) to dispositions of assets following covered asset acquisitions. Notice 2014-44 states that those regulations will generally apply to dispositions that occur on or after, and any Unallocated Basis Difference (as that term is defined in Notice 2014-44) with respect to a relevant foreign asset as of, July 21, 2014.

In order to prevent abuse, the regulations described in Notice 2014-44 will also apply to determine the tax consequences under section 901(m) of an entity classification election made under ยง 301.7701-3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, including whether a disposition results from the election for purposes of section 901(m) and the treatment of any Unallocated Basis Difference that results from such an election.

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