INTRODUCTION

On September 14, 2010, the IRS and the Department of the Treasury published long-awaited proposed Treasury regulations addressing the federal tax classification of ‘‘series’’ entities or, more precisely, of the ‘‘eligible series’’ of a ‘‘series organization.’’ In brief, these proposed Treasury regulations (the ‘‘Proposed Regulations’’)2 provide that an eligible series 3 will be treated as an entity formed under local law for federal tax purposes whether or not it actually is recognized as a separate legal entity for local law purposes. The Proposed Regulations further provide that the classification of an eligible series that is treated as a separate entity for federal tax purposes must be determined under the same rules that govern the classification of other types of separate entities.

Although the IRS and Treasury have taken a significant step forward by providing an initial framework for the federal tax classification of eligible series, the Proposed Regulations leave a number of important issues unresolved. This article reviews the Proposed Regulations and offers recommendations for addressing several of their most pressing unresolved issues.

BACKGROUNDFor more than a decade, the ‘‘check-the-box’’ Treasury regulations (the ‘‘CTB Regulations’’) have allowed for certainty by choice in classifying business entities for federal tax purposes.4 In general, the CTB Regulations provide a flexible framework, permitting owners and managers in most instances to choose the entity’s federal tax classification. In situations where that choice is not made affirmatively by election, the CTB Regulations fill the gap with default classifications that apply for both domestic and foreign business entities.

Fundamental to the application of the CTB Regulations is that, first, there must exist a ‘‘business entity’’ to be classified. Generally, a business entity is any entity recognized for federal tax purposes.5 Whether an organization or enterprise is recognized as an entity separate from its owner or owners for federal tax purposes (a ‘‘separate entity’’) is a matter of federal taxlaw.6 Correspondingly, that determination is not dependent upon recognition of the entity under local law.7 While the CTB Regulations provide that a joint venture or other contractual arrangement may create a separate entity for federal tax purposes if the participants carry on, inter alia, a business or financial operation and divide the profits therefrom,8 the question of whether an enterprise constitutes a separate entity for federal tax purposes is not one that can be answered with certainty in many circumstances.9