US Treasury Withdraws Extraordinary Transaction Rule

by Mike Godfrey, for LawAndTax-News.com, Washington

23 October 2003

The US Treasury Department on Tuesday confirmed that it has withdrawn the so-called "extraordinary transaction" rule, which was included in proposed regulations issued in 1999, and announced that it has finalized all other portions of the 1999 regulations.

The extraordinary transaction rule would have changed the classification of a foreign entity for tax purposes if certain transactions occurred within a year of the date that the entity elected disregarded-entity status.

According to a Treasury statement, the proposed measure was removed from the finalized regulations because:

"Most commentators on the proposed regulations criticized this approach as overly broad and expressed concern that it would undermine the increased certainty and simplification promoted by the entity classification regulations issued in 1996."

Speaking earlier this year, when the Treasury and Internal Revenue Service (IRS) first announced their intention to remove this provision, Treasury Assistant Secretary for Tax Policy, Pamela Olson explained that:

"We are continuing to examine certain categories of transactions to ensure that the substantive rules of particular statutory and treaty provisions reach appropriate results notwithstanding changes in entity classification."

The full text of the final regulations for certain foreign business entities in the United States can be found in the Tax News Resources section.

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