rp-02-69.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 301.7701-3: Classification of certain business entities.
(Also § 301.7701-2.)

Rev. Proc. 2002-69

SECTION 1. PURPOSE

The Treasury Department and the Internal Revenue Service have become aware
that taxpayers are unsure of the classification for an entity that is owned solely by a
husband and wife as community property under the laws of a state, a foreign country, or
a possession of the United States. To alleviate this uncertainty and in the interest of
administrative simplicity, this revenue procedure provides that the Internal Revenue
Service will respect a taxpayer’s treatment of these entities as either disregarded entities
or partnerships.
This revenue procedure provides guidance on the classification for federal tax
purposes of a qualified entity (described in section 3.02 of this revenue procedure) that is
owned solely by a husband and wife as community property under the laws of a state, a
foreign country, or a possession of the United States.
SECTION 2. BACKGROUND
Section 301.7701-1(a)(1) states that the Code prescribes the classification of
various organizations for federal tax purposes. Whether an organization is an entity

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separate from its owners for federal tax purposes is a matter of federal tax law and does

not depend on whether the organization is recognized as an entity under local law.
Section 301.7701-1(b) provides that the classification of organizations that are
recognized as separate entities is determined under §§ 301.7701-2, 301.7701-3, and
301.7701-4 unless a provision of the Code provides for special treatment of that
organization.
Section 301.7701-2(a) defines the term “business entity” as any entity recognized
for federal tax purposes (including an entity with a single owner that may be disregarded
as an entity separate from its owner under § 301.7701-3) that is not properly classified
as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code.
A business entity with two or more members is classified for federal tax purposes as
either a corporation or a partnership. A business entity with only one owner is classified
as a corporation or is disregarded; if the entity is disregarded, its activities are treated in
the same manner as a sole proprietorship, branch, or division of the owner.
SECTION 3. SCOPE
.01 In General
. This revenue procedure provides guidance on the classification
for federal tax purposes of a qualified entity (described in section 3.02 of this revenue
procedure).
.02 Qualified Entity
. A business entity is a qualified entity if:

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(1) The business entity is wholly owned by a husband and wife as
community property under the laws of a state, a foreign country, or a possession of the
United States;
(2) No person other than one or both spouses would be considered an
owner for federal tax purposes; and
(3) The business entity is not treated as a corporation under
§ 301.7701-2.
SECTION 4. APPLICATION
.01 If a qualified entity (as described in section 3.02 of this revenue procedure),
and the husband and wife as community property owners, treat the entity as a
disregarded entity for federal tax purposes, the Internal Revenue Service will accept the
position that the entity is a disregarded entity for federal tax purposes.
.02 If a qualified entity (as described in section 3.02 of this revenue procedure),
and the husband and wife as community property owners, treat the entity as a
partnership for federal tax purposes and file the appropriate partnership returns, the
Internal Revenue Service will accept the position that the entity is a partnership for
federal tax purposes.
.03 A change in reporting position will be treated for federal tax purposes as a
conversion of the entity.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective on the date published in the Internal
Revenue Bulletin.

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SECTION 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Laura Nash of the Office of the
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this revenue procedure contact Ms. Nash or Ms. Rebekah Myers at (202)
622-3050 (not a toll free call).