Proposal to Simplify
Business Classification Rules

The Internal Revenue Service and the Treasury Department announced today that they are considering a proposal that would greatly simplify the current rules for classifying unincorporated business organizations either as partnerships or as associations taxable as corporations.

Specifically, the IRS and Treasury are considering whether a taxpayer should be allowed simply to elect to treat an unincorporated business organized in the United States as either a partnership or an association. This election would eliminate the often difficult and cumbersome process of applying the existing regulations and rulings. The IRS and Treasury also announced they are considering a similar approach for classifying foreign business organizations.

Many states have revised their statutes to allow partnerships to possess characteristics traditionally associated with corporations, such as limited liability. The flexibility provided by these revised statutes allow taxpayers to achieve partnership tax classification for non-publicly traded organizations that in all meaningful respects are indistinguishable from corporations.

Nevertheless, the IRS and thousands of taxpayers spend considerable resources in determining the classification of unincorporated business organizations under the current rules. If adopted, the proposal would save these resources. In addition, it would aid numerous small unincorporated businesses that cannot afford to commit significant time and resources to cope with the current complexity.

On February 22, 1995, President Clinton announced four important goals in a plan to reinvent the regulatory processes of the federal government. One of these goals is to identify regulations that have become obsolete or unduly burdensome on those being regulated. Another is for the government to work cooperatively with the regulated community to develop new rules and regulations that take into account the best interests of that community.

Today's announcement represents an important step towards meeting these goals. The proposal under consideration would replace the current regulations and rulings regarding classification, which are becoming obsolete, with a new classification election that is as simple as possible for taxpayers to use. The IRS and Treasury are seeking to work cooperatively with taxpayers by soliciting views on this proposal

I before proposing any specific amendment to the current regulations.

Details of the proposal under consideration are contained in Notice 95-14, which will appear in Internal Revenue Bulletin 1995-14, dated April 3, 1995. The IRS is requesting written comments on this proposal and will hold a public hearing on July 20, 1995, at 10:00 AM in the IRS auditorium at 1111 Constitution Ave. N.W. Washington, DC.

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