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Section 7701.-Definitions
26 CFR 301.7701-3: Classification of certain business entities.
Does an election to treat a wholly owned subsidiary of an S corporation as a qualified subchapter S subsidiary (QSub) or an entity classification election of a subsidiary terminate when the subsidiary's interest is transferred pursuant to certain section 368(a)(1) reorganizations or otherwise? See Rev. Rul. 2004-85, page 189.
26 CFR 301.7701-1: Classification of organizations for federal tax purposes.
(Also: §§671, 677, 761, 1031, 1.761-2, 301.7701-1, 301.7701-3, 301.7701-4.)
Classification of Delaware statutory trust. This ruling explains how a Delaware statutory trust described in the ruling will be classified for federal tax purposes and whether a taxpayer may acquire an interest in the Delaware statutory trust without recognition of gain or loss under section 1031 of the Code. Rev. Ruls. 78-371 and 92-105 distinguished.
ISSUE(S)
(1) In the situation described below, how is a Delaware statutory trust, described in Del. Code Ann. title 12, §§ 3801 - 3824, classified for federal tax purposes?
(2) In the situation described below, may a taxpayer exchange real property for an interest in a Delaware statutory trust' without recognition of gain or loss under § 1031 of the Internal Revenue Code?
FACTS
On January 1, 2005, A, an individual, borrows money from BK, a bank, and signs a 10-year note bearing adequate stated interest, within the meaning of § 483. On January 1, 2005, A uses the proceeds of the loan to purchase Blackacre, rental real property. The note is secured by Blackacre and is nonrecourse to A.
Immediately following A's purchase of Blackacre, A enters into a net lease with Z for a term of 10 years. Under the terms of the lease, Z is to pay all taxes, assessments, fees, or other charges imposed on Blackacre by federal, state, or local authorities. In addition, Z is to pay all insurance, maintenance, ordinary repairs, and utilities relating to Blackacre. Z may sublease Blackacre. Z's rent is a fixed amount that may be adjusted by a formula described in the lease agreement that is based upon a fixed rate or an objective index, such as an escalator clause based upon the Consumer Price Index, but adjustments to the rate or index are not within the control of any of...