I. Introduction

Recently, the Internal Revenue Service ("IRS") revised and simplified the entity classification rules under Treasury Regulation § 301.7701 to allow every unincorporated business entity that is not properly classified as a trust or expressly taxed as a corporation under the Internal Revenue Code to elect how it is to be classified and taxed for federal income tax purposes. Under the new federal rules ("check-the-box rules"), single-member unincorporated business entities may elect either to be taxed as corporations or to be disregarded as entities separate from their owners, in which case they will be treated as a sole proprietorship, branch, or division of the owner. Unincorporated business entities with two members or more may elect to be taxed as partnerships or as corporations.

Prior to the revision of Treasury Regulation § 301.7701, all unincorporated business entities were treated for federal income tax purposes either as partnerships or as corporations. The federal entity classification rules then in effect listed six corporate attributes which were used to determine whether an unincorporated business entity was to be classified as a partnership or as a corporation. Entities possessing a preponderance of the six attributes were classified as corporations. Adoption of the check-the-box rules render such an analysis unnecessary.

The check-the-box rules, effective January 1, 1997, sanction single-member limited liability companies ("LLCs") for the first time. Prior to January 1, 1997, single-member LLCs were not formally recognized by the IRS. This Technical Information Release announces that, in determining the Massachusetts income tax treatment of (1) a non-Massachusetts single-member LLC and (2) either a Massachusetts or non-Massachusetts LLC with two members or more, the Commissioner of Revenue will adopt the entity's federal income tax classification, as determined under the check-the-box rules.

II. Discussion

A. The Massachusetts Income Tax Treatment of LLCs Prior to Amendment of Treasury Regulation § 301.7701

Prior to the amendment of Treasury Regulation § 301.7701, the Massachusetts and federal income tax treatments of LLCs were basically identical. Under G.L. c. 62, § 17, both a Massachusetts and a non-Massachusetts LLC were deemed to be a partnership for Massachusetts income tax purposes if they were classified for the taxable year as a partnership for federal income tax purposes. Under G.L. c. 63, § 30(1), a Massachusetts LLC which was not classified for the taxable year as a partnership for federal income tax purposes was deemed to be a "domestic corporation," as that term is used in c. 63. Similarly, under G.L. c. 63, § 30(2), a non-Massachusetts LLC which was not classified for the taxable year as a partnership for federal income tax purposes was deemed to be a "foreign corporation," as that term is used in c. 63.

B. The Massachusetts Income Tax Treatment of Non-Massachusetts Single-Member LLCs and of LLCs With Two Members or More After Amendment of Treasury Regulation § 301.7701

After the amendment of Treasury Regulation § 301.7701, the Massachusetts income tax treatment of an LLC will continue to be determined by adopting the entity's federal income tax classification. Effective for taxable years beginning on or after January 1, 1997, a non-Massachusetts single-member LLC will be disregarded as an entity separate from its owner for Massachusetts income tax purposes if it is so disregarded for federal income tax purposes. Otherwise, a non-Massachusetts single-member LLC will be treated as a corporation for Massachusetts income tax purposes if it is classified as such for federal income tax purposes.
Similarly, effective for taxable years beginning on or after January 1, 1997, an LLC with two members or more will be treated as a partnership for Massachusetts income tax purposes if it is classified as such for federal income tax purposes. Otherwise, an LLC with two members or more will be treated as a corporation for Massachusetts income tax purposes if it is classified as such for federal income tax purposes.

C. The Massachusetts Income Tax Treatment of All Other Unincorporated Business Entities

In contrast to LLCs, the Massachusetts income tax treatment of all other unincorporated business entities is governed by Massachusetts General Laws which make no reference to those entities' federal classification. Thus, in contrast to LLCs, the Massachusetts income tax treatment of all other unincorporated business entities is unaffected by the recent federal changes discussed above. Of course, the Massachusetts income tax treatment of an unincorporated business entity other than an LLC could coincide with the election that entity makes under the check-the-box rules.


Mitchell Adams
Commissioner of Revenue

TIR 97-8

June 16, 1997