US Treasury To Withdraw Proposed 'Extraordinary Transaction' Rule

01 July 2003 The US Treasury Department and Internal Revenue Service (IRS) on Friday announced that

they will be withdrawing the 'extraordinary transactions' rule contained in proposals issued in 1999 dealing with the international business activities of US firms.

The rule would have changed the classification of a foreign entity for tax purposes if certain transactions took place within a year of the date that the entity elected to assume disregarded-entity status. However, it was criticised by tax experts and observers, who warned that it would undermine the increased certainty and simplification created by the 1996 entity classification regulations.

Speaking last week, Treasury Assistant Secretary for Tax Policy, Pamela Olson explained that:'Withdrawing the proposed extraordinary transaction rule preserves the certainty in tax results that taxpayers need to organize their international business operations.' However, she added 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.'