Technical Advice Memorandum


Subject: New I.R.S. "Check the Box" Regulations
                 and Qualified Subchapter S Subsidiaries
Issued By: Corporate, Excise, and Insurance Tax Division
Date: January 27, 1997

Elective Classification

The new "check-the-box" regulations issued by the IRS clarify which types of business entities are automatically classified as corporations and provide a method of elective classification for certain business entities.

Pursuant to the new regulations, partnerships and LLCs that do not elect to be classified as a corporation will be classified by default as a partnership if it has two or more members, or disregarded as an entity separate from its owner if it has a single owner. Similarly, a foreign entity that does not elect to be classified as a corporation will be classified as a partnership if it has two or more members and any member has unlimited liability, classified as an association if no member has unlimited liability, and disregarded as an entity separate from its owner if it has a single owner that has unlimited liability.

Under the provisions of North Carolina General Statute 57C-10-06, a limited liability company, a foreign limited liability company authorized to transact business in this State, and a member of one of these companies are subject to taxation under Article 4 of Chapter 105 of the General Statutes in accordance with their classification for federal income tax purposes. Therefore, if the entity is classified as a corporation, partnership or disregarded as separate from its owner for federal income tax purposes, North Carolina will tax the company and its members in a manner consistent with that federal classification.

S Corporations

Beginning with tax years that start after 1996, an S corporation is permitted to own a qualified S subsidiary (QSSS). This includes any domestic corporation that: qualifies as an S corporation and is 100% owned by an S corporation parent, which elects to treat it as a QSSS. For federal purposes, a QSSS is not treated as a separate corporation - all of its tax items are treated as belonging to the parent S corporation.

North Carolina will follow the federal treatment for income tax purposes and recognize all of the income and expense items as belonging to the current corporation. However, for franchise tax purposes, each QSSS doing business in this State must file a franchise tax return for each taxable period. Under the franchise tax laws, each for-profit entity incorporated, domesticated or doing business in this State is required to file a franchise tax return annually with some exceptions for those that must file more often.