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close of the day before the election is effective”. For example,
if H&C’s disregarded entity election is effective as of the start
of business on June 30, 1997, the deemed liquidation of H&C is
treated as occurring immediately before the close of business on
June 29, 1997.
The making of a disregarded entity election “is considered
to be the adoption of a plan of liquidation immediately before
the deemed liquidation”, thereby qualifying the parties to the
deemed liquidation for tax-free treatment under sections 332 and
337. Sec. 301.7701-3(g)(2)(ii), Proced. & Admin. Regs.
Lastly, section 301.7701-3(g)(2)(i), Proced. & Admin. Regs.,
provides:
(2) Effect of elective changes.--(i) In general.
The tax treatment of a change in the classification of
an entity for federal tax purposes by election under
paragraph (c)(1)(i) of this section is determined under
all relevant provisions of the Internal Revenue Code
and general principles of tax law, including the step
transaction doctrine.
The preamble to the 1997 proposed regulations, which contains the
identical provision, explains the purpose of the above quoted
provision:
This provision * * * is intended to ensure that the tax
consequences of an elective change will be identical to
the consequences that would have occurred if the
taxpayer had actually taken the steps described in the
* * * regulations. [REG-105162-97, 62 Fed. Reg. 55768
(Oct. 28, 1997).]
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