Disregarded Entity Qualification: Married Couple in Community Property State

[Eric Williams]

Rev. Proc. 2002-69

I found this guidance and thought I would provide a summary:

It was issued to remove uncertainty surrounding treatment of an entity owned solely by a husband and wife in a community property state.

Essentially, if that entity is a "qualified business entity", and the husband and wife choose to treat it as a disregarded entity, the IRS will respect that classification.

On the flipside, if they choose to treat it as a partnership for Federal tax purposes, and file a partnership return, the IRS will accept that the entity is a partnership for Federal tax purposes.

A business entity is a qualified entity if:

1) The business is wholly owned by a husband and wife as community property under relevant laws,

2) No person other than one or both spouses would be considered an owner for Federal tax purposes,

3) The entity is note treated as a corporation under Reg. 301.7701-2