For United States federal tax purposes, the classificaiton of an entity as a partnership or a corporation has significant ramifications, particularly with respect to entities in foreign countries. Classification is especially important to the owners – whether shareholders or partners – of the entity because the question of whether they are taxed on their share of the profits or only upon repartriation will often depend on how the entity, set up under foreign law, is recognized by the Internal Revenue Service (Service). While entity classification in the domestic area has always been vulnerable to challenge, foreign entities face an additional problem in view of the Service’s application of a rather complicated “separate interests” test. While in theory the classification of a foreign entity embodies the same tests as the classification of a domestic entity, recent cases and revenue rulings have created uncertainty and confusion for United States taxpayers wishing to conduct some portion of their operations abroad. In MCA, Inc. v. United States, the United States Court of Appeals for the Ninth Circuit examined this problem of classifying foreign entities for federal tax purposes.
