PLR 200206051: Foreign entity gets more time to elect disregarded status

Plain-English summary

A foreign entity became wholly owned by another company and changed its legal form. It missed the deadline to elect treatment as a disregarded entity for U.S. tax purposes. The IRS granted it 60 days from the letter to file Form 8832, effective from the date of the legal conversion, under the regulatory extension rules. Relief was conditioned on filing an amended return for the stated taxable year and reporting any gain or income required by the entity classification change. The IRS treated that change as a liquidation under IRC § 332, subject to the rules under § 367(b), but gave no opinion on the election's other U.S. tax consequences.

Ruling snapshot

• Question: Could the foreign entity file a late election to be disregarded from the date of its legal conversion?
• Outcome: Approved, subject to filing Form 8832 within 60 days and an amended return reporting the required gain or income.
• Key authorities: IRC §§ 332, 367(b); Treas. Reg. §§ 301.7701-3, 301.9100-3, 1.367(b)-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200206051
Washington, DC 20224
Release Date: 2/8/2002
Index Number: 9100.00-00, 7701.00-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:2 - PLR-127366-01
Date:
November 13, 2001

X
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Y
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Country 1
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Date 1
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Date 2
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Date 3
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Date 4
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Dear

This is in reply to a letter dated May 15, 2001, submitted by X’s authorized representative on behalf of X, requesting a ruling that X be given an extension of time to elect to be treated as a disregarded entity for federal tax purposes.

The information submitted states that Y acquired 90% of the outstanding stock of X on Date 1. On Date 2, Y acquired the remaining 10% interest in X. On Date 3, the legal form of X was converted, under the laws of Country 1, from a Sociedad Anonima to a Sociedad de Responsabilidad Limitada.

Section 301.7701-3(a) of the Procedure and Administration Regulations provides that a business entity that is not classified as a corporation under § 301.7701- 2(b)(1), (3), (4), (5), (6), (7), or (8) (an "eligible entity") can elect its classification for federal tax purposes. A "business entity" is any entity recognized for federal tax purposes that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Internal Revenue Code. Section 301.7701-2(a).
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An eligible entity with a single owner can be classified as either an association (and thus a corporation under § 301.7701-2(b)(2)) or as disregarded as an entity separate from its owner.

Section 301.7701-3(b)(2)(i) provides that unless a foreign eligible entity elects otherwise, the entity is: (A) a partnership if it has two or more members and at least one member does not have limited liability; (B) an association if all members have limited liability; or (C) disregarded as an entity separate from its owners if it has a single owner that does not have limited liability.

Section 301.7701-3(b)(2)(ii) provides that for purposes of § 301.7701-3(b)(2)(i), a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member.

To elect to be classified other than as provided in § 301.7701-3(b), an eligible entity must file Form 8832, Entity Classification Election, with the designated service center. Section 301.7701-3(c)(1)(i). An election will be effective on the date specified on the Form 8832 or on the date filed if no such date is specified. The effective date specified on the Form 8832 cannot be more than 75 days prior to the date the election is filed. Section 301.7701-3(c)(2)(iii).

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in § 301.9100-3 to make a regulatory election. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the Government. Section 301.9100-3(a).

Based solely on the facts submitted and representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. As a result, X is granted an extension of time of 60 days from the date of this letter to file Form 8832 with the appropriate service center, effective Date 3. A copy of this letter should be attached to the Form 8832. A copy is included for that purpose.

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code. No opinion is expressed about the U.S. tax consequences of the election for X to be treated as a disregarded entity. The ruling set forth in this letter is conditioned upon the facts and representations submitted by X . This office has not verified any of
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the materials submitted in support of the request for a ruling. Verification of the information, representations, and other data may be required as part of the audit process.

Furthermore, pursuant to § 301.7701-3(g)(1)(iii), the change in entity classification from an association to a disregarded entity will be treated as if X distributed all of its assets and liabilities to Y in liquidation of the association. Such liquidation will constitute a liquidation under § 332 of the Internal Revenue Code and will be governed by § 1.367(b)-3. Thus, relief under § 301.9100-3 is conditioned on the taxpayer filing an amended return for the Date 4 taxable year and reporting the appropriate amount of gain or income recognized under § 1.367(b)-3.

This ruling is directed only to the taxpayers who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Pursuant to the power of attorney on file with this office a copy of this letter is being sent to X's authorized representatives.

Sincerely,
PAUL F. KUGLER
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes