CCA 200913042: An LLC's default classification determined the examination procedure

Plain-English summary

Chief Counsel considered the examination consequences if an invalid election caused an LLC to fall back to a default tax classification. If the default was C corporation status, the IRS would issue the corporation an ordinary non-TEFRA notice of deficiency. If the default was partnership status, TEFRA applied because passthrough entities were members and prevented use of the small-partnership exception. The partnership assessment period would remain open indefinitely because no partnership return had been filed. The writer referred the underlying default-classification question to another official.

Ruling snapshot

• Question: Which deficiency procedure and limitations period applied under the LLC's possible default classifications?
• Outcome: Advice given: use a corporate deficiency notice for C corporation status or an open-ended TEFRA proceeding for partnership status.
• Key authorities: IRC § 6229; default entity-classification rules under Treas. Reg. § 301.7701-3.

Full text (IRS public release)

ID: CCA-107103-08 Number: 200913042
Release Date: 3/27/2009
Office: --------------
UILC: 7701.02-00

From: -------------------
Sent: Tue 10/7/2008 10:37 AM
To: -------------------
Cc: ---------------------------------------------------------------------------------------------------------------------------
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Subject: RE: Invalid Check the box to be S Corp and also S Corp Election invalid, now partnership by default?

I have forwarded this to ----- for answers on the default entity rules.

If the default to a C corporation applies, we would issue a non-TEFRA notice of deficiency to the corporation as a C corporation.

If it defaults to a partnership, TEFRA would apply since the LLC members are pass-thru entities disqualifying it from the small partnership exception to TEFRA. But the statute would be held open indefinitely since no partnership return was filed. I.R.C. 6229. ---------------------------------------------------------
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