PLR 1202011: IRS permits an early entity classification change

Plain-English summary

The IRS permitted a foreign entity to elect classification as an association taxable as a corporation within 60 months of a prior entity classification election. The entity had previously elected disregarded-entity status and later experienced an ownership change in which more than half of its interests were held by people who had not previously owned interests. The IRS concluded that this ownership change satisfied the exception to the 60-month limitation. The entity was instructed to file Form 8832 with the requested effective date.

Ruling snapshot

• Question: Could the foreign entity change its tax classification to an association taxable as a corporation before the 60-month waiting period ended?
• Outcome: Approved, the requested classification election was permitted.
• Key authorities: Treas. Reg. § 301.7701-3(c)(1)(iv)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201202011 Third Party Communication: None
Release Date: 1/13/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7701.00-00 ----------------------, ID No. -----------------
Telephone Number:

                                                            Refer Reply To:

---------------------------------------------- CC:PSI:B03
------------------------------------------------ PLR-125791-11
--------------------------------------------------------------- Date:
---------------- September 26, 2011

X = ------------------------------------------------------------------------------------------------
----------------------

Y = ------------------------------------------------------------------------------------------------
-----------------------

Z = ------------------------------------------------------------------------------------------------
-----------------------

Country = --------
#1
Country ------------------
#2
D1 = -------------------

D2 = ----------------------

D3 = ----------------------

D4 = --------------------------

a = -----

Dear --------:

   This letter responds to a letter dated June 15, 2011, submitted on behalf of X,

requesting a determination that X may file an election to be treated as an association
PLR-125791-11 2

taxable as a corporation under § 301.7701-3(c)(1)(iv) of the Procedure and
Administration Regulations with an effective date within sixty months of a previous entity
classification election.

FACTS

    X was formed on D1 under the laws of Country #1. X represents that it is a

foreign entity eligible to elect to be classified as an association taxable as a corporation
for federal tax purposes. X was a wholly-owned subsidiary of Y, a domestic
corporation. X elected to be classified as a disregarded entity for federal tax purposes
effective D2. As of D3, X underwent an ownership change whereby a% of the
ownership interests in X now are owned by persons that did not own any interests in X
as of D2. Z intended that X would be treated as an association taxable as a corporation
effective D4. Because an entity classification election was made within 60 months prior
to D4, X requests the Service’s consent under § 301.7701-3(c)(1)(iv) to change its
classification.

LAW AND ANALYSIS

    Section 301.7701-3(a) provides, in part, 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 as provided in
§ 301.7701-3.

    Section 301.7701-3(c)(1)(iii) provides that an election under § 301.7701-3(c)(i)

will be effective on the date specified by the entity on Form 8832 or on the date filed if
no such date is specified on the election form. The effective date specified on Form
8832 can not be more than 75 days prior to the date on which the election is filed and
can not be more than 12 months after the date on which the election is filed. If an
election specifies an effective date more than 75 days prior to the date on which the
election is filed, it will be effective 75 days prior to the date it was filed.

    Section 301.7701-3(c)(1)(iv) provides, in part, that if an eligible entity makes an

election under § 301.7701-3(c)(1)(i) to change its classification, the entity cannot
change its classification by election again during the sixty months succeeding the
effective date of the election. However, the Commissioner may permit the entity to
change its classification by election within the sixty months if more than fifty percent of
the ownership interests in the entity as of the effective date of the subsequent election
are owned by persons that did not own any interests in the entity on the filing date or on
the effective date of the entity’s prior election.

CONCLUSION
PLR-125791-11 3

    Based solely on the facts submitted and the representations made, we conclude

that the requirements of § 301.7701-3(c)(1)(iv) have been satisfied. Accordingly, X may
elect to be treated as an association taxable as a corporation for federal tax purposes,
effective D4. The election should be made by filing Form 8832 with the appropriate
service center. A copy of this letter should be attached to the election.

   Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the above described facts under any other provision of the
Internal Revenue Code.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to X’s authorized representative.

                                     Sincerely,



                                     Richard T. Probst
                                     Senior Technician Reviewer, Branch 3
                                     (Passthroughs & Special Industries)


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

cc: