Converted subsidiaries may make two classification elections despite the 60-month rule

Plain-English summary

Eight subsidiaries first converted from state-law corporations into limited liability companies because state law did not permit the direct conversion ultimately desired. They planned to elect association status effective on that first conversion date, then elect disregarded status after converting into LLCs in another state. The IRS concluded that each subsidiary became a newly formed eligible entity when it stopped being a per se corporation. Therefore, the first election was not a classification change for the 60-month limitation, and the second election was not barred by that rule. The ruling did not decide whether the subsidiaries otherwise qualified for either classification.

Ruling snapshot

• Question: Does the 60-month classification-change rule prevent the subsidiaries' planned second elections after two state-law conversions?
• Outcome: Approved: the first elections are formation-date elections, so the second elections are not barred.
• Key authorities: Treas. Reg. §§ 301.7701-2(b) and 301.7701-3(a) and (c)(1)(iv).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201516034 Third Party Communication: None
Release Date: 4/17/2015 Date of Communication: Not Applicable
Index Number: 7701.00-00
Person To Contact:
------------------------------------- ---------------------, ID No. ----------------
----------------------------------------------------- Telephone Number:
------------------------------------------------- --------------------
------------------------------------ Refer Reply To:
CC:PSI:B03
PLR-127292-14
Date:
December 18, 2014

                                                   LEGEND

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

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

---------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------

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

State1 = ------------

State2 = ------------

Country = ----------------

Sub1 = -------------------------

Sub2 = ---------------------------

Sub3 = -------------------------------------

Sub4 = -----------------------------------

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Sub5 = -----------------------------

Sub6 = ------------------------------------------

Sub7 = ---------------------------------------

Sub8 = -------------------------

D1 = ----------------

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

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

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

Dear -----------:

    We received a letter dated July 14, 2014, submitted on behalf of X and Z

requesting rulings under § 301.7701-3(c)(1)(iv) of the Procedure and Administration
Regulations relating to whether certain subsidiaries of X are considered newly formed
eligible entities.

                                                   FACTS

     The information submitted discloses that X is a corporation under State1 law. X

owns all of the interests in Sub1, Sub2, Sub3, and Sub6; Sub3 owns all of the interests
in Sub4, which owns all of the interests in Sub5; and Sub6 owns all of the interests in
Sub7, which owns all of the interests in Sub8 (collectively, “Subs”). The Subs were
initially incorporated under State1 law. On D4, X’s former owner, Y, sold all of the
common stock in X to (indirectly) Z, a Country entity. Prior to the D4 stock sale,
however, the Subs converted to State1 limited liability companies on D1 (“State1
Conversions”). The State1 Conversions were due to the fact that State1 law barred
direct conversions of State1 corporations to the State2 limited liability companies that Z
preferred. The Subs intend to file elections under § 301.7701-3(c)(1)(i) to be classified
as associations effective D1 (“First Elections”). In addition, Sub1, Sub2, Sub3, Sub4,
Sub5, Sub6, and Sub7 on D2, and Sub8 on D3, then converted to State2 limited liability
companies, as permitted under State1 law. The Subs intend again to file elections
PLR-127292-14 3

under § 301.7701-3(c)(1)(i) to be classified as disregarded entities effective D4
(“Second Elections”).

                               LAW AND ANALYSIS

   Section 301.7701-2(b)(1) provides that for federal tax purposes, the term

“corporation” means a business entity organized under a Federal or State statute, or
under a statute of a federally recognized Indian tribe, if the statute describes or refers to
the entity as incorporated or as a corporation, body corporate, or body politic (“per se
corporation”).

    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. An eligible entity with at least two members can elect to be classified as
either an association (and thus a corporation under § 301.7701-2(b)(2)) or a
partnership, and an eligible entity with a single owner can elect to be classified as an
association or to be disregarded as an entity separate from its owner.

   Section 301.7701-3(c)(1)(i) provides that except as provided in § 301.7701-

3(c)(1)(iv) and (v), an eligible entity may elect to be classified other than as provided
under § 301.7701-3(b), or to change its classification, by filing Form 8832, Entity
Classification Election, with the service center designated on Form 8832.

    Section 301.7701-3(c)(1)(iv) provides, in pertinent 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 within the sixty months succeeding the
effective date of the election. An election made by a newly formed eligible entity that is
effective on the date of formation is not considered a change for purposes of
§ 301.7701-3(c)(1)(iv).

    The Subs formerly were classified as per se corporations under

§ 301.7701-2(b)(1) and, thus, did not constitute eligible entities pursuant to § 301.7701-
3(a). However, upon converting to State1 limited liability companies the Subs became
eligible entities as defined in § 301.7701-3(a). Therefore, the Subs are considered
newly formed eligible entities as of D1 for purposes of § 301.7701-3(c)(1)(iv).

                                  CONCLUSION

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

the First Elections effective D1 by the Subs will not be considered a change of entity
classification of the Subs for purposes of § 301.7701-3(c)(1)(iv). In addition, the Subs
will not be prohibited under § 301.7701-3(c)(1)(iv) from changing their entity
classification by making the Second Elections effective D4.
PLR-127292-14 4

    Except for the specific ruling above, we express or imply no opinion concerning

the federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion on whether the Subs are otherwise
eligible to make the elections or otherwise qualify to be treated as either associations or
disregarded entities.

  This ruling is directed only to the taxpayer requesting it. According to

§ 6110(k)(3) of the Code, this ruling may not be used or cited as precedent.

    Under a power of attorney on file with this office, we are sending a copy of this

letter to X and Z’s authorized representatives.

   The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

                                          Sincerely,

                                          /s/
                                          Holly Porter
                                          Chief, Branch 3
                                          Office of the Associate Chief Counsel
                                          (Passthroughs & Special Industries)

Enclosures: Copy of this letter
Copy for § 6110 purposes