Initial classification ruling clears the way for a late disregarded-entity election

Plain-English summary

A foreign eligible entity filed an election to be taxed as a corporation, then sought to be treated as a disregarded entity from a requested effective date. It asked the IRS to confirm that its corporate election was an initial classification rather than a change that would trigger the 60-month limit on another election. The IRS agreed after considering that the entity had been dormant, with no assets, income, liabilities, bank accounts, business operations, or board meetings. The IRS also found that the entity satisfied the regulatory extension standards and granted 120 days to file Form 8832 for disregarded-entity treatment. The relief is conditioned on the owners filing all required returns for open years consistently with the ruling.

Ruling snapshot

• Question: Was the corporate election an initial classification, and may the entity receive more time to elect disregarded-entity status?
• Outcome: Approved (initial-classification ruling and 120-day filing extension granted)
• Key authorities: Treas. Reg. §§ 301.7701-3(c)(1)(i), 301.7701-3(c)(1)(iv), 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201849004                                              Third Party Communication: None
Release Date: 12/7/2018                                        Date of Communication: Not Applicable
Index Numbers: 7701.00-00; 9100.31-00
                                                               Person To Contact:
------------------------------------------------------------   -------------------, ID No. ------------------
------------------------------------------------------------   Telephone Number:
-----                                                          ----------------------
-------------------------------------                          Refer Reply To:
 ----------------------------------                            CC:PSI:B01
                                                               PLR-103793-18
                                                               Date:
                                                               August 06, 2018




LEGEND

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

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

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

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

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

D5                =        -----------------------

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



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

This is in response to a letter dated February 1, 2018, submitted on behalf of X by its
authorized representatives. X requests (1) a ruling that X’s election to be classified as
an association taxable as a corporation was an initial classification election, and not a
change in classification, for purposes § 301.7701-3(c)(1)(i) of the Procedure and
Administration Regulations and (2) an extension of time under § 301.9100-3 to file an
election under § 301.7701-3(c) to be treated as a disregarded entity for federal tax
purposes.


FACTS

According to the information submitted, X was formed on D1 under the laws of Country.
X intended to be treated as a disregarded entity for federal tax purposes effective D3.
However, X inadvertently failed to timely file Form 8832, Entity Classification Election, to
be treated as a disregarded entity for federal tax purposes effective D3. Instead, on D4,
X filed a Form 8832, Entity Classification Election, requesting to be classified as an
association taxable as a corporation effective D2.

Prior to D3, X had no assets, income, deductions, liabilities, bank accounts, business
operations, or board meetings, and was dormant.

LAW AND ANALYSIS

Section 301.7701-3(b)(2) provides guidance on the classification of a foreign eligible
entity for federal tax purposes. Generally, a foreign eligible entity is treated as an
association if all members have limited liability, unless the entity makes an election to
be treated otherwise. A foreign eligible entity with two or more members having limited
liability may elect to be treated as a partnership pursuant to the rules of § 301.7701-
3(c). Section 301.7701-3(c) provides that an entity classification election must be filed
on Form 8832 and can be effective up to 75 days prior to the date the form is filed or up
to 12 months after the date the form is filed.

Section 301.7701-3(c)(1)(i) provides, in part, 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 that if an eligible entity makes an election under §
301.7701-3(c)(1)(i) to change its classification (other than an election made by an
existing entity to change its classification as of the effective date of this section), 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. An election 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).

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time to
make a regulatory election, or a statutory election (but no more than six months except
in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue
Code, except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term


“regulatory election” as including an election whose due date is prescribed by a
regulation published in the Federal Register.

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
will use to determine whether to grant an extension of time to make an election. Section
301.9100-1(a).

Section 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 provides rules for requesting extensions of time for regulatory
elections that do not meet the requirements of § 301.9100-2.

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.

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
X’s corporate classification election was an initial classification effective D2, and not a
change in classification, for purposes of § 301.7701-3(c)(1)(i). As such, a subsequent
election by X to change its classification will not be subject to the sixty months limitation
set forth in § 301.7701-3(c)(1)(iv).

Further, we conclude that the requirements of § 301.9100-3 have been satisfied. As a
result, X is granted an extension of time of 120 days from the date of this letter to make
an election to be treated as a disregarded entity for federal tax purposes effective D3. X
should make the election by filing a properly executed Form 8832 with the appropriate
service center. A copy of this letter should be attached to the form.

This ruling is contingent on the owners of X filing within 120 days of this letter all
required returns for all open years consistent with the requested relief. These returns
may include, but are not limited to, the following forms: (i) Forms 5471, Information
Return of U.S. Persons With Respect to Certain Foreign Corporations, (ii) Forms 8865,
Return of U.S. Persons With Respect to Certain Foreign Partnerships, and (iii) Forms
8858, Information Return of U.S. Persons With Respect to Disregarded Entities, such
that these forms reflect the consequences of the relief granted in this letter. A copy of
this letter should be attached to any such returns.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

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


In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (Passthroughs & Special Industries)

                                       Joy C. Spies

                                       Joy C. Spies
                                       Senior Technician Review, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)



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


cc: