Ownership change permitted early partnership classification

Plain-English summary

A limited liability company had elected corporate classification and then sought to become a partnership within the normally applicable 60-month waiting period. More than half of its ownership had changed before the requested effective date, and the company timely filed a new entity-classification election, but the IRS service center denied it because of the prior election. The IRS consented to the change under the regulatory ownership-change exception and directed the company to file Form 8832 with a copy of the ruling.

Ruling snapshot

• Question: Could an eligible entity change from corporate classification to partnership status within 60 months of its prior classification election after a greater-than-50-percent ownership change?
• Outcome: Approved effective on the requested date, subject to filing Form 8832 and otherwise qualifying for the election.
• Key authorities: Treas. Reg. §§ 301.7701-2 and 301.7701-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201926006                                              Third Party Communication: None
Release Date: 6/28/2019                                        Date of Communication: Not Applicable
Index Numbers: 7701.00-00, 7701.02-00
                                                               Person To Contact:
------------------------------------------------               -------------------------, ID No. -----------------
--------------------------------------                         -----------------------------------------------------
--------------------------                                     Telephone Number:
-----------------------------------------------                ----------------------
-------------------------------------------                    Refer Reply To:
                                                               CC:PSI:B03
                                                               PLR-131664-18
                                                               Date:
                                                               March 22, 2019

Legend

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

State =           --------------

Date1 =           -------------------

Date2 =           ----------------------

Date3 =           ------------------------

Date4 =           --------------------------


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

       This letter responds to a letter dated September 14, 2018, and subsequent
correspondence submitted on behalf of X, requesting a ruling under § 301.7701-
3(c)(1)(iv) of the Procedure and Administration Regulations. Specifically, your letter
requests the Service’s consent to change X’s classification from an association taxable
as a corporation to a partnership effective Date3.

                                               FACTS

        The information submitted states that on Date1, X was formed under the laws of
State as a limited liability company. Effective Date2, X filed a Form 8832, Entity
Classification Election, to change its classification to an association taxable as a
corporation. On Date3, X had a change in ownership of more than fifty percent that
would satisfy § 301.7701-3(c)(1)(iv). On Date4, X filed a timely Form 8832 to change its
classification to a partnership effective Date3. The IRS Service Center denied the
PLR-131664-18                                  2

change in classification due to the prior classification change effective on Date2, which
was within the 60-month period set forth in § 301.7701-3(c)(1)(iv).

                             LAW AND ANALYSIS

        Section 301.7701-3(a) 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 as provided in § 301.7701-3. Elections
are necessary only when an eligible entity does not want to be classified under the
default classification or when an eligible entity chooses to change its classification.

      Section 301.7701-3(b)(1) provides that, unless the entity elects otherwise, a
domestic eligible entity is (i) a partnership if it has two or more members; or (ii)
disregarded as an entity separate from its owner if it has a single 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 with the
service center designated on Form 8832.

        Section 301.7701-3(c)(1)(iii) provides that an election made under § 301.7701-
3(c)(1)(i) will be effective on the date specified by the entity on the Form 8832 or on the
date filed if no date is specified on the election form. The effective date specified on
Form 8832 cannot be more than 75 days prior to the date on which the election is filed
and cannot be more than 12 months after the date on which the election is filed.

        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, 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

        Based solely on the information submitted and the representations made, we
consent to X changing its classification to a partnership for federal tax purposes
effective Date3 under § 301.7701-3(c)(1)(iv). X should file a Form 8832, Entity
Classification Election, with the appropriate service center and attach a copy of this
letter to the election.
PLR-131664-18                                3

        Except as expressly provided herein, we express or imply no opinion concerning
the federal tax consequences of any transaction or item discussed or referenced in this
letter. Specifically, we express or imply no opinion regarding whether X is otherwise
eligible to make the election.

       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.

      This ruling is directed only to the taxpayer requesting it. According to
§ 6110(k)(3), this ruling may not be used or cited as precedent.

                                         Sincerely,



                                         James A. Quinn
                                         Senior Counsel, Branch 3
                                         Office of the Associate Chief Counsel
                                         (Passthroughs & Special Industries)



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