IRS permits foreign entity to change its tax classification early

Plain-English summary

A foreign entity had previously received relief to elect disregarded-entity status and later wanted to be taxed as a corporation before the usual 60-month waiting period ended. It asked the IRS for consent to change its classification and for extra time to file Form 8832. Based on the submitted facts and representations, the IRS found that the requirements for discretionary election relief were satisfied. The IRS consented to the change and granted 120 days to file Form 8832 with the requested effective date. The relief was conditioned on the entity and its owners filing all required returns for open years consistently with the new classification within the same 120-day period.

Ruling snapshot

• Question: Could the foreign entity change from disregarded status to corporate status within 60 months and file the election late?
• Outcome: Approved.
• Key authorities: Treas. Reg. §§ 301.7701-3, 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202131007 Third Party Communication: None
Release Date: 8/6/2021 Date of Communication: Not Applicable
Index Numbers: 9100.00-00, 9100.31-00
Person To Contact:
---------------------------------------------- ---------------------, ID No. ---------------
---------------------------- Telephone Number:
-------------------------------- --------------------
----------------------------------------- Refer Reply To:
----------------------------------------------------- CC:PSI:B03
--------------------------------------- PLR-126326-20
Date:
May 07, 2021

Legend:

X: ----------------------------------

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

Country: ----------

Date 1: -------------------------

Date 2: ------------------

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

   This letter responds to a letter dated October 20, 2020, and subsequent

correspondence submitted on behalf of X by its authorized representatives, requesting
the Service’s consent to change X’s classification under § 301.7701-3(c)(1)(iv) and
§ 301.9100-3 of the Procedure and Administration Regulations from a disregarded
entity to an association taxable as a corporation for federal tax purposes.

                                                      FACTS

   The information submitted states that X was formed under the laws of Country

and its entity classification for federal tax purposes became relevant Date 1. The
Service granted X relief to file a late election to be classified as a disregarded entity
effective Date 1. X requests the Service’s consent to change X’s classification from a
disregarded entity to an association taxable as a corporation for federal tax purposes
effective Date 2.

PLR-126326-20 2

                                  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. Under
§ 301.7701-3(a), an eligible entity with a single owner can elect to be classified as an
association (and thus a corporation under § 301.7701-2(b)(2)) or to be disregarded as
an entity separate from its owner.

    Section 301.7701-3(b)(2)(i)(B) provides that, unless an entity elects otherwise, a

foreign eligible entity is an association if all members have limited liability. Section
301.7701-3(b)(2)(ii) provides that a member of a foreign eligible entity has limited
liability if the member has no personal liability for the debts of or claims against the
entity by reason of being a member.

   Section 301.7701-3(c)(1)(i) provides that an eligible entity may elect to be

classified other than as provided in § 301.7701-3(b), or to change its classification, by
filing a Form 8832 with the service center designated on the 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 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. 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).

  Section 301.7701-3(d)(1)(i) provides that a foreign eligible entity’s classification is

relevant when its classification affects the liability of any person for federal tax or
information purposes.

   Section 301.7701-3(d)(2) provides that if the classification of a foreign eligible

entity the classification has never been relevant (as defined in § 301.7701-3(d)(1)), then
the entity’s classification will initially be determined pursuant to the default classification
provisions of § 301.7701-3(b)(2) when the classification of the entity first becomes
relevant (as defined in § 301.7701-3(d)(1)(i)).

PLR-126326-20 3

  Section 301.9100-1(c) provides that 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 (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 301.9100-2 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.

   Under § 301.9100-3, a request for relief will be granted when the taxpayer

provides evidence (including affidavits described in § 301.9100-3(e)) to establish to the
satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) the grant of relief will not prejudice the interests of the Government.

                                CONCLUSION

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

the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. We further
consent to X changing its classification for federal tax purposes. As a result, X is
granted an extension of time of 120 days from the date of this letter to file Form 8832
with the appropriate service center to elect under § 301.7701-3 to be an association
taxable as a corporation for federal tax purposes effective Date 2. A copy of this letter
should be attached to the Form 8832.

   This ruling is contingent on X and the owners of X filing within 120 days from the

date 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) Form
5471, Information Return of U.S. Persons With Respect to Certain Foreign
Corporations, (ii) Form 8865, Return of U.S. Persons With Respect to Certain Foreign
Partnerships, and (iii) Form 8858, Information Return of U.S. Persons With Respect to
Foreign Disregarded Entities and Foreign Branches, 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 specifically set forth above, we express or imply no opinion concerning

the facts of this case under any other provision of the Code. In addition, § 301.9100-
1(a) provides that the granting of an extension of time for making an election is not a
determination that the taxpayer 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

PLR-126326-20 4

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. Section 6110(k)(3) of

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

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

copy of this letter to your authorized representatives.

                                 Sincerely,

                                 Associate Chief Counsel
                                 (Passthroughs & Special Industries)


                            By: __________________________________
                                Adrienne M. Mikolashek
                                Branch Chief, Branch 3
                                Office of Associate Chief Counsel
                                (Passthroughs & Special Industries)

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

cc: