IRS permits an entity to change classification within the 60-month limit

Plain-English summary

A single-owner limited liability company had elected corporate tax status and later underwent a complete ownership change. It wanted to elect disregarded-entity status effective on the acquisition date, even though Treasury Regulation § 301.7701-3 ordinarily bars another classification election for 60 months. The regulation lets the Commissioner permit an earlier change when more than half the ownership after the new election belongs to people who held no interest when the prior election was filed or became effective. The company represented that the ownership test was satisfied, that it acted reasonably and in good faith, and that relief would not prejudice the government. The IRS consented to the early classification change and gave the company 120 days to file Form 8832 for the requested effective date.

Ruling snapshot

• Question: May the company elect disregarded-entity status less than 60 months after its prior corporate-classification election?
• Outcome: Approved (consent granted and 120 days allowed to file Form 8832).
• Key authorities: Treas. Reg. §§ 301.7701-3(c)(1)(iv), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202137004 Third Party Communication: None
Release Date: 9/17/2021 Date of Communication: Not Applicable
Index Number: 7701.00-00, 9100.31-00
Person To Contact:
--------------------- -------------------, ID No. -----------------
------------------------------------------ Telephone Number:
------------------ --------------------
-------------------------- Refer Reply To:
CC:PSI:B03
PLR-127993-20
Date:
June 07, 2021

                                              LEGEND

X = -----------------------------------------------------------------------------------------------
--------------------------
Y = -----------------------------------------------------------------------------------------------
--------------------------
Z = -----------------------------------------------------------------------------------------------
--------------------------
Date 1 = -------------------
Date 2 = -------------------------
Date 3 = --------------------------
Date 4 = --------------------------
Date 5 = -------------------------
Date 6 = -------------------------
Year 1 = -------
State = ----------

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

   This letter responds to a letter dated November 25, 2020, and subsequent

correspondence, submitted on behalf of X by X's authorized representative, requesting
a ruling under § 301.7701-3(c)(1)(iv) and § 301.9100-3 of the Procedure and
Administration Regulations. Specifically, your letter requests the Service's consent to
change X's entity classification from an association taxable as a corporation to a
disregarded entity for federal tax purposes effective Date 6.

                                               FACTS

   According to the information submitted, X was incorporated on Date 1 under the

laws of State and elected to be treated as an S corporation effective Date 2. Effective
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Date 3, X represents that it converted from a corporation to a limited liability company
under the laws of State in a transaction that was treated as a taxable liquidation for
federal tax purposes.

  On Date 4, all of the interests in X were acquired by Y and X became a

disregarded entity by default under § 301.7701-3(b)(1).

    Effective Date 5, X filed a Form 8832, Entity Classification Election to change its

classification from being disregarded as an entity separate from its owner to an
association taxable as a corporation for federal tax purposes.

   On Date 6, Z acquired all of the outstanding interests in X. X represents that as

of Date 6, X had a change of ownership of more than fifty percent that would satisfy
§ 301.7701-3(c)(1)(iv). X requests to change its classification from an association
taxable as a corporation to a disregarded entity for federal tax purposes effective
Date 6.

   X represents that it acted reasonably and in good faith. Further, X represents

that the interests of the Government will not be prejudiced for all taxable years affected
by the election by granting the relief sought.

                               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. Elections are necessary only when an eligible entity does not want to be
classified under the default classification or when an eligible entity chooses its
classification.

    Section 301.7701-3(b)(1) provides that, except as provided in § 301.7701-

3(b)(3), 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 owners 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, Entity
Classification Election, 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 Form 8832 or on the
date filed if no such date is specified. The effective date specified on Form 8832 cannot
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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.

    Section 301.9100-1(c) provides that the Commissioner in exercising the

Commissioner's discretion may grant a reasonable extension of time under the rules set
forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory
election (but not more than 6 months except in the case of a taxpayer who is abroad),
under all subtitles of the Code, except subtitles E, G, H, and I. Section 301.9100-1(b)
provides that the term “regulatory election” includes an election whose due date is
prescribed by a regulation published in the Federal Register.

  Section 301.9100-2 provides the standards the Commissioner will use to

determine whether to grant an automatic extension of time for making certain elections.

   Section 301.9100-3 provides the guidelines for granting extensions of time for

making elections that do not meet the requirements of § 301.9100-2. Section 301.9100-
3(a) provides that requests for relief subject to § 301.9100-3 will be granted when the
taxpayer provides the evidence (including affidavits described in § 301.9100-3(e)) to
establish to the satisfaction of the Commissioner that the taxpayer acted reasonably
and in good faith, and the grant of relief will not prejudice the interests of the
Government.

                                  CONCLUSION

   Based solely on the information submitted and the representations made, we

consent to X changing its entity classification for federal tax purposes less than 60
months after its previous classification election. As a result, X is granted an extension
of time of 120 days from the date of this letter to file the form 8832 with the appropriate
service center to elect to be disregarded as an entity separate from its owner for federal
tax purposes effective Date 6. A copy of this letter should be attached to the
Form 8832.

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

the 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.
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   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. 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 X's authorized representative.

                                  Sincerely,

                                  Associate Chief Counsel
                                  (Passthroughs & Special Industries)




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

Enclosures (2)
A copy of this letter
A copy for § 6110 purposes

cc: