An LLC received relief to become a disregarded entity

Plain-English summary

An LLC had elected S corporation status and was later treated as a qualified subchapter S subsidiary. Its corporate parent then transferred all of the LLC interests to an entity treated as a partnership. The LLC sought to change from an association taxable as a corporation to an entity disregarded from its new owner, even though fewer than 60 months had passed since its prior classification election. The LLC represented that more than half of its ownership had changed, satisfying the ownership condition for discretionary consent under the entity-classification regulations. The IRS consented to the early classification change and granted 120 days to file Form 8832 with the requested effective date.

Ruling snapshot

• Question: Could the LLC change to disregarded-entity status within 60 months of its previous classification election and receive more time to file Form 8832?
• Outcome: Approved, with consent to the early change and 120 days to file
• Key authorities: IRC §§ 1361 and 1362; Treas. Reg. §§ 301.7701-3(c)(1)(iv), 301.7701-3(c)(1)(v)(C), and 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202252001
Third Party Communication: None
Release Date: 12/30/2022
Date of Communication: Not Applicable
Index Number: 7701.00-00, 9100.00-00,
9100.31-00
Person To Contact:
-----------------, ID No. ------------------
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Telephone Number:
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Refer Reply To:
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CC:PSI:B01
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PLR-106727-22

Date:
September 29, 2022

LEGEND

X = -----------------------------
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A = -------------------------------------------
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B = -------------------------------------------
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State = --------------

Date 1 = ---------------------------

Date 2 = ----------------------

Date 3 = ----------------------

Date 4 = ----------------------

Date 5 = -------------------

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

This responds to a letter dated March 25, 2022, and subsequent correspondence, requesting a ruling under §§ 301.9100-3 and 301.7701-3(c)(1)(iv) of the Procedure and Administration Regulations. Specifically, your letter requests the Service's consent to
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change X's classification from an association taxable as a corporation to a disregarded entity, effective Date 5.

FACTS

According to the information submitted, X was formed on Date 1 as a limited liability company under the laws of State. X elected to be treated as an S corporation effective Date 2. Under § 301.7701-3(c)(1)(v)(C), X had been treated as having made an election to be classified as an association taxable as a corporation effective Date 2. On Date 3, A, an entity treated as an association taxable as a corporation for federal tax purposes, acquired all of the interests in X. A elected to be treated as an S corporation effective Date 4, and A made a timely election to treat X as a qualified subchapter S subsidiary effective Date 4. On Date 5, A transferred all of the interests in X to B, an entity treated as a partnership for federal tax purposes. X represents that, by Date 5, X had changes of ownership of more than fifty percent that would satisfy § 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. An eligible entity with a single owner can elect to be classified as an association (and thus classified as a corporation under
§ 301.7701-2(b)(2)) or to be disregarded as an entity separate from its owner.

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 owner if it has a single owner.

Section 301.7701-3(c)(1)(i) provides, in part, that 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, Entity Classification Election.

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 (other than an election made by an existing entity to change its classification as of the effective date of § 301.7701-3), the entity cannot change its classification by election again during the sixty months
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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(c)(1)(v)(C) provides that an eligible entity that timely elects to be an S corporation under section 1362(a)(1) is treated as having made an election under
§ 301.7701-3 to be classified as an association, provided that (as of the effective date of the election under section 1362(a)(1)), the entity meets all other requirements to qualify as a small business corporation under section 1361(b). Subject to § 301.7701- 3(c)(1)(iv), the deemed election to be classified as an association will apply as of the effective date of the S corporation election and will remain in effect until the entity makes a valid election, under § 301.7701-3(c)(1)(i), to be classified as other than an association.

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.

Section 301.9100-3(a) provides that 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 on the facts submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Further, we consent to X changing its classification for federal tax purposes less than 60 months after its previous entity classification election under § 301.7701-3(c)(1)(iv). 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 classified as
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a disregarded entity for federal tax purposes effective Date 5. 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 federal tax consequences of the facts described above under any other provision of the Internal Revenue Code. Specifically, we express or imply no opinion regarding whether the taxpayer is otherwise eligible to make the election.

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.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer an accompanied by a penalty of perjury statement executed by the appropriate party. While this office has not verified any of the material submitted in support of the ruling request, it is subject to verification or examination.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to X's authorized representative.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: Caroline Hay
Caroline Hay
Senior Technician Reviewer, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosure
Copy of this letter for § 6110 purposes

cc: