LLC allowed to change from corporation to disregarded entity

Plain-English summary

A limited liability company had elected to be taxed as a corporation and later wanted to change to disregarded-entity status before the usual 60-month waiting period expired. A new owner had acquired more than 50 percent of the company, satisfying the ownership-change condition under the entity-classification regulations. The IRS consented to the requested classification change effective on the stated date. The company must file Form 8832 under Revenue Procedure 2009-41 and attach the ruling letter. The IRS did not decide whether the company was otherwise eligible to make the election.

Ruling snapshot

• Question: Could the LLC change from corporate classification to disregarded-entity status within 60 months of its earlier election?
• Outcome: Approved because more than 50 percent of the ownership had changed
• Key authorities: Treas. Reg. §§ 301.7701-2 and 301.7701-3; Rev. Proc. 2009-41

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202341001                                             Third Party Communication: None
 Release Date: 10/13/2023                                      Date of Communication: Not Applicable
 Index Number: 7701.00-00, 9100.00-00
                                                               Person To Contact:
 -------------------------------------------                   ----------------------, ID No. -----------------
 --------------------------------------------------------      Telephone Number:
 ---------------------------------------                       --------------------
 --------------------------------                              Refer Reply To:
 --------------------------                                    CC:PSI:B3
                                                               PLR-100331-23
                                                               Date:
                                                               July 05, 2023




                                                      LEGEND

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

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

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

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

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

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


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

This letter responds to a letter dated December 13, 2022, 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
entity classification from an association taxable as a corporation to a disregarded entity
for federal tax purposes effective Date 4.

                                                      FACTS

The information submitted states that X was formed under the laws of State as a limited
liability company on Date 1. X subsequently elected to be classified as an association
taxable as a corporation effective Date 2. On Date 3, a new owner acquired more than
fifty percent of X, satisfying § 301.7701-3(c)(1)(iv).
PLR-100331-23                                  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. 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, 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 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 entity classification to a disregarded entity for federal tax purposes
effective Date 4 under § 301.7701-3(c)(1)(iv). Accordingly, X should file a Form 8832
pursuant to Rev. Proc. 2009-41, 2009-39 I.R.B. 439, with the appropriate service center
to elect to be disregarded as an entity separate from its owner effective Date 4 and
attach a copy of this letter to its Form 8832.
PLR-100331-23                                             3

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. Specifically, we express or imply no opinion regarding whether X is
otherwise eligible to make the election.

The rulings contained in this letter are 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 request for rulings, 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 copies
of this letter to X’s authorized representatives.

                                                 Sincerely,

                                                 Holly Porter
                                                 Associate Chief Counsel
                                                 (Passthroughs & Special Industries)




                                        By:      __________________________
                                                 Richard T. Probst
                                                 Senior Technician Reviewer, Branch 3
                                                 (Passthroughs & Special Industries)



Enclosure:
      Copy of this letter




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