Dormant LLC's corporate election treated as initial classification

Plain-English summary

A limited liability company remained dormant after formation, with no assets, income, liabilities, bank accounts, operations, or board meetings. Before it acquired property and began business, it filed Form 8832 to be classified as an association taxable as a corporation. The company asked whether that filing was an initial classification election rather than a change in classification. The distinction mattered because an entity generally cannot make another classification change within 60 months. The IRS ruled that the corporate classification was an initial election effective when the company began business, so it was not a classification change for the 60-month limitation.

Ruling snapshot

• Question: Was the dormant LLC's election of corporate tax status an initial classification election rather than a change in classification?
• Outcome: Approved
• Key authorities: Treas. Reg. §§ 301.7701-3(a) and 301.7701-3(c)(1)

Full text (IRS public release)

Internal Revenue Service                                Department of the Treasury
                                                        Washington, DC 20224

Number: 201622020                                       Third Party Communication: None
Release Date: 5/27/2016                                 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:B01
                                                        PLR-130088-15
                                                        Date:
                                                        February 23, 2016




LEGEND

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

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

D1                =        --------------------------

D2                =        ---------------------

D3                =        ---------------------


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

        This responds to the letter dated September 10, 2015, and related
correspondence, submitted on behalf of X, requesting a ruling that X’s election to be
classified as an association taxable as a corporation was an initial classification
election, and not a change in classification, for purposes of § 301.7701-3(c)(1)(iv) of the
Procedure and Administration Regulations.
PLR-130088-15                                  2

FACTS


         The information submitted states that X was formed as a limited liability company
under the laws of State on D1. Prior to D2, X had no assets, income, deductions,
liabilities, bank accounts, business operations, or board meetings, and was dormant.
On D2, X purchased a residential and retail property and began its business operations.
X elected to be classified as an association taxable as a corporation, by filing a Form
8832, Entity Classification Election, effective D3, a date between D1 and D2 (“corporate
classification election”).


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. 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(c)(1)(i) provides that, subject to the limitation of § 301.7701-
3(c)(1)(iv), an eligible entity may elect to be classified other than its default
classification, or to change its classification, by filing Form 8832, with the service center
designated on Form 8832.


        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 this section), 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).
PLR-130088-15                                 3

CONCLUSION


        Based solely upon the facts submitted and the representations made, we
conclude that X’s corporate classification election was an initial classification election
effective D2, and not a change in classification, for purposes of § 301.7701-3(c)(1)(iv).


       Except as specifically set forth above, no opinion is expressed or implied
concerning the federal tax consequences of the above-described facts under any other
provision of the Code.


       This ruling is directed only to the taxpayer who requested 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, a copy of this
letter ruling will be sent to X’s authorized representatives.


                                           Sincerely,

                                           Associate Chief Counsel
                                           (Passthroughs & Special Industries)




                                     By: Joy C. Spies
                                         Joy C. Spies
                                         Senior Technician Reviewer, Branch 1
                                         Office of Associate Chief Counsel
                                         (Passthroughs & Special Industries)


Enclosures (2)

       Copy of this letter
       Copy of this letter for section 6110 purposes


cc: