LLC allowed to switch back to partnership taxation within the usual 60-month lock-out because ownership changed by more than half

Plain-English summary

An LLC can choose how it is taxed (disregarded, partnership, or corporation), but
once it elects to change its classification, it generally cannot change again for
60 months. Here an LLC started as a disregarded single-owner entity, then elected
S corporation status, which also made it (by default rule) an association taxed as
a corporation. Later, new owners bought in and it wanted to be taxed as a
partnership, but that was within the 60-month window. The regulations allow an
exception: the IRS may permit an earlier change when more than 50% of the
ownership as of the new election's effective date is held by people who did not
own interests at the time of the prior election. Because the LLC had a more than
50% ownership change, the IRS consented and, using "9100 relief," granted 120 days
to file Form 8832 electing partnership classification. The IRS expressed no
opinion on whether the LLC otherwise qualifies to make the election.

Ruling snapshot

• Question: May an LLC change its tax classification to a partnership within the 60-month lock-out period after a greater-than-50% ownership change?
• Outcome: Approved (consent granted; 120 days to file Form 8832)
• Key authorities: Treas. Reg. §§ 301.7701-3(c)(1)(iv), (v)(C), 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201840008                                             Third Party Communication: None
Release Date: 10/5/2018                                       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:01
                                                              PLR-136973-17
                                                              Date:
                                                              June 11, 2018

Legend

X                       = ----------------------------------------------------------------------------------------
                          ----------------------------------------------------------------------------------------
                          -----------
State                   = ---------------
Date 1                  = ---------------------------
Date 2                  = ------------------------
Date 3                  = ----------------------
Date 4                  = --------------------------
Date 5                  = ----------------------


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

       This letter responds to a letter dated December 1, 2017, and subsequent
correspondence, submitted on behalf of X, 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 classification from
an association taxable as a corporation to a partnership effective Date 4.

                                                     FACTS

         The information submitted states that on Date 1, X was formed as a limited
liability company under the laws of State. At the time of formation, X had a single owner
and was treated as a disregarded entity for federal tax purposes. On Date 2, X elected
to be an S corporation effective Date 2. Under § 301.7701-3(c)(1)(v)(C), X is also
treated as having made an election to be classified as an association taxable as a
corporation effective Date 3. On Date 4, new owners acquired interests in X. X
represents that as of Date 4, X had a change of ownership of more than fifty percent
that would satisfy § 301.7701-3(c)(1)(iv).

LAW

        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(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 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 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. If
an election specifies an effective date more than 75 days prior to the date on which the
election is filed, it will be effective 75 days prior to the date it was 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 301.7701-3(c)(1)(v)(C) provides that an eligible entity that timely elects to
be an S corporation under § 1362(a)(1) of the Internal Revenue Code (Code) 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 § 1362(a)(1)) the entity
meets all other requirements to qualify as a small business corporation under § 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 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 classification for federal tax purposes less than 60 months
after its previous classification change. 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 to be classified as a partnership for federal tax purposes effective Date 5.
A copy of this letter should be attached to the Form 8832.

       Except as expressly provided herein, 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.

        This ruling is directed only to the taxpayer that requested 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
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.

      In accordance with a 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)


                                     Laura C. Fields
                                   By:
                                     Laura C. Fields
                                     Senior Technician Reviewer, Branch 1
                                     (Passthroughs & Special Industries)



Enclosures (2)
 Copy of Letter
 Copy for § 6110 purposes