LLC received 120 days for entity classification and S elections

Plain-English summary

A domestic LLC's majority and minority owners intended it to be taxed as an S corporation from formation. The company did not timely file either Form 8832 to elect corporate classification or Form 2553 to elect S corporation status. It nevertheless timely filed S corporation returns, and its shareholders reported their shares of company income consistently with that treatment. The IRS found that the company acted reasonably and in good faith and had reasonable cause for the late S election. It granted 120 days to file both forms retroactively, while expressing no opinion on whether the company otherwise qualified as an S corporation.

Ruling snapshot

• Question: Could the LLC make late corporate-classification and S corporation elections effective from formation?
• Outcome: approved, with 120 days to file Forms 8832 and 2553
• Key authorities: IRC § 1362(a), (b)(1), (b)(3), (b)(5); Treas. Reg. §§ 301.7701-2, 301.7701-3, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201930010                                            Third Party Communication: None
Release Date: 7/26/2019                                      Date of Communication: Not Applicable
Index Number: 1362.01-03, 7701.00-00,
              9100.31-00                                     Person To Contact:
                                                             ---------------------, ID No. ------------------
----------------------------                                 Telephone Number:
------------------------------------------                   ----------------------
------------------------                                     Refer Reply To:
----------------------------                                 CC:PSI:B01
                                                             PLR-127275-18
                                                             Date:
                                                             April 12, 2019




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

A                 =         -----------------------
------------------------------------------------------

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

d1                =        --------------------------

Year 1            =        -------

Year 2            =        -------


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

        We received a letter dated July 23, 2018, written on behalf of X, requesting an
extension of time under § 301.9100-3 of the Procedure and Administration Regulations
for X to elect to be treated as an association taxable as a corporation for federal tax
purposes, and requesting relief to file a late S corporation election under § 1362(b)(5) of
the Internal Revenue Code. This letter responds to that request.

Facts

       X was formed as a limited liability company under State law on d1. X’s majority
shareholder, A, and its minority shareholder intended that X be an S corporation for
federal tax purposes effective d1. However, neither Form 8832, Entity Classification
Election, nor Form 2553, Election by a Small Business Corporation, was filed timely for

X. X represents that it timely filed Forms 1120-S, U.S. Income Tax Return for an S
Corporation, for its tax years Year 1 through Year 2. X represents that all of its
shareholders reported their respective shares of X’s income on their tax returns for
Year 1 through Year 2.

Law and Analysis

      Section 1362(a) provides that, except as provided in § 1362(g), a small business
corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.

       Section 1362(b)(1) provides an election under § 1362(a) may be made by a small
business corporation for any taxable year at any time during the preceding taxable year,
or at any time during the taxable year and on or before the 15th day of the 3rd month of
the taxable year. Section 1362(b)(3) provides that, if a small business corporation
makes an election under § 1362(a) for any taxable year, and the election is made after
the 15th day of the 3rd month of the taxable year and on or before the 15th day of the 3rd
month of the following taxable year, then the election shall be treated as made for the
following taxable year.

       Section 1362(b)(5) provides that if an election under § 1362(a) is made for any
taxable year (determined without regard to § 1362(b)(3)) after the date prescribed by
§ 1362(b) for making the election, or no § 1362(a) election is made for any taxable year,
and the Secretary determines that there was reasonable cause for the failure to timely
make such election, the Secretary may treat such an election as timely made for such
taxable year and § 1362(b)(3) shall not apply.

        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. An eligible
entity with at least two members can elect to be classified as either an association (and
thus a corporation under § 301.7701-2(b)(2)) or a partnership, and an eligible entity with
a single owner can elect to be classified as an association or to be disregarded as an
entity separate from its owner.

       Section 301.7701-3(b)(1)(i) provides that, except as provided in § 301.7701-
3(b)(3), unless the entity elects otherwise, a domestic eligible entity is a partnership if it
has two or more members.

       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.

        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 no 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.

       Sections 301.9100-1 through 301.9100-3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make an
election with a due date that is prescribed by a regulation (and not expressly provided
by statute). Section 301.9100-2 provides an automatic extension of time for making
certain elections. Section 301.9100-3 provides that requests for extensions of time for
regulatory elections that do not meet the requirements of § 301.9100-2 must be made
under the rules of § 301.9100-3. 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 facts submitted and representations made, we conclude that
X has established that X acted reasonably and in good faith, and that granting relief will
not prejudice the interests of the Government. Thus, X has satisfied the requirements
of § 301.9100-3. As a result, X is granted an extension of time of 120 days from the
date of this letter to file a properly executed Form 8832 with the appropriate service
center, electing to be treated as an association taxable as a corporation for federal tax
purposes effective d1. A copy of this letter should be attached to the election.

        In addition, we conclude that X has established reasonable cause for failing to
make a timely election to be an S corporation effective d1. Thus, we conclude that X is
eligible for relief under § 1362(b)(5). Accordingly, provided that X makes an election to
be an S corporation by filing with the appropriate service center a completed Form 2553
effective d1, along with a copy of this letter, within 120 days from the date of this letter,
then such election shall be treated as timely made for X’s taxable year beginning d1. A
copy of this letter is enclosed for that purpose.

      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.

       Except as expressly provided herein, we express or imply no opinion concerning
the federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion concerning
whether X is otherwise eligible to be an S corporation for federal income tax purposes.

      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, a copy of this
letter is being sent your authorized representative.


                                        Sincerely,


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

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