Late disregarded-entity election approved before automatic partnership classification

Plain-English summary

A domestic limited liability company began with one member and later added members. It intended to be disregarded as separate from its owner from formation and then treated as a partnership when the additional members joined, but it did not file Form 8832 for the initial classification. The IRS found that the company met the standards for discretionary late-election relief. It granted 120 days to file Form 8832 electing disregarded-entity treatment from the requested date. The company would then become a partnership automatically when it gained additional members under the default classification rules.

Ruling snapshot

• Question: May the limited liability company file a late election for disregarded-entity status before its membership increase caused partnership classification?
• Outcome: approved
• Key authorities: Treas. Reg. §§ 301.7701-3 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

                                                               Third Party Communication: None
Index Number: 7701.00-00, 9100.31-00
                                                               Date of Communication: Not Applicable

                                                               Person To Contact:
Number: 202006009
                                                               -----------------------, ID No. -----------------
Release Date: 2/7/2020                                         Telephone Number:
                                                               -------------------
                                                               Refer Reply To:
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------------------------------                                 PLR-112384-19
                                                               Date:
----------------------------------                             November 12, 2019
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                                                     LEGEND

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

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

Date              =        -----------------------

Year              =        -------


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

      This letter responds to a letter dated May 23, 2019, and subsequent
correspondence, submitted on behalf of X by X’s authorized representative, requesting
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations for X to file an entity classification election under § 301.7701-3.

                                                 FACTS

        The information submitted states that X was formed as a limited liability company
under the laws of State on Date. At the time of formation, X had a single member.
During Year, X gained additional members. X intended to be treated as a disregarded
entity for federal tax purposes effective Date, and as a partnership when additional
members joined in Year. However, X did not file Form 8832, Entity Classification
Election, electing to be treated either as a disregarded entity effective on Date or as a
partnership effective on the first date in Year after one or more additional members
joined X in Year.
PLR-112384-19                                  2




                                         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. An eligible entity with at least two
members can election 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) provides that, unless the entity elects otherwise, a
domestic eligible entity is classified as a partnership if it has two or more members or is
disregarded as an entity separate from its owner if it has a single owner.

        Section 301.7701-3(c)(1)(i) provides 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 appropriate service center. Under § 301.7701-3(c)(1)(iii),
this election will be effective on the date specified by the entity on Form 8832 or on the
date filed if no such date is specified. The date specified on Form 8832 cannot be more
than 75 days prior to the date on which the election is filed and no more than 12 months
after the date the election is filed.

        Section 301.7701-3(f)(2) provides that an eligible entity classified as a
partnership becomes disregarded as an entity separate from its owner when the entity’s
membership is reduced to one member. A single member entity disregarded as an
entity separate from its owner is classified as a partnership when the entity has more
than one member. If an elective classification change under § 301.7701-3(c) is effective
at the same time as a membership change described in § 301.7701-1(f)(2), the deemed
transactions in § 301.7701-3(g) resulting from the elective change preempt the
transactions that would result from the change in membership.

       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
6 months except in the case of a taxpayer who is abroad), under all subtitles of the
Internal Revenue 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.

       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 the
election. Section 301.9100-2 provides the rules governing automatic extension of time
for making certain elections. Section 301.9100-3 provides the standards the
PLR-112384-19                                 3

Commissioner will use to determine whether to grant an extension of time for regulatory
elections that do not meet the requirements of § 301.9100-2. Under § 301.9100-3, a
request for relief will be granted when a 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) granting relief will not
prejudice the interests of the government.

                                   CONCLUSION

        Based solely on the information submitted and the representations made, we
conclude that X has satisfied the requirements of §§ 301.9100-1 and 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
Form 8832 with the appropriate service center and elect to be treated as a disregarded
entity for federal tax purposes, effective Date. In addition, X will be treated as a
partnership beginning on the first date in Year in which one or more additional members
joined X by operation of § 301.7701-3(b)(1) and § 301.7701-3(f)(2). A copy of this letter
should be attached to the Form 8832.

       Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under any other provision of the
Internal Revenue Code and the regulations thereunder. In addition, § 301.9100-1(a)
provides that the granting of an extension of time for making an election is not a
determination that the taxpayer is otherwise eligible to make the election.

       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.

      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.
PLR-112384-19                               4

      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,

                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)


                                  By: __________________________
                                      Adrienne M. Mikolashek
                                      Branch Chief, Branch 3
                                      Office of Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes
PLR-112384-19                                           5

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