IRS permits an LLC to change from corporate to partnership status within 60 months

Plain-English summary

An LLC had elected to change from disregarded-entity status to an association taxable as a corporation. Before 60 months had passed, a corporation acquired more than half of the LLC's ownership interests, and neither that acquirer, its public parent, nor the parent's other subsidiaries had previously owned an interest. The LLC asked to change its classification again, this time to a partnership, effective on the acquisition date. Treas. Reg. § 301.7701-3(c)(1)(iv) allows the IRS to permit a second election within 60 months when more than 50 percent of the entity is owned by persons who held no interest at the time of the earlier election. The IRS consented and directed the LLC to file Form 8832, without deciding whether it otherwise qualified to make the election.

Ruling snapshot

• Question: Could the LLC elect partnership status within 60 months of its earlier corporate-classification election after a greater-than-50-percent ownership change?
• Outcome: approved (the IRS consented to partnership classification effective on the ownership-change date)
• Key authorities: IRC § 7701; Treas. Reg. §§ 301.7701-2, 301.7701-3(c)(1)(iv)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202036002                                              Third Party Communication: None
 Release Date: 9/4/2020                                         Date of Communication: Not Applicable
 Index Numbers: 7701.00-00, 7701.02-00
                                                                Person To Contact:
 --------------------------------------                         ------------------------, ID No. -----------------
 --------------------                                           Telephone Number:
 ---------------------------------                              --------------------
 ----------------------------------------                       Refer Reply To:
                                                                CC:PSI:B03
                                                                PLR-106183-20
                                                                Date:
                                                                May 20, 2020


Legend

X                 =         --------------------------------------
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Y                 =         -----------------------
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Z                 =         ---------------------------------------
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State1            =        -----------

State2            =        ---------

Date1             =        --------------------

Date2             =        ---------------------

Date3             =        -------------------




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

        This letter responds to a letter dated March 2, 2020, 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 partnership
effective Date3.
PLR-106183-20                                  2


                                           FACTS

       The information submitted states that on Date1, X was formed under the laws of
State1 as a limited liability company. On Date2, X filed a Form 8832, Entity
Classification Election, to change its classification from being disregarded as an entity
separate from its owner to an association taxable as a corporation for federal tax
purposes. On Date3, Y, a State2 corporation, acquired more than fifty percent of the
outstanding ownership interests in X. Y is a wholly-owned subsidiary of Z, a State2
publicly-traded corporation.

        X represents that, on Date3, X experienced a change in its ownership interests of
more than fifty percent that would satisfy § 301.7701-3(c)(1)(iv). X further represents
that, prior to Date3, Y, Z, and the other subsidiaries of Z did not hold any ownership
interests in X.

                                   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 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
PLR-106183-20                                3

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 partnership for federal tax purposes
effective Date3 under § 301.7701-3(c)(1)(iv). X should file a Form 8832, Entity
Classification Election, with the appropriate service center and attach a copy of this
letter to the election.

        Except as expressly provided herein, we express or imply no opinion concerning
the federal 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.

       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. According to
§ 6110(k)(3), this ruling 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,

                                          Richard T. Probst
                                          Senior Technician Reviewer, Branch 3
                                          Office of the Associate Chief Counsel
                                          (Passthroughs & Special Industries)

Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes




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