LLC may change from S corporation status to disregarded entity within 60 months

Plain-English summary

A single-owner limited liability company had elected S corporation status,
which also caused it to be classified as an association taxable as a corporation.
It later came under new ownership, with the new owner acquiring more than half
of the company. The company wanted to change its federal tax classification to
a disregarded entity before the normal 60-month waiting period expired. The
regulations allow the IRS to permit an early change when more than 50 percent
of the ownership at the new election date is held by people who owned no
interest when the prior election was filed or became effective. The IRS
consented to the change and directed the company to file Form 8832 under Revenue
Procedure 2009-41. The ruling did not decide whether the company otherwise
qualified to make the election.

Ruling snapshot

• Question: May an LLC change from association status to a disregarded
  entity within 60 months after its prior classification election when new
  owners hold more than 50 percent?
• Outcome: Approved. The IRS consented to the classification change.
• Key authorities: Treas. Reg. §§ 301.7701-3(a), 301.7701-3(b)(1), and
  301.7701-3(c)(1)(iv), (v)(C); IRC §§ 1361(b), 1362(a)(1); Rev. Proc.
  2009-41.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202313003 Third Party Communication: None
Release Date: 3/31/2023 Date of Communication: Not Applicable
Index Number: 7701.00-00
Person To Contact:
------------------------------------------ ----------------------, ID No. -----------------
-------------------------- Telephone Number:
---------------------------------- --------------------
------------------------------------ Refer Reply To:
----------------------------- CC:PSI:B01
PLR-113270-22
Date:
January 05, 2023

Legend

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

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

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

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

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

Date4 = ------------------

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

This letter responds to a letter dated July 7, 2022, 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 disregarded entity for federal tax
purposes effective Date4.

                                                   FACTS

The information submitted states that X was formed under the laws of State as a limited
liability company on Date1. X subsequently elected to be an S corporation effective
Date2. Under § 301.7701-3(c)(i)(v)(C), X is treated as having made an election to be
classified as an association taxable as a corporation for federal tax purposes effective

PLR-113270-22 2

Date2. On Date3, a new owner acquired more than fifty percent of X, satisfying
§ 301.7701-3(c)(1)(iv).

                               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, 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 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
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.

PLR-113270-22 3

                                 CONCLUSION

Based solely on the information submitted and the representations made, we consent to
X changing its entity classification to a disregarded entity for federal tax purposes
effective Date4 under § 301.7701-3(c)(1)(iv). Accordingly, X should file a Form 8832
pursuant to Rev. Proc. 2009-41, 2009-39 I.R.B. 439, with the appropriate service center
to elect to be disregarded as an entity separate from its owner effective Date4 and
attach a copy of this letter to its Form 8832.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect 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 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.

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, we are sending copies
of this letter to X’s authorized representatives.

                                  Sincerely,

                                  Holly Porter
                                  Associate Chief Counsel
                                  (Passthroughs & Special Industries)



                           By:    __________________________
                                  Joy C. Spies
                                  Senior Technician Reviewer, Branch 1
                                  (Passthroughs & Special Industries)

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

PLR-113270-22 4

cc: -

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