Early change to disregarded status permitted

Plain-English summary

A limited liability company had elected S corporation status, which caused it to be classified as an association taxable as a corporation. A new owner later acquired more than half of the company and the company sought to become disregarded from that owner before the usual 60-month waiting period for another classification election had expired. The regulations allow the IRS to consent to an earlier change when more than 50 percent of the ownership is held by people who held no interest at the relevant time of the prior election. The IRS consented to the early classification change and found that the late-election relief standards were met. It granted 120 days to file Form 8832 for disregarded-entity treatment effective on the acquisition date.

Ruling snapshot

• Question: Could the company change from corporate to disregarded status within 60 months after its prior classification election?
• Outcome: Approved, with 120 days to file Form 8832
• Key authorities: IRC §§ 1361, 1362; Treas. Reg. §§ 301.7701-3(c)(1)(iv), 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202345002                                             Third Party Communication: None
 Release Date: 11/10/2023                                      Date of Communication: Not Applicable
 Index Number: 7701.00-00, 9100.00-00,
               9100.31-00                                      Person To Contact:
                                                               ---------------------------, ID No. ---------------
 -------------------------------------------------             -----------------
 ----------------------------------------                      Telephone Number:
 ----------------------                                        --------------------
 -----------------------------                                 Refer Reply To:
 ------------------------------                                CC:PSI:B01
                                                               PLR-101858-23
                                                               Date:
                                                               July 25, 2023




                                                     LEGEND

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

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

This letter responds to a letter dated December 14, 2022, submitted on behalf of X by
X’s authorized representative, requesting a ruling under § 301.9100-3 and § 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 Date
3.

                                                     FACTS

The information submitted states that X was formed under the laws of State as a limited
liability company on Date 1. X subsequently elected to be an S corporation effective
Date 2. 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
Date 2. On Date 3, a new owner acquired more than fifty percent of X, satisfying
§ 301.7701-3(c)(1)(iv). X requests to change its classification from an association
taxable as a corporation to a disregarded entity for federal tax purposes effective Date
3.

PLR-101858-23                                 2

                                   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. 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) 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. An election by a newly formed eligible entity
that is effective on the date of formation is not considered a change for purposes of
§ 301.7701-3(c)(1)(iv).

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-101858-23                                3


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
six months except in the case of a taxpayer who is abroad), under all subtitles of the
Internal Revenue Code (Code), except subtitles E, G, H, and I. Section 301.9100-
1(b) defines the term “regulatory election” as including 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 that the Commissioner
will use to determine whether to grant an extension of time to make an election. Section
301.9100-2 provides automatic extensions of time for making certain elections. Section
301.9100-3 provides rules for requesting extensions of time for regulatory elections that
do not meet the requirements of § 301.9100-2.

Section 301.9100-3(a) provides that a request for relief will be granted when the
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) the grant of relief will not prejudice the interests of the
Government.

                                     CONCLUSION

Based solely on the information submitted and the representations made, we conclude
that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Further,
we consent to X changing its entity classification to a disregarded entity for federal tax
less than 60 months after its previous entity classification election under § 301.7701-
3(c)(1)(iv). Accordingly, 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 under
§ 301.7701-3.to be disregarded as an entity separate from its owner effective Date 3. A
copy of this letter should be attached to the 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.

PLR-101858-23                                             4

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to X's authorized representatives.

                                                 Sincerely,

                                                 Holly Porter
                                                 Associate Chief Counsel
                                                 (Passthroughs & Special Industries)



                                           By:                    /S/
                                                 Caroline E. Hay
                                                 Senior Technician Reviewer, Branch 1
                                                 Office of the Associate Chief Counsel
                                                 (Passthroughs & Special Industries)


Enclosure
      Copy for § 6110 purposes




 CC: ----------------------------------------
     ----------

       ----------------------------------
       ----------------------------
       ------------------------------------------------
       ------------------------
       ------------------------------