IRS lets an LLC change its tax classification again inside the 60-month limit after a majority ownership change

Plain-English summary

An LLC changed its federal tax classification over time. It began as a two-owner partnership, then became a "disregarded entity" (ignored as separate from its owner) when one owner bought out the other, then filed a Form 8832 to be taxed as a corporation. Normally, once an eligible entity elects to change its classification, it cannot elect again for 60 months. There is an exception: the IRS may permit an earlier change when more than 50% of the ownership interests are held by people who did not own any interest at the time of the prior election. Here such a majority ownership change had occurred. The IRS consented to the entity changing its classification back to a disregarded entity inside the 60-month window and granted 120 days to file a new Form 8832 effective the requested date. The IRS did not decide whether the entity was otherwise eligible to make the election, and expressed no other opinion.

Ruling snapshot

• Question: May an eligible entity change its classification by election within 60 months of a prior election, where more than 50% of its ownership changed hands, and get time to file the Form 8832?
• Outcome: approved
• Key authorities: Treas. Reg. § 301.7701-3(c)(1)(iv) (60-month limit and majority-ownership-change exception); Treas. Reg. §§ 301.7701-2, 301.7701-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202439010
Release Date: 9/27/2024
Index Number: 7701.00-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
------------, ID No. -----------------
Telephone Number:

Refer Reply To:
CC:PSI:B03
PLR-116652-21

Date:
June 21, 2024

LEGEND

X = [redacted]

State = [redacted]

Date 1 = [redacted]

Date 2 = [redacted]

Date 3 = [redacted]

Date 4 = [redacted]

Date 5 = [redacted]

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

   This ruling is in response to your request dated August 12, 2021, and

subsequent correspondence, submitted on behalf of X by its authorized representative,
requesting a ruling under § 301.7701-3(c)(1)(iv) of the Procedure and Administration
Regulations to change X's classification from an association taxable as a corporation to
a disregarded entity for federal tax purposes.

                                         FACTS

   The information submitted states that X was formed under the laws of State as a

limited liability company on Date 1. At the time of formation, X had two owners and was
treated as a partnership for federal tax purposes. On Date 2, one of X's owners
acquired all of the outstanding interest in X and thus X became classified as a
disregarded entity for federal tax purposes. X subsequently filed a Form 8832, Entity
Classification Election, to change its classification to an association taxable as a
corporation for federal income tax purposes effective Date 3. X had a change in
ownership of more than fifty percent that would satisfy the requirements of § 301.7701-
3(c)(1)(iv) on Date 4.

                               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. Under
§ 301.7701-3(a), an eligible entity with a single owner can elect to be classified as an
association (and thus a corporation under § 301.7701-2(b)(2)) or to be disregarded as
an entity separate from its owner.

    Section 301.7701-3(b) provides a default classification for an eligible entity that

does not make an election. Thus, elections are necessary only when an eligible entity
chooses to be classified initially as other than the default classification or when an
eligible entity chooses to change its classification.

  Section 301.7701-3(b)(1)(ii) provides that a domestic eligible entity 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 in § 301.7701-3(b), or to change its classification, by
filing a Form 8832 with the service center designated on the 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 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.

                                  CONCLUSION

    Based solely on the information submitted and representations made, we

consent to X changing its entity classification to a disregarded entity for federal tax
purposes effective Date 5 under § 301.7701-3(c)(1)(iv). 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 to elect to be classified as a disregarded entity for federal tax purposes
effective Date 5. A copy of this letter should be attached to the Form 8832.

   Except as specifically set forth above, we express or imply no opinion concerning

the federal tax consequences of the facts of this case under any other provision of the
Code and the regulations thereunder. 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 information
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.

  In accordance with the power of attorney on file with this office, we are sending a

copy of this letter to X's authorized representative.

                                  Sincerely,

                                  Associate Chief Counsel
                                  (Passthroughs & Special Industries)

                                              /S/
                               By:_______________________________
                                  Richard T. Probst
                                  Senior Technician Reviewer, Branch 3
                                  (Passthroughs & Special Industries)

Enclosure:
Copy of this letter for § 6110 purposes

cc: [redacted]