Today the I.R.S. issued Revenue Procedure 2009-41 which allows certain late entity classification (“check-the-box”) elections to be filed retroactively for a period of 3 years and 75 days.
Entity Classification Elections Generally
Treas. Reg. § 301.7701-3(a) provides in part that a business entity that is not a per se corporation under Treas. Reg. § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (i.e., an eligible entity) can elect its classification for federal tax purposes as provided in Treas. Reg. § 301.7701-3. An eligible entity with at least two members can elect to be classified as either a corporation or a partnership, and an eligible entity with a single owner can elect to be classified as a corporation or as a disregarded entity.
Treas. Reg. § 301.7701-3(b) provides a default classification for an eligible entity that does not file an entity classification election. Thus, an entity classification election is necessary only when an eligible entity chooses to be classified initially as other than its default classification or when an eligible entity chooses to change its classification.
Entity classification elections are made by filing Form 8832, Entity Classification Election. Treas. Reg. § 301.7701-3(c)(1)(iii) provides that an entity classification 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 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.
Under Treas. Reg. § 301.9100-1(c) the I.R.S. may grant a reasonable extension of time to make certain elections. Treas. Reg. § 301.9100-3 provides that the I.R.S. will grant an extension of time when the taxpayer provides the evidence to establish to the satisfaction of the I.R.S. that the taxpayer has acted reasonably and in good faith and the grant of relief will not prejudice the interests of the government.
Revenue Procedure 2002-59
Revenue Procedure 2002-59 provides guidance for entities newly formed under local law to request relief for a late initial classification election filed by the due date for the first federal tax return (excluding extensions) of the entity’s desired classification for the year of the entity’s formation.
Extended to CHANGES in Classification
Revenue Procedure 2009-41 supersedes Revenue Procedure 2002-59. Significantly, Revenue Procedure 2009-41 extends late entity classification relief to changes in classification elections. Under Revenue Procedure 2002-59 relief was only available for initial classification elections. This extension is important because it eliminates many questions related to late entity classification elections, for instance where “off-the-shelf” entities are used.
No Retroactive Election for Per Se Corporations Until Conversion
One must remember, however, that no entity classification elections can be made for per se corporations. Consequently, even if an entity converts from being a per se corporation to being an eligible entity, the effective date of the entity classification election cannot be prior to the date of the conversion.
An eligible entity may qualify for alternative relief under Treas. Reg. § 301.7701-3(c)(1)(v)(C), which treats an entity as having made a classification election to be treated as a corporation when it timely elects to be an S corporation under Code § 1362(a)(1). Also, see Revenue Procedure 2004-48 and Revenue Procedure 2007-62 for special rules applicable to late S corporation elections and late entity classification elections.
Private Letter Rulings
An entity that does not satisfy the requirements for relief under Revenue Procedure 2009-41 may request relief by applying for a letter ruling. However, the I.R.S. user fees (not to mention advisor fees) for private letter rulings can be significant.
Importance for Foreign Entities
This new relief is very helpful for many taxpayers that form entities outside the United States without first obtaining thorough U.S. tax advice. Often it is beneficial to make entity classification elections for foreign entities, but taxpayers may not be immediately made aware of the benefits of such an election. Importantly, however, certain requirements must be met to obtain relief under Revenue Procedure 2009-41 and not all taxpayers may qualify for such relief.