PLR 202552007

IRS Grants Foreign Entity Time to Fix Partnership Election

The IRS has granted a foreign entity, referred to as "Company," a 120-day extension to file Form 8832, Entity Classification Election. The ruling, issued in PLR 202552007, allows Company to elect to be classified as a partnership for U.S. federal tax purposes, rectifying a missed filing deadline. Thus, the taxpayer succeeded in their request.

The Missed Deadline and Consistent Filings

The request for relief stemmed from Company's failure to timely file Form 8832, Entity Classification Election, to be classified as a partnership for U.S. federal tax purposes. According to the ruling, Company was formed under the laws of a foreign country on a specific date and represented that it was eligible to elect partnership status. Under Section 301.7701-3 of the Treasury Regulations, certain foreign entities can elect their classification for U.S. tax purposes, a process often referred to as "check-the-box" election. If the entity fails to make an election, it will be assigned a default classification under these regulations.

Despite missing the filing deadline, the IRS considered the specific facts presented. Company represented, and the IRS acknowledged, that both Company and its owners had consistently filed tax returns as if the partnership election had been in effect. This consistent treatment was a key factor in the IRS's decision. Furthermore, Company explicitly stated that it acted reasonably and in good faith, and that granting the requested relief would not prejudice the interests of the U.S. government.

Applying the 'Good Faith' Standard for 9100 Relief

Despite missing the filing deadline, the IRS considered the specific facts presented. Company represented, and the IRS acknowledged, that both Company and its owners had consistently filed tax returns as if the partnership election had been in effect. This consistent treatment was a key factor in the IRS's decision. Furthermore, Company explicitly stated that it acted reasonably and in good faith, and that granting the requested relief would not prejudice the interests of the U.S. government.

The IRS's analysis hinged on Treasury Regulation § 301.9100-3, which governs extensions of time for making regulatory elections. This regulation works in conjunction with the "check-the-box" rules of § 301.7701-3. Under § 301.7701-3, an "eligible entity"—one not automatically classified as a corporation—can elect its classification for federal tax purposes. A foreign eligible entity with two or more members generally defaults to partnership status if at least one member does not have limited liability. However, it can elect to be classified as an association, taxable as a corporation, by filing Form 8832.

Because the company missed the initial deadline to file Form 8832, it requested relief under § 301.9100-3, which allows the Commissioner to grant an extension of time when a taxpayer demonstrates they acted reasonably and in good faith, and that granting relief will not prejudice the government's interests. The IRS determined that both criteria were met. The consistent tax filings, treating the entity as a partnership, supported the claim of reasonable action and good faith. Moreover, the IRS concluded that granting relief would not harm the government's interests. This relief allows the partnership election to be effective retroactively, as if the Form 8832 had been filed on time.

Implications: Avoiding Default Corporate Classification

The IRS granted the Company 120 days from the date of the letter to file Form 8832, Entity Classification Election, with the appropriate service center to elect to be classified as a partnership for federal tax purposes, effective retroactively to the desired date. Without this relief, the entity would likely have been classified differently.

Practice Note: Many foreign entities with limited liability default to being taxed as corporations (associations) for U.S. federal income tax purposes if they do not make an affirmative election. According to Treasury Regulations Section 301.7701-3, also known as the "check-the-box" regulations, an eligible foreign entity can elect its classification for U.S. tax purposes. However, if no election is made, default rules apply. Specifically, if all members of the foreign entity have limited liability, the entity is classified as an association taxable as a corporation. This PLR illustrates that late relief under Treasury Regulations Section 301.9100-3 is available if the taxpayer demonstrates reasonable action, good faith, and no prejudice to the government, especially when supported by a consistent filing history. Nonetheless, timely filing is always the safest course to ensure the desired tax classification.