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FedTax: Entity Elections

California CPA October 2009


New guidance extends relief for late elections

By Stuart R. Josephs, CPA
Rev. Proc. 2009-41 (Internal Revenue Bulletin 2009-39, Sept. 28, 2009) provides guidance under Internal Revenue Code Sec. 7701 for an eligible entity that requests relief for a late entity classification election filed with the applicable IRS campus (service center) within three years and 75 days of the requested effective date of the entity’s election.

Rev. Proc. 2009-41 also provides guidance for eligible entities that do not qualify for relief under this revenue procedure and are required to request a letter ruling to request relief for a late entity classification election.

Background
Regs. Sec. 301.7701-3(c)(1)(iii) provides that an election under Regs. Sec. 301.7701-3(c)(1)(i) will be effective on the date specified by the entity on IRS Form 8832, Entity Classification Election, or on the date filed if no effective date is specified on this form.

A specified effective date cannot be more than 75 days before the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed.

Rev. Proc. 2002-59 provided 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 Relief
Rev. Proc 2009-41 supersedes Rev. Proc. 2002-59 by extending late-entity classification relief to both initial classification elections and changes in classification elections, along with extending the time for filing late elections to within three years and 75 days of the requested effective date of the eligible entity’s classification. For entities satisfying the eligibility requirements described below, Rev. Proc. 2009-41 is the exclusive means for obtaining relief for a late entity classification election and is in lieu of the letter ruling process used to obtain relief for late elections under Regs. Secs. 301.9100-1 and -3. Thus, no user fees apply to action under Rev. Proc. 2009-41.

An eligible entity may qualify for alternative relief, under Regs. Sec. 301.7701(3(c)(1)(v)(C), which treats an entity as having elected corporate classification when it timely elects to be an S corporation. Rev. Procs. 2004-48 and 2007-62 contain special rules for late S corp elections and late entity classification elections. (See “Late Elections Relief,” December 2007 California CPA, Page 16.)

Eligibility Requirements
An entity qualifies for relief under Rev. Proc. 2009-41, Section 4.01, for a late election if the following conditions are met:
1a. The entity failed to obtain its requested classification as of its formation date, or upon a foreign eligible entity’s classification becoming relevant, when its classification affects any person’s liability for federal tax or information purposes, solely because Form 8832 was not filed timely; or
1b. The entity failed to obtain its requested change in classification, subject to the limitation in Regs. Sec. 301.7701-3(c)(1)(iv), solely because Form 8832 was not filed timely; and
2a. The entity seeking an extension to make an entity classification election has not filed a federal tax or information return for the first year in which the election was intended because the due date has not passed for that year’s federal tax or information return; or
2b. The entity seeking an extension to make an entity classification election timely filed all required federal tax and information returns consistent with its requested classification for all of the years the entity intended the requested election to be effective and no inconsistent returns have been filed by, or with respect to, the entity during any of the tax years.

For changes in an entity’s classification election, consistent filing of returns includes filing returns consistent with the deemed treatment of elective changes under Regs. Sec. 301.7701-3(g).

Under Rev. Proc. 2009-41, if an entity is not required to file a federal tax or information return, each affected person, who is required to file such a return, must have timely filed all these returns consistent with the entity’s requested classification for all of the years the entity intended the requested election to be effective and no inconsistent tax or information returns have been filed during any of the tax years.

Solely for purposes of this condition 2b, an entity and an affected person will be treated as having timely filed a required return if it is filed within six months after its due date, excluding extensions. Affected and non-affected persons are further described in Rev. Proc. 2009-41, Section 4.01(2)(b).
3. The entity has reasonable cause for its failure to timely make the entity classification election.

4. Three years and 75 days from the requested effective date of the entity’s election have not passed.

Procedural Requirements
Rev. Proc. 2009-41, Section 4.02 contains detailed procedural specifications for requesting relief.

Granting Relief
Upon receiving a completed Form 8832 requesting relief under Rev. Proc. 2009-41, Section 4.01, the IRS campus (service center) will determine whether the requirements for granting the late entity classification election have been satisfied and will notify the entity of the result of its determination. An entity receiving relief under Rev. Proc. 2009-41 is treated as having made a timely election as of the requested effective date of the election.

Entities not Meeting the Eligibility Requirements
Entities requesting a letter ruling because they do not meet all of the eligibility requirements of Rev. Proc. 2009-41, Sec. 4.01, discussed above, must include either the following representation as part of the entity’s request for a letter ruling or an explanation regarding why they do not qualify to do so: “All required U.S. tax and information returns of the entity (or, if the entity was not required to file any such returns under the desired classification, then all required U.S. tax and information returns of each affected person as defined in Section 4.02 of Rev. Proc. 2009-41) were filed timely or within six months of the due date of the respective return (excluding extensions) as if the entity classification election had been in effect on the requested date. No U.S. tax or information returns were filed inconsistently with those described in the prior sentence.”

Note: Under Rev. Proc. 2009-1, Appendix A, an $11,500 user fee is charged for requesting a letter ruling. However, a reduced user fee applies if the request involves a personal or business tax issue from a person with the following gross income (as determined under Appendix A):
   
Gross Income                        Reduced Fee
Less than $250,000                $625
More than $250,000,
but less than $1 million           $2,100

To obtain the reduced fee, the certification specified in Rev. Proc. 2009-1, Appendix A, must be attached to the ruling request.

General Effective Date
Except as provided in the transition rule for pending letter ruling requests, discussed below, Rev. Proc. 2009-41 was effective Sept. 28, 2009, which was the date of its publication in the Internal Revenue Bulletin. Rev. Proc. 2009-41 applies to requests that were pending with the IRS campus (service center) pursuant to Rev. Proc. 2002-59 on Sept. 28, 2009, and to requests received thereafter.

Rev. Proc. 2009-41 also applies to all letter ruling requests that were pending in the IRS national office on Sept. 28, 2009, and to requests for relief received thereafter.

Transition Rule for Pending Letter Ruling Requests
If an entity has filed a letter ruling request seeking relief for a late entity classification election and that letter ruling request was pending in the IRS national office on Sept. 28, 2009, the entity may rely on Rev. Proc. 2009-41, withdraw its request and receive a refund of its user fee.

However, the IRS national office will process letter ruling requests that were pending on Sept. 28, 2009, unless the entity notifies the IRS national office that it will rely on Rev. Proc. 2009-41 and withdraw its letter ruling request. This notification must be provided to the IRS national office prior to the earlier of:

  • Nov. 12, 2009; or
  • The issuance of the letter ruling. 

Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients’ tax questions and problems. Josephs is chair of the Federal Subcommittee of CalCPA’s Committee on Taxation.