Relief for Late Initial Entity-Classification Elections

Rev. Proc. 2002-15 permitted a newly formed entity to request relief for a late initial entity-classification election filed within six months of its due date and before the entity's unextended return due date. The Service has now broadened that relief, giving new entities until their unextended return due dates to request relief from a late election, even if that date is more than six months after the initial classification election should have been made.

Background

Under Regs. Sec. 301.7701-3, the check-the-box regulations, a business entity not mandatorily classified as a corporation may elect a classification for Federal tax purposes. An eligible entity with at least two members is automatically classified as a partnership unless it elects to be taxed as a corporation. An eligible entity with a single owner is automatically classified as a disregarded entity, but may elect to be classified as a corporation.

According to Regs. Sec. 301.7701-3(c)(1)(iii), entity-classification elections are made by filing Form 8832, Entity Classification Election, with the appropriate service center. An election is 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). If an election specifies an effective date more than 75 days before the date on which it is filed, it will be effective 75 days before the date it was filed.

Rev. Proc. 2002-15 provided a simplified method to request relief for a late initial classification election (i.e., an election by an eligible entity newly formed under local law to be classified effective on the date of its formation as other than the default classification provided under Regs. Sec. 301.7701-3(b)). This procedure was in lieu of the letter ruling procedure that otherwise would have to be used to obtain relief for a late entity-classification election.

Procedure

Rev. Proc. 2002-15 is now modified and superseded by extending the time for filing a late initial entity-classification election beyond six months, to the unextended due date for the Federal return of the entity's desired classification for the year of its formation. The return due date for an entity desiring to be disregarded as an entity separate from its owner is its sole owner's return due date for the tax year in which the entity was formed.

This procedure is in lieu of the letter ruling procedure that would otherwise have to be used; thus, user fees do not apply to corrective action under the procedure. An entity not eligible for relief under this procedure (or denied relief by the service center) may apply for a letter ruling.

Eligibility. An entity is eligible for relief under Rev. Proc. 2002-15 for a late initial classification election if:

1. It failed to obtain its desired classification as of the date of its formation solely because Form 8832 was not timely filed under Regs. Sec. 301.7701-3(c)(1);

2. The due date for the return of the entity's default classification (excluding extensions) for the tax year beginning with the date of the entity's formation has not passed; and

3. The entity has reasonable cause for its failure to timely make the initial entity-classification election.

The entity must file Form 8832 with the applicable service center by the original due date of the first Federal return of the entity's desired classification. The form must be signed in the manner required by Regs. Sec. 301.7701-3(c)(2), with “FILED PURSUANT TO REV. PROC. 2002-59” written at the top. A statement must be attached explaining the reason for the failure to file a timely initial classification election. After receiving the request, IRS will notify the entity whether it qualifies for relief.

Rev. Proc. 2002-59, 2002-39 IRB 615

REFLECTIONS: Rev. Proc. 2002-59 generally applies to all ruling requests pending in the IRS National Office on Sept. 30, 2002, and to relief requests received after that date.