Check-the-box relief for certain foreign entities electing flowthrough treatment.

• Author: Dell, Michael

The IRS issued Rev. Proc. 2010-32, which provides relief to certain foreign eligible entities that made erroneous entity classification elections (check-the-box elections) based on a mistaken understanding of the number of owners as of the effective date of the election.

In general, when the requirements of Rev. Proc. 2010-32 are met, the IRS will respect the intention of a qualified entity (defined below) to be treated as a flowthrough entity (i.e., as a partnership or disregarded as an entity separate from its owner (a disregarded entity)) rather than treat the qualified entity as an association taxable as a corporation. More specifically, if a qualified entity elected to be a partnership based on the reasonable assumption that it had more than one owner, but then determined it only had one owner as of the effective date of the election, the IRS will treat the original election as an election to classify the qualified entity as a disregarded entity as long as the requirements of Rev. Proc. 2010-32 are met. Similarly, if a qualified entity elected to be a disregarded entity based on the reasonable assumption that it had one owner, but then determined it had more than one owner as of the effective date of the election, the IRS will treat the original election as an election to classify the qualified entity as a partnership as long as the requirements of Rev. Proc. 2010-32 are met.

The relief granted by Rev. Proc. 2010-32 is in lieu of the letter ruling process ordinarily used to obtain relief for a late change of entity classification. As such, user fees do not apply to the corrective actions granted under Rev. Proc. 2010-32.

Rev. Proc. 2010-32 is effective on September 7, 2010. Any qualified entity that meets the requirements of Rev. Proc. 2010-32 as of September 7, 2010, may seek relief pursuant to the revenue procedure.

Definition of "Qualified Entity"

In Rev. Proc. 2010-32, Treasury and the IRS have acknowledged taxpayers' concerns regarding the validity of certain check-the-box elections when a foreign eligible entity elects to be classified as a partnership or as a disregarded entity but has made an error regarding the number of owners. The concern is a result of the uncertainty that may exist regarding the number of owners of a foreign eligible entity on the effective date of the check-the-box election. To achieve certainty, taxpayers sought permission to file a late election under the letter ruling process.

To alleviate these concerns and simplify tax...