Late check-the-box elections made easier.

• Author: Packard, Pamela

Under Rev. Proc. 2002-15, a new procedure exists to seek relief under Regs. Sec. 301.9100-1 for a late initial-classification election under the Sec. 7701 check-the-box regulations.

Regs. Sec. 301.7701-3 provides that an entity not classified as a corporation under Regs. Sec. 301.7701-2 can choose its tax classification. An entity with multiple owners may choose to be taxed as an association or as a partnership. An entity with only one owner can choose to be taxed as an association or be completely disregarded for tax purposes. Regs. Sec. 301.7701-3(b) provides default classifications, and the check-the-box election overrides the default.

Taxpayers make a check-the-box election under Regs. Sec. 301.77013(c)(1) by filing Form 8832, Entity Classification Election, specifying an effective date not more than 75 days before the date that they file the election. If an election specifies an effective date more than 75 days before, the elected classification is effective only 75 days before filing. Thus, the entity is classified under one status for a period of time, and then changed to the other status. For example, assume a foreign entity not on the per se corporation list forms on January 1 and its owners (all of whom have limited liability) intend it to be a partnership, but do not file Form 8832 until June 14. The entity is an association until March 31 at the earliest. On April 1, it changes to a partnership, resulting in a deemed liquidation of the association, followed by a contribution of the assets and liabilities to a partnership (Regs. Sec. 1.77013(g)(1)(iii)). Unless the liquidation meets the requirements of Sec. 332, the liquidation is a taxable event.

Regs. Sec. 301.9100-1 gives the Service authority to grant extensions of time to make a regulatory election, if (1) the taxpayer acted reasonably and in good faith and (2) granting the relief does not prejudice the government's interests. Regs. Sec. 301.9100-3 (b) lists circumstances under which a taxpayer acts reasonably and in good faith.

Before Rev. Proc. 2002-15, taxpayers had to seek Regs. Sec. 301.9100-3 relief by requesting a letter ruling. The National Office has issued at least 200 rulings for relief for late check-the-box elections since Jan. 1,1997. The ruling request process requires the taxpayer to pay an IRS user fee ($6,000 under Rev. Proc. 2002-1), as well as significant fees to attorneys and accountants for their assistance with the request. The process is...