Sean Foley		Landon McGrew

The IRS recently issued new guidance providing extended relief for late check-the-box elections. Under revenue procedure 2009-41, the IRS has extended the time period for requesting relief for a late check-the-box election to three years and 75 days after the requested effective date of the entity classification election. The new rules also extend relief to changes in entity classification. Under the old rules, relief was only available for initial entity classifications.

For US federal income tax purposes, an entity that is not automatically classified as a corporation by the regulations (an eligible entity) can elect its classification as a corporation or a pass through entity, in other words, a partnership or disregarded entity.

The regulations in this area provide default classifications for eligible entities depending upon the entity's number of owners, the entity's status as either a US or foreign entity, and whether the owners have unlimited liability for the debts of the entity. If an eligible entity wishes to be classified as an entity other than its default classification, the entity must file a form 8832 with the IRS (a check-the-box election) within 75 days of the desired effective date of the change in entity classification. Check-the-box elections are frequently used in international tax planning to create hybrid structures in which an entity is classified as one type of entity for US tax purposes and as another for foreign tax purposes.

If a check-the-box election is not timely filed, the IRS has provided simplified procedures for obtaining relief. Before the release of the new guidance, revenue procedure 2002-59 provided late filing relief if requested by the due date of the entity's tax return (excluding extensions) for the tax year of the desired effective date and the entity established reasonable cause for the failure to file a timely election.

Under these rules, relief was available only in the case of newly formed eligible entities that were making an election to be effective as of the entity's date of formation.

Revenue procedure 2009-41 extends the period for requesting relief from the due date of the tax return to three years and 75 days after the requested effective date of the late check-the-box election. Importantly, the revenue procedure also extends relief to changes in entity classification. Thus, relief is available for both initial classifications and changes to classifications.

Revenue procedure 2009-41 contains a number of specific requirements for entities seeking relief. For entities that satisfy those requirements, revenue procedure 2009-41 is now the sole means for obtaining relief from a late check-the-box election. Entities that do not satisfy its requirements may still submit a private letter ruling request to the IRS seeking relief.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Sean Foley (sffoley@kpmg.com) Washington, DC and Landon McGrew (lmcgrew@kpmg.com), McLean, VA