April 6, 2010

 

 

In September of 2009, the IRS offered some relief to U.S. taxpayers wanting to "check-the-box" to treat a foreign entity as a partnership or disregarded entity (branch) for U.S. tax purposes, but who may not have filed the election form (IRS Form 8832) within the 75-day window from the time the entity was formed.

 

Rev. Proc. 2009-41, offers a welcome alternative to getting a private letter ruling in order to make a late election up to 3 years and 75 days prior to the date the election is filed (instead of the old limit of 75 days), but only for those who meet the terms for relief and back that up with documentation. 

 

Considering that this is the time of year when a missed election may come to light while tax returns and extensions are being prepared, this Tidbit suggests a "check-up" on "check-the-box" and focuses on the relief that could still be available thanks to Rev. Proc. 2009-41.

 

Under U.S. Treasury Regulations (§301.7701-3(b)), a foreign eligible entity (i.e., not a per se corporation) can elect to be treated as a partnership or disregarded entity for U.S. tax purposes, effectively offering flow-through treatment to its owner(s).  In the absence of an election, a foreign eligible entity is treated as a corporation, whereby income could be deferred until dividends are paid to U.S. shareholders.

 

A reason check-the-box elections may have been missed involves how differently foreign entities are treated from U.S. ones under the Treasury Regulations.  For example, in the case of a limited liability company formed under the laws of a U.S. state, if no election is filed the "default" treatment of the company is as a disregarded entity if it has one owner, or a partnership if it has more than one owner.  The opposite is true for foreign eligible entities.   Do nothing and the limited liability company is treated as a corporation.  However, the “check-the-box” election on Form 8832 could allow the limited liability company to be treated as a disregarded entity (foreign branch) or partnership.

 

With Rev. Proc. 2009-41 the IRS offered relief, but it is not automatic.  There are several prerequisites that must be fulfilled.  They reflect the IRS's goal of not allowing hindsight to motivate a change in the way an entity is treated for U.S. tax purposes.  For example, if no election was made because a foreign entity was expected to be profitable and the objective was to defer income outside the U.S., but economic conditions generated losses that could have offset income in the U.S. if the election had been made, Rev. Proc. 2009-41 will not permit a do-over.  In order to make a late election for an entity that has been around for several years, the person signing it must represent that information returns filed with respect to the entity were consistent with the requested classification.  Therefore, if Forms 5471 were filed to report on the entity as a foreign corporation, a late election under Rev. Proc. 2009-41 to disregard the foreign entity would not be permitted and the only remaining option would be to obtain a private letter ruling.  The person signing the election must also include an explanation of why the election was not timely made.