Canada: IRS Extends Time For Making Check-The-Box Elections

The Internal Revenue Service (the "Service") recently issued Revenue Procedure 2009-41 which extends the time for filing initial entity classification elections ("check-the-box elections") and changes to the classification an entity previously elected for elections pending or filed subsequent to September 28, 2009. Essentially, the new procedure allows an entity, that establishes reasonable cause for late filing, three additional years (for a total of three years and 75 days) to make or change an election if either the election did not matter because no returns were filed by the entity or any affected person or if the entity was mistaken about the classification but the entity and, if applicable, all affected persons, acted consistently with its mistaken belief.

Background

An eligible business entity (other than an entity treated as a per se corporation) can choose whether to be classified as a corporation or, in the case of a single-member entity, a disregarded entity, and in the case of a multiple member entity, a partnership. In order to be classified as other than its default classification, an entity files an election with the Service on IRS Form 8832, Entity Classification Election. This election is effective on the date chosen by the entity but no earlier than 75 days prior to or later than twelve months after the filing of the election.

Under prior law, in the event that an entity (other than a newly-formed entity as discussed below) wished to have a check-the-box election apply for a period earlier than 75 days prior to the filing of the election, the entity was required to seek a ruling from the Service. A request for relief under Treasury Regulation § 301.9100-3 would be granted if the entity provided evidence to establish that the entity acted reasonably and in good faith, and that granting the relief would not prejudice the interests of the government.

A newly formed entity that did not file a timely election could also seek relief pursuant to Revenue Procedure 2002-59. Under that guidance, a newly formed entity that failed to make a timely initial classification election and had reasonable cause for its failure, could make such election at any time prior to the due date of the federal tax return for the entity's desired classification (excluding extensions) for the taxable year beginning with the date of the entity's formation. If a newly formed entity was electing to be treated as a disregarded entity, the time for the election is measured by the deadline for its owner's return.

New Rules

Revenue Procedure 2009-41 now will allow an entity that has reasonable cause for failure to make a timely filing (i.e., within 75 days of the effective date) up to three additional years to file an election for its initial classification or to change its classification. In order to qualify for this three-year extension, however, the entity either (i) must not have filed a federal tax or information return for the first year in which the election is intended because the due date has not passed; or (ii) must have filed all required federal tax returns and information returns consistent with the requested classification for all tax years the entity intended the election to be effective. If the entity is not required to file any returns, each "affected person" who was required to file a federal tax return or information return must have timely filed consistently with the requested classification for all years the entity intended the requested classification and no inconsistent tax or information returns have been filed. Importantly, for these purposes, a return is "timely filed" if it is filed within six months of the due date of the return excluding extensions. An affected person includes anyone required to attach a copy of the election to its federal income tax return.

Procedure

In order to file an election after the initial 75 day period has passed, the entity must file the IRS Form 8832 with the words "Filed Pursuant to Rev. Proc. 2009-41" written across the top of the form. The entity must attach to the IRS Form 8832 a declaration that the elements for relief from late filing under the new procedure have been met and an explanation of the reason for the failure to timely file. The declaration and reasonable cause statement must be accompanied by a dated declaration, signed by an authorized representative of the entity and any affected person, under penalties of perjury. The person signing the declaration must have personal knowledge of the facts constituting the basis for the requested relief.

An entity that does not qualify under this new procedure may still seek relief through a letter ruling, but must either affirm that all tax returns for the entity, or if no tax returns were required, for any affected person, for the period at issue were filed consistently with the desired classification or explain why it cannot so affirm.

Effective

Revenue Procedure 2009-41 applies to any requests pending or filed after September 28, 2009. Please note that if an entity had a request for a ruling pending on September 28, 2009, under the former procedures, the entity may withdraw that request prior to November 12, 2009, obtain a refund of the ruling request fee, and seek relief under the new procedure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.