Election Made By Shell LLC That Held No Assets and Conducted No Activities Since Formation Held to Be Initial Classification Election

Under Reg. §301.7701-3(c)(1)(iv) an LLC that makes an election to change its classification may not, without IRS approval, change its classification again within 60 months of that change of classification.  However, this rule does not apply to the entity’s initial classification.  In that case, the organization could change its classification to an acceptable alternative at any time without IRS approval, even if that was less than 60 months after the initial classification.

In PLR 201622020 the situation involved an LLC that was formed but which sat dormant from its formation until it finally acquired assets at a later date.  This LLC now wished to be taxed as an organization taxed as a corporation, but asked the IRS to allow it to treat this election as an initial election and not a change of classification that would trigger the 60 month waiting period before a change of classification could be undertaken without IRS approval.

The IRS granted the entity’s request that this be treated as an initial classification by a newly formed entity that was effective on the date of formation—that is, the IRS treated the date of formation as the date in which the entity ceased to be an empty shell, despite that being well after the date the LLC had been formed under applicable law.

Note that while the LLC may change its classification from a corporation to an acceptable alternative (a disregarded entity if it has only one owner or a partnership otherwise) at any time, that does not mean that there would not a tax consequence to doing so.  Rather the corporation would need to go through a deemed liquidation, with distribution of assets to the shareholders followed by the creation of the new entity—and either (or both) of those transactions could trigger taxable events.