Free Trial: TheSiteFactory.com

S-Corp Conversion to LLC Wants to Retain S-Election

Technical topics regarding tax preparation.
#1
bethb19  
Posts:
4
Joined:
2-Dec-2021 2:39pm
Location:
CA - California
I have an S-Corp formed in 2016 that converted to an LLC (CA) in 2020 and will be retaining it's S-Election and filed a 2020 1120S. Per Letter Ruling 200528021 my understanding the S-Corp will not lose it's S status and this is considered a tax-free reorganization. I was reading a forum post and EADave mentioned needing to file form 8332 with the IRS for entity classification election requesting late relief under RP 2009.41. Is this required and if I need to file form 8332 is box 6A checked (I am assuming yes). Thanks for any help :D PS - client did not tell me about conversion until after I filed the tax return.
 

#2
Posts:
862
Joined:
28-Apr-2021 7:00am
Location:
FL
You don't have to do anything. The conversion changes nothing for tax purposes.
Steve
 

#3
MWPXYZ  
Posts:
986
Joined:
23-Apr-2014 3:21pm
Location:
Lancaster NH
I don't know.

It seems that the letter rulings regrading these conversions require an election be made.

I had a few clients perform statutory conversions and, initially, i assumed that merely being classified as an "F" reorganization was sufficient to retain the S election (Rev Rul 64-250).

Subsequently, i have read Letter Rulings, 200528021, 200719005, and 200839017 as it seems like that an election should be made by the LLC to be taxed as an association. An election which now can be made, or assumed, on the Form 2553. Subsequently, I have had clients make a late S election pursuant to Rev Proc 2013-30 with the 2020 returns.

200528021 has this under its RULING:
(1) The conversion of Corporation A to New A, a State X LLC followed by an election to be treated as an association taxable as a corporation for federal tax purposes effective as of the date of conversion qualifies as a reorganization under section 368(a)(1)(F).

I have read several articles stating that one should consider making the S election and maybe even complete Form 8832, but no clear cut advice. Also to make sure the LLC agreement does not violate the one class of stock requirement of S Corporations.

Here is another discussion - see post 9 for aother POV
https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=20107&hilit=viewtopic.php%3Ff%3D8%26amp%3Bt%3D10241
 

#4
Posts:
862
Joined:
28-Apr-2021 7:00am
Location:
FL
Again. You don't have to do anything.
Steve
 

#5
Pitch78  
Posts:
657
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
gatortaxguy wrote:Again. You don't have to do anything.



Not sure that is right. Even in the PLR sited by Dave, the new LLC elected to be taxed as a corporation.

See this thread - viewtopic.php?f=8&t=16520&start=50

I would complete a 2553 and send a letter to the IRS explaining what happened.
 

#6
bethb19  
Posts:
4
Joined:
2-Dec-2021 2:39pm
Location:
CA - California
Thanks everyone for your responses and help. It seems like I need to do something. In a 2020 post EADave mentioned calling the entity unit to let them know what has happened. The LR below does state that an election needs to be made. I think the 8832 is what I need to file choosing box 6a A domestic entity choosing to be taxed as an association - but after reading the posts I am not sure since someone did bring up filing a 2553 - S Election...

If anyone else wants to chime in with some words of wisdom - go for it.

Doing nothing seems appealing but I am leaning to side of caution.

200528021 has this under its RULING:
(1) The conversion of Corporation A to New A, a State X LLC followed by an election to be treated as an association taxable as a corporation for federal tax purposes effective as of the date of conversion qualifies as a reorganization under section 368(a)(1)(F).

Thanks Again!
 

#7
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
gatortaxguy, I wish you would cite some authority for the positions you post on this board. You are incorrect that nothing needs to be done here.

bethb19, I will assume that the entity started out in 2016 as a corporation, made an S corporation election, then reorganized under state law into an LLC in 2020.

The IRS has ruled that in such a situation, the LLC needs to make the entity election to be an association (Form 8832) in order to keep the S corporation election intact. See PLRs 199942009, 200042008, 200043001, 200450012, 200622025, 200633008 and 200718014, all of which you can view here:

https://www.irs.gov/written-determinations
 

#8
JR1  
Posts:
4307
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
This is clearly a reorg. I don't know or care about CA law, I only go to drink wine. Generally, there is no such language as a conversion from an S corp (or any corp for that matter) to anything else in Fed tax law.

Now, some states do allow a conversion, and I'm not clear how the state conversion affects the Fed status, but I'd want to be sure that the new LLC elects properly and all that is recognized. Otherwise you're a C corp for Fed and who knows what for CA?
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#9
sjrcpa  
Posts:
4000
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
Beth, nowadays an LLC that wants to be taxed as an S Corp only needs to file the 2553.
Years ago they had to file the 8832 and 2553.
 

#10
Pitch78  
Posts:
657
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
What sjrcpa said. the instructions to 2553 state:

Purpose of Form

A corporation or other entity eligible to elect to be treated as a corporation must use Form 2553 to make an election under section 1362(a) to be an S corporation. An entity eligible to elect to be treated as a corporation that meets certain tests discussed below will be treated as a corporation as of the effective date of the S corporation election and doesn’t need to file Form 8832, Entity Classification Election.
 

#11
bethb19  
Posts:
4
Joined:
2-Dec-2021 2:39pm
Location:
CA - California
Thanks so much!
 

#12
MWPXYZ  
Posts:
986
Joined:
23-Apr-2014 3:21pm
Location:
Lancaster NH
Just to muddy the waters:

The (other) Dave in Post 9 just sent a letter - no 2553 -
Here is another discussion - see post 9 for another POV
viewtopic.php?f=8&t=20107&hilit=viewtopic.php%3Ff%3D8%26amp%3Bt%3D10241


In another (CA) thread running in conjunction with this one there is this:

Thread title: LLC filed as partnership making a late S election
See Post #2, item 2 b. & c. just a letter was sent

There are some returns I have done where i just get to the right answer and skip formalities.
There are some returns I have done where i dot each i and cross each l because the stakes are too high for a technical issue to develop.
 

#13
Posts:
32
Joined:
15-Nov-2021 8:00pm
Location:
Livin’ on Tulsa time
Converting an S corp to an LLC is basically an F reorganization; however, the mechanics of achieving the transaction my vary depending on state law. In my state, Oklahoma, we have a “statutory conversion” procedure whereby papers are filed with the Secretary of State. Under Oklahoma's conversion statute, the LLC is "deemed to be the same entity as the corporation," but with a different legal form. You may want to check if your state has a similar conversion procedure.

The result of the state statutory conversion is that the entity remains the same for federal filing purposes but is treated as an LLC for state purposes. I have never had to file a F2553 with the IRS because there was no effect on the federal status; there was a change in name only to “S Corp XXX, LLC.”
 

#14
EADave  
Posts:
1354
Joined:
22-Apr-2014 9:25pm
Location:
Texas
Their article is worth a read; https://www.jdsupra.com/legalnews/mere- ... s-6271926/

The gist of an F Reorg, as mentioned above, is the entity retains its character if there is no material change in the organization (no new members, same assets, same owners, same State of charter, etc).

Here’s an important snippet from the article I mentioned: “Further, unlike other reorganizations under Section 368(a)(1), an “F” reorganization is exempt from the COI and COBE requirements.[8] However, “F” reorganizations must still have a valid business purpose and be made pursuant to a plan of reorganization.”

Thanks for the shout outs, by the way; I’ve been a bit lazy in my approach lately. Admittedly, I’ve also done the Steve approach and “did nothing”, for a client that did the same thing to the OP, “hey, I converted and never told you, surprise!” On that particular return, I literally indicated “name change” on the return with no issues from the IRS. There was absolutely no change, other than “Inc” to “LLC”.

Best practices, in my opinion, is to alert the IRS to the plan. Put it in writing, indicate there is no material change in the company, fire it off to the Entity Unit, put it in your file and move forward.
 

#15
Posts:
862
Joined:
28-Apr-2021 7:00am
Location:
FL
I don't have authority for my negative opinion. The fact that the IRS approves conversions where the elections are made is reassuring for those who make the elections, but misses the point. Besides, PLRs and published articles are not authority. Show me an actual case holding that mere conversion of an INC to an LLC is a taxable event.

I would be very surprised to see one. Taxation is based on rights under state law. And I'm not aware of any state law rights that are affected by the conversion. All the property and contract rights are the same before and after the conversion. The only differences are the name and the internal procedures.
Steve
 

#16
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
gatortaxguy wrote:Besides, PLRs and published articles are not authority.

Here is part of Reg. 1.6662-4(d)(3)(iii) (emphasis added):

(iii) Types of authority. Except in cases described in paragraph (d)(3)(iv) of this section concerning written determinations, only the following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item: Applicable provisions of the Internal Revenue Code and other statutory provisions; proposed, temporary and final regulations construing such statutes; revenue rulings and revenue procedures; tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; court cases; congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers; General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); private letter rulings and technical advice memoranda issued after October 31, 1976; * * * * *
 

#17
Posts:
862
Joined:
28-Apr-2021 7:00am
Location:
FL
Excellent. Thank you for that cite.

I knew that as a practical matter PLRs are useful in audit, but I should have been clearer that I was talking about whether PLRs are authority in court...
Steve
 

#18
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
In court, private letter rulings may not be used or relied upon as precedent (sec. 6110(k)(3)) but may be cited to show the practice of the Commissioner. See Rauenhorst, 119 T.C. 157, n.8 (2002). In addition, the IRS’s legal analysis presented in a favorable private letter ruling issued on the same issue to an identically-situated taxpayer may be used to rebut a contrary position taken by the IRS.

What we're discussing here in this thread is what procedural steps must be taken for an S corp, that converts to an LLC under state law, to retain its S election status. The IRS has demonstrated in several PLRs that the proper procedure is for the LLC to file Form 8832 to elect status as an association, and that the S corporation election will remain intact. Citing PLRs is definitely relevant to show "the practice of the Commissioner" on this issue. Is filing the form required under the law? I don't know. The IRS certainly thinks so.
 

#19
Posts:
862
Joined:
28-Apr-2021 7:00am
Location:
FL
I hear you and I'm not changing my opinion. I never file elections when converting to an LLC to an S. To me that's just an additional expense for my client with no benefit.
Steve
 

#20
Posts:
32
Joined:
15-Nov-2021 8:00pm
Location:
Livin’ on Tulsa time
dave829 wrote:What we're discussing here in this thread is what procedural steps must be taken for an S corp, that converts to an LLC under state law, to retain its S election status. The IRS has demonstrated in several PLRs that the proper procedure is for the LLC to file Form 8832 to elect status as an association, and that the S corporation election will remain intact. Citing PLRs is definitely relevant to show "the practice of the Commissioner" on this issue. Is filing the form required under the law? I don't know. The IRS certainly thinks so.


Many states now recognize a “statutory conversion” which is a process that, for the most part, came into being subsequent to the PLRs listed above. During that “old regime” a new entity would be created and the old entity would then merge into the newly created entity under an F reorganization; thus, the need for filing as you indicated.

Under this “new regime” with the statutory conversion, no new entity is created. The only procedure is to file Articles with the respective SOS to change the entity into a state recognized LLC. The only thing that needs to be done with respect to the IRS is to check the box that the entity name has changed from “XXX, Inc.” to “XXX, LLC.” I also attach a statement to the return outlining what has taken place along with a copy of the state Articles that were filed.

Of course, one can still opt to file under the old method of actually creating a new entity and then jumping through the merger hoops. But why do that if the state utilizes a statutory conversion method?
 

#21
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
Verytaxing wrote:Many states now recognize a “statutory conversion” which is a process that, for the most part, came into being subsequent to the PLRs listed above.

That's an interesting observation. I can't find any PLRs after 2005 that address the need to file Form 8832. But not all states have the "statutory conversion" process. So, why are there no PLRs after 2005 for entities in those states that have to use the "old regime" process?
 

#22
Posts:
32
Joined:
15-Nov-2021 8:00pm
Location:
Livin’ on Tulsa time
dave829 wrote:That's an interesting observation. I can't find any PLRs after 2005 that address the need to file Form 8832. But not all states have the "statutory conversion" process. So, why are there no PLRs after 2005 for entities in those states that have to use the "old regime" process?


I can't answer that. I can only guess that everyone now has a comfort level with filing under either "regime" that a PLR is no longer needed. Also, PLRs are a LOT more expensive than what they used to be.
 

#23
bethb19  
Posts:
4
Joined:
2-Dec-2021 2:39pm
Location:
CA - California
Verytaxing wrote:
dave829 wrote:Under this “new regime” with the statutory conversion, no new entity is created. The only procedure is to file Articles with the respective SOS to change the entity into a state recognized LLC. The only thing that needs to be done with respect to the IRS is to check the box that the entity name has changed from “XXX, Inc.” to “XXX, LLC.” I also attach a statement to the return outlining what has taken place along with a copy of the state Articles that were filed.


I have learned a lot reading all your responses and appreciative of everyone's time. To summarize, under the new regime I only need to file an amended return indicating a name change, attach a statement with an explanation along with the articles of conversion. I do not need to file form 8832 or 2553. Once again, thank you and happy holidays!
 

#24
Posts:
862
Joined:
28-Apr-2021 7:00am
Location:
FL
You don't need to even do that, but it's a good idea.
Steve
 

#25
JR1  
Posts:
4307
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Beth, no explanation needed, but I'd file the 2553, no harm done.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 


Return to Taxation



Who is online

Users browsing this forum: DavidG, dellpaul, Google [Bot], ManVsTax, MSchmahl, Nightsnorkeler, ocdtax, SlipperyPencil, Tenletters and 84 guests