The IRS Extends Due Date for Late Filing of Entity Classification Election Forms

By Steven M. Etkind and Roger D. Lorence

The Internal Revenue Service (“IRS”) has done taxpayers a favor in Revenue Procedure 2009-41 (“2009 Procedure”) by greatly extending the due date for making retroactive elections for entity classifications (known as the “check-the-box” regime) in cases where the election was missed. In the fund world, this most often occurs in the case of an offshore master fund formed as a company under foreign law, for which an election on IRS Form 8832 for partnership status for U.S. federal income tax rules was missed.

The check-the-box regime is commonly used to convert an offshore company (which would otherwise be classified as a corporation) that is used as a master fund (typically with domestic and offshore feeder funds as its owners) into a partnership for U.S. federal income tax purposes. This removes the classification of the offshore master fund as a Passive Foreign Investment Company (“PFIC”) which may carry disadvantageous tax results for taxable U.S. investors.

The check-the-box flexibility comes with a price. The election must be made timely. Generally, for a newly formed entity, the election needs to be made within 75 days of its formation. For an existing entity, Form 8832 must be filed no more than 75 days before the effective date of the election and no more than 12 months prior to the election’s effective date. In practice, the Form 8832 is filed effective for the first day of the offshore company’s life.

The 2009 Procedure addresses the case where an election’s due date was missed and extends relief afforded in the 2002 guidance. The 2009 Procedure extends the due date for filing Form 8832 for both missed initial entity classifications and change of classification for existing entities, to three years and 75 days of the requested effective date (again, generally, back to the first day of existence of the offshore master fund). To claim the extended due date, the entity must have made all federal tax filings as though it had made a valid election. If no entity level federal tax filings were required, all owners of the entity (such as the feeder funds of a foreign master fund) must have filed federal tax returns consistent with the desired entity classification. An entity that does not meet the new extended date will, however, still have to apply for an IRS letter ruling.

The 2009 Procedure is effective September 28, 2009 and generally applies to all requests for relief pending under the 2002 guidance, as well as requests for relief made after September 28, 2009.

The extended relief under the 2009 Procedure is certainly welcome. However, funds whose financial statements use U.S. GAAP (generally accepted accounting principles) may still be required to report under FIN 48 (Uncertain Tax Positions) the missed election, which is an embarrassment, if nothing else. A structure using an offshore master fund formed under the local limited partnership act, so that the master fund will be classified as a partnership under U.S. federal income tax rules without the need for a Form 8832, eliminates the uncertainties surrounding the check-the-box election.

If you have any questions concerning this Tax Alert or any related matters, please contact Steven M. Etkind, 212-573-8412 ( or Roger D. Lorence, 212-573-8413 ( We welcome your input.

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