Revenue Procedure 2010-32: A Plain English Guide

This procedure sits inside the entity classification rules, not the S corporation rules. It applies only to foreign eligible entities.

It addresses an election that was filed correctly but rested on a wrong assumption. The assumption concerns the number of owners on the effective date.

Without relief, that error can push the entity into corporate treatment. For cross border structures, that outcome is often catastrophic.

The procedure took effect on September 7, 2010. It applies when a qualified entity filed an otherwise valid Form 8832. The entity elected either partnership treatment or disregarded treatment. It then learned the ownership count was wrong on the effective date.

Two directions of error are covered. An entity may have elected partnership status while actually having one owner. Or it may have elected disregarded status while actually having two or more. Either way the elected classification was impossible.

The relief treats the original form as electing the correct classification instead. The election stands from its original effective date. No corrected effective date and no gap in treatment results. The text appears printed there in the weekly bulletin.

Note carefully what this procedure does not do. It is not a late election procedure at all. The form was filed on time and was otherwise valid. Only the ownership assumption underlying it was mistaken.

Counting owners sounds trivial and often is not. Foreign ownership structures frequently involve nominee arrangements and local law formalities. An interest that looks like ownership abroad may not be ownership federally. The reverse also happens regularly.

The stakes are asymmetric because of the default rules. A foreign eligible entity whose members all have limited liability defaults to corporate treatment. An election that fails leaves that default in place. Suddenly a structure built for flow through treatment holds a corporation.

That outcome can trigger controlled foreign corporation consequences and lost credits. It can also strand income in the wrong regime for years. The concern behind the procedure was reviewed at issuance in professional commentary. Treasury responded with an administrative fix rather than a ruling requirement.

The table below shows both corrections and the boundaries of the relief. Notice that consistency by every owner is the operative condition. The statute of limitations is the hard outer limit. Neither can be worked around.

The reasonableness standard deserves attention. The assumption must have been reasonable when the election was filed. Careless ownership analysis does not qualify. Document what you knew and when you knew it.

The mechanics are short but unforgiving on detail. Each step below exists because the procedure requires it. Complete them together rather than in sequence over months. The assessment period runs the whole time.

• Confirm the entity is foreign and meets the qualified entity definition
• Determine the actual ownership as of the original effective date
• Prepare original or amended returns for every actual and purported owner
• Confirm the assessment period remains open for each affected year
• File a corrected Form 8832 with the required notation across the top
• Satisfy the signature requirements in the classification regulations
• Attach copies of the corrected form to the amended returns

The purported owners matter as much as the actual ones. Someone who reported as a partner must now unwind that reporting. Coordinating those returns across jurisdictions takes time. Start that work before the assessment period narrows.

This route replaces the ruling process rather than supplementing it. Entities that qualify use it, and there is no fee. Entities that do not qualify request a ruling instead. The practical tradeoffs were assessed afterward in follow up commentary.

Form 2553 is the S corporation election, and it has nothing to do with this procedure. That form elects treatment under Subchapter S for a corporation. Only domestic corporations and entities deemed corporations may file it. A foreign entity cannot hold S status at all.

The timing rules are also completely different. Form 2553 is due two months and fifteen days after the tax year begins. Calendar year filers generally face a March 15 deadline. A late filing is repaired under a separate procedure issued in 2013.

The confusion is understandable because both procedures involve classification. An LLC electing S status is deemed to elect corporate classification automatically. That deemed election lives inside the 2013 procedure, not this one. Keep the two straight, because filing under the wrong authority guarantees rejection.

Revenue Procedure 2010-32 corrects a foreign classification election built on a wrong ownership count. It works in both directions, partnership to disregarded and disregarded to partnership. The election survives from its original effective date. There is no user fee and no ruling request.

Consistency and the assessment period are the two gates. Every actual and purported owner must report the corrected classification. Every affected year must remain open for assessment. And if your question involves Form 2553 or a domestic entity, this is the wrong procedure entirely.