PLR 200440022: Partnership receives more time to elect a property basis adjustment

Plain-English summary

A partnership made a liquidating distribution but missed the deadline for electing a basis adjustment under Section 754. Its accountant had failed to advise it that the election was available. The IRS granted the partnership 60 days from the letter date to file the election for the distribution year. The IRS relied on the partnership's representations that it acted in good faith and that late relief would not prejudice the government. The letter also requires basis adjustments for depreciation that would have been allowable in closed years if the election had been timely.

Ruling snapshot

• Question: May a partnership file a late Section 754 election after a liquidating distribution?
• Outcome: Approved: 60 additional days to file the election, subject to stated basis adjustments.
• Key authorities: IRC §§ 754, 734(b); Treas. Reg. §§ 1.754-1(b), 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200440022
Release Date: 10/1/04
Index Number: 9100.00-00

------------------------------------------------------------ Person To Contact:
------------------------------------------------ ------------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:PSI:1 – PLR-171619-03
Date:
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June 09, 2004

Legend

Partnership = ------------------------------------------------------------
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A = ----------------
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D1 = --------------------------

Year 1 = -------

Year 2 = -------

Dear -------------:

This letter responds to a letter dated December 12, 2003, together with subsequent correspondence, submitted on behalf of Partnership, requesting an extension of time under section 301.9100-3 of the Procedure and Administration Regulations to make an election under section 754 of the Internal Revenue Code, for the period ending D1.

FACTS

According to the information submitted, Partnership was formed in Year 1. In Year 2, Partnership made a liquidating distribution to A. Partnership relied on its accountant to provide Partnership with tax advice. Partnership’s accountant inadvertently failed to inform Partnership of the advisability of making an election under section 754.

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Partnership represents that it has acted reasonably and in good faith, that granting relief will not prejudice the interests of the government, and that it is not using hindsight in making the election.

LAW AND ANALYSIS

Section 754 provides that a partnership may elect to adjust the basis of partnership property where there is a distribution of property or a transfer of a partnership interest. The election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable year that the election applies and all subsequent taxable years.

Section 1.754-1(b) of the Income Tax Regulations provides that an election under section 754 is made in a written statement filed with the partnership return for the taxable year during which the distribution or transfer occurs. For the election to be valid, the return must be filed no later than the time for filing for the taxable year.

Under section 301.9100-1(c), the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term Aregulatory election@ as an election whose deadline is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

Sections 301.9100-2 and 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making elections that do not meet the requirements of section 301.9100-2. Requests for relief under section 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interest of the government.

CONCLUSION

Based on the information submitted and the representations made, we conclude that the requirements of sections 301.9100-1 and 301.9100-3 have been satisfied. As a result, Partnership is granted an extension of time of sixty (60) days following the date of this letter to make a section 754 election, effective Year 2. The election should be made in a written statement filed with the applicable service center. A copy of this letter

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should be attached to the statement filed. A copy of this letter is enclosed for that purpose.

If the statutory period of limitation on assessment or filing a claim for refund has expired for any year subject to this grant of late relief and as a condition of this late relief, Partnership must adjust the basis of property to reflect any additional depreciation that would have been allowable under section 734(b) if the section 754 election had been timely made. Any depreciation deduction allowable for an open year, is to be computed based upon the remaining useful life and using property basis as adjusted by the greater of any depreciation deduction allowed or allowable in any prior year had the section 754 election been timely made.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

/s/ Heather C. Maloy

Heather C. Maloy
Associate Chief Counsel
Passthroughs and Special Industries

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes