Partnership receives extension for section 754 election

Plain-English summary

A partner died, and portions of the deceased partner's partnership interest passed to two trusts. The partnership could have elected under IRC § 754 to adjust the basis of partnership property for those transfers, but its tax adviser did not know the death made the partnership eligible and omitted the election from the return. A new adviser later discovered the failure. The IRS found that the partnership acted reasonably and in good faith and that relief would not prejudice the government. It granted 120 days from the ruling date to file the election for the relevant tax year, subject to basis and depreciation adjustments for any closed years.

Ruling snapshot

• Question: Could the partnership make a late § 754 election for partnership interests transferred at a partner's death?
• Outcome: Approved. The partnership received 120 days from the letter date to file the election.
• Key authorities: IRC §§ 743, 754, 755; Treas. Reg. §§ 1.754-1(b), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201433010 Third Party Communication: None
Release Date: 8/15/2014 Date of Communication: Not Applicable
Index Number: 754.00-00, 9100.00-00,
9100.15-00 Person To Contact:
-----------------------, ID No. -------------------
-------------------------- --------------------------------------------------
------------------------------------------------------ Telephone Number:
----------------------------------- --------------------
----------------- Refer Reply To:
---------------------------- CC:PSI:B02
PLR-145685-13
Date:
December 11, 2013

Legend

X = ---------------------------------

Y = ------------------------------------------

A = ------------------------------------------------

B = -----------------------------------

Trust1 = ----------------------------------------------------------

Trust2 = ---------------------------------------------------------

State = --------

Date1 = --------------------

Date2 = ---------------------

Date3 = -------------------------
PLR-145685-13 2

Date4 = --------------------------

Date5 = -------------

n = ------------

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

This responds to a letter dated October 31, 2013, submitted on behalf of X,
requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations for X to make an election under § 754 of the Internal
Revenue Code.

The information submitted states that X was formed as a limited partnership
under the laws of State on Date1, and is treated as a partnership for federal income tax
purposes. Y, a corporation, is the managing general partner of X. On Date2, A, who
had owned n% of the outstanding partnership interests of X, died. On Date3, B, A’s
surviving spouse, was appointed as executor of A’s estate. Pursuant to A’s will, a
portion of A’s estate was transferred to Trust1, and the balance was transferred to
Trust2. B was appointed as trustee for Trust1 and Trust2.

The transfers of A’s interest in X to Trust1 and Trust2 on account of A’s death are
events for which X could have made a § 754 election, but for which it failed to timely do
so. According to the information submitted, X’s tax advisor was unaware that X was
eligible to make an election under § 754 on account of A’s death and did not advise X to
make the election, nor did the tax advisor make the election when preparing X’s return
for the tax year ending on Date4. X discovered the failure to make the § 754 election on
Date5, after it had hired a new tax advisor.

Section 743(b) provides, in pertinent part, that, in the case of a transfer of an
interest in a partnership by sale or exchange or upon the death of a partner, a
partnership, with respect to which an election provided in § 754 is in effect, will increase
the adjusted basis of the partnership property by the excess of the basis to the
transferee partner of his interest in the partnership over his proportionate share of the
adjusted basis of the partnership property, or decrease the adjusted basis of the
partnership property by the excess of the transferee partner’s proportionate share of the
adjusted basis of the partnership property over the basis of his interest in the
partnership. Section 743(b) further provides that such increase or decrease shall
constitute an adjustment to the basis of partnership property with respect to the
transferee partner only.
PLR-145685-13 3

Section 743(c) provides that the allocation of basis among partnership properties
where § 743(b) is applicable shall be made in accordance with the rules provided in
§ 755.

Section 754 provides that if a partnership files an election, in accordance with
regulations prescribed by the Secretary, the basis of partnership property shall be
adjusted, in the case of a distribution of property, in the manner provided in § 734 and,
in the case of a transfer of a partnership interest, in the manner provided un § 743.
Such an election shall apply with respect to all distributions of property by the
partnership and to all transfers of interests in the partnership during the taxable year
with respect to which such election was filed and all subsequent taxable years.

Section 1.754-1(b) of the Income Tax Regulations provides that an election
under § 754 to adjust the basis of partnership property under §§ 734(b) and 743(b), with
respect to a distribution of property to a partner or a transfer of an interest in a
partnership, shall be 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 not later than the time prescribed by § 1.6031-1(e)
(including extensions thereof) for filing the return for such taxable year.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
6 months except in the case of a taxpayer who is abroad), under all subtitles of the
Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-1(b) provides
that the term “regulatory election” includes an election whose due date is prescribed by
a regulation published in the Federal Register.

Sections 301.9100-1 through 301.9100-3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make the
election. Section 301.9100-2 provides the rules governing automatic extensions of time
for making certain elections. Section 301.9100-3 provides the standards the
Commissioner will use to determine whether to grant an extension of time for regulatory
elections that do not meet the requirements of § 301.9100-2. Under § 301.9100-3, a
request for relief will be granted when the taxpayer provides evidence to establish to the
satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) granting relief will not prejudice the interests of the government.

Based solely on the information submitted and the representations made, we
conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
As a result, X is granted an extension of time of 120 days from the date of this letter to
make an election under § 754, effective for X’s taxable year ending on Date4. The
election should be made in a written statement filed with the appropriate service center
for association with X’s tax return for the taxable year ending on Date4. A copy of this
letter should be attached to the election.
PLR-145685-13 4

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, X must adjust the basis of property to reflect any additional depreciation that
would have been allowable under § 743(b) if the § 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 § 754 election
been timely made.

Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under any other provision of the
Internal Revenue Code and the regulations thereunder.

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.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

In accordance with the power of attorney on file with this office, a copy of this
letter is being sent to X’s authorized representative.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: _____
Bradford R. Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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