Partnership receives 120 days for a late section 754 election

Plain-English summary

A partnership intended to make a section 754 election after a partner died and the partnership interest passed to the partner's estate. The partnership omitted the formal election statement, but its timely return calculated the section 743 basis adjustment and allocated related depreciation to the estate. Later returns continued to reflect the intended basis treatment. The IRS found that the regulatory-relief requirements were satisfied and gave the partnership 120 days to file the election effective for the original year and later years. The relief required the partnership and its partners to make all basis and depreciation adjustments that would have applied if the election had been timely, even for closed years.

Ruling snapshot

• Question: Could the partnership make a late section 754 election after consistently reporting the intended basis adjustments?
• Outcome: Approved, with 120 days to file the election and required retroactive adjustments
• Key authorities: IRC §§ 734(b), 743(b), 754, and 755; Treas. Reg. §§ 1.754-1(b) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201510024 Third Party Communication: None
Release Date: 3/6/2015 Date of Communication: Not Applicable
Index Numbers: 754.02-00, 9100.15-00
Person To Contact:
---------------------------- ----------------------, ID No. ----------------
----------------------------------------------- Telephone Number:
------------------------------------------------ --------------------
--------------------------------------------------- Refer Reply To:
--------------------------------- CC:PSI:B03
PLR-119944-14
Date:
September 23, 2014

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

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

A’s Estate = ----------------------------------------
-----------------------

State = ------------

Date = -------------------

Year 1 = ------

Year 2 = ------

Year 3 = ------

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

    This letter responds to a letter dated May 14, 2014, submitted on behalf of X by

its authorized representatives, requesting a ruling that X be granted an extension of
time under § 301.9100-3 of the Procedure and Administration Regulations to make an
election under § 754 of the Internal Revenue Code (Code) for Year 1.

                                                  FACTS

  X is a limited liability company organized under the laws of State. On Date, A, a

partner of X, died. At that time, A’s interest in X transferred to A’s Estate. X timely filed
PLR-119944-14 2

its partnership return for Year 1. X intended to make an election under § 754 for Year 1
but inadvertently failed to file the election statement. The Year 1 partnership return,
however, included a statement computing the § 743 basis adjustment to X’s property
and the identity of partnership properties to which the adjustment had been allocated.
In addition, a depreciation adjustment was allocated to A’s Estate on its Year 1
Schedule K-1. X’s timely filed partnership return for Year 2 also reflected a § 743
depreciation adjustment allocated to A’s Estate. X’s partnership return for Year 3 was
timely amended to reflect additional basis adjustments to X’s property following the
transfer of other interests in X.

                                        LAW

   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, shall
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.

   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 is 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 in § 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 the
election was filed and all subsequent tax years.

   A transfer of an interest in a partnership on the death of a partner is eligible for

the § 754 election. The value of the partnership interest reported on the estate tax
return (including discounts) is the value used to determine the basis of the partnership
interest and the adjustments to basis under §§ 743(b) and 754. See generally
§ 1.1014-3 of the Income Tax Regulations.

  Section 1.754-1(b) of the Income Tax Regulations provides that an election

under §§ 754 and 1.754-1 to adjust the basis of partnership property under §§ 734(b)
PLR-119944-14 3

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(a)-1(e) (including extensions thereof) for filing the return for that taxable year.

   Section 301.9100-1(c) provides that the Commissioner may grant a reasonable

extension of time to make a regulatory 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) provides that a 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 a
regulatory election. Section 301.9100-2 provides the rules governing automatic
extensions of time for making certain elections. Section 301.9100-3 provides
extensions of time for making regulatory elections that do not meet the requirements of
§ 301.9100-2.

    Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3

will be granted when the taxpayer provides the evidence (including affidavits described
in § 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the
interests of the Government.

                                  CONCLUSION

   Based solely on the information submitted and representations made, we

conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
Accordingly, X is granted an extension of time of 120 days from the date of this letter to
make an election under § 754 effective for its Year 1 taxable year and thereafter. The
election should be made in a written statement filed with the appropriate service center
for association with X’s Year 1 tax return. A copy of this letter should be attached to the
statement filed.

    To the extent not already done, this ruling is contingent on X adjusting the basis

of its properties to reflect any § 734(b) or § 743(b) adjustments that would have been
made if the § 754 election had been timely made. These basis adjustments must reflect
any additional depreciation that would have been allowable if the § 754 election had
been timely made, regardless of whether 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. 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
PLR-119944-14 4

greater of any depreciation deduction allowed or allowable in any prior year had the
§ 754 election been timely made. Additionally, the partners of X must adjust the basis
of their interests in X to reflect what that basis would be if the § 754 election had been
timely made, regardless of whether 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.
Specifically, the partners of X must reduce the basis of their interests in X in the amount
of any additional depreciation that would have been allowable if the § 754 election had
been timely made.

   Except as specifically set forth above, we express or imply no opinion concerning

the federal tax consequences of the facts described above under any other provision of
the Code.

  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 a power of attorney on file with this office, we are sending a

copy of this letter to your authorized representative.

   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.

                                  Sincerely,
                                  Associate Chief Counsel
                                  (Passthroughs and Special Industries)


                               By:____________________________
                                  Holly Porter
                                  Branch Chief, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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

cc: