Partnership receives 120 days for late section 754 election

Plain-English summary

A partnership issued a warrant with a note, later transferred the resulting partnership interest to the warrant holders, and entered into a redemption agreement for that interest. When filing its return for the relevant year, the partnership relied on its tax adviser and did not know it could elect under section 754 to adjust the basis of partnership property. It discovered the missed election later and requested relief without using hindsight. The IRS found that the partnership acted reasonably and in good faith and that relief would not prejudice the government. It granted 120 days to file the section 754 election for the affected year with the appropriate service center.

Ruling snapshot

• Question: Should the partnership receive extra time to make a section 754 basis-adjustment election for the year of the interest transfer and redemption?
• Outcome: Approved, with 120 days to file the election
• Key authorities: IRC §§ 734(b), 743(b), and 754; Treas. Reg. §§ 1.754-1(b) and 301.9100-1 through -3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201530004 Third Party Communication: None
Release Date: 7/24/2015 Date of Communication: Not Applicable
Index Numbers: 754.00-00, 9100.15-00
Person To Contact:
------------------------------------------------------------ -----------------, ID No. -----------------
--- Telephone Number:
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------------------------------------- Refer Reply To:
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PLR-101947-15
Date:
April 10, 2015

LEGEND

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

Date 1 = -------------------

Date 2 = --------------------------

Date 3 = ----------------------

Date 4 = ---------------------

Date 5 = ------------------

Year 1 = ------

Year 2 = ------

$a = -------------

$b = ------

n% = ------

State = ------
PLR-101947-15 2

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

This is in response to a letter dated January 6, 2015, and supplemental
correspondence, submitted on behalf of X, by X’s authorized representative, requesting
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations to file an election under § 754 of the Internal Revenue Code.

FACTS

According to the information submitted, X was formed as a limited liability company
under the laws of State on Date 1. X is treated as a partnership for federal tax
purposes.

In Year 1, X executed a note payable to unrelated individuals in the amount of $a. At
the time the note was issued a warrant was issued to the unrelated individuals to
purchase a n% interest in X for consideration. On Date 3, the warrant was executed
and the n% interest in X was transferred to the unrelated individuals for $b. On Date 3,
a redemption agreement was executed between X and the unrelated individuals for the
redemption of the n%. Promissory notes were issued from X to the unrelated
individuals.

X filed its income tax return for Year 2. X represents that it relied upon its tax advisor
when preparing the tax return for Year 2. X represents that it was unaware that it was
eligible to make a section 754 election. X further represents that around Date 5, X
became aware of its eligibility to make a section 754 election and its failure to timely
make the election with its return for its taxable year ending on Date 2.

X further 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 when there is a distribution of property or a transfer of a partnership interest.
An election under § 754 applies 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 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
PLR-101947-15 3

distribution of property to a partner or a transfer of an interest in a partnership, must 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) for filing
the return for such taxable year.

Under § 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 Internal Revenue
Code, except subtitles E, G, H, and I. Section 301-9100-1(b) defines the term
“regulatory election” as including 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 that the Commissioner
will use to determine whether to grant an extension of time to make an election. Section
301.9100-1(a). Section 301.9100-2 provides automatic extensions of time for making
certain elections. Section 301.9100-3 provides rules for requesting extensions of time
for regulatory elections that do not meet the requirements of § 301.9100-2.

Requests for relief under § 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. Section 301-9100-3(a).

CONCLUSION

Based solely on the facts 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 one hundred twenty (120) days from the date of this
letter to make a § 754 election for Year 2. The election should be made in a written
statement filed with the applicable service center for association with X’s tax return for
its taxable year ending Date 2. A copy of this letter should be attached to the statement
filed.

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) provides
that it may not be used or cited as precedent.
PLR-101947-15 4

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

                                   Sincerely,



                                   Curt G. Wilson
                                   Deputy Associate Chief Counsel
                                   (Passthroughs & Special Industries)



                              By: David Haglund
                                  David Haglund, Branch Chief
                                  Branch 1
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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

cc: