IRS grants surviving partnership 120 days for a late section 754 election

Plain-English summary

Two partnerships made liquidating distributions, but their tax advisers did not tell them about the IRC § 754 election. After one partnership merged into the other, the surviving partnership discovered that it had not made the election for the relevant year. The IRS found the regulatory-relief requirements satisfied and granted the survivor 120 days to file the election for that year and later years. The ruling required retroactive adjustments under IRC §§ 734(b) and 743(b), including adjusted basis allocations for domestic oil and gas property and recalculated depletion deductions. Partners also had to adjust their outside bases and account for additional allowable depletion when determining gain under IRC § 1254.

Ruling snapshot

• Question: May the surviving partnership receive extra time to make an IRC § 754 election after its advisers failed to identify the election?
• Outcome: Approved
• Key authorities: IRC §§ 734(b), 743(b), 754, and 1254; Treas. Reg. §§ 1.754-1(b) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201620002                                             Third Party Communication: None
Release Date: 5/13/2016                                       Date of Communication: Not Applicable
Index Numbers: 9100.00-00, 754.00-00,
              9100.15-00                                      Person To Contact:
                                                              -------------------------, ID No. -----------------
-----------------------------------                           ----------------------------------------------------
---------------------------------------                       Telephone Number:
-------------------                                           ------------------
---------------------------------------                       Refer Reply To:
                                                              CC:PSI:03
                                                              PLR-119399-15
                                                              Date:
                                                              January 7, 2016




LEGEND


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

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

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

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

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

Date3             =        --------------------------

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

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


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

      This letter responds to a letter dated June 4, 2015, submitted on behalf of X,
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
(“Code”).
PLR-119399-15                                 2

FACTS

        X was formed as a limited liability company under State law in Date1 and is
treated as a partnership for federal tax purposes. Y was formed as a limited liability
company under State law in Date2 and was treated as a partnership for federal tax
purposes. Beginning in the year ending on Date3, X and Y made liquidating
distributions to a significant number of their members. X’s and Y’s tax advisors did not
inform them as to the availability of an election under § 754. On Date4, Y merged into
X, and the members of Y became members of X.

        In Date5, X became aware of its failure to make an election under § 754 effective
for the year ending Date3. X now requests an extension of time under §§ 301.9100-1
and 301.9100-3 to make a § 754 election to adjust the basis of its property.

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 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 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 301.9100-2 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.
PLR-119399-15                                  3

        Requests for relief under § 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 upon 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 120 days from the date of this letter to
make a § 754 election for its taxable year ending Date3 and thereafter. The election
should be made in a written statement filed with the applicable service center for
association with X’s return for the taxable year ending Date3. A copy of this letter
should be attached to the statement filed.

       As a condition of this ruling, X must adjust 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 and reallocate to each member the member’s proportionate share of
the adjusted basis of each of X’s domestic oil or gas property in accordance with the
principles under § 1.613A-3(e) as if a § 754 election had been timely made, taking into
account any allowed or allowable depletion deduction regardless of whether the
statutory period of limitation on assessment or filing a claim for refund has expired for
any year subject to the grant of late relief.

        Any depletion deduction allowable for an open year is to be computed by the
members of X as if a § 754 election had been timely made, taking into account any
allowed or allowable depletion deduction regardless of whether the statutory period of
limitation on assessment or filing a claim for refund has expired for any year subject to
the grant of late relief. Additionally, members of X must adjust the bases of their
interests in X to reflect what the 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 the grant of late relief. Specifically,
the members of X must reduce the bases of their interests in X in the amount of any
additional depletion that would have been allowed or allowable if the § 754 election had
been timely made. Finally, the additional depletion deductions that would have been
allowed or allowable if the § 754 election had been timely made must be taken into
account in determining the members’ gain under § 1254 on any disposition of § 1254
property by X.

      Except as specifically ruled upon above, we express or imply no opinion
concerning the tax consequences of any facts discussed or referenced in this letter.

      This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.
PLR-119399-15                               4


      In accordance with a power of attorney on file with this office, we are sending a
copy of this letter ruling to your authorized representatives.

                                     Sincerely,

                                     Associate Chief Counsel
                                     (Passthroughs & Special Industries)



                                By: ___________________________________
                                    Mary Beth Carchia
                                    Senior Technician Reviewer, Branch 3
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)




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