Partnership receives 120 days to make a late section 754 election

Plain-English summary

A partner died after holding general and limited partnership interests, but the partnership inadvertently omitted a section 754 election from its timely return for that year. The IRS found that the partnership satisfied the standards for discretionary regulatory-election relief. It granted 120 days to file a written election effective for the missed year and later years. The partnership must calculate the related section 734 basis adjustments as if the election had been timely, including specified partner-basis reductions if limitations periods had already expired.

Ruling snapshot

• Question: Could the partnership make a late section 754 election after omitting it from a timely filed return?
• Outcome: approved, with 120 days to file
• Key authorities: IRC §§ 734, 743, 754, and 755; Treas. Reg. §§ 1.754-1 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201707011 Third Party Communication: None
Release Date: 2/17/2017 Date of Communication: Not Applicable
Index Number: 754.02-00, 9100.00-00
Person To Contact:
------------------------------------------------------------ -----------------------------, ID No. -------------
-------- -----------------
---------------------------------------------- Telephone Number:
------------------------- ----------------------
----------------------------- Refer Reply To:
CC:PSI:01
PLR-124091-16
Date:
October 25, 2016

Legend
X = -------------------------------------------------------------------------------------------------
--------------------------------
State = ---------------------
Date 1 = ----------------------------
Date 2 = ---------------------------
Date 3 = ------------------------
A = ----------------------------------------
Trust = -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
--------------------------------------
Year = -------

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

   This responds to a letter dated July 29, 2016, and subsequent correspondence

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.

                                                 FACTS

    According to the information submitted, X was formed as a partnership under the

laws of State and became a limited partnership under the laws of State on Date 2. X is
classified as a partnership for federal tax purposes.

   A owned a general partner interest in X through Trust, a grantor trust, and

individually owned a limited partner interest in X. On Date 3 of Year, A died. X’s
PLR-124091-16 2

partnership return was timely filed for Year, but a § 754 election to adjust the basis of
partnership property was inadvertently not filed with the return.

                                LAW & ANALYSIS

   Section 754 provides that if a partnership files an election, in accordance with the

regulations prescribed by the Secretary, the basis of the partnership property is
adjusted, 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 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 therefore) for filing the return for the 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) defines
the item “regulatory election” as an election whose due date 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.

    Section 301.9100-1 through 301.9100-3 provide the standards the Commissioner

will use to determine whether to grant and 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 § 301.9100-3. 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.

                                  CONCLUSION

   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 Year and thereafter. The election should be
PLR-124091-16 3

made in a written statement filed with the appropriate service center for association with
X’s Year return. A copy of this letter should be attached to the election.

    X must calculate the adjustments under § 734(b) and (c), and § 1.755-1(c), as if

X had timely made the § 754 election and allocated the increase in basis among the
properties held by X at that time. 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, then
the partners of X must reduce their respective basis of their interests in X to reflect any
additional basis adjustments under section 734 that would have been allocated under
section 755 to any properties sold in such years as if the section 754 election had been
timely.

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

                                   Sincerely,

                                   Associate Chief Counsel
                                   (Passthroughs & Special Industries)

                                   By: David R. Haglund
                                   David R. Haglund
                                   Branch Chief, Branch 1
                                   (Passthroughs & Special Industries)

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

cc: