Partnership receives 120 days to make a late section 754 election

Plain-English summary

A partnership underwent a technical termination under then-applicable IRC § 708(b)(1)(B) when an owner's interest changed hands. The partnership intended to make an IRC § 754 election but did not file a timely return containing the election. 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 signed election statement. Relief was conditioned on reconstructing property basis, depreciation, and the members' outside bases as if the election had been timely made, even for years otherwise closed by limitation periods.

Ruling snapshot

• Question: Could the partnership make a late IRC § 754 election for the year of its technical termination?
• Outcome: approved
• Key authorities: IRC §§ 708(b)(1)(B), 734(b), 743(b), and 754; 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: 201729015 Third Party Communication: None
Release Date: 7/21/2017 Date of Communication: Not Applicable
Index Numbers: 9100.15-00, 754.02-00
Person To Contact:
------------------------------------------------------ ---------------------------, ID No. ---------------
------------------------------------------- -----------------
------------------------------------------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-134316-16

                                                              Date:
                                                              April 20, 2017
      LEGEND

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

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


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

----------------------------------

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

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

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

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

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

   This letter responds to a letter dated October 27, 2016, and subsequent

correspondence, 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-134316-16 2

                                      FACTS

     The information submitted states that X was organized on Date 1 as a limited

liability company under the laws State. X is treated as a partnership for federal tax
purposes.

    Before Date 2, Y, one of X’s members, held ----% or more of the interest in

capital and profits in X. A was the sole member of Y. On Date 2, A sold its interest in Y
to B, resulting in a technical termination of X under § 708(b)(1)(B). X intended to make
an election under § 754 in connection with this sale; however X did not file a timely
return making the election.

    X represents that it has acted reasonably and in good faith, and that granting

relief will not prejudice the interests of the Government.

                                       LAW

   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 signed 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
PLR-134316-16 3

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.

   Section 301.9100-3(a) provides that 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 Date 2. The election should be made
in a signed written statement filed with the appropriate 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.

   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 greater of any depreciation deduction allowed or
allowable in any prior year had the § 754 election been timely made. Additionally, the
members 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 members 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 ruled upon above, we express or imply no opinion

concerning the tax consequences of any facts discussed or referenced in this letter.
Specifically, we express no opinion as to whether or not X is a partnership for federal
tax purposes.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.
PLR-134316-16 4

   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, we are sending a

copy of this letter ruling to your authorized representatives.

                                               Sincerely,

                                               Associate Chief Counsel
                                               (Passthroughs and Special Industries)



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

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