Partnership gets more time to make a section 754 basis-adjustment election it missed

Plain-English summary

When someone buys into a partnership, the partnership can make a § 754 election
so the new partner's share of the partnership's assets gets a basis adjustment
that matches what they paid, which usually gives that partner larger depreciation
or lower gain down the road. The election must be filed with the partnership
return for the year of the purchase. Here a limited partnership had a partner buy
an additional interest but inadvertently failed to make the § 754 election on
time. It asked the IRS for an extension under the "9100 relief" rules. Because
the § 754 deadline is set by regulation rather than statute, the IRS can grant
extra time when the taxpayer acted reasonably and in good faith and relief will
not hurt the government. The IRS found those conditions met and granted 120 days
to make the election, effective for the purchase year and later years.

Ruling snapshot

• Question: May a partnership get an extension of time to make a late § 754 election for the year a partner bought in?
• Outcome: Approved (120-day extension granted)
• Key authorities: IRC § 754; Treas. Reg. §§ 1.754-1(b)(1), 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                         Department of the Treasury
                                                                  Washington, DC 20224

 Number: 201839004                                                Third Party Communication: None
 Release Date: 9/28/2018                                          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-103627-18

                                                                  Date:
                                                                  July 02, 2018

          LEGEND

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

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

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

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

          N          =     ----

          Year       =     -------


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

       This letter responds to a letter dated January 26, 2018, and subsequent
 correspondence, submitted on behalf of X by its 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 (Code).

                                                       FACTS

        The information submitted states that X is a State limited partnership and is
classified as a partnership for federal tax purposes. On Date, A purchased an
additional N% interest in X. X inadvertently failed to make a timely election under § 754
for the year of A’s purchase (Year).

        X represents that it has acted reasonably and in good faith, and that granting
relief will not prejudice the interests of the government.

                                   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 as provided in §734 or a
transfer of a partnership interest as provided in §743. 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)(1) of the Income Tax Regulations provides, in part, 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(a)-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.

       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 Year 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 tax return. A copy of this letter should be attached to the statement filed.

       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 or imply no opinion as to whether 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.

      In accordance with the power of attorney on file with this office, we are sending a
copy of this letter ruling 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:       ________________________________
                                                   Caroline E. Hay
                                                   Assistant to the Branch Chief, Branch 3
                                                   Office of the Associate Chief Counsel
                                                   (Passthroughs & Special Industries)


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