IRS grants a partnership extra time to make a late § 754 basis-adjustment election after its preparer failed to advise it

Plain-English summary

When a partner dies or a partnership interest changes hands, a partnership can
make a "§ 754 election" to adjust the tax basis of its property, which often
lets the remaining or incoming partners claim larger depreciation deductions.
The election normally has to be filed with the partnership's timely return for
the year of the event. Here, one of the partners in a limited liability limited
partnership died shortly after the partnership was formed, but the partnership's
tax preparer never told it about the § 754 election, so it was never filed. The
partnership asked the IRS for relief under the "9100" regulations, which let the
IRS grant extra time to make a missed election when the taxpayer acted
reasonably and in good faith and relief won't harm the government. The IRS
granted 120 days to make the election, subject to conditions: the partnership and
its partners must file consistent returns for all open years and properly adjust
the basis of the partnership property and of the partners' interests as if the
election had been timely made.

Ruling snapshot

• Question: Should the partnership get an extension of time under Treas. Reg. § 301.9100-3 to make a late § 754 election?
• Outcome: Approved (120-day extension granted, subject to conditions)
• Key authorities: IRC § 754; §§ 734(b), 743(b); Treas. Reg. § 1.754-1(b); Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201846003
Release Date: 11/16/2018
Index Numbers: 754.00-00, 9100.00-00, 9100.15-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
-------------------------, ID No. -----------------
Telephone Number:

Refer Reply To:
CC:PSI:B03
PLR-112173-18

Date:
August 06, 2018

Legend

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

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

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

C = --------------------

D = ------------------------

E = ------------------

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

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

Year = -------

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

   This letter responds to a letter dated March 24, 2018, 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 ("Code").

PLR-112173-18 2

                               FACTS

    According to the information submitted, X is a State limited liability limited

partnership classified as a partnership for federal tax purposes. X was owned by A, B,
C, D and E at the time of formation. A died shortly after the formation of X during Year.
X represents that its tax return for Year was filed timely, but a § 754 election to adjust
the basis of partnership property was not filed with the return. X represents that its
professional tax return preparer did not inform X of the availability of the § 754 election
at the time its tax return for Year was prepared and filed, but that X 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 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(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) provides that the term "regulatory
election" includes 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 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 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

PLR-112173-18 3

§ 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 applicable service center for association with
X's return for its Year taxable year. A copy of this letter should be attached to the
statement filed.

   This ruling is contingent on X and its partners filing within 120 days of this letter

all required returns for all open years consistent with the requested 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, 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. 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. Additionally,
the partners 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 partners 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 for the specific ruling above, we express or imply no opinion concerning

the federal tax consequences of the facts of this case under any other provision of the
Code. In addition, § 301.9100-1(a) provides that the granting of an extension of time for
making an election is not a determination that the taxpayer is otherwise eligible to make
the election.

   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.

PLR-112173-18 4

  This ruling is directed only to the taxpayer requesting it. According to

§ 6110(k)(3), this ruling may not be used or cited as precedent.

            Under a power of attorney on file with this office, we are sending a copy of

this letter to X's authorized representative.

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)

                               By:    _____________________________
                                      Richard T. Probst
                                      Senior Technician Reviewer, Branch 3
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

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