Lower-tier partnership gets 120 extra days to make a late Section 754 election

Plain-English summary

A partner in an upper-tier partnership died, and both that partnership and a lower-tier partnership it partly owned failed to make timely Section 754 elections for the year. The lower-tier partnership asked for "9100 relief," which allows the IRS to extend certain regulatory election deadlines when the taxpayer acted reasonably and in good faith and the government would not be prejudiced. The IRS found those requirements satisfied and gave the lower-tier partnership 120 days from the letter date to make its election effective for the missed year and later years. The relief requires the partnership and its partners to adjust property basis, interest basis, and depreciation as though the election had been timely, including adjustments relating to otherwise closed years. The ruling shows that a missed Section 754 deadline may be corrected, but the taxpayer must accept the full tax consequences that would have followed from a timely election.

Ruling snapshot

• Question: May the lower-tier partnership receive more time to make a Section 754 election that it inadvertently missed?
• Outcome: Approved (120-day extension, subject to retroactive basis and depreciation adjustments)
• Key authorities: IRC §§ 734(b), 743(b), 754; Treas. Reg. §§ 1.754-1(b)(1), 301.9100-1 through 301.9100-3; Rev. Rul. 87-115

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201851007                                              Third Party Communication: None
Release Date: 12/21/2018                                       Date of Communication: Not Applicable
Index Numbers: 754.00-00, 754.02-00,
              9100.00-00, 9100.15-00                           Person To Contact:
                                                               ----------------------, ID No. ------------------
------------------------------                                 Telephone Number:
------------------------------------------------------------   ----------------------
-----------------------------                                  Refer Reply To:
--------------------------------------------                   CC:PSI:B03
----------------------------------------                       PLR-125617-18
                                                               Date:
                                                               September 20, 2018




                                                    LEGEND

P1        = -----------------------------------------------------------------------------------------------------
            ----------------------------

P2        = -----------------------------------------------------------------------------------------------------
            -----------------------

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

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

Year1 = -------

r         = ----


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

This letter responds to a letter dated March 28, 2018, and subsequent correspondence,
submitted on behalf of P2 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 P1 is a State limited partnership that is classified
as a partnership for federal tax purposes. P2 is a State general partnership that is
PLR-125617-18                                 2

classified as a partnership for federal tax purposes. P1 owns an r% interest in P2. A, a
partner in P1, died during Year1.

P1 and P2 inadvertently failed to file timely elections under § 754 for Year1.

                                           LAW

Section 754 provides, in part, that if a partnership files an election, in accordance with
the regulations prescribed by the Secretary, the basis of partnership property is
adjusted, in the case of a distribution of property, in the manner provided in § 734, and,
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.

The optional adjustment to basis under § 754 will be available to both an upper-tier
partnership (UTP) and a lower-tier partnership (LTP) when there is a sale or exchange
of a partnership interest or the death of a partner in UTP, and both UTP and LTP have
made an election under § 754 to adjust the basis of partnership property on a sale or
exchange of a partnership interest or on the death of a partner. Rev. Rul. 87-115, 1987-
2 C.B. 163.

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, 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(a)-1(e)
(including extensions thereof) 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
Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term
"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.

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 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 § 301.9100-2.
PLR-125617-18                                3


Under § 301.9100-3, a request for relief 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 (1) the taxpayer acted reasonably and in good
faith, and (2) the grant of 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, P2 is granted an extension of time of 120 days from the date of this letter to
make an election under § 754 effective for its Year1 taxable year and thereafter. The
election should be made in a written statement filed with the appropriate service center
for association with P2's Year1 return. A copy of this letter should be attached to the
statement filed.

This ruling is contingent on P2 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
partners of P2 must adjust the basis of their interests in P2 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 P2 must reduce
the basis of their interests in P2 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 P2 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.

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-125617-18                                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 representative.

                                            Sincerely,

                                             Associate Chief Counsel
                                             (Passthroughs & Special Industries)



                                         By:_____________________________
                                            Caroline E. Hay
                                            Assistant to the Branch Chief, Branch 3
                                            Office of the Associate Chief Counsel
                                            (Passthroughs & Special Industries)



Enclosures: Copy of this letter
            Copy of this letter for § 6110 purposes




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