Partnership gets 120 extra days to make a late Section 754 basis-adjustment election

Plain-English summary

A limited partnership meant to make a Section 754 election, which lets a partnership adjust the tax basis of its assets after a partner dies or a partnership interest changes hands, so the new owner is not stuck with mismatched basis. Here a partner (who held the interest through a trust) died, and the partnership intended to make the election with the return for that year but never filed a properly executed election by the deadline. The partnership asked the IRS for "9100 relief," the discretionary extension available under Treas. Reg. § 301.9100-3 when a taxpayer misses a regulatory election deadline but acted reasonably and in good faith. The IRS agreed the requirements were met and gave the partnership 120 days from the date of the letter to make the election. The relief is conditioned on the partnership and its partners going back and adjusting basis (and depreciation) as if the election had been timely, even for years the statute of limitations has closed. Anyone who blew a § 754 election deadline would care because this is the standard path to fix it.

Ruling snapshot

• Question: Should the partnership get more time to make a late Section 754 election after inadvertently failing to file it?
• Outcome: Approved (120-day extension granted, contingent on conforming basis and depreciation adjustments)
• Key authorities: IRC § 754 (with §§ 734(b), 743(b)); Treas. Reg. §§ 1.754-1(b), 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201852013                                              Third Party Communication: None
Release Date: 12/28/2018                                       Date of Communication: Not Applicable
Index Number: 754.00-00, 9100.00-00,
              9100.15-00                                       Person To Contact:
                                                               --------------------, ID No. ------------------
--------------------------------------                         Telephone Number:
------------------------------------------                     ----------------------
-------------------                                            Refer Reply To:
----------------------------------------                       CC:PSI:01
                                                               PLR-112769-18
                                                               Date:
                                                               September 20, 2018

LEGEND

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

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

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

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

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

Year        = -------

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

This letter responds to a letter dated March 25, 2018, 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).

                                                     FACTS

The information submitted states that X was formed on Date 1 under the laws of State
as a limited partnership classified as a partnership for federal tax purposes. A, who
owned an interest in X through a trust, died on Date 2. X intended to file an election
under § 754 to adjust the basis of partnership property with its return for its taxable year
ending in Year. However, X inadvertently failed to file a properly executed § 754
election.

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

                                  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 statement must (i) set forth the name and address of the
partnership making the election, (ii) be signed by any one of the partners, and (iii)
contain a declaration that the partnership elects under § 754 to apply the provisions of
§§ 734(b) and 743(b).

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, or a revenue ruling, revenue procedure, announcement, or notice published in
the Internal Revenue Bulletin.

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. Requests for relief under § 301.9100-3
will be granted when the taxpayer provides evidence to establish that the taxpayer
acted reasonably and in good faith, and that granting 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 ended in Year. The election should be made in a written
statement filed with the appropriate service center. A copy of this letter should be
attached to the § 754 election. A copy is enclosed for that purpose.

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 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 as specifically ruled upon above, no opinion is expressed or implied concerning
the tax consequences of any facts discussed or referenced in this letter. This ruling is
directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may
not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, copies of this letter
ruling will be sent to your authorized representatives.

                                          Sincerely,

                                          Associate Chief Counsel
                                          (Passthroughs & Special Industries)

                                          Laura C. Fields
                                    By:
                                          Laura C. Fields
                                          Senior Technician Reviewer, Branch 1
                                          (Passthroughs & Special Industries)

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