Late relief granted for a partnership to make a section 754 basis-adjustment election

Plain-English summary

When someone buys into a partnership, a section 754 election lets the partnership adjust the tax basis of its assets so the new partner's inside basis matches what they paid, which can produce extra depreciation and other deductions. The election has to be made on a timely filed partnership return for the year of the transfer. This taxpayer, a state limited partnership, had interests transferred to unrelated parties in a given year and filed its return on time, but left off the section 754 election. It asked the IRS for extra time under Treasury Regulation section 301.9100-3, representing that it acted reasonably and in good faith and that relief would not harm the government. The IRS granted a 120-day extension to make the election, on the condition that the partnership and its partners recompute their basis (including any depreciation that would have been allowed) as if the election had been timely, even for years now closed by the statute of limitations. The ruling is a standard example of curing a missed section 754 election through 9100 relief.

Ruling snapshot

• Question: Should the partnership get an extension of time under Treas. Reg. § 301.9100-3 to make a section 754 election to adjust the basis of partnership property after a transfer of interests?
• Outcome: Approved (120-day extension, contingent on making the corresponding basis adjustments)
• Key authorities: IRC §§ 754, 743(b), 734(b); Treas. Reg. §§ 301.9100-1, 301.9100-3, 1.754-1(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201904010 Third Party Communication: None
Release Date: 1/25/2019 Date of Communication: Not Applicable
Index Number: 9100.15-00
Person To Contact:
-------------------------------------------- ------------------, ID No. -----------------
------------------------------------- Telephone Number:
---------------------------------------------------- ------- -------------
------------------------------------------- Refer Reply To:
CC:PSI:03
PLR-120519-18
Date:
October 25, 2018

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

State = ------------
Date 1 = -----------------
Date 2 = ----------------------
Year 1 = ------

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

  This responds to a letter dated June 5, 2018, submitted on behalf of X,

requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations to make an election under § 754 of the Internal Revenue
Code (Code).

   The information submitted states that X is a State limited partnership and has

been classified as a partnership for federal income tax purposes since its organization
on Date 1. In Year 1, interests in X were transferred to unrelated parties. X’s tax return
was timely filed, but a § 754 election was not filed with the return. X represents that it
has acted reasonably and in good faith and that granting relief will not prejudice the
interest of the government.

   Section 754 provides, in part, that if a partnership files an election, in accordance

with the regulations prescribed by the Secretary, the basis of the partnership property is
adjusted, 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.

     Section 1.754-1(b)(1) of the Income Tax Regulations provides, in part, that an

PLR-120519-18 2

election under § 754 to adjust the basis of partnership property under 743(b) with
respect to 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 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 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 the
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. Under § 301.9100-3, a
request for relief will be granted when the taxpayer provides 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.

   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, X is granted an extension of time of 120 days from the date of this letter to
make an election under § 754 effective for its taxable year ending on Date 2 and
thereafter. The election should be made in a written statement filed with the appropriate
service center for association with X’s return for its taxable year ending on Date 2. A
copy of this letter should be attached to the election.

    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 has
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
PLR-120519-18 3

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 set forth above, we express or imply no opinion concerning

the federal tax consequences of the facts described above under any other provision of
the Internal Revenue Code and the regulations thereunder. 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.

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

Code provides that it may not be used or cited as precedent.

   This 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 that 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 to X's authorized representative.

                                              Sincerely,


                                              Associate Chief Counsel
                                              (Passthroughs and Special Industries)




                                       By:    _______________
                                              Stacy L. Short
                                              Senior Technician Reviewer, Branch 3
                                              Office of Associate Chief Counsel
                                              (Passthroughs & Special Industries)

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