Lower-tier partnership received late section 754 election relief

Plain-English summary

An upper-tier partnership had a section 754 election in effect when one of its partners sold an interest to a new partner. The lower-tier partnership, in which the upper-tier partnership held an interest, timely filed its return but failed to make its own section 754 election. Revenue Ruling 87-115 requires elections at both partnership tiers for the optional basis adjustment to reach the lower-tier property. After the lower-tier partnership represented that it acted reasonably and in good faith and that relief would not prejudice the government, the IRS granted it 120 days to file the election for the relevant year and later years.

Ruling snapshot

• Question: Could the lower-tier partnership obtain extra time to make the section 754 election needed after a transfer of an upper-tier partnership interest?
• Outcome: approved; a 120-day extension was granted
• Key authorities: IRC §§ 734(b), 743(b), 754; Treas. Reg. §§ 1.754-1(b), 301.9100-1, 301.9100-3; Rev. Rul. 87-115

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201919007                                             Third Party Communication: None
Release Date: 5/10/2019                                       Date of Communication: Not Applicable
Index Numbers: 9100.15-00, 754.00-00
                                                              Person To Contact:
-----------------------------                                 -----------------------, ID # ------------------
--------------------------                                    Telephone Number:
------------------------------                                ----------------------
---------------------------------------------                 Refer Reply To:
----------------------------------                            CC:PSI:B03
                                                              PLR-122360-18
                                                              Date:
                                                              January 29, 2019



LEGEND

LTP         =      -------------------------------------------------------------------------------------------------
                   ---------------

UTP         =      ----------------------------------

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

D1          =      -------------------

D2          =      -------


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

      This letter responds to a letter dated July 19, 2018, submitted on behalf of LTP
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

        According to the information submitted, LTP is a State limited liability company
classified as a partnership for federal tax purposes. UTP is represented as a domestic
limited partnership that has had a § 754 election in place since before LTP’s formation.
UTP owns an interest in LTP.

       In D1, one of UTP’s partners sold its interest in UTP to a new partner. LTP’s tax
return for the D2 taxable year was filed timely, but a § 754 election to adjust the basis of
partnership property was not filed with the return. LTP represents that it has acted
PLR-122360-18                                 2

reasonably and in good faith and that granting relief will not prejudice the interests of the
government.

                            LAW AND ANALYSIS

       Section 754 provides, in part, that if a partnership files an election, in accordance
with regulations prescribed by the Secretary, the basis of partnership property is
adjusted when there is a distribution of property or a transfer of a partnership interest.
Such an election 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.

        Rev. Rul. 87-115, 1987-2 C.B. 163, provides that the optional adjustment to basis
under section 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.

        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
§ 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
PLR-122360-18                                 3


       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, LTP is granted an extension of time of 120 days from the date of this letter
to make a § 754 election for its D2 taxable year and thereafter. The election should be
made in a written statement filed with the applicable service center for association with
LTP's return for its D2 taxable year. A copy of this letter should be attached to the
statement filed.

       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.

      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 LTP’s authorized representatives.

       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 & Special Industries)



                                          By:__/s/___________________________
                                             Mary Beth Carchia
                                             Senior Technician Reviewer, Branch 3
                                             Office of the Associate Chief Counsel
                                             (Passthroughs & Special Industries)


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


cc: