Partnership received 120 days to make a late section 754 election

Plain-English summary

A limited liability company treated as a partnership missed a section 754 election after an owner died because its advisor did not explain that the election was available. The IRS found that the regulatory-extension requirements were satisfied and gave the partnership 120 days to make the election effective for the relevant tax year and later years. The relief was conditioned on reconstructing the property-basis, depreciation, and partner-basis adjustments that would have applied if the election had been timely. Those adjustments were required even for years whose assessment or refund limitation periods had expired.

Ruling snapshot

• Question: May the partnership make a late section 754 election after an advisor failed to inform it that the election was available?
• Outcome: approved, with 120 days to file the election and required retroactive basis adjustments
• Key authorities: IRC §§ 734, 743, and 754; Treas. Reg. §§ 1.754-1(b) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201937012                                              Third Party Communication: None
Release Date: 9/13/2019                                        Date of Communication: Not Applicable
Index Number: 754.00-00, 9100.00-00,
              9100.31-00                                       Person To Contact:
                                                               -----------------------------,
------------------------------------------                     ID No. ----------------
-----------------------------------                            Telephone Number:
-------------------------------                                ----------------------
-------------------------------------------------              Refer Reply To:
--------------------------------------------                   CC:PSI:B01
                                                               PLR-132861-18
                                                               Date:
                                                               May 24, 2019


LEGEND

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

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

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

Y                          =        ----------------------------

Year                       =        -------


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

      This letter responds to a letter dated October 25, 2018, 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

       X was formed as a limited liability company under State law on Date and is
treated as a partnership for federal tax purposes. Y, who owned an interest in X through
a grantor trust, died in Year. X’s advisor did not inform X as to the availability of an
election under § 754. Therefore, X failed to make an election under § 754 for Year.
PLR-132861-18                                 2



Law and Analysis

       Section 754 provides 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.

       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, is 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 that 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) defines the term “regulatory election” as
including 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 making 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-132861-18                                 3



       Based on 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 an
election under § 754, effective for its Year taxable year and thereafter. The election
should be made in a written statement filed with the appropriate service center for
association with X’s Year tax return. A copy of this letter should be attached to the § 754
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 had the § 754 election been
timely made. These basis adjustments must reflect any additional depreciation that
would have been allowable had the § 754 election 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 election relief. Any depreciation
deduction allowable for an open year is to be computed based upon the remaining
useful life and using property basis adjusted by the greater of any depreciation allowed
or allowable in any prior year had the § 754 election been timely made. Additionally, X’s
partners must adjust the basis of their interests in X to reflect what that basis would be
had the § 754 election 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 election relief. Specifically, X’s partners must reduce the basis of their
interests in X in the amount of any additional depreciation that would have been
allowable had the § 754 election been timely made.

        Except as expressly provided herein, we express or imply no opinion concerning
the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. Specifically, we express or imply no opinion as to whether X is a
partnership for federal tax purposes.

       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.

        Pursuant to a power of attorney on file with this office, we are sending a copy of
this letter to X’s authorized representative.
PLR-132861-18                                4



      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.


                                          Sincerely,

                                          Holly Porter
                                          Associate Chief Counsel
                                          (Passthroughs & Special Industries)



                                   By:    Laura C. Fields
                                          Laura C. Fields
                                          Senior Technician Reviewer, Branch 1
                                          Office of Associate Chief Counsel
                                          (Passthroughs & Special Industries)




Enclosures (2)

       Copy of this letter
       Copy of this letter for section 6110 purposes




cc: