LLC gets 120 days for Section 754 election after member's death

Plain-English summary

A limited liability company taxed as a partnership failed to make a section 754 election for the year in which a member died and the member's interest passed to four other owners. Its professional tax adviser had not told it that the election was available. The IRS granted 120 days to file the election, conditioned on the company and its owners filing amended returns within the same period and reporting all consequences consistently. They also had to make the property-basis, partner-basis, and depreciation adjustments that would have applied if the election had been timely, even where limitation periods had expired.

Ruling snapshot

• Question: Could the partnership make a late section 754 election following the transfer of a deceased member's interest?
• Outcome: Approved, with 120 days to file the election and required amended returns.
• Key authorities: IRC §§ 734(b), 743(b), and 754; Treas. Reg. §§ 1.754-1(b), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201949018
Third Party Communication: None
Release Date: 12/6/2019
Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.15-00
Person To Contact:
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Refer Reply To:
CC:PSI:B03
PLR-108087-19
LEGEND
Date:
September 03, 2019
X: -------------------------------------
-----------------------------------

A: ---------------------------

B: ---------------------------

C: ------------------------------

D: ------------------------

E: ------------------------

D1: ------------------

D2: --------------------------

D3: ------------------- ---------

State: ----------

Year: -------

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

This letter responds to a letter dated March 25, 2019, 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 a State limited liability company formed on D1. X is classified as a partnership for federal tax purposes. A, B, C, D, and
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E were each owned a membership interest in X. A’s interest in X devolved on A’s death on D2 to B, C, D, and E.

X’s professional tax advisor failed to inform X of the availability of an election under § 754 for the taxable year ending with A’s death. Accordingly, X inadvertently failed to file an election under § 754. X requests an extension of time to make a § 754 election. X represents that it acted reasonably and in good faith, and that granting relief will not prejudice the interests of the Government.

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 return must be filed no later than the time prescribed by § 1.6031(a)-1(e) (including extensions) for filing the return for such 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 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 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.

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.
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CONCLUSION

Based solely 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 one hundred-twenty (120) days from the date of this letter to make a § 754 election for its taxable year ended D3. The election should be made in a written statement filed with the applicable service center for association with X's return for its taxable year ended D3. A copy of this letter should be attached to the statement filed.

This ruling is contingent on X and X's owners filing amended returns within one hundred-twenty (120) days of the date of this letter properly reporting the consequences of the election under § 754. This ruling is also 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. Furthermore, X and X’s owners agree to amend their Year taxable year returns to be filed consistently with § 1.743- 1(j).

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.

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 the 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.
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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.

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: ____
Wendy L. Kribell
Senior Counsel, Branch 3
Office of Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2):

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

cc: