Partnership gets 120 days for late Section 754 election

Plain-English summary

A partnership timely filed its return but omitted a Section 754 election after its tax preparers failed to advise it that an election was needed. The IRS found that the partnership acted reasonably and in good faith and that relief would not prejudice the government. It granted 120 days to make the election effective for the affected year and later years. The partnership and its partners must reconstruct all Section 734(b) and 743(b) basis adjustments, including allowable depreciation and partner-basis reductions, even for years whose assessment or refund periods have expired.

Ruling snapshot

• Question: May the partnership receive extra time to make a Section 754 basis-adjustment election?
• Outcome: Approved. The partnership has 120 days, subject to comprehensive retroactive basis adjustments.
• Key authorities: IRC §§ 734, 743, and 754; Treas. Reg. §§ 1.754-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202113003 Third Party Communication: None
Release Date: 4/2/2021 Date of Communication: Not Applicable
Index Numbers: 754.02-00, 9100.15-00
Person To Contact:
--------------------------------------- -------------------, ID No. -----------------
------------------------------------- Telephone Number:
------------------------------ --------------------
---------------------------- Refer Reply To:
CC:PSI:B03
PLR-114193-20
Date:
December 21, 2020

Company = ----------------------------------------------------------------------------------------------
-----------------------
State = -------------
X = ----------------------------------------------------------------------------------------------
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Y = ----------------------------------------------------------------------------------------------
------------------------
Date = ----------------
Year = -------

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

  This letter responds to a letter dated June 16, 2020 submitted on behalf of

Company 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 Company is a State limited liability

company that is classified as a partnership for federal tax purposes. Company is owned
by X and Y. On Date, interests in X were sold and as a result X became classified as a
partnership for federal tax purposes. X's tax return for its Year taxable year was timely
filed with a § 754 election to adjust the basis of partnership property. Company’s return
for its Year taxable year was timely filed but a § 754 election was inadvertently not filed
with the return. Company represents its tax preparers failed to advise it about the need
to make the election. Company represents that it acted reasonably and in good faith,
and that granting relief will not prejudice the interests of the Government.
PLR-114193-20 2

                                 Law and Analysis

     Section 754 provides, in part, 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)(1) of the Income Tax Regulations provides, in part, 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, shall 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 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 an
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 the 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.
PLR-114193-20 3

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

    This ruling is contingent on Company 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 on 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 Company must adjust the basis of their interests in

Company 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 Company must reduce the basis of their interests in Company in the amount
of any additional depreciation that would have been allowable if the § 754 election had
been timely made.

   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 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.

  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.
PLR-114193-20 4

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to your authorized representatives.

                                 Sincerely,

                                 Associate Chief Counsel
                                 (Passthroughs & Special Industries)




                              By: _________________________
                                  Adrienne M. Mikolashek
                                  Chief, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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

cc: