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:
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Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-114193-20
Date:
December 21, 2020

Company = ----------------------------------------------------------------------------------------------
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State = -------------
X = ----------------------------------------------------------------------------------------------
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Y = ----------------------------------------------------------------------------------------------
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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
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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: