IRS gives limited partnership more time for Section 754 election

Plain-English summary

A limited partnership timely filed its return for the year a partner died but inadvertently omitted a valid Section 754 election. The partnership represented that it acted reasonably and in good faith and that relief would not prejudice the government. The IRS granted 120 days to file the written election for association with the return. The partnership had to make all Section 734(b) and 743(b) property-basis adjustments that would have been available if the election were timely, including depreciation adjustments for earlier years. Its partners also had to adjust their outside bases even where limitation periods had expired.

Ruling snapshot

• Question: Could the limited partnership make a late Section 754 election for the year of a partner's death?
• Outcome: Approved.
• Key authorities: IRC §§ 734(b), 743(b), 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: 202130006 Third Party Communication: None
Release Date: 7/30/2021 Date of Communication: Not Applicable
Index Number: 754.00-00, 9100.00-00,
9100.15-00 Person To Contact:
----------------, ID No. ---------------
------------------------------------------------------------ Telephone Number:
------------------------------------------------- --------------------
----------------------------- Refer Reply To:
-------------------------- CC:PSI:01
-------------------------------------------- PLR-118716-20
Date:
February 02, 2021

                                                 Legend

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

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

Year 1 = -------

Year 2 = -------

Year 3 = -------

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

A = -----------------------

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

This responds to a letter dated August 14, 2020, submitted on behalf of X by X’s
authorized representative, 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 formed in Year 1, began operating in Year
2 as a State limited partnership, and is classified as a partnership for federal tax
PLR-118716-20 2

purposes. A was a partner in X. A died on Date. X timely filed a partnership return for
its Year 3 taxable year, but inadvertently failed to make a valid § 754 election with the
return. X represents that it has acted reasonably and in good faith, and that granting
relief to make a § 754 election 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
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, 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 that taxable year.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 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. Requests for relief under § 301.9100-3 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 the taxpayer
acted reasonably and in good faith, and grant of relief will not prejudice the interests of
the government.
PLR-118716-20 3

                                     Conclusion

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 3 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 3 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 allowable if the § 754 election had been
timely made, regardless of whether the statutory period of limitation on assessment or
filing for a claim of 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 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 made, regardless
of whether the statutory period of limitations 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.

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 an 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 or 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-118716-20 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 and
                                  Special Industries)




                              By: Caroline E. Hay
                                 Caroline E. Hay
                                 Senior Counsel, Branch 1
                                 (Passthroughs and Special Industries)

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

cc: