A partnership gets 120 days of 9100 relief to make a late section 754 election

Plain-English summary

A limited liability company taxed as a partnership was supposed to make a section 754 election but missed the deadline. A section 754 election lets a partnership adjust the inside basis of its assets when partnership interests change hands or property is distributed, which can give the partners larger depreciation deductions going forward. Here, ownership of a related partnership shifted (sellers sold some interests and had the rest redeemed, a buyer took over, and the entity was later contributed into another entity), and the governing purchase agreement had required the election, but the tax return was filed without it. The taxpayer asked for relief under Treasury Regulation 301.9100-3, which allows a late regulatory election if the taxpayer acted reasonably and in good faith and granting relief won't prejudice the government. The IRS granted 120 days from the date of the letter to make the election. The relief is conditioned on the partnership and its partners adjusting basis to reflect what it would have been had the election been timely (including depreciation), even for years already closed by the statute of limitations. The IRS expressed no opinion on any other issue, including whether the entity is actually a partnership.

Ruling snapshot

• Question: Should the IRS grant an extension of time under Treas. Reg. § 301.9100-3 for a partnership to make a late section 754 election?
• Outcome: Approved (120-day extension granted, subject to conforming basis adjustments)
• Key authorities: IRC § 754; § 734(b); § 743(b); Treas. Reg. § 1.754-1(b); Treas. Reg. § 301.9100-1 and § 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202144023 Third Party Communication: None
Release Date: 11/5/2021 Date of Communication: Not Applicable
Index Number: 9100.15-00, 754.02-00
Person To Contact:
------------------------ -----------------------, ID No. -----------------
-------------------------------- Telephone Number:
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----------------------------------------------- Refer Reply To:
CC:PSI:B03
PLR-112184-21
Date:
August 05, 2021

Legend

A = ------------------------------------------
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B = ------------------------------------------
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C = ------------------------------------------
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D = ------------------------------------------
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State 1 = -------------
Date 1 = ---------------------------
Date 2 --------------------------
Date 3 = --------------------------
Date 4 -------------------------
Year 1 = -------

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

  This responds to a letter, dated May 26, 2021, and subsequent correspondence,

requesting an extension of time under § 301.9100-3 of the Procedures and
Administration Regulations to file an election under § 754 of the Internal Revenue Code.

                                                FACTS

     The information submitted states that on Date 1, A was formed as a limited

liability company under the laws of State 1 and is classified for federal income tax
purposes as a partnership. B and C were the partners of A at the time of formation. On
PLR-112184-21 2

Date 2, various entities (the “Sellers”) contributed assets to B which caused B to
become a partnership for federal income tax purposes on Date 2. On Date 3, the
Sellers sold certain of their partnership interests in B to C (the “Buyer”). Also on Date 3,
the Sellers had their remaining membership interests in B redeemed by B pursuant to a
purchase agreement which was signed on Date 4 (“Purchase Agreement”). Section
6.20(d) of the Purchase Agreement provided that “B shall make a Code Section 754
election with the initial federal income tax return for [B].” Under Section 6.20(a) of the
Purchase Agreement, the Buyer was responsible for causing the tax returns for B and
all other subsidiary entities, including A, to be filed.

   A failed to make the Section 754 election for the short period in Year 1 beginning

on Date 2 and ending on December 31st of Year 1. Lastly, on Date 3, the Buyer and
other remaining members of B contributed their membership interests in B to D. As a
result of the contributions, B became a disregarded entity of D.

                              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, 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 § 1.6031-1(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 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
Internal Revenue 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 the
election.
PLR-112184-21 3

    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 evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and that granting
relief will not prejudice the interests of the government.

                                 CONCLUSIONS

   Based on the information submitted and the representations made, we conclude

that the requirements of sections 301.9100 -1 and 301.9100-3 have been satisfied. As
a result, A is granted an extension of time of 120 days following the date of this letter to
make a section 754 election. The election should be made in a written statement filed
with the applicable service center for association with A's return. A copy of this letter
should be attached to the statement filed. A copy of this letter is enclosed for that
purpose.

    This ruling is contingent on A adjusting the basis of its properties to reflect any

section 734(b) or section 743(b) adjustments that would have been made had the
section 754 election been timely made. These basis adjustments must reflect any
additional depreciation that would have been allowable had the section 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 section 754
election been timely made. Additionally, A's partners must adjust the basis of their
interests in A to reflect what that basis would be had the section 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, A's partners must reduce the basis of their interests in A in the
amount of any additional depreciation that would have been allowable had the section
754 election been timely made.

   Except as specifically set forth above, we express no opinion concerning the

federal income tax consequences of the transactions described above under any other
provision of the Code. Specifically, we express no opinion as to whether or not A 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.
PLR-112184-21 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.

  Pursuant to the Power of Attorney on file with this office, a copy of this ruling will

be sent to the taxpayer representative.

                                   Sincerely,

                                   Associate Chief Counsel
                                   (Passthroughs and Special Industries)



                                By: _______________________________
                                   Richard T. Probst
                                   Senior Technician Reviewer, 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: