Partnership gets 120 days to make a late Section 754 basis-adjustment election after a partner's death

Plain-English summary

A limited partnership wanted to make a section 754 election, which lets a partnership adjust the tax basis of its assets when a partnership interest is transferred (here, after a partner died) or property is distributed. Making the election preserves a basis step-up that the transferee would otherwise lose. The partnership relied on its advisor to file the election with its return, but the advisor failed to make it for the year in question. Under Treasury Regulation section 301.9100-3, the IRS can extend the deadline for such regulatory elections when the taxpayer acted reasonably and in good faith and the government is not prejudiced. The IRS found those standards met and granted 120 days from the letter to file the section 754 election, conditioned on the partnership and its partners adjusting basis (and any related depreciation) as if the election had been timely made. It matters because it is a common fix that saves the basis adjustment a partnership loses when it misses the 754 election after a partner dies or sells out.

Ruling snapshot

• Question: Will the IRS extend the deadline for a partnership to make a late section 754 basis-adjustment election?
• Outcome: Approved (120 days from the letter to make the election, effective for the year in question)
• Key authorities: IRC § 754 (and §§ 734, 743); Treas. Reg. § 1.754-1; Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202147007 Third Party Communication: None
Release Date: 11/26/2021 Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.15-00
Person To Contact:
------------------------------- -----------------, ID No. ---------------
-------------------------- Telephone Number:
------------------------- ---------------------
-------------------------------- Refer Reply To:
CC:PSI:01
PLR-106143-21
Date:
August 25, 2021

                                               Legend

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

A ----------------------

State = ---------

Date 1 = ------------------

Date 2 = -----------------------

Year = -------

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

This responds to a letter dated October 4, 2021, and additional correspondence,
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 on Date 1 as a State limited
partnership. X was classified as a partnership for federal tax purposes. A, a partner in
X, died on Date 2. X relied on its advisor to file an election under § 754; however, the
advisor failed to make an election under § 754 for Year.
PLR-106143-21 2

                                        Law

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.

Section 301.9100-3(a) provides that 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 the grant of relief will not prejudice the interests
of the government.

                                    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 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 tax return.
PLR-106143-21 3

This ruling is contingent on X filing all required returns and 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 by
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 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 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 representatives.

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)

Enclosure:
Copy for §6110 purposes

cc: