IRS grants a partnership 120 more days to make a section 754 basis-adjustment election

Plain-English summary

When a partnership interest changes hands, the partnership can make a "section 754 election" to adjust the tax basis of its assets, which usually benefits the incoming partner by aligning the inside basis of the assets with what the new partner paid. That election must be made on a timely filed partnership return for the year of the transfer. Here, an LLC taxed as a partnership had an interest bought by a married couple, but the partnership's tax advisor never told it that a § 754 election was available, so it did not make the election that year. The partnership asked the IRS for more time under Treasury Regulation § 301.9100-3, which allows relief for a missed regulatory election when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS concluded those requirements were satisfied and granted a 120-day extension to make the § 754 election for that year by filing a written statement with the service center. This is a common form of relief for partnerships whose advisers overlooked the election.

Ruling snapshot

• Question: May a partnership get an extension of time under § 301.9100-3 to make a late § 754 election after a transfer of a partnership interest?
• Outcome: approved (120-day extension granted)
• Key authorities: IRC §§ 754, 734(b), 743(b); Treas. Reg. §§ 1.754-1(b), 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202150011 Third Party Communication: None
Release Date: 12/17/2021 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:B01
                                                     PLR-107939-21
                                                     Date:
                                                     September 22, 2021


                                                LEGEND

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

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

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

B = -----------------

C = ------------------

D = -------------------

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

Year = -------

t% = -----

m% = ---

n% = ---

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

This letter responds to a letter dated February 15, 2021, and subsequent
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 is a State limited liability company that is
classified as a partnership for federal tax purposes. On Date 1, A and B, a married
couple, collectively purchased a t% interest in X from C and D. Following the transfer, A
and B each owned a separate interest of m% and n% in X, respectively. X's tax advisor
did not inform X as to the availability of an election under § 754 during the taxable year
of the transfer (Year). Therefore, X was unaware that it was eligible to make a § 754
election and failed to make an election under § 754 for Year.

                              LAW AND ANALYSIS

Section 754 provides that a partnership may elect to adjust the basis of partnership
property when there is a distribution of property or a transfer of a partnership interest.
An election under § 754 applies 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, must 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) for filing
the return for such taxable year.

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time 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 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 that 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 rules for requesting extensions 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 (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.

                                  CONCLUSION

Based solely 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 one hundred-twenty (120) days from the date of this
letter to make a § 754 election for partnership's Year tax year. The election should be
made in a written statement filed with the applicable service center for association with
X's Year tax return. A copy of this letter should be attached to the statement filed.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

The ruling contained in this letter is based on 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.

In accordance with the Power of Attorney on file with this office, we have sent a copy of
this letter to your authorized representative.

                               Sincerely,

                               Associate Chief Counsel
                               (Passthroughs & Special Industries)



                               By: _____________________
                                   Jennifer N. Keeney
                                   Senior Counsel, Branch 1
                                   Office of the Associate Chief Counsel

Enclosure
Copy for § 6110 purposes

cc: