IRS grants a partnership 120 days to make a late § 754 election tied to an intended transfer

Plain-English summary

An LLC taxed as a partnership meant to make a Section 754 election when two members
transferred part of their interests in a multi-step deal, and the deal documents said the
parties intended that election, but the partnership never filed it on time. A Section 754
election lets a partnership adjust the tax basis of its property after a transfer of an interest,
which affects later depreciation and gain for the incoming owner. Under the Section
301.9100-3 relief rules, the IRS can extend the time to make such a regulatory election
when the taxpayer acted reasonably and in good faith and relief will not prejudice the
government. The IRS found those conditions met and gave the partnership 120 days to
make the election, subject to conditions: it and its partners must file amended returns for
all open years and adjust basis as if the election had been timely made.

Ruling snapshot

• Question: Should the partnership get a § 301.9100-3 extension to make a late § 754 election for the year of the transfer?
• Outcome: Approved (120-day extension, with conditions)
• Key authorities: IRC § 754; 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: 202215008                                             Third Party Communication: None
 Release Date: 4/15/2022                                       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-115093-21
                                                               Date:
                                                               January 18, 2022


                                                     LEGEND

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

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

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

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

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

 Year           =      -------


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

This letter responds to a letter dated July 21, 2021, 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 transferred a
portion of their interest in X as part of a multiple-step transaction. The agreement
governing the multi-step transaction indicated the parties' intention that X make a § 754
election in connection with the transaction. However, X inadvertently failed to make a
timely election under § 754 for the year of the transfer (Year).
PLR-115093-21                                 2

                                  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 its Year taxable year and thereafter. 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.
PLR-115093-21                                  3

This ruling is contingent on X and its partners filing within 120 days of this letter
amended returns for all open years properly reporting the consequences of the election
under §754. Further, as a condition of this ruling, to the extent that X has not already
done so, X must adjust 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 upon 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 X must adjust the basis of their interests in X 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 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 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
or the regulations thereunder. 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.

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.
PLR-115093-21                                  4

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)


                                         /s/ Laura C. Fields
                                  By: _____________________
                                      Laura C. Fields
                                      Chief, Branch 1
                                      Office of the Associate Chief Counsel




Enclosure
      Copy for § 6110 purposes




cc: