Partnership granted extra time to make a late Section 754 basis-adjustment election after a partner's death

Plain-English summary

When a partner dies (or a partnership interest otherwise transfers), a partnership can make a § 754 election to adjust the basis of its assets so the new owner's inside basis matches what they effectively paid. The election must be filed with the partnership's return for the year of the transfer. Here a limited partnership had partners die in two different years and inadvertently failed to file the § 754 election either time. It asked the IRS for more time under Treas. Reg. § 301.9100-3, which lets the Commissioner grant relief for a missed regulatory election if the taxpayer acted reasonably and in good faith and the government is not harmed. The IRS granted a 120-day extension to make the § 754 election for Year 1. The relief is conditional: the partnership and its partners must actually make the resulting § 734(b)/§ 743(b) basis adjustments (including recomputing depreciation) even for years that are otherwise closed by the statute of limitations. Granting the extension does not decide whether the partnership was otherwise eligible to make the election.

Ruling snapshot

• Question: May a partnership that missed the deadline to make a § 754 election get an extension of time to file it?
• Outcome: approved (120-day extension granted for Year 1, subject to making the required basis adjustments)
• Key authorities: IRC § 754 (with §§ 734(b), 743(b)); Treas. Reg. § 1.754-1; 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: 202220004
Third Party Communication: None
Release Date: 5/20/2022
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:B01
--------------------------------
PLR-117577-21
Date:
February 23, 2022

LEGEND

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

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

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

State = --------

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

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

Year 1 = ------

Year 2 = -------

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

This responds to a letter dated August 27, 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).
PLR-117577-21
2

FACTS

According to the information submitted, X was formed on Date 1 as a State limited partnership and was classified as a partnership for federal tax purposes. A, a partner in X, died on Date 2; however, X inadvertently failed to file a § 754 election for Year 1. Subsequently, B died on Date 3, and X inadvertently failed to file a § 754 election for Year 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.
PLR-117577-21
3

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 1 taxable year. The election should be made in a written statement filed with the applicable service center for association with X's Year 1 tax return. A copy of this letter should be attached to each statement filed.

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 made if the § 754 elections had been timely made. These basis adjustments must reflect any additional depreciation that would have been allowable if the § 754 elections 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 elections 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 elections 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-117577-21
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,

Holly Porter
Associate Chief Counsel
(Passthroughs & Special Industries)

By: _/s/______
Joy C. Spies
Senior Technician Reviewer, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purpose

cc: