A foreign partnership gets 120 more days to make the section 754 election it forgot to file with its return

Plain-English summary

A section 754 election lets a partnership adjust the tax basis of its assets when a partner's interest changes hands or when the partnership distributes property, so that the inside basis of the assets lines up with what the partners actually paid. It usually benefits the partners by increasing depreciation or reducing gain, but it has to be made in a written statement filed with the partnership's timely return. Here a foreign company treated as a partnership for U.S. tax purposes intended to make the election but simply failed to file it with the return for the relevant year. The partnership asked the IRS for relief under Treasury Regulation section 301.9100-3, which allows a late regulatory election when the taxpayer acted reasonably and in good faith and the government is not prejudiced. The IRS granted 120 days from the date of the letter to make the election. As a condition, the partnership and its partners must actually adjust their basis (both the assets under sections 734(b)/743(b) and the partners' interests) to match what would have happened if the election had been timely, even for years now closed by the statute of limitations, so the taxpayer cannot cherry-pick the benefits. The IRS also cautioned that granting the extension does not decide whether the partnership was otherwise eligible to make the election.

Ruling snapshot

• Question: Should a partnership get an extension under Treas. Reg. § 301.9100-3 to make a late section 754 election it failed to file with its return?
• Outcome: Approved (120-day extension granted, conditioned on making all corresponding basis adjustments even for closed years)
• Key authorities: IRC §§ 754, 734(b), 743(b); Treas. Reg. §§ 1.754-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202244002 Third Party Communication: None
Release Date: 11/4/2022 Date of Communication: Not Applicable
Index Numbers: 754.00-00, 754.02-00,
9100.00-00, 9100.15-00 Person To Contact:
--------------------, ID No. -----------------
-------------------------------------------- Telephone Number:
----------------------------------------------------- --------------------
----------------------------------- Refer Reply To:
----------------------------- CC:PSI:03
----------------------------------- PLR-103037-22
Date:
August 4, 2022

Legend

X: ---------------------------------------------

Country: --------------------------

Date: --------------------------

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

  This letter responds to a letter dated February 4, 2022, and subsequent

correspondence submitted on behalf of X, requesting an extension of time under
§ 301.9100-3 of the Procedure and Administration Regulations for X to file an election
under § 754 of the Internal Revenue Code (Code).

                                                 FACTS

   X, a Country company that is classified as a partnership for federal tax purposes,

intended to make a § 754 election for its taxable year ended Date. However, X failed to
timely file an election under § 754 with its partnership return for its taxable year ended
Date.
PLR-103037-22 2

                              LAW AND ANALYSIS

    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 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 no later than the time prescribed by § 1.6031(a)-1(e)
(including extensions) for filing the return for such 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
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 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 120 days from the date of this letter to make
a § 754 election for its taxable year ended Date. The election should be made in a
written statement filed with the applicable service center for association with X's return
PLR-103037-22 3

for its taxable year ended Date. A copy of this letter should be attached to the
statement filed.

    This ruling is contingent on X adjusting 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 deductions for
the recovery of basis related to X’s property 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 deductions for the recovery of basis allowable for an open year are to
be computed based on the remaining useful life or recovery period and using property
basis as adjusted by the greater of any such deductions 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 deductions
for the recovery of basis related to X’s property 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. 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.

   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.

  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.
PLR-103037-22 4

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter ruling to your authorized representatives.

                                    Sincerely,

                                 Associate Chief Counsel
                                 (Passthroughs & Special Industries)



                              By:
                                    Mary Beth Carchia
                                    Senior Technician Reviewer, Branch 3
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)

Enclosure:
Copy of this letter for § 6110 purposes

cc: