Partnership gets 120 days to make a late Section 754 basis-adjustment election it meant to make on a buyout

Plain-English summary

When someone buys into a partnership (here an LLC taxed as a partnership), the partnership can elect under Section 754 to adjust the tax basis of its assets so the new partner's inside basis lines up with what they paid. That election has to be filed with the partnership return for the year of the transfer. This partnership sold a chunk of its equity to a new owner and its sale agreement expressly said it would make the Section 754 election, but it inadvertently failed to do so. It asked the IRS for late relief under the Section 301.9100-3 regulations. The IRS found the partnership acted reasonably and in good faith and granted 120 days to make the election, effective for the year of the sale and after. The relief comes with strings: the partnership and its partners must go back and make the basis adjustments (and any related depreciation/amortization) as if the election had been timely, even for years now closed by the statute of limitations.

Ruling snapshot

• Question: May a partnership get an extension of time to make a late § 754 election for the year an equity interest was sold?
• Outcome: approved (120-day extension, subject to conforming basis adjustments)
• Key authorities: IRC §§ 754, 734, 743; Treas. Reg. §§ 1.754-1(b), 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202308002                                             Third Party Communication: None
 Release Date: 2/24/2023                                       Date of Communication: Not Applicable
 Index Number: 754.00-00, 754.02-00,
               9100.00-00, 9100.15-00                          Person To Contact:
                                                               ----------------------, ID No. -----------------
 --------------------------------------------                  Telephone Number:
 -----------------------------------------------               --------------------
 -------------------------------------------                   Refer Reply To:
 --------------------------                                    CC:PSI:B01
  -----------------------------                                PLR-110042-22
                                                               Date:
                                                               November 15, 2022




Legend

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

 Y                    --------------------------------------------------------------------------------------------
                      -----------------------

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

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

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

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

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

 Year             = -------

 n%               = ------

 Agreement = --------------------------------------------------

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

      This letter responds to a letter dated May 18, 2022, and subsequent
correspondence, submitted on behalf of X by X's authorized representative, requesting
PLR-110042-22                                2

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.

                                           Facts

       X was formed as a limited liability company in State on Date 1 and is treated as a
partnership for federal tax purposes. On Date 2, X's owners, A and B, agreed to sell
n% of the equity interests in X to Y.

       X represents that it intended to make a § 754 election, which was reflected in
Section 6.16 of Agreement (providing that X would make a § 754 election on its tax
return for the year in which the transfer took place). However, X inadvertently failed to
make a § 754 election for Year.

                                    Law and Analysis

       Section 754 provides that if a partnership files an election, in accordance with
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 6 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) provides that the term "regulatory
election" includes 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 the standards the Commissioner will use to
PLR-110042-22                                  3

determine whether to grant an extension of time for regulatory elections that do not
meet the requirements of § 301.9100-2.

       Under § 301.9100-3(a), 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 the taxpayer acted reasonably and in good faith,
and that granting relief will not prejudice the interests of the government.

                                         Conclusion

        Based solely on the information 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
either (1) to be associated with X's Year partnership tax return, or (2) accompanying
Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request
(AAR), and any related filings as instructed in Form 8082, as appropriate. A copy of this
letter should be attached to the relevant filing.

        This ruling is contingent on X's relevant filing(s) properly reflecting the § 754
election being in place following the sale transaction, including by containing
adjustments to the basis of X's 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.

       If the partnership is required to file an AAR in order to properly amend a
partnership tax return, then this ruling is also contingent on X filing Form 8082 and
taking into account the adjustments as required by § 6227(b).

        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.
PLR-110042-22                                  4

       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) of the
Code provides that it may not be used or cited as precedent.

       A copy of this letter must be attached to any income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

      The rulings contained in this letter are 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 request for rulings, it is subject to verification on
examination.

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

                                       Sincerely,

                                       Holly Porter
                                       Associate Chief Counsel
                                       (Passthroughs & Special Industries)



                                by:    ___/s/____________________________
                                       Caroline E. Hay
                                       Senior Technician Reviewer, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

Enclosure
      Copy of this letter for section 6110 purposes


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