Partnership receives 120 days to make a late section 754 election

Plain-English summary

A partnership failed to make a section 754 election after a deceased partner's interest passed to several successors. The IRS concluded that the partnership met the standards for discretionary relief and granted 120 days to submit the election for the affected tax year. The partnership must make all section 734(b) and 743(b) basis adjustments that would have applied if the election had been timely, including deductions allowed or allowable in closed years. Its partners also must adjust their outside bases to the amounts that would have resulted from a timely election. If an administrative adjustment request is required, the partnership must file Form 8082 and account for the changes under section 6227(b).

Ruling snapshot

• Question: May the partnership make a late section 754 election for the year in which a deceased partner's interest was transferred?
• Outcome: Approved, with a 120-day filing period and retroactive basis-adjustment conditions
• Key authorities: IRC §§ 6227(b), 734(b), 743(b), and 754; Treas. Reg. §§ 1.754-1(b), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202314009                                            Third Party Communication: None
Release Date: 4/7/2023                                       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-113653-22
                                                             Date:
                                                             January 11, 2023




                                                   LEGEND

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

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

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

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

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

E              =      -------------------
                      --------------------------

F              =      -----------------------------
                      --------------------------

G              =      --------------------------
                      --------------------------

State          =      --------

Date 1         =      -------------------
PLR-113653-22                                        2

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

 Year 1        =     -------

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

      This letter responds to a letter dated July 12, 2022, and subsequent
correspondence, submitted on behalf of X by its 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 (the ‘Code’).


                                                   FACTS

       According to the information submitted, X was formed on Date 1 under the laws
of State as a limited liability company. X is classified as a partnership for federal tax
purposes. A died on Date 2 and A’s interest in X was subsequently transferred to B, C,
D, E, F and G in Year 1. X represents that it inadvertently failed to timely file a § 754
election to adjust the basis of the partnership property for its Year 1 taxable year and
thereafter.

                                         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.
PLR-113653-22                                  3


       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 1 taxable year. The election should be
made in a written statement filed with the appropriate service center either (1) to be
associated with: X's Year 1 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(s).

        This ruling is contingent on X’s relevant filing(s) 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.

        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-113653-22                                  4

       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).

       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.

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

       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.

                                       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 purposes


cc: