Late partnership basis-adjustment election (§ 754) allowed under 9100 relief

Plain-English summary

A limited partnership meant to make a section 754 election, which lets a partnership adjust the tax basis of its assets when interests change hands or property is distributed, so the incoming or affected partners are not over- or under-taxed. The election has to be attached to the partnership return for the year in question, and this partnership missed that deadline. It asked the IRS for an extension of time under the "9100 relief" regulations (Treas. Reg. § 301.9100-3), which let a taxpayer make a late election if it acted reasonably and in good faith and granting relief would not hurt the government. The IRS agreed and gave the partnership 120 days from the date of the letter to make the election. The catch: the partnership and its partners must go back and make all the basis adjustments (under §§ 734(b) and 743(b)) that would have applied had the election been timely, even for years the statute of limitations has otherwise closed, so the late election does not become a way to claim deductions twice.

Ruling snapshot

• Question: May a partnership that missed the deadline to make a § 754 basis-adjustment election get an extension of time to make it?
• Outcome: Approved (120-day extension granted, contingent on making the corresponding basis adjustments)
• Key authorities: IRC § 754; Treas. Reg. § 1.754-1(b); Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                       Department of the Treasury
                                               Washington, DC 20224

Number: 202320003                              Third Party Communication: None
Release Date: 5/19/2023                        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:B03
--------------------------------                 PLR-116187-22
----------------------------                   Date:
------------------------------------             February 17, 2023


LEGEND

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

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

Date     = --------------------------


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

      This letter responds to a letter dated August 11, 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 State limited partnership, 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.

                              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 appropriate service center either (1) to be associated
with X's return for its taxable year ended Date, 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) 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 has been timely made, regardless of
whether the statutory period of limitations 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 limitations 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.

      In accordance with the power of attorney on file with this office, we are sending a
copy of this letter to your authorized representative.


                                     Sincerely,

                                     Associate Chief Counsel
                                     (Passthroughs & Special Industries)


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

Enclosure:
      Copy of this letter for § 6110 purposes


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