Partnership received 120 days to make a late Section 754 election

Plain-English summary

A limited liability company taxed as a partnership intended to make a Section 754 election after one partner acquired portions of another partner's interest in two transactions. The partnership timely filed its return but, through inadvertence by its tax advisers, did not include the election. The IRS found that the partnership acted reasonably and in good faith and granted 120 days to file a written election effective for the relevant year and later years. The relief required the partnership and its partners to make all basis and depreciation adjustments that would have applied if the election had been timely, even for otherwise closed years. If an administrative adjustment request was required, the partnership also had to file Form 8082 and apply Section 6227(b).

Ruling snapshot

• Question: Could the partnership make a late Section 754 election after its advisers omitted it from a timely return?
• Outcome: approved
• Key authorities: IRC §§ 734(b), 743(b), 754, 6227(b); 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: 202328003                                              Third Party Communication: None
   Release Date: 7/14/2023                                        Date of Communication: Not Applicable
   Index Number: 9100.15-00, 754.02-00
                                                                  Person To Contact:
   ----------------                                               -------------------, ID No. -----------------
   ----------------------------------                             Telephone Number:
   ------------                                                   ---------------------
   ---------------------------------------                        Refer Reply To:
   ---------------------------------                              CC:PSI:03
   ----------------------------                                   PLR-119741-22
                                                                  Date:
   ------------------------------
                                                                  April 12, 2023




LEGEND

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

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

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

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

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

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

Date 3            =        -------------------------

Date 4            =        --------------------------



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

        This letter responds to a letter dated October 14, 2022, submitted on behalf of X by
its authorized representatives, requesting an extension of time under § 301.9100-3 of the
PLR-119741-22
                                           2

Procedure and Administration Regulations to make an election under § 754 of the Internal
Revenue Code (Code).
                                       FACTS

        The information submitted states that X was organized as a limited liability company
under the laws of State on Date 1 and was classified as a partnership for federal tax
purposes. On Date 2 and again on Date 3, one of X’s partners, B, acquired from A a
portion of A’s interest in X. X’s tax return for its taxable year ending on Date 4 was timely
filed. X intended to file a § 754 election to adjust the basis of X’s property for the taxable
year ending Date 4 and relied on its tax advisors to timely file the election. However, due to
inadvertence, X failed to timely file a § 754 election with its return for the taxable year
ending Date 4. X represents that it has acted reasonably and in good faith, and that
granting relief will not prejudice the interests of the Government.

                                               LAW

       Section 754 provides, in part, 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, 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) 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
6 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 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 the election. Section
301.9100-2 provides the rules governing automatic extensions of time for making certain
elections. Section 301.9100-3 provides the standards the Commissioner will use to
determine whether to grant an extension of time for regulatory elections that do not meet
the requirements of § 301.9100-2.

      Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be
granted when the taxpayer provides the evidence (including affidavits described in
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                                         3

§ 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and that the grant of 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 taxable year ending on Date 4 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 partnership tax return for the taxable year ending
Date 4, 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.

        As a condition of this ruling, to the extent that X has not already done so, X must
adjust 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 depreciation 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 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.

       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 depreciation 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 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.

      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
PLR-119741-22
                                         4

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 X's authorized representatives.

                                                 Sincerely,

                                                 Associate Chief Counsel
                                                 (Passthroughs & Special Industries)



                                          By:    ____________________
                                                 Robert D. Alinsky
                                                 Chief, Branch 3
                                                 Office of Associate Chief Counsel
                                                 (Passthroughs & Special Industries)


Enclosure:
      Copy for § 6110 purposes



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