Late partnership basis election allowed after partner's death

Plain-English summary

A partnership failed to make a section 754 election on the return for the year in which one of its partners died. The election would apply the partnership-property basis adjustments required by sections 734 and 743 to covered distributions and transfers. The IRS found that the partnership satisfied the discretionary relief standards and granted 120 days to file the election statement. Relief is conditioned on the partnership and its partners reconstructing all property and partnership-interest basis adjustments as if the election had been timely, even for closed years. Open-year recovery deductions must use the remaining useful life or recovery period and basis reduced by deductions allowed or allowable in earlier years.

Ruling snapshot

• Question: May the partnership make a late section 754 election for the year of a partner's death?
• Outcome: Approved, with 120 days to file and full retroactive basis adjustments
• Key authorities: IRC §§ 734(b), 743(b), 754; 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: 202432014
Third Party Communication: None
Release Date: 8/9/2024
Date of Communication: Not Applicable
Index Numbers: 754.02-00, 9100.15-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:PSI:03
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Date:
May 13, 2024

LEGEND

Company = ----------------
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State = -------------

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

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

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

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

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

This letter responds to a letter dated November 1, 2023, and subsequent correspondence submitted on behalf of Company, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations for Company to file an election under § 754 of the Internal Revenue Code (Code).

FACTS

The information submitted states that Company, a State limited liability company formed on Date 1, is classified as a partnership for federal tax purposes. A, a partner in
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Company, died on Date 2. However, Company inadvertently failed to make a § 754 election with its return for its taxable year ended Date 3.

LAW & 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 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)(1) of the Income Tax Regulations provides, in part, 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 thereof) for filing the return for the 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 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 the Commissioner will use to determine whether to grant an extension of time to make an 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.

Under § 301.9100-3, a request for relief will be granted when the taxpayer provides the 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.
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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, Company is granted an extension of time of 120 days from the date of this letter to make an election under § 754 for its taxable year ended Date 3. The election should be made in a written statement filed with the appropriate service center for association with Company’s return for its taxable year ended Date 3. A copy of this letter should be attached to the statement filed.

This ruling is contingent on Company 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 Company’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 upon 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 Company must adjust the basis of their interests in Company 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 Company must reduce the basis of their interests in Company in the amount of any additional deductions for the recovery of basis related to Company’s property that would have been allowable if the § 754 election had been timely made.

Except as specifically ruled upon above, we express or imply no opinion concerning the federal tax consequences of any facts discussed or referenced in this letter. In addition, § 301.9100-1(a) provides that the granting of an extension of time for making an election is not a determination that a 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 requested ruling, 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.
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In accordance with a 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)

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

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