Partnership gets more time to make a late section 754 election after a sale

Plain-English summary

A company that is taxed as a partnership had a buyer purchase a large stake in its parent, a transfer that would let the partnership adjust the tax basis of its assets under a section 754 election so the new owner's share of inside basis matches economic reality (usually producing bigger deductions). The partnership meant to make that election for the relevant tax year but missed the filing deadline. It asked the IRS for relief under the § 301.9100-3 regulations, which allow a late regulatory election when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS granted 120 days to make the election, conditioned on the partnership and its partners properly reflecting the resulting section 734(b)/743(b) basis adjustments, even for years otherwise closed by the statute of limitations. This is routine cleanup that preserves a basis step-up after an ownership change.

Ruling snapshot

• Question: Should a partnership get more time to make a late section 754 election tied to a change in ownership?
• Outcome: approved
• Key authorities: IRC § 754 (with §§ 734, 743); Treas. Reg. §§ 1.754-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202452008                                              Third Party Communication: None
 Release Date: 12/27/2024                                       Date of Communication: Not Applicable
 Index Number: 9100.00-00, 9100.15-00,
               754.00-00, 754.02-00                             Person To Contact:
                                                                ----------------------------, ID No. --------------
 ----------------------------------                             -----------------
 ------------------------------------                           Telephone Number:
 ----------------------------                                   ----------------------
 ---------------------------------                              Refer Reply To:
 ------------------------------------------------------------   CC:PSI:B03
 -------------------------------------------------              PLR-107391-24
 ---------------------------                                    Date:
 ---------------------------                                    October 02, 2024




Legend

 Company          = -------------------------------------------------------------
                    -----------------------
 Country          = ----------------------
 Date 1           = ------------------
 Date 2           = ------------------
 Buyer            = ----------------------------------------------------------
 x                = ---
 Date 3           = --------------------------


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

This letter responds to a letter dated April 13, 2024, submitted on behalf of Company by
its authorized representatives, 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 (Code).

                                          FACTS

Company was formed under the laws of Country on Date 1 and elected to be classified
as a disregarded entity as of Date 1. Company later added partners and became
automatically classified as a partnership. On Date 2, Buyer agreed to purchase x% of
Company’s parent company, causing Buyer to become a continuation of Company’s
parent company. Company and Buyer intended to make a § 754 election for Company’s
taxable year ending Date 3. However, Company failed to timely file the election.


                                  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 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 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) 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 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 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.


                                     CONCLUSION

Based solely upon 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 a valid election under § 754 effective for Company's taxable year ended
Date 3. The election should be made in a written statement filed with the appropriate
service center accompanying Form 1065, U.S. Return of Partnership Income, and for
any related filings as instructed in Form 1065, as appropriate. A copy of this letter
should be attached to the relevant filing.

This ruling is contingent on Company's relevant filing(s) containing adjustments to 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 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 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 adjusted by the greater
of any such deductions allowed or allowable in any prior year had the § 754 election
been timely made.

Finally, affected partners of Company must adjust the basis of their interests in
Company to reflect what the 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,
affected 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 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 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 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.


In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                                    Sincerely,

                                                    Associate Chief Counsel
                                                    (Passthroughs & Special Industries)




                                                    By: Richard T. Probst
                                                    Senior Technician Reviewer, Branch 3
                                                    (Passthroughs & Special Industries)



Enclosure:
Copy of this letter for § 6110 purposes


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