Late relief for a partnership to make a section 754 basis-adjustment election

Plain-English summary

An LLC taxed as a partnership went through a series of ownership changes: its interests were transferred to a newly formed partnership (briefly making it a disregarded entity), then interests were transferred to a new partner (making it a partnership again), followed by additional sales. Those transfers of partnership interests would let the entity make a section 754 election to adjust the tax basis of its assets so incoming owners' inside basis matches what they paid, usually producing larger deductions. The entity inadvertently failed to make the election for the relevant year. 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 properly reflecting the resulting section 734(b)/743(b) basis adjustments even for years otherwise closed by the statute of limitations. This is standard cleanup preserving a basis step-up after ownership changes.

Ruling snapshot

• Question: Should a partnership get more time to make a late section 754 election after transfers of partnership interests?
• 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: 202452009                                              Third Party Communication: None
 Release Date: 12/27/2024                                       Date of Communication: Not Applicable
 Index Number: 754.00-00, 754.02-00,
               9100.00-00, 9100.15-00                           Person To Contact:
                                                                -------------------------, ID No. -----------------
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 ------------------------------------------------------------   Telephone Number:
 -----                                                          --------------------
 ----------------------------                                   Refer Reply To:
 ----------------------------                                   CC:PSI:B01
 -----------------------------                                  PLR-107831-24
                                                                Date:
                                                                September 26, 2024




LEGEND

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

 Y              = ------------------------------
                  -----------------------

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

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

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

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

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

 Date 5         = --------------------------


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

This letter responds to a letter dated February 6, 2024, and subsequent
correspondence, submitted on behalf of X by X’s authorized representative, 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 was formed on Date 1 as a limited liability company under the laws of State and was
first treated as a partnership for federal tax purposes. The partners of X transferred
100% of their interests in X to Y, a newly formed domestic partnership, on Date 2 and X
became a disregarded entity. On Date 3, interests in X were transferred to a new
partner and X became a partnership again. On Date 4, additional interests in X were
sold. X inadvertently failed to make a § 754 election for its taxable year ended Date 5.


                                  LAW AND ANALYSIS

Section 754 provides, in part, that if a partnership files an election, in accordance with
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) 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, 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 thereof) for filing the return for that 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 6 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) 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.

                                     CONCLUSIONS

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, X is granted an extension of time of 120 days from the date of this letter to
make an election under § 754 effective for X’s taxable year ended Date 5. 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 5, or
(2) accompanying Form 1065-X, Amended Return or Administrative Adjustment
Request (AAR ), or Form 8082, Notice of Inconsistent Treatment or AAR, and for any
related filings as instructed in Form 1065-X or 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 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 limitations on assessment or filing a claim for refund has expired for
any year subject to this grant of late relief. Any deductions for 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 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 to properly amend a partnership return, then
this ruling is also contingent on X filing Form 1065-X or 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
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, 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) provides
that it may not be used or cited as precedent.

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

                                                  Sincerely,
                                                  Holly Porter
                                                  Associate Chief Counsel
                                                  (Passthroughs & Special Industries)



                                           By:
                                                  Caroline E. Hay
                                                  Senior Technician Reviewer, Branch 1
                                                  Office of Associate Chief Counsel
                                                  (Passthroughs & Special Industries)

Enclosure
      Copy for § 6110 purposes

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