Partnership receives 120 days to make a late section 754 election

Plain-English summary

A partnership failed to include a section 754 election with its return for the year in which a member died. The IRS concluded that the partnership satisfied the standards for discretionary regulatory-election relief. It granted 120 days to file the election for that year and later years. The relief requires the partnership and its partners to reconstruct all section 734(b) and 743(b) basis and depreciation consequences as if the election had been timely made, even for years whose limitation periods have expired.

Ruling snapshot

• Question: Could the partnership make a late section 754 election after filing its return without the required statement?
• Outcome: approved, with a 120-day extension and corrective basis-adjustment conditions
• Key authorities: IRC §§ 734(b), 743(b), and 754; Treas. Reg. §§ 1.754-1(b), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201717014
Release Date: 4/28/2017
Index Numbers: 754.00-00, 9100.15-00

----------------                                                  Person To Contact:
-----------------------------------------------                   -----------------------, ID No. -------------------
-------------------------------                                   ---------------------------------------------------
---------------------------------------                           Telephone Number:
                                                                  ----------------------
                                                                  Refer Reply To:
                                                                  CC:PSI:B03 – PLR-127118-16
                                                                  Date:
                                                                  January 30, 2016


                                                    LEGEND

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

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

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

D1                =                 --------------------------

D2                =                 ---------------------------



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

      This letter responds to a letter dated August 25, 2016, 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

      According to the information submitted, X was formed as a limited liability
company under State law and is classified as a partnership for federal tax purposes. A,
a member in X, died on D1. X’s tax return for the taxable year ended D2 was filed
without a § 754 election.
                                             2
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                                  LAW AND ANALYSIS

       Section 754 provides 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, 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 not later than the time prescribed by § 1.6031(a)-1(e)
(including extensions) for filing the return for such taxable year.

        Under § 301.9100-1(c), 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) 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 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 extensions 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
§ 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and the grant of relief will not prejudice the interests
of the Government.

                                      CONCLUSION

       Based solely upon 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 D2 and thereafter. The election should
be made in a written statement filed with the applicable service center for association
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PLR-127118-16

with X’s return for the taxable year ended D2. A copy of this letter should be attached to
the statement filed.

        This ruling is contingent on X adjusting the basis of its properties to reflect any
§ 734(b) or § 743(b) adjustments that would have been made had the § 754 election
been timely made. These basis adjustments must reflect any additional depreciation
that would have been allowable had the § 754 election 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 election relief. Any depreciation
deduction allowable for an open year is to be computed based upon the remaining
useful life and using property basis adjusted by the greater of any depreciation allowed
or allowable in any prior year had the § 754 election been timely made. Additionally, X’s
partners must adjust the basis of their interests in X to reflect what that basis would be
had the § 754 election 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 election relief. Specifically, X’s partners must reduce the basis of their
interests in X in the amount of any additional depreciation that would have been
allowable had the § 754 election 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.

      This ruling is directed only to the taxpayer requesting it. According to
§ 6110(k)(3) of the Code, this ruling may not be used or cited as precedent.

        Under a power of attorney on file with this office, we are sending a copy of this
letter to X’s authorized representative.
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PLR-127118-16

       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.


                                            Sincerely,

                                            Associate Chief Counsel
                                            (Passthroughs & Special Industries)



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



Enclosures (2): Copy of this letter
                Copy for § 6110 purposes