Partnership receives late section 754 election relief after a partner's death

Plain-English summary

A limited partnership failed to make a section 754 election after one of its limited partners died because its tax advisers neither explained the available election nor filed it. The partnership represented that it acted reasonably and in good faith, that relief would not prejudice the government, and that it was not using hindsight. The IRS granted 120 days to file the election effective for the relevant tax year and later years. The partnership and its partners must reconstruct all section 734(b) and 743(b) basis adjustments and related depreciation as though the election had been timely, including adjustments attributable to closed years.

Ruling snapshot

• Question: May the partnership make a late section 754 election after its advisers failed to identify and file it?
• Outcome: approved, subject to retroactive basis and depreciation adjustments
• Key authorities: IRC §§ 734(b), 743(b), 754; Treas. Reg. §§ 1.754-1(b)(1), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                  Department of the Treasury
                                                          Washington, DC 20224

Number: 201748001                                         Third Party Communication: None
Release Date: 12/1/2017                                   Date of Communication: Not Applicable
Index Number: 9100.15-00
                                                          Person To Contact:
-------------------------                                 --------------------, ID No. ------------------
---------------------------------------------------       Telephone Number:
----------------------                                    ---------------------
-------------------                                       Refer Reply To:
-------------------------------                           CC:PSI:03
------------------------------------                      PLR-107272-17
                                                          Date:
                                                          August 28, 2017




X                 =        -------------------
---------------------------------------------------
State             =        ------------
D1                =        --------------------------
D2                =        ----------------------------

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

      This responds to a letter dated February 14, 2017, submitted on behalf of X,
requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations to make an election under § 754 of the Internal Revenue
Code (Code).

                                                      FACTS

       The information submitted states that X was a limited partnership organized
under the laws of State. On D1, a limited partner of X died. X’s tax advisors neither
advised X of the availability to make an election under § 754 nor made the election
when preparing the relevant tax return. Accordingly, X inadvertently failed to timely file
a § 754 election for the taxable year ending D2.

        X represents that it has acted reasonably and in good faith, that granting relief
will not prejudice the interests of the government, and that it is not using hindsight in
making the election.
PLR-107272-17                             2

                                              LAW

       Section 743(b) provides, in pertinent part, that, in the case of a transfer of an
interest in a partnership by sale or exchange or upon the death of a partner, a
partnership with respect to which an election provided in § 754 is in effect, will increase
the adjusted basis of the partnership property by the excess of the basis to the
transferee partner of his interest in the partnership over his proportionate share of the
adjusted basis of the partnership property, or decrease the adjusted basis of the
partnership property by the excess of the transferee partner’s proportionate share of the
adjusted basis of the partnership property over the basis of his interest in the
partnership. Section 743(b) further provides that such increase or decrease shall
constitute an adjustment to the basis of partnership property with respect to the
transferee partner only.

       Section 754 provides, in part, that if a partnership files an election in accordance
with the regulations prescribed by the Secretary, the basis of the partnership property is
adjusted, 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 § 743(b) with
respect to 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 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 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 an election whose due date is prescribed by a regulation published in the
Federal Register or a revenue ruling, revenue procedure, notice, or announcement
published in the Internal Revenue Bulletin.

       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. Under § 301.9100-3, a
request for relief will be granted when the taxpayer provides 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
PLR-107272-17                             3

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 D2 and thereafter.
The election should be made in a written statement filed with the appropriate service
center for association with X’s return for its taxable year ending on D2. A copy of this
letter should be attached to the election.

        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 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. 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 as specifically set forth above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Internal Revenue Code and the regulations thereunder.

        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. This 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 that not verified any of the material submitted in support of the ruling request,
it is subject to verification on examination.
PLR-107272-17                           4

      In accordance with the power of attorney on file with this office, we are sending a
copy of this letter to X's authorized representative.


                                                Sincerely,



                                                Associate Chief Counsel
                                                (Passthroughs and Special Industries)



                                         By:    _______________
                                                Holly Porter
                                                Chief, Branch 3
                                                Office of Associate Chief Counsel
                                                (Passthroughs & Special Industries)

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