Partnership receives 120 days to make a late Section 754 election

Plain-English summary

A partnership failed to make a Section 754 election for the year in which one owner sold its interest to the remaining and incoming owners. The election would permit a transferee-specific adjustment to the basis of partnership property under Section 743(b). The IRS found that the partnership met the reasonable-cause standards for regulatory-election relief and that granting relief would not prejudice the government. It gave the partnership 120 days from the ruling date to file the election statement for the affected tax year and later years.

Ruling snapshot

• Question: Could the partnership receive extra time to make the Section 754 election missed for the interest-transfer year?
• Outcome: Approved, with a 120-day extension from the ruling date.
• Key authorities: IRC §§ 734, 743, 754, 755; 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: 201826005 Third Party Communication: None
Release Date: 6/29/2018 Date of Communication: Not Applicable
Index Numbers: 754.00-00, 9100.00-00,
9100.15-00 Person To Contact:
-------------------------, ID No. -----------------
------------------------------------- -----------------------------------------------------
-------------------------------------- Telephone Number:
----------------------------------------- ----------------------
------------------------------------------ Refer Reply To:
CC:PSI:B03
PLR-103643-18
Date:
March 12, 2018

Legend

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

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

Z = ------------------------------------

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

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

Date1 = --------------------

Date2 = ---------------------------

Date3 = ---------------------------

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

  This letter responds to a letter dated January 25, 2018, and subsequent

correspondence, submitted on behalf of X requesting an extension of time under
§ 301.9100-3 of the Procedure and Administration Regulations for X to make elections
under § 754 of the Internal Revenue Code (“Code”).

   The information submitted states that X, is a limited liability company formed

under the laws of State on Date1 and is treated as a partnership for federal income tax
purposes. X had been owned equally by Y and Z. On Date2, Y and A entered into an
agreement with Z to purchase Z's ownership interest in X. This purchase transaction
closed on Date3. However, X inadvertently failed to make an election under § 754 for
the tax year ending Date3 in which this sale occurred.

   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 743(c) provides that the allocation of basis among partnership properties

where § 743(b) is applicable shall be made in accordance with the rules provided in
§ 755.

     Section 754 provides that if a partnership files an election, in accordance with

regulations prescribed by the Secretary, the basis of partnership property shall be
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 such 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, 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 § 1.6031-1(e)
(including extensions thereof) for filing the return for such 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) 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 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 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
granting of relief will not prejudice the interests of the Government.

   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 a § 754 election for its taxable year ending Date3 and thereafter. The election
should be made in a written statement filed with the applicable service center for
association with X's return for the taxable year ending Date3. A copy of this letter
should be attached to the statement filed.

   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 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.

   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.

  In accordance with the power of attorney on file with this office, we are sending a

copy of this letter to the authorized representative of X.

                                     Sincerely,

                                     Associate Chief Counsel
                                     (Passthroughs & Special Industries)



                              By:    _____________________________
                                     Richard T. Probst
                                     Senior Technician Reviewer, Branch 3
                                     Office of the Associate Chief Counsel
                                     (Passthroughs & Special Industries)

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