Partnership gets a late section 754 election after a member bought out another, subject to basis-adjustment conditions

Plain-English summary

An LLC taxed as a partnership had one member transfer her entire interest to
another member. The partnership filed its return for that year on time but did not
include the § 754 election that would let it adjust the basis of its assets to
reflect the transfer. It asked the IRS for "9100 relief" to make the election
late. Because the § 754 deadline is set by regulation, the IRS can grant extra
time when the taxpayer acted reasonably and in good faith and relief will not
prejudice the government. The IRS granted 120 days to file the election, but
attached conditions: the partnership and its partners must file consistent returns
for all open years and must recompute basis and depreciation as if the election
had been timely made, including reducing the partners' outside basis by
depreciation that would have been allowable, even for years now closed by the
statute of limitations.

Ruling snapshot

• Question: May a partnership get an extension of time to make a late § 754 election after a partner buyout?
• Outcome: Approved (120-day extension granted, with basis-adjustment conditions)
• Key authorities: IRC §§ 754, 734(b), 743(b); Treas. Reg. §§ 1.754-1(b), 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201840005                                             Third Party Communication: None
Release Date: 10/5/2018                                       Date of Communication: Not Applicable
Index Numbers: 9100.15-00, 754.02-00
                                                              Person To Contact:
------------------------------------------------              -----------------------, ID # ---------------------
-----------------------------                                 -----------------------------------------------------
--------------------------                                    Telephone Number:
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                                                              Refer Reply To:
                                                              CC:PSI:B03
                                                              PLR-109559-18
                                                              Date: July 9, 2018




LEGEND

X        =        ---------------------------------------------
------------------------------------------
State =           -----------------


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

D1       =        -------


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

This letter responds to a letter dated March 13, 2018, submitted on behalf of X
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

        According to the information submitted, X is a State limited liability company
classified as a partnership for federal tax purposes. In D1, one of X’s members
transferred her entire interest in X to another member, A. X’s tax return for the D1
taxable year was filed timely, but a § 754 election to adjust the basis of partnership

property was not filed with the return. X represents that it has acted reasonably and in
good faith and that granting relief will not prejudice the interests of the government.

                            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 D1 taxable year and thereafter. The election should be
made in a written statement filed with the applicable service center for association with
X's return for its D1 taxable year. A copy of this letter should be attached to the
statement filed.

       This ruling is contingent on X and its partners filing within 120 days of this letter
all required returns for all open years consistent with the requested 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, as a condition of this ruling, X must adjust 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. 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 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), 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 representatives.

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



Enclosures (2)

      Copy of this letter
      Copy of this letter for section 6110 purposes