Grants 120 days for a late section 754 election after a partnership-interest transfer

Plain-English summary

A limited liability company taxed as a partnership timely filed its return for a year in which one member transferred part of its interest to another member, but it did not attach a section 754 election. The IRS found that the partnership acted reasonably and in good faith and that granting relief would not prejudice the government. It granted 120 days to file the written section 754 election for that year and later years. The relief requires the partnership to make every section 734(b) or 743(b) adjustment that would have applied with a timely election, including additional allowable depreciation, even for years whose assessment or refund periods have closed. The partners must likewise reconstruct their outside bases and reduce them for any additional depreciation that would have been allowable.

Ruling snapshot

• Question: May the partnership make a late section 754 election for the year of a partnership-interest transfer?
• Outcome: Approved, with 120 days to elect and retroactive basis-adjustment conditions
• Key authorities: IRC §§ 754, 734(b), and 743(b); Treas. Reg. §§ 1.754-1(b), 1.6031(a)-1(e), and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201841003 Third Party Communication: None
Release Date: 10/12/2018 Date of Communication: Not Applicable
Index Numbers: 9100.15-00, 754.02-00
Person To Contact:
---------------------------------------------- ---------------------, ID # ------------------------
---------------------------- --------------------------------------------------
-------------------------------------- Telephone Number:
------------------------------- --------------------
Refer Reply To:
CC:PSI:B03
PLR-114118-18
Date:
July 17, 2018

LEGEND

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

State = ---------

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

D1 = ------

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

  This letter responds to a letter dated April 23, 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 part of its interest in X to another member, Y. X’s 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 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), 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.

   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 the Associate Chief Counsel
                                        (Passthroughs & Special Industries)

Enclosures (2)

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