Partnership received late section 754 election relief after partner’s death

Plain-English summary

After a partner died and an heir inherited the partnership interest, the partnership inadvertently failed to make a timely section 754 election for the year of death. It represented that it had acted reasonably and in good faith and that relief would not prejudice the government. The IRS granted 120 days to file the election under Treasury Regulation section 301.9100-3. The ruling required the partnership and its partners to make the property-basis, outside-basis, and depreciation adjustments that would have applied if the election had been timely, even when the limitation period for an affected year had expired.

Ruling snapshot

• Question: Could the partnership receive additional time to make a section 754 election for the year a deceased partner’s interest passed to an heir?
• Outcome: approved; a 120-day extension was granted subject to basis and depreciation adjustments
• Key authorities: IRC §§ 734(b), 743(b), 754; 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: 201919009                                               Third Party Communication: None
 Release Date: 5/10/2019                                         Date of Communication: Not Applicable
 Index Number: 9100.00-00, 9100.15-00
                                                                 Person To Contact:
 ---------------------------------------------                   ---------------------, ID No. ---------------
 -------------------------------                                 Telephone Number:
 ---------------------------------                               --------------------
                                                                 Refer Reply To:
                                                                 CC:PSI:B03
                                                                 PLR-127071-18
                                                                 Date:
                                                                 February 08, 2019

LEGEND

X:         ---------------------------------------------------
           ------------------------

State:     ----------

Year:      ------

A:         ----------------------

B:         -------------------------------
           ------------------------

C:          --------------------
           ------------------------

Date 1: ------------------------

Date 2: -----------------

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

       This letter responds to a letter dated August 28, 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

        X was formed as a limited liability company under State law on Date 1 and is
 treated as a partnership for federal tax purposes. A, a partner of X, died on Date 2 and
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C inherited A’s interest in X. X inadvertently failed to make a timely election under
§ 754 for the year of A’s death.

       X requests an extension of time to make a § 754 election. X represents that it
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 no later than the time prescribed by § 1.6031-1(e)
(including extensions) 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
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) defines the term
“regulatory election” as including 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 that 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 rules for requesting extensions 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) granting relief will not prejudice the interests of the government.

CONCLUSION
PLR-127071-18                                    3

        Based solely on 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 one hundred-twenty (120) days from the date of this
letter to make a § 754 election for Year. The election should be made in a written
statement filed with the applicable service center for association with X’s return. 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 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 on 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 ruled on above, we express or imply no opinion concerning
the tax consequences of any facts discussed or referenced in this letter. This ruling is
directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may
not be used or cited as precedent.

      In accordance with a power of attorney on file with this office, we are sending a
copy of this letter ruling to your authorized representatives.


                                                     Sincerely,

                                                     Associate Chief Counsel
                                                     (Passthroughs & Special Industries)

                                           By:       ____________________________
                                                     Adrienne M. Mikolashek
                                                     Branch Chief, Branch 3
                                                     Office of Associate Chief Counsel
                                                     (Passthroughs & Special Industries)
PLR-127071-18                               4

Enclosures (2):

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


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