Partnership gets 120 days for late Section 754 election

Plain-English summary

A partnership relied on its tax adviser but failed to make a Section 754 election after two partners died. The IRS found reasonable conduct, good faith, no hindsight, and no government prejudice, and granted 120 days to make the election effective for the first affected year. The partnership and owners must file amended returns for open years and reconstruct all Section 734(b) and 743(b) basis adjustments as if the election had been timely. That reconstruction must include allowable depreciation and partner-basis reductions even for years whose assessment or refund periods have expired.

Ruling snapshot

• Question: May the partnership receive extra time to make a Section 754 basis-adjustment election?
• Outcome: Approved. The partnership has 120 days, subject to comprehensive retroactive basis and return adjustments.
• Key authorities: IRC §§ 734, 743, and 754; Treas. Reg. §§ 1.754-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202114003 Third Party Communication: None
Release Date: 4/9/2021 Date of Communication: Not Applicable
Index Number: 754.02-00, 9100.00-00,
9100.15-00 Person To Contact:
--------------------, ID No. -----------------
---------------------------------------- Telephone Number:
---------------------------------------------------------- --------------------
----------------------------------- Refer Reply To:
--------------------------------- CC:PSI:B01
PLR-112570-20
Date:
November 24, 2020

                                                  LEGEND

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

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

B = ---------------------------------------------------------------------------------------
-------------------------------------

Date 1 = ------------------------

Date 2 = -----------------------

Date 3 = -----------------------

Year 1 = -------

Year 2 = -------

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

  This letter responds to a letter dated May 21, 2020, and subsequent

correspondence, submitted on behalf of X by X’s authorized representative, requesting
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations for X to file an election under § 754 of the Internal Revenue Code.
PLR-112570-20 2

                                      FACTS

  X was formed as a limited liability company in State on Date 1. X is treated as a

partnership for Federal tax purposes. A, a partner in X, died on Date 2. B, another
partner in X, died on Date 3.

   X relied on its tax advisor for advice. However, X inadvertently failed timely to

make a § 754 election for Year 1 or Year 2. 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.

                               LAW AND ANALYSIS

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

regulations prescribed by the Secretary, the basis of partnership property is 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 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, 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(a)-1(e)
(including extensions thereof) for filing the return for that 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
Internal Revenue 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 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.
PLR-112570-20 3

   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 the taxpayer acted reasonably and in good faith,
and that granting relief will not prejudice the interests of the government.

                                   CONCLUSION

    Based solely upon 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 following the date of this letter
to make an election under § 754 effective for Year 1. The election should be made in a
written statement filed with the appropriate service center for association with X’s return
for its Year 1 taxable year. A copy of this letter should be attached to each § 754
election. A copy is enclosed for that purpose.

    This ruling is contingent on X and X's owners filing amended returns for open

years within one hundred-twenty (120) days of the date of this letter properly reporting
the consequences of the election under § 754. 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 expressly set forth above, we express or imply no opinion concerning

the federal tax consequences of the facts discussed above under any other provision of
the Code. Specifically, we express or imply no opinion as to whether or not X is a
partnership for federal tax purposes. 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. Section 6110(k)(3)

provides that it may not be used or cited as precedent.
PLR-112570-20 4

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

copy of this letter to your authorized representative.

                                 Sincerely,

                                 Holly Porter
                                 Associate Chief Counsel
                                 (Passthroughs & Special Industries)



                           by:   Caroline Hay
                                 Caroline Hay
                                 Senior Counsel, Branch 1
                                 Office of the Associate Chief Counsel
                                 (Passthroughs & Special Industries)

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

cc: