IRS grants converted LLC late Section 754 election

Plain-English summary

A general partnership converted into an LLC that continued to be treated as a partnership for federal tax purposes. After a partner died, the company timely filed its return but inadvertently omitted a valid Section 754 election to adjust partnership-property basis. The IRS found that the company acted reasonably and in good faith and that relief would not prejudice the government. It granted 120 days to file the written election for association with the return. The relief required the company and its partners to make all basis and depreciation adjustments that would have applied if the election had been timely, including adjustments relating to years whose limitation periods had expired.

Ruling snapshot

• Question: Could the LLC make a late Section 754 election for the year a partner died?
• Outcome: Approved.
• Key authorities: IRC §§ 734(b), 743(b), 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: 202130008 Third Party Communication: None
Release Date: 7/30/2021 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:B01
PLR-118913-20
Date:
February 17, 2021

Legend

Company = --------------------------------------------
------------------------
Date 1 = ------------------
Date 2 = ----------------------
Year = -------
A = -----------------------
-------------------------
State = -------------

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

     This letter responds to a letter dated August 14, 2020 and additional information,

submitted on behalf of Company by its authorized representative, 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

   The information submitted states that Company was formed as a general

partnership under the laws of State on Date 1. On Date 2, Company was converted to a
limited liability company treated as a partnership for federal income tax purposes. A held
a partnership interest in Company when A died in Year. Company’s tax return for Year
was timely filed, but a valid § 754 election to adjust the basis of partnership property was
inadvertently not filed with the return. Company represents that it has acted reasonably
and in good faith, and that granting relief will not prejudice the interests of the
Government.
PLR-118913-20 2

                                 Law and Analysis

     Section 754 provides, in part, 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)(1) of the Income Tax Regulations provides, in part, 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 the 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) defines the term “regulatory
election” as an election whose due date is prescribed by a regulation published in the
Federal Register, or a revenue ruling, revenue procedure, notice, or announcement
published in the Internal Revenue Bulletin.

   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 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 grant of relief will not prejudice the interests of the Government.

                                     Conclusion

  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
PLR-118913-20 3

a result, Company is granted an extension of time of 120 days from the date of this
letter to make an election under § 754 effective for its Year taxable year and thereafter.
The election should be made in a written statement filed with the appropriate service
center for association with Company’s Year return. A copy of this letter should be
attached to the statement filed.

    This ruling is contingent on Company filing all required returns and 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
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, the partners of Company must adjust the basis of their interests
in Company 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 Company must reduce the basis of their interests in Company in the amount of any
additional depreciation that would have been allowable if the § 754 election had been
timely made.

   Except as specifically ruled upon above, we express or imply no opinion

concerning the tax consequences of any facts discussed or referenced in this letter.
Specifically, we express no opinion as to whether Company is a partnership for federal
tax purposes.

  This ruling is directed only to the taxpayer who requested 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.
PLR-118913-20 4

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

copy of this letter ruling to your authorized representative

                                Sincerely,

                                Holly Porter
                                Associate Chief Counsel
                                (Passthroughs & Special Industries)

                                By:

                                Laura Fields
                                Laura Fields
                                Senior Technician Reviewer, Branch 1
                                Office of the Associate Chief Counsel
                                (Passthroughs & Special Industries

Enclosures (2)

  Copy of Letter
  Copy for 6110 purposes

cc: