IRS grants a partnership 120 days to make a late § 754 basis-adjustment election

Plain-English summary

A partnership missed a Section 754 election and asked the IRS for permission to make it
late. A Section 754 election lets a partnership adjust the tax basis of its property when a
partner dies or a partnership interest changes hands, which can matter a lot for later
depreciation and gain. Here a partner died, but the partnership did not file the election
with its timely return because its tax advisor never told it the option existed. Under the
Section 301.9100-3 relief rules, the IRS can extend the time to make such a regulatory
election when the taxpayer acted reasonably and in good faith and granting relief will not
hurt the government. The IRS found those conditions met and gave the partnership 120
days to make the election, subject to conditions: the partners must file amended returns
for all open years and adjust their basis (and the partnership's property basis) as if the
election had been timely made.

Ruling snapshot

• Question: Should the partnership get an extension of time under § 301.9100-3 to make a late § 754 election?
• Outcome: Approved (120-day extension, with conditions)
• Key authorities: IRC § 754; Treas. Reg. §§ 1.754-1(b), 1.743-1, 301.9100-1 through 301.9100-3

Full text (IRS public release)

   Internal Revenue Service                                       Department of the Treasury
                                                                  Washington, DC 20224

   Number: 202215001                                              Third Party Communication: None
   Release Date: 4/15/2022                                        Date of Communication: Not Applicable
   Index Number: 9100.15-00, 754.02-00
                                                                  Person To Contact:
   -----------------------------------------------------          -------------------, ID No. -----------------
   ----------------------------------------                       Telephone Number:
   ---------------------------                                    ---------------------
   ------------------------                                       Refer Reply To:
   -------------------------------------------                    CC:PSI:03
                                                                  PLR-114099-21
                                                                  Date:
                                                                  January 4, 2022




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

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

State             =        ---------------

D1                =        ----------------------

D2                =        ---------------------------


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

      This responds to a letter dated June 1, 2021, and subsequent correspondence,
submitted on behalf of X, requesting an extension of time under § 301.9100-3 of the
Procedure and Administration Regulations to make an election under § 754 of the Internal
Revenue Code (Code).

                                                         FACTS

        The information submitted states that X was an entity organized in State and was
classified as a partnership for federal tax purposes. A, one of X's partners, died on D1.
X's partnership return for its taxable year ending on D2 was timely filed, but a § 754
election to adjust the basis of X's property was not filed with the return because its tax
advisor at the time failed to advise X about the availability and tax consequences of
making the election. X represents that it has acted reasonably and in good faith, and that
granting relief will not prejudice the interests of the Government.
PLR-114099-21                             2

                                           LAW

       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 1.743-1(j)(1) of the Income Tax Regulations provides that the basis
adjustment constitutes an adjustment to the basis of partnership property with respect to
the transferee only. No adjustment is made to the common basis of partnership property.
Thus, for purposes of calculating income, deduction, gain, and loss, the transferee will
have a special basis for those partnership properties the bases of which are adjusted
under § 743(b) and § 1.743-1. The adjustment to the basis of partnership property under
§ 743(b) has no effect on the partnership's computation of any item under § 703.

        Section 1.754-1(b) of the 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.

       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.

        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 the 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.

       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 that the grant of relief will not prejudice the
interests of the Government.
PLR-114099-21                            3

                                       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
a result, X is granted an extension of time of 120 days from the date of this letter to make
an election under § 754 effective for its taxable year ending on D2 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 taxable year ending on D2. 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
amended returns for all open years properly reporting the consequences of the election
under § 754. Further, as a condition of this ruling, to the extent that X has not already
done so, 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. 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 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 or
the regulations thereunder. 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 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-114099-21                            4

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

      In accordance with the power of attorney on file with this office, we are sending a
copy of this letter to X's authorized representatives.

                                                 Sincerely,

                                                 Associate Chief Counsel
                                                 (Passthroughs and Special Industries)



                                          By:    ______________
                                                 Adrienne M. Mikolashek
                                                 Chief, Branch 3
                                                 Office of Associate Chief Counsel
                                                 (Passthroughs & Special Industries)


Enclosure:
      Copy for § 6110 purposes




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