A lower-tier partnership gets 120 extra days to make a late § 754 basis-adjustment election

Plain-English summary

This is a companion ruling to another § 754 relief request on the same facts. A partner in an upper-tier partnership died, and the interest passed to his estate. A § 754 election lets a partnership adjust the inside basis of its assets when a partnership interest transfers, preserving tax benefits like depreciation for the incoming owner. The upper-tier partnership made a timely § 754 election, but the lower-tier partnership it invests in inadvertently failed to make its own, and a § 754 adjustment flows through the tiers only if both partnerships elect. The lower-tier partnership asked the IRS for more time under the § 301.9100-3 relief rules. The IRS found the taxpayer acted reasonably and in good faith and that relief would not prejudice the government, so it granted a 120-day extension to make the election. Relief is conditioned on the partnership and its partners filing amended returns and making the basis and depreciation adjustments that would have applied had the election been timely.

Ruling snapshot

• Question: Should the lower-tier partnership get an extension of time to make a late § 754 election after inadvertently missing the deadline?
• Outcome: Approved (120-day extension granted under § 301.9100-3, subject to conditions)
• Key authorities: IRC § 754; Treas. Reg. §§ 1.754-1(b), 301.9100-1 through 301.9100-3; Rev. Rul. 87-115

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202218013 Third Party Communication: None
Release Date: 5/6/2022 Date of Communication: Not Applicable
Index Number: 754.00-00, 9100.00-00,
9100.15-00 Person To Contact:
--------------------------, ID No. ---------------
------------------------------------------------ Telephone Number:
------------------ --------------------
------------------------- Refer Reply To:
------------- CC:PSI:B01
------------------------------- PLR-116314-21
----------------------------------- Date:
February 07, 2022

                                                LEGEND

LTP = ------------------
-----------------------

UTP = --------------------------------------
-----------------------

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

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

Estate = ---------------------------------------
----------------------

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

Year 1 = -------

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

   This letter responds to a letter dated August 10, 2021, and subsequent

correspondence, submitted on behalf of LTP by LTP’s 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).
PLR-116314-21 2

                                      FACTS

 According to the information submitted, LTP and UTP are State limited liability

companies that were classified as partnerships for federal tax purposes as of Date 1.
UTP owns an interest in LTP.

    A owned an interest in UTP when A died on Date 1. A’s interest in UTP

transferred to Estate on Date 1. UTP filed a timely § 754 election to adjust the basis of
partnership property for its Year 1 taxable year. However, LTP inadvertently failed to
file a § 754 election.

                              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 § 1.6031-1(e) (including
extensions) for filing the return for such taxable year.

   Rev. Rul. 87-115, 1987-2 C.B. 163, provides that the optional adjustment to basis

under § 754 will be available to both an upper-tier partnership (UTP) and a lower- tier
partnership (LTP) when there is a sale or exchange of a partnership interest or the
death of a partner in UTP, and both UTP and LTP have made an election under § 754
to adjust the basis of partnership property on a sale or exchange of a partnership
interest or on the death of a partner.

   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 Internal
Revenue 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.
PLR-116314-21 3

   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) the grant of relief will not prejudice the interests of the government.

                                   CONCLUSION

    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, LTP is granted an extension of time of one hundred-twenty (120) days from the
date of this letter to make a § 754 election for its Year 1 taxable year. The election
should be made in a written statement filed with the applicable service center for
association with LPT's Year 1 tax return. A copy of this letter should be attached to the
statement filed.

    This ruling is contingent on LTP 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, as well as any amended returns reflecting LTP and UTP’s current
federal tax classification. Further, as a condition of this ruling, to the extent that LTP has
not already done so, LTP 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 f or 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 LTP must adjust the basis of their interests in LTP 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
LTP must reduce the basis of their interests in LTP 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
PLR-116314-21 4

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 is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

   The ruling contained in this letter is based on 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.

  In accordance with the Power of Attorney on file with this office, we have sent a

copy of this letter to your authorized representative.

                                   Sincerely,

                                   Holly Porter
                                   Associate Chief Counsel
                                   (Passthroughs & Special Industries)



                               By: _/s/________________________
                                   Jennifer N. Keeney
                                   Senior Counsel, Branch 1
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purpose

cc: