Partnership granted more time to make a late section 754 basis-adjustment election

Plain-English summary

A limited partnership got more time to make a section 754 election after its tax preparer inadvertently missed the deadline. A section 754 election lets a partnership adjust the tax basis of its property when a partnership interest changes hands (here, one partner died and another partner acquired the deceased partner's interest), so the new owner's inside basis matches what was paid. The election must normally be made on a written statement filed with the timely partnership return for the year of the transfer. Because the preparer failed to attach it, the election was late. The IRS treats this as a regulatory election eligible for relief under Treas. Reg. § 301.9100-3, which is granted when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. Finding those tests met, the IRS granted a 120-day extension, contingent on the partnership and its partners filing amended returns for all open years and making the corresponding basis and depreciation adjustments as if the election had been timely made.

Ruling snapshot

• Question: May a partnership get an extension of time under Treas. Reg. § 301.9100-3 to make a late § 754 election its preparer failed to file?
• Outcome: approved (120-day extension granted, contingent on amended returns and basis adjustments)
• Key authorities: IRC § 754 (and §§ 734(b), 743(b)); 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: 202222002                                              Third Party Communication: None
 Release Date: 6/3/2022                                         Date of Communication: Not Applicable
 Index Number: 754.00-00, 754.02-00,
               9100.00-00, 9100.15-00                           Person To Contact:
                                                                ----------------------, ID No. -----------------
 --------------------------                                     Telephone Number:
 ----------------------------------------------------           --------------------
 ----------------------                                         Refer Reply To:
 ----------------------                                         CC:PSI:B01
 ---------------------------                                    PLR-119255-21
                                                                Date:
                                                                March 08, 2022




Legend

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

 A                   =       --------------------------------------------------------------------------------------
                             --------------------------------------------------------------------------------------
                             --------------------------------------------------------------------------------------
 B                   =       --------------------------------------------------------------------------------------
                             ---------------------------------------

 State               =       ------

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

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

 Year 1              =       -------




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

        This letter responds to a letter dated September 2, 2021, 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-119255-21                                2


                                          Facts

       X was formed as a limited partnership in State on Date 1. A, a partner in X, died
on Date 2. B, another partner in X, acquired A’s interest in X. X relied on its tax
preparer to prepare its tax returns. However, the tax preparer inadvertently failed to
timely make a § 754 election for Year 1.

                                    Law and Analysis

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

       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.
PLR-119255-21                                  3


                                         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 Year 1
return. 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. This ruling is also 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 limitations 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. Specif ically, 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.

       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.

       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. 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-119255-21                                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 E. Hay
                                     Senior Counsel, Branch 1
                                     Office of the Associate Chief Counsel
                                     (Passthroughs & Special Industries)

Enclosure
      Copy of this letter for section 6110 purposes


cc: