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

Plain-English summary

When interests in a partnership change hands, a section 754 election lets the partnership adjust the tax basis of its assets to match what the new partner effectively paid, which can prevent that partner from being over- or under-taxed later. The election is made by attaching a written statement to the partnership's timely filed return for the year of the transfer. Here an LLC taxed as a partnership had interests transferred during a year, filed its return on time, but inadvertently left out the section 754 election. It asked the IRS for an extension under the "9100 relief" regulation (Treas. Reg. § 301.9100-3), representing that it acted reasonably and in good faith, that the government would not be harmed, and that it had already been filing its returns as if the election were in place. The IRS granted 120 days from the date of the letter to make the election, either with the original partnership return or via a Form 8082 (inconsistent-treatment/administrative adjustment request). As usual, the IRS did not decide whether the partnership is otherwise eligible, only excused the late filing. It matters to partnerships and LLCs that experienced an ownership change and forgot to make this common basis-step-up election.

Ruling snapshot

• Question: Should the IRS grant an extension under § 301.9100-3 to make a late § 754 election?
• Outcome: approved (120 days to make the § 754 election)
• Key authorities: IRC § 754; IRC §§ 734, 743; Treas. Reg. § 1.754-1(b)(1); Treas. Reg. §§ 301.9100-1, 301.9100-2, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                         Department of the Treasury
                                                 Washington, DC 20224

Number: 202336015                                Third Party Communication: None
Release Date: 9/8/2023                           Date of Communication: Not Applicable
Index Numbers: 754.00-00, 754.02-00,
              9100.00-00, 9100.15-00             Person To Contact:
                                                 --------, ID No. ------
                                                 Telephone Number:
                                                 ------
                                                 Refer Reply To:
                                                 CC:PSI:B03
                                                 PLR-124128-22
                                                 Date:
                                                 June 05, 2023

 LEGEND:

 X        = ------
 State = ------
 Year     = ------

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

This letter responds to a letter dated December 5, 2022, and subsequent
correspondence, submitted on behalf of X, by its 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 ("Code").

                                          FACTS

The information submitted states that X, a State limited liability company, is classified as
a partnership for federal tax purposes. Interests in X were transferred in Year. X's tax
return for its Year taxable year was timely filed, but a § 754 election to adjust the basis
of partnership property was inadvertently not filed with the return. X represents that it
has acted reasonably and in good faith, and that granting relief to make a § 754 election
will not prejudice the interests of the Government.

X represents that it has filed returns for its Year taxable year and subsequent taxable
years in a manner consistent with the § 754 election having been made.

                                           LAW

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 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)(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 upon 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, X
is granted an extension of time of 120 days from the date of this letter to make a § 754
election for its Year taxable year. The election should be made in a written statement
filed with the applicable service center either (1) to be associated with X's Year
partnership tax return, or (2) accompanying Form 8082, Notice of Inconsistent
Treatment or Administrative Adjustment Request (AAR), and any related filings as
instructed in Form 8082, as appropriate. A copy of this letter should be attached to the
relevant filing.

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. 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 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.

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,

                                              Associate Chief Counsel
                                              (Passthroughs & Special Industries)


                                         By:_____________________________
                                            Richard T. Probst
                                            Senior Technician Reviewer, Branch 3
                                            Office of the Associate Chief Counsel
                                            (Passthroughs & Special Industries)


Enclosure:
    Copy of this letter for § 6110 purposes

cc: