Adviser omission led to late Section 754 election relief

Plain-English summary

A partner who held an interest through a grantor trust died, but the partnership's adviser did not explain the availability of a Section 754 election. The partnership therefore omitted the election from its return for the affected year. The IRS granted 120 days to file the election with Form 1065-X or Form 8082, as appropriate. The relief requires the partnership to reconstruct its property basis and basis-recovery deductions as if the election had been timely, including for affected closed years. It also requires the administrative-adjustment filing and Section 6227(b) treatment, while affected partners must make corresponding adjustments to the basis of their partnership interests.

Ruling snapshot

• Question: Could the partnership make a late Section 754 election after its adviser failed to identify the election?
• Outcome: approved, subject to filings and basis adjustments within 120 days
• Key authorities: IRC §§ 734(b), 743(b), 754, and 6227(b); Treas. Reg. §§ 1.754-1(b), 301.9100-1, and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202411010                                             Third Party Communication: None
 Release Date: 3/15/2024                                       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-113323-23
                                                               Date:
                                                               December 18, 2023


LEGEND

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

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

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

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

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

Date 3           =        --------------------------


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

       This letter responds to a letter dated June 23, 2023, 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

       X was formed on Date 1, as a limited partnership under the laws of State and is
treated as a partnership for federal tax purposes. A, who held an interest in X through a
grantor trust, died on Date 2. X’s advisor did not inform X as to the availability of an
election under § 754. Consequently, X failed to file an election under § 754 with its
partnership return for its taxable year ended Date 3.

PLR-113323-23                                 2

                                   LAW AND ANALYSIS

        Section 754 provides 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) 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 no 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 under the rules set forth in §§ 301.9100-2 and 301.9100-3 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 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 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 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 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 X’s taxable year ended Date 3. The election
should be made in a written statement filed with the appropriate service center
accompanying Form 1065-X, Amended Return or Administrative Adjustment Request
(AAR), or Form 8082, Notice of Inconsistent Treatment or AAR, and for any related

PLR-113323-23                                 3

filings as instructed in Form 1065-X or Form 8082, as appropriate. A copy of this letter
should be attached to the relevant filing.

        This ruling is contingent on X’s relevant filing(s) containing adjustments to 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 deductions for recovery of basis related to X’s property 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 deductions for the recovery of basis
allowable for an open year are to be computed based on the remaining useful life or
recovery period and using property basis adjusted by the greater of any such
deductions allowed or allowable in any prior year had the § 754 election been timely
made.

       Additionally, this ruling is contingent on X filing Form 1065-X or Form 8082 and
taking into account the adjustments as required by § 6227(b).

        Finally, affected partners of X must adjust the basis of their interests in X to
reflect what the basis would be 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. Specifically, affected
partners of X must reduce the basis of their interests in X in the amount of any
additional deductions for the recovery of basis related to X’s property 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. 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.

       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 requested ruling, it is subject to verification on examination.

      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.

PLR-113323-23                                             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,

                                                 Associate Chief Counsel
                                                 (Passthroughs & Special Industries)


                                            By: _______________________________
                                               Mary Beth Carchia
                                               Senior Technician Reviewer, Branch 3
                                               Office of the Associate Chief Counsel
                                               (Passthroughs & Special Industries)


Enclosure:
      Copy of this letter for § 6110 purposes


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