Late section 754 election allowed after partnership interest sales

Plain-English summary

Interests in a partnership were sold, and the partnership intended to elect under section 754 to adjust the basis of partnership property for that tax year. It inadvertently omitted the election. The IRS found that the partnership met the regulatory relief standards and granted 120 days to file the election with the appropriate amended return or administrative adjustment request. Relief requires all partnership-property and partner-interest basis adjustments, including deductions that would have been allowable with a timely election, even for years otherwise closed by a limitations period. The ruling does not determine whether the partnership is otherwise eligible to make the election.

Ruling snapshot

• Question: May the partnership make a late section 754 election after partnership interests were sold?
• Outcome: Approved, with 120 days to file and required retroactive basis adjustments
• Key authorities: IRC §§ 734(b), 743(b), 754, 6227(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: 202436005 Third Party Communication: None
Release Date: 9/6/2024 Date of Communication: Not Applicable
Index Number: 754.00-00, 9100.00-00,
9100.15-00 Person To Contact:
-----------------, ID No. -----------------
------------------------------------ Telephone Number:
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--------------------- Refer Reply To:
-------------------------- CC:PSI:1
------------------------------ PLR-123835-23
Date:
June 5, 2024

                                              LEGEND

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

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

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

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

Year 1 = -------

Year 2 = -------

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

This letter responds to a letter dated December 7, 2023, and subsequent
correspondence, 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 to file an election under § 754 of the Internal Revenue Code (Code).

                                               FACTS

According to the information submitted, X was formed as a limited liability company
under the laws of State on Date 1 and is treated as a partnership for federal tax

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purposes. On Date 2, interests in X were sold. X inadvertently failed to file a § 754
election to adjust basis for partnership property for its Year 1 taxable year.

                              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 shall be
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 such 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(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) 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 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
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 one hundred-twenty (120) days from the date of this

PLR-123835-23 3

letter to make a § 754 election for its Year 1 taxable year. 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 filings as instructed in
Form 1065-X or Form 8082, as appropriate, for X’s Year 2 taxable year to be associated
with X’s Year 1 tax return.

This ruling is contingent on X’s relevant filing(s) containing adjustments to the basis of
X’s 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 the 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 limitation 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 as adjusted by the greater of any such
deductions allowed or allowable in any prior year had the § 754 election been timely
made.

If X is required to file an AAR in order to properly amend a partnership tax return, then
this ruling is contingent on X filing Form 1065-X or Form 8082 and taking into account
the adjustments as required by § 6227(b).

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 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
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.

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 request for rulings, it is subject to verification on examination.

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

PLR-123835-23 4

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                             Sincerely,
                                             Holly Porter
                                             Associate Chief Counsel
                                             (Passthroughs and Special Industries)




                                             By:_________________________________
                                             Caroline Hay
                                             Senior Technician Reviewer, Branch 1
                                             Office of the Associate Chief Counsel
                                             (Passthroughs & Special Industries)

Enclosures
Copy for § 6110 purposes

cc: ------
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