120-day extension to make a section 754 partnership basis election

Plain-English summary

A state LLC taxed as a partnership asked the IRS for more time to make an election under Section 754. When some of its owners transferred part of their partnership interests as part of a multi-step deal, the partnership meant to make the Section 754 election, which lets it adjust the "inside" basis of its assets to reflect the transfer, but it missed the deadline for the year of the transfer. Under the Section 301.9100-3 regulations, the IRS can grant extra time for a missed regulatory election if the taxpayer acted reasonably and in good faith and letting it elect late will not hurt the government's interests. The IRS found both conditions satisfied and gave the partnership 120 days from the date of the letter to make the election. The relief is conditioned on the partnership and its partners computing the resulting basis adjustments (under Sections 734(b) and 743(b)) as if the election had been timely, even for years now closed by the statute of limitations.

Ruling snapshot

• Question: Should a partnership that inadvertently missed the deadline get an extension to make a § 754 election for the transfer year?
• Outcome: approved (120-day extension granted)
• Key authorities: IRC § 754; Treas. Reg. § 1.754-1(b); Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202438015 Third Party Communication: None
Release Date: 9/20/2024 Date of Communication: Not Applicable
Index Number: 9100.15-00, 754.00-00
Person To Contact:
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----------------------------- Telephone Number:
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------------------------ Refer Reply To:
CC:PSI:B01
PLR-125218-23
Date:
June 26, 2024

Legend

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

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

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

Year 1 = -------

Year 2 = -------

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

This letter responds to a letter dated December 21, 2023, 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

The information submitted states that X is a State limited liability company that is
classified as a partnership for federal tax purposes. On Date 1, the owners of X
transferred a portion of their interests in X as part of a multiple-step transaction. The
agreement governing the multi-step transaction indicated the parties' intention that X
make a § 754 election in connection with the transaction. However, X inadvertently
failed to make a timely election under § 754 for the year of the transfer (Year 1).

                                 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.

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.

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, X
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 and thereafter. 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. 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
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 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 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 such deductions
allowed or allowable in any prior year had the § 754 election been timely made.

If the partnership is required to file an AAR in order to properly amend a partnership
return, then this ruling is also 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
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, 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. 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 ruling request, it is subject to verification on examination.

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.

In accordance with a power of attorney on file with this office, we are sending a copy of
this letter to your authorized representatives.

                                             Sincerely,

                                             Holly Porter
                                             Associate Chief Counsel
                                             (Passthroughs & Special Industries)

                                       By: __/s/_______________________
                                           Laura C. Fields
                                           Branch Chief, Branch 1
                                           Office of the Associate Chief Counsel
                                           (Passthroughs & Special Industries)

Enclosure
Copy of this letter for section 6110 purposes

cc: --------------------
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