IRS grants a 120-day extension to make a late section 754 election for a partnership

Plain-English summary

A limited liability company taxed as a partnership wanted to make a section 754 election. That election lets a partnership adjust the tax basis of its own assets when a partner's interest changes hands or property is distributed, so the inside basis lines up with what the affected partner effectively paid (typically producing extra depreciation or reduced gain). The election must be filed in a written statement with the partnership's timely return. The partnership relied on its tax advisors but, through inadvertence, missed the deadline. It asked the IRS for relief under the "9100" regulations (Treas. Reg. § 301.9100-3), which allow more time for a missed election when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS found the standards met and granted 120 days to make the election, effective for the taxable year in question and thereafter. As a condition, the partnership and its partners must make the section 734(b) and 743(b) basis adjustments (including the depreciation) that would have applied if the election had been timely, even for years now closed by the statute of limitations. Granting the extension does not decide whether the partnership was otherwise eligible to make the election.

Ruling snapshot

• Question: May a partnership that inadvertently missed the deadline get an extension of time under § 301.9100-3 to make a section 754 election?
• Outcome: approved
• Key authorities: IRC § 754 (with §§ 734(b), 743(b)); Treas. Reg. § 1.754-1(b); Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202439011
Release Date: 9/27/2024
Index Number: 754.00-00, 754.02-00, 9100.15-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
-----------------------, ID No. -------------------
Telephone Number:

Refer Reply To:
CC:PSI:B03
PLR-122625-23

Date:
May 15, 2024

LEGEND

X = [redacted]

State = [redacted]

Date 1 = [redacted]

Date 2 = [redacted]

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

  This letter responds to a letter dated September 29, 2023, and subsequent

correspondence, submitted on behalf of X by its authorized representatives, requesting
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations to make an election under § 754 of the Internal Revenue Code (Code).

                                         FACTS

  The information submitted states that X is a State limited liability company

formed on Date 1 which is classified as a partnership for federal tax purposes. X
intended to file a § 754 election to adjust the basis of X's property for the taxable year
ending Date 2 and relied on its tax advisors to time file the election. However, due to
inadvertence, X failed to timely file a § 754 election with its return for the taxable year
ending Date 2.

  X represents that it has acted reasonably and in good faith, and that granting

relief will not prejudice the interests of the government.

                              LAW AND ANALYSIS

   Section 754 provides, in part, 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, 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) 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) defines the term
"regulatory election" as 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 the
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.

   Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 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 the taxpayer
acted reasonably and in good faith, and that the grant of relief will not prejudice the
interests of the Government.

                                   CONCLUSION

   Based solely on 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 one hundred-twenty (120) days from
the date of this letter to make an election under § 754 effective for its taxable year
ending on Date 2 and thereafter. The election should be made in a written statement
filed with the appropriate service center either (1) to be associated with X's tax return for
the taxable year ending Date 2, or (2) 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. A copy of this letter should be attached to the relevant filing.

    As a condition of this ruling, to the extent that X has not already done so, X must

adjust 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
limitation 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 upon 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.

   If the partnership is required to file an AAR in order to properly amend a

partnership tax return, then this ruling is also contingent on X filing 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 depreciation
that would have been allowable if the § 754 election had been timely made.

   Except as expressly provided herein, we express or imply no opinion concerning

the federal tax consequences of any aspect of any transaction or item discussed or
referenced in the September 29, 2023 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.

  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.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to the X's authorized representatives.

                                            Sincerely,

                                            Associate Chief Counsel
                                            (Passthroughs & Special Industries)



                                       By:
                                             Robert D. Alinsky
                                             Branch Chief, Branch 3
                                             Office of Associate Chief Counsel
                                             (Passthroughs & Special Industries)

Enclosure:
Copy of this letter for § 6110 purposes

cc: [redacted]