Partnership gets more time to make a late Section 754 basis-adjustment election

Plain-English summary

An LLC taxed as a partnership wanted to make a Section 754 election, which lets a partnership adjust the tax basis of its assets when an interest changes hands (here triggered by the death of an indirect owner's spouse in a community property state). A timely § 754 election can give the successor a stepped-up basis, and thus larger future depreciation or reduced gain. The partnership accidentally failed to file the election with its Form 1065 for the year. It asked the IRS for relief under the § 301.9100-3 regulations, which allow extra time for a missed regulatory election when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS granted 120 days from the date of the letter to make the election, effective for that year and after. The relief is conditioned on the partnership and its partners actually making all the § 734(b)/§ 743(b) basis adjustments (and taking only the deductions that would have been allowed) as if the election had been timely, even for closed years, and on filing any required amended return or administrative adjustment request. This is a routine partnership late-election fix.

Ruling snapshot

• Question: Should the partnership get an extension of time under § 301.9100-3 to make a late Section 754 election?
• Outcome: Approved (120-day extension)
• Key authorities: IRC § 754 (with §§ 734(b), 743(b)); Treas. Reg. §§ 1.754-1, 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202506006
Release Date: 2/7/2025
Index Number: 754.00-00, 9100.00-00, 9100.15-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
[redacted], ID No. [redacted]
Telephone Number: [redacted]

Refer Reply To:
CC:PSI:01
PLR-109220-24

Date: November 07, 2024

LEGEND

X = [redacted]
A = [redacted]
B = [redacted]
State 1 = [redacted]
State 2 = [redacted]
Date 1 = [redacted]
Date 2 = [redacted]
Year = [redacted]

Dear [redacted]:

This letter responds to a letter dated May 2, 2024, and subsequent correspondence, submitted on behalf of X by X's authorized representatives, 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 is a limited liability company organized under the laws of State 1 on Date 1 and is treated as a partnership for federal tax purposes. On Date 2, A, spouse of B, one of the indirect owners of X, died. A and B were residents of State 2, a community property state. X represents it inadvertently failed to timely file a § 754 election with its Form 1065, U.S. Return of Partnership Income, for Year.

LAW AND ANALYSIS

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 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, 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) 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 120 days from the date of this letter to make an election under § 754 effective for X's Year taxable year 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 return for its taxable year ended Year, 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.

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 as specifically ruled upon 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 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.

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,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: ____
Joy Spies
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosure:
Copy for § 6110 purposes

cc: [redacted]