Partnership Granted Extension for Late Section 754 Election

The Missed Deadline After Partner's Death

In a recent private letter ruling, the IRS granted Partnership X a 120-day extension to file a late election under Section 754 of the Internal Revenue Code. This election allows a partnership to adjust the basis of its assets following certain events, such as the death of a partner. The ruling provides relief to Partnership X, which inadvertently failed to make the election after the death of Partner A, thereby allowing the partnership to capture associated tax benefits.

The Rules: Basis Adjustments and '9100 Relief'

The IRS ruling hinged on two key areas of tax law: partnership basis adjustments and the agency's authority to grant extensions for certain missed elections. When a partner dies, it can trigger a need to adjust the partnership's internal accounting of its assets. Section 754 of the Internal Revenue Code addresses this, allowing a partnership to elect to adjust the basis of its assets following a transfer of a partnership interest, such as the death of a partner. This election, when in place, allows the partnership to increase (or decrease) the inside basis of its assets to reflect the fair market value of the partnership interest acquired by the new partner (or the deceased partner's estate).

The benefit of making a Section 754 election is that it can prevent double taxation or unintended losses when the partnership later sells its assets. Without the election, the new partner's outside basis (their investment) might not align with their share of the partnership's inside basis (the partnership's basis in its assets), leading to discrepancies upon sale. To be effective, a Section 754 election must be filed with the partnership's tax return for the year in which the triggering event (like the partner's death) occurred.

However, sometimes partnerships miss this deadline. That's where "9100 relief" comes in. Specifically, Regulations Section 301.9100-3 provides the IRS with the discretion to grant an extension of time to make certain elections, including the Section 754 election, even if the original deadline has passed. To obtain this relief, the taxpayer must demonstrate that they acted reasonably and in good faith and that granting the extension will not prejudice the interests of the government. In essence, the IRS needs to be convinced that the late filing was a genuine mistake and not an attempt to gain a tax advantage with the benefit of hindsight.

The Verdict: Extension Granted with Conditions

As detailed above, the IRS has the discretion under Regulation Section 301.9100-3 to grant extensions for certain missed elections if taxpayers acted reasonably and in good faith, and if the government's interests aren't prejudiced. The IRS confirmed that the partnership in this case met those requirements. Consequently, the IRS granted "X" a 120-day extension from the date of the ruling letter to make the election under Section 754, which governs optional adjustments to the basis of partnership property.

To properly make the election, the partnership must include a written statement with either Form 1065-X, Amended Return or Administrative Adjustment Request (AAR), or Form 8082, Notice of Inconsistent Treatment or AAR, for the relevant tax year. Critically, the election will be effective for the partnership's tax year that ended on Date 3—the year of Partner A's death. A copy of the IRS's ruling letter must also be attached to the filing. The IRS stipulated that this ruling is contingent upon the partnership retroactively adjusting the basis of its properties under Section 734(b) and Section 743(b), as if the Section 754 election had been timely made. These adjustments are necessary to reflect any basis recovery deductions that would have been available had the election been in place when Partner A died. This ensures the partnership corrects the missed election and properly adjusts the basis of partnership property and partner interests for the year of the triggering event, the death of Partner A.

Implications for Partnerships

The IRS's willingness to grant Section 9100 relief impacts partnerships facing similar administrative oversights. Specifically, Regulation Section 301.9100-3 provides the IRS with discretion to grant extensions for regulatory elections, such as the Section 754 election, when taxpayers demonstrate they acted reasonably and in good faith, and that granting relief won't prejudice the government's interests. A Section 754 election, authorized by Section 754 of the tax code, allows a partnership to adjust the basis of its assets under Section 743(b) and Section 734(b) when a partnership interest is transferred or when a distribution occurs. The ruling confirms that the IRS is generally willing to grant extensions for missed 754 elections resulting from administrative errors (inadvertence), provided the partnership acts to correct it by retroactively adjusting the basis of its properties under Section 734(b) and Section 743(b), as if the Section 754 election had been timely made. These adjustments are necessary to reflect any basis recovery deductions that would have been available had the election been in place when Partner A died. This ensures the partnership corrects the missed election and properly adjusts the basis of partnership property and partner interests for the year of the triggering event, the death of Partner A.

While this Private Letter Ruling (PLR) applies only to the requesting taxpayer, as specified under Section 6110(k)(3), which states that it cannot be used or cited as precedent, the broader takeaway is clear: the IRS is generally willing to grant extensions for missed 754 elections resulting from administrative errors (inadvertence), provided the partnership acts to correct it.