IRS Grants Extension for Late § 754 Election Under § 301.9100-3

IRS Permits Late § 754 Election for Partnership: A Narrow but Critical Relief

The IRS granted a 120-day extension to a partnership that missed its § 754 election deadline, ruling the taxpayer acted reasonably and in good faith. Section 754 allows partnerships to adjust the basis of property when interests are transferred or distributions occur, preventing tax inefficiencies like built-in gain mismatches. While § 754 elections are typically due with the partnership’s tax return, the IRS’s rare relief under § 301.9100-3 signals that partnerships may seek similar leniency for missed elections—provided they meet strict standards. This decision underscores the IRS’s willingness to accommodate procedural oversights when taxpayers demonstrate diligence and no prejudice to the government.

Can a Partnership Fix a Missed § 754 Election?

A State LLC classified as a partnership sought retroactive relief to make a § 754 election after missing the deadline tied to its Form 1065. The partnership intended to file the election for its taxable year ended Date 1 but failed to do so. It requested an extension under § 301.9100-3, which allows the IRS to grant discretionary relief for late regulatory elections when reasonable cause or undue hardship is shown.

Facts: Procedural Oversight Leads to Late § 754 Election Request

X, a State LLC classified as a partnership, intended to file a § 754 election with its Form 1065 for the taxable year ended Date 1 to trigger basis adjustments under § 734(b) and § 743(b). However, it missed the deadline prescribed under Reg. § 1.754-1(b), which requires the election to accompany the partnership return filed by the due date (including extensions). The partnership sought relief under § 301.9100-3, asserting that its failure to file was due to a procedural oversight and that it had acted reasonably and in good faith.

Ruling: IRS Grants 120-Day Extension with Conditions

The IRS granted X a 120-day extension to file a late § 754 election under § 301.9100-3, contingent on the partnership adjusting property bases to reflect § 734(b) and § 743(b) adjustments as if the election had been timely made. The election must be filed as a written statement attached to Form 1065-X or Form 8082, with a copy of the PLR included. Basis adjustments must account for any additional deductions related to basis recovery, regardless of the statute of limitations for affected years.

The ruling is non-precedential and applies only to X. The IRS emphasized that the relief does not prejudice the government’s interests, as X demonstrated reasonable cause and no tax loss would result from the adjustment.

Rationale: Procedural Oversight Meets § 301.9100-3 Relief Criteria

The IRS granted the late § 754 election under § 301.9100-3, which permits discretionary relief for missed regulatory elections if the taxpayer acted reasonably and in good faith and the government’s interests were not prejudiced. X met this burden by submitting affidavits and contemporaneous records showing the oversight was unintentional—a clerical error in the partnership’s tax filing process. The IRS emphasized that X’s error did not result in tax loss or prejudice to the government, as the basis adjustments would have been neutral in effect.

The decision reflects a narrow application of § 301.9100-3, where procedural mistakes—rather than substantive tax avoidance—are remedied without undermining enforcement priorities. The ruling underscores that § 754 elections are critical tools for basis alignment, and their oversight can have material tax consequences.

Implications: Limited Relief for Procedural Oversights

This PLR offers narrow relief for partnerships that miss the § 754 election deadline due to procedural mistakes—not substantive tax avoidance. The IRS’s willingness to grant a 120-day extension under § 301.9100-3 depends on the taxpayer demonstrating reasonable cause (e.g., administrative oversight) and no prejudice to the government (e.g., no built-in gains triggering tax loss). For partnerships, this means documentation is paramount: a well-documented PLR request may succeed if the IRS sees no risk of revenue loss.

The ruling does not create precedent but signals that partnerships can seek similar relief under § 301.9100-3 if they act promptly and in good faith. Advisors should emphasize that timely elections are critical: missing the deadline—even by a day—can trigger unintended gain recognition under § 743(b) or § 734(b). The PLR’s message is clear: procedural errors may be fixable, but substantive tax consequences are not.

For practitioners, the takeaway is twofold. First, proactively document § 754 elections in partnership agreements and tax filings. Second, if a deadline is missed, file a PLR immediately with evidence of reasonable cause and proof that the IRS’s position is unaffected.