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

IRS Allows 120-Day Extension for Late § 754 Election: What Partnerships Need to Know

The IRS granted a 120-day extension under Treas. Reg. § 301.9100-3 to X, a state LLC taxed as a partnership, to file a late § 754 election for its taxable year ended Date 1. The ruling permits the election to be made in a written statement filed with the appropriate service center within 120 days of the letter date, contingent on specific basis adjustments and amended return filings. The IRS emphasized the non-precedential nature of the ruling.

The Question: Can a Partnership Fix a Missed § 754 Election?

A § 754 election, authorized under Internal Revenue Code § 754, allows partnerships to adjust the inside basis of partnership assets when a partner’s outside basis changes due to a transfer of interest or a distribution. Without this election, partnerships risk mismatched tax bases between new and existing partners, potentially leading to phantom income or double taxation. For example, if a new partner buys into a partnership with appreciated assets, the partnership’s historical inside basis may not reflect the new partner’s outside basis, creating tax inefficiencies.

In this case, X, a state LLC taxed as a partnership, intended to file a § 754 election for its taxable year ended Date 1 but failed to do so by the original deadline. To correct the oversight, X sought relief under Treas. Reg. § 301.9100-3, which allows partnerships to request an extension for late elections under certain conditions. The taxpayer’s ask centered on whether the IRS would permit a retroactive fix for the missed deadline.

The Facts: Why Did the Partnership Miss the Deadline?

X, a state limited liability company taxed as a partnership for federal tax purposes, intended to file a § 754 election for its taxable year ended Date 1. The election under § 754 of the Internal Revenue Code must be filed with the partnership’s return by the original due date, including any extensions. X failed to timely file the election with its Form 1065 for the taxable year ended Date 1.

The IRS evaluates relief under Treas. Reg. § 301.9100-3 by determining whether the taxpayer acted reasonably and in good faith, and whether granting relief would prejudice the government’s interests.

The Ruling: IRS Grants 120-Day Extension with Strings Attached

The IRS granted X a 120-day extension to file its § 754 election for the taxable year ended Date 1. The election must be made in a written statement filed with the appropriate service center, accompanied by either Form 1065-X (Amended Return or Administrative Adjustment Request) or Form 8082 (Notice of Inconsistent Treatment or AAR), along with a copy of this PLR. The IRS further required that X adjust the basis of its properties to reflect any § 734(b) or § 743(b) adjustments that would have been made if the election had been timely filed. These adjustments must account for any additional deductions for the recovery of basis related to X’s property, regardless of whether the statute of limitations on assessment or filing a claim for refund has expired for any year subject to this relief.

The ruling also stipulated that affected partners must adjust their basis in X to reflect the same basis adjustments, and if an Administrative Adjustment Request (AAR) is required, X must file Form 1065-X or Form 8082 and account for adjustments under § 6227(b). The IRS made clear that these adjustments are mandatory and must be made irrespective of the statute of limitations status.

The Rationale: Why Did the IRS Say Yes?

The IRS granted relief under § 301.9100-3, which permits extensions for late regulatory elections if the taxpayer demonstrates they acted reasonably and in good faith and that granting relief would not prejudice the government. The IRS concluded X met these requirements based on the representations made in its request, including the penalty of perjury statement affirming the accuracy of the facts. While the IRS did not independently verify the submitted information, it reserved the right to do so during an examination.

The ruling is explicitly limited to this specific request and does not imply that X or other taxpayers would qualify for § 754 election relief under other provisions or circumstances.

Implications: What Does This Mean for Other Partnerships?

This ruling offers no broader precedent—it applies strictly to this taxpayer under Section 6110(k)(3) of the Code, which bars citing private letter rulings as legal authority. Partnerships that miss the § 754 election deadline may still pursue relief under Treas. Reg. § 301.9100-3, but must demonstrate reasonable action and good faith in their request. The IRS will scrutinize such filings during examinations, particularly where representations in the relief request—including penalty-of-perjury statements—are unverified.

The case underscores the risks of late elections: partnerships risk complex basis adjustments under § 734(b) or § 743(b) if the election is not made timely, potentially leading to phantom income, double taxation, or disallowed losses. Taxpayers should consult advisors to navigate late-election requirements, including filing amended returns (Form 1065-X) and adjusting partner basis, while ensuring compliance with § 301.9100-3’s strict standards.