IRS Grants Extension for Late § 754 Election Following Partner's Death

IRS Grants Rare Extension for Late Partnership Election After Partner's Death

The IRS granted a rare 120-day extension for a late § 754 election after a partnership missed the filing deadline due to an advisor's oversight and the death of a partner. In a non-precedential ruling, the agency concluded the partnership acted reasonably and in good faith, despite the omission. The decision underscores the IRS's narrow discretion under § 301.9100-3 to grant relief for late elections, particularly in cases involving unforeseen circumstances like a partner's death.

The Question: Can a Partnership Fix a Missed § 754 Election After a Partner's Death?

The taxpayer sought an extension under § 301.9100-3 to file a late § 754 election, which allows partnerships to adjust the basis of partnership property to match the transferee’s outside basis. The election is critical for partnerships because it prevents tax inequities arising from mismatches between a partner’s outside basis (their investment in the partnership) and the partnership’s inside basis (the basis of its assets). Without the election, a deceased partner’s estate or a new partner could face unintended tax consequences, such as phantom income or disallowed losses, due to disparities between the two bases. The taxpayer’s request hinged on whether the IRS would grant relief for a missed election in the emotionally and administratively complex context of a partner’s death.

The Facts: A Partner's Death and an Advisor's Oversight

The partnership, X, was formed as a limited liability company under State law and classified as a partnership for federal tax purposes. On Date 1, Partner A died, triggering potential basis disparities between the deceased partner’s estate and the partnership’s assets. Due to an oversight by the partnership’s tax advisors, X failed to file a § 754 election for the taxable year ended Date 2. The advisors had not advised the partnership of the election’s availability, despite its relevance following Partner A’s death.

X represented that it had acted reasonably and in good faith, noting the administrative complexity surrounding Partner A’s death and the advisors’ unintentional failure to file the election. The partnership emphasized that granting relief would not prejudice the Government’s interests, as the late election would not affect tax revenue or administrative burdens.

The Ruling: IRS Grants 120-Day Extension for Late § 754 Election

The IRS granted X a 120-day extension to file a late § 754 election, concluding that the partnership had acted reasonably and in good faith. The election, which allows partnerships to adjust asset bases upon transfers or distributions, was missed due to the advisors’ oversight following Partner A’s death. The IRS emphasized that granting relief would not prejudice the Government, as the late election would not affect tax revenue or administrative burdens.

To formalize the election, X must file a written statement with Form 1065-X (Amended Return or Administrative Adjustment Request) or Form 8082 (Notice of Inconsistent Treatment or AAR) for the taxable year ending Date 2, attaching a copy of this PLR. The partnership must also include basis adjustments under § 734(b) or § 743(b), reflecting any additional deductions for recovery of basis that would have applied had the election been timely made—even for open tax years. The ruling is non-precedential and contingent on X’s filings complying with these requirements.

Implications: What This Means for Partnerships and Estate Planners

The IRS’s rare extension in this PLR signals a narrow but critical window for partnerships facing late § 754 elections, particularly in the aftermath of a partner’s death. For partnerships, the ruling underscores the absolute necessity of timely § 754 elections—or at least a documented, good-faith effort to comply—given the IRS’s willingness to grant relief under § 301.9100-3 only in cases of reasonable oversight. The 120-day extension granted here, while non-precedential, suggests the IRS may extend similar leniency to other partnerships that can demonstrate inadvertent delays rather than intentional avoidance.

For tax advisors, the case serves as a cautionary tale: clerical errors or advisor oversights (as described in the facts) may now carry more weight in securing relief, but the burden remains on the taxpayer to prove good faith and no prejudice to the IRS. Estate planners must take note that post-mortem basis adjustments—a common scenario in estate administration—are especially vulnerable to scrutiny. The IRS’s explicit warning that § 301.9100-1(a) does not validate the election itself highlights the strict procedural requirements for relief, including the need to file amended returns or AARs with precise basis adjustments under § 734(b) or § 743(b).

The implications extend beyond partnerships to any entity relying on basis adjustments, from LLCs taxed as partnerships to family limited partnerships in estate planning. The IRS’s emphasis on non-precedential rulings means taxpayers cannot rely on this outcome as precedent, but the pattern of recent PLRs suggests a growing tolerance for administrative errors—provided they are corrected promptly and transparently. For those outside the 12-month automatic relief window, the path to relief remains uncertain and costly, reinforcing the need for robust internal controls and proactive tax compliance in partnership governance.