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

IRS Grants Rare Extension for Late § 754 Election After Partner’s Death

The IRS granted a 120-day extension to a partnership that missed its § 754 election after a partner’s death, marking a rare instance of relief under § 301.9100-3. The partnership failed to make the election due to its tax advisors overlooking the requirement, leaving it unable to adjust basis following the partner’s passing—a critical omission given the potential for double taxation. The IRS’s decision underscores the stakes for partnerships navigating complex basis adjustments, particularly in estate-driven transactions where timing and procedural errors can have lasting consequences.

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

X, an LLC taxed as a partnership for federal tax purposes, sought an extension under § 301.9100-3 to file a late § 754 election for the taxable year ended Date 2. The partnership’s request stemmed from a partner’s death on Date 1, which triggered potential basis adjustments under § 743(b) but left X unable to make the required election due to oversight by its tax advisors. X argued that its advisors failed to advise on the § 754 election’s availability, leaving the partnership unaware of the need to adjust basis following the partner’s passing—a critical omission given the risk of double taxation in estate-driven transactions. The partnership maintained it had acted reasonably and in good faith, asserting that granting relief would not prejudice the government’s interests.

The IRS’s Rationale: Why Relief Was Granted Under § 301.9100-3

The IRS granted X’s request for a 120-day extension under § 301.9100-3, which permits relief for late regulatory elections when two conditions are met: (1) the taxpayer acted reasonably and in good faith, and (2) granting relief would not prejudice the Government’s interests.

The IRS emphasized X’s reasonable reliance on its tax advisors, who failed to advise on the § 754 election’s availability—a critical omission given the risk of double taxation in estate-driven transactions. The partnership’s representations, including its assertion of good faith, were accepted due to the lack of contradictory evidence submitted by the IRS. The absence of any indication that the Government’s interests would be harmed further supported the decision, as no prior audits or assessments had occurred for the relevant tax year.

The relief was conditioned on X filing the § 754 election within 120 days via Form 1065-X (Amended Return or Administrative Adjustment Request) or Form 8082 (Notice of Inconsistent Treatment or AAR), accompanied by the required basis adjustments under § 734(b) or § 743(b). The IRS underscored that the ruling was contingent on X’s filings reflecting the adjustments that would have applied had the election been timely made, regardless of whether the statute of limitations had expired for prior years.

Basis Adjustments and Partner Obligations: The Fine Print of the Ruling

The IRS conditioned relief on precise basis adjustments to ensure compliance with the § 754 election’s intent. First, the partnership must adjust the basis of its properties to reflect any § 734(b) or § 743(b) adjustments that would have applied had the election been timely. These adjustments align the partnership’s inside basis with the economic reality of the transaction, preventing double taxation or unwarranted deductions. For instance, if a partner’s death triggered a step-up in basis under § 743(b), the partnership’s assets must reflect that adjustment, even if prior years’ statutes of limitations have expired.

Second, partners must adjust their outside basis in the partnership to match what it would have been if the election had been made on time. This means reducing their basis by the amount of any additional depreciation or recovery deductions that would have been allowable under the adjusted inside basis. The IRS emphasized that these adjustments are mandatory, regardless of whether the statute of limitations has closed on prior years, to maintain consistency in tax reporting.

Third, any deductions for the recovery of basis must be computed based on the remaining useful life of the property, not the original recovery period. This ensures that depreciation or amortization deductions reflect the adjusted basis accurately, avoiding overstated or understated tax benefits. The IRS specified that these computations must use the greater of the deductions allowed or allowable in prior years had the election been timely, reinforcing the need for precise calculations.

Finally, the partnership must file Form 1065-X (Amended Return) or Form 8082 (Notice of Inconsistent Treatment) to formalize these adjustments. These filings serve as the mechanism for reporting the basis changes and ensuring the IRS can verify compliance. The IRS underscored that failure to file these forms—or to include the required adjustments—would invalidate the relief granted, leaving the partnership exposed to potential audits or penalties. These steps are critical not only for compliance but also for maintaining the integrity of the partnership’s tax reporting across all affected years.

Implications for Partnerships: When Can Taxpayers Expect Similar Relief?

The IRS’s decision to grant relief in this case signals a cautious but pragmatic approach to late § 754 elections, particularly in the context of a partner’s death. Partnerships facing similar circumstances—especially those with deceased partners or missed elections—should take note: the IRS appears willing to grant § 301.9100-3 relief when taxpayers demonstrate reasonable cause and good faith, such as reliance on professional advice or unforeseen administrative failures. This ruling underscores the importance of documenting advisor oversight, internal controls, or other extenuating circumstances that may justify leniency. Partnerships should maintain detailed records of tax planning decisions, including emails, engagement letters, and internal memos, to substantiate any future relief requests.

However, taxpayers should not interpret this PLR as a blanket endorsement of late elections. The IRS explicitly cautioned that this ruling is non-precedential under § 6110(k)(3), meaning it cannot be cited as binding authority in other cases. Each request for relief is evaluated on its own facts, and the IRS reserves the right to deny relief if the taxpayer fails to meet the stringent requirements of § 301.9100-3, such as demonstrating no prejudice to the government’s interests. Partnerships with deceased partners or missed elections must act swiftly to file amended returns (Form 1065-X) and seek relief, as the IRS’s willingness to grant extensions may hinge on the absence of prior audits or adjustments.

Looking ahead, the IRS’s stance on similar requests may evolve as it continues to refine its approach to partnership tax compliance. While this PLR suggests a degree of flexibility for taxpayers acting in good faith, partnerships should anticipate stricter scrutiny in cases involving complex transactions or where the IRS perceives a pattern of neglect. The stakes remain high: failure to secure relief could expose partnerships to audits, penalties, or disallowed basis adjustments. For now, partnerships must balance proactive tax planning with meticulous documentation to navigate the IRS’s evolving expectations.