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

IRS Allows Late § 754 Election After Partner’s Death: What Partnerships Need to Know

The IRS granted a 120-day extension for a late § 754 election in a non-precedential private letter ruling (PLR-117052-25), permitting a partnership to retroactively adjust asset bases after a partner’s death. Section 754 allows partnerships to align inside and outside bases for transferee partners—critical for avoiding double taxation when a partner sells or dies. In this case, the partnership missed the election due to the partner’s death, but the IRS ruled the delay was reasonable and did not prejudice the Government, approving relief under § 301.9100-3.

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

X, a State limited liability company taxed as a partnership, asked the IRS whether it could retroactively make a § 754 election after inadvertently failing to file one for its taxable year ended Date 3. The partnership’s oversight stemmed from the death of partner A on Date 2, which disrupted normal filing procedures. Section 754 allows partnerships to adjust the inside basis of partnership assets to match the outside basis of a transferee partner, preventing double taxation when a partner sells or dies. The partnership’s request hinged on whether the IRS would grant relief under § 301.9100-3, which permits late elections when the taxpayer demonstrates reasonable cause and no prejudice to the Government. The core procedural hurdle was that the § 754 election must be filed with the partnership’s timely filed return, and the partnership sought to address the missed deadline caused by the partner’s death.

The Facts: How a Partner’s Death Led to a Compliance Oversight

X, a State limited liability company formed on Date 1 and classified as a partnership for federal tax purposes, experienced a partner’s death on Date 2. In the wake of this event, the partnership inadvertently failed to file a § 754 election for its taxable year ended Date 3. The § 754 election, required to be filed with the partnership’s timely filed return, allows the partnership to adjust the inside basis of its assets to align with a transferee partner’s outside basis. Without this election, the partnership risked basis misalignment that could lead to tax inefficiencies, such as double taxation when assets are sold or when a partner exits the partnership. The error arose not from intentional disregard but from the administrative disruption caused by the partner’s death, leaving the partnership unaware of the missed deadline until after the fact.

The Ruling: IRS Grants 120-Day Extension Under § 301.9100-3 Relief

The IRS granted the partnership a 120-day extension to make a late § 754 election under § 301.9100-3, which provides discretionary relief for missed tax elections when the taxpayer acted reasonably and the government’s interests were not prejudiced. The ruling hinged on two key determinations: first, that the partnership’s failure to file the election was not willful neglect but stemmed from administrative disruption following the partner’s death; and second, that the IRS would suffer no prejudice since the late election would not alter the substantive tax treatment of the transaction.

To qualify for relief, the partnership must file the § 754 election as a written statement attached to either Form 1065-X (Amended Return or Administrative Adjustment Request) or Form 8082 (Notice of Inconsistent Treatment or AAR), both of which must be filed for the taxable year in question. A copy of the PLR must accompany the filing, and the election must reflect all required basis adjustments under § 734(b) or § 743(b). These adjustments must account for any additional deductions for basis recovery that would have applied had the election been timely made, even if the statute of limitations for assessment or refund claims has expired for affected years. Affected partners must similarly adjust their outside basis in the partnership to reflect what it would have been if the election had been made on time.

The relief is contingent on full compliance with these technical requirements, including the retroactive application of basis adjustments to prior years. The IRS emphasized that this ruling does not confer eligibility for the § 754 election itself but merely extends the time to make it, and the ruling may not be cited as precedent under § 6110(k)(3).

Why This Matters: Implications for Partnerships and Estate Planners

The IRS’s recent ruling underscores the critical importance of timely § 754 elections, particularly in the wake of a partner’s death, where basis misalignments can trigger costly tax inefficiencies. Partnerships that fail to make the election risk double taxation—where transferee partners face tax on both the sale of their interest and the partnership’s subsequent asset sales—as well as basis distortions that inflate or understate depreciation deductions. The ruling also highlights the limited but valuable relief available under § 301.9100-3, which permits late elections if the taxpayer demonstrates reasonable cause, such as reliance on a tax advisor or clerical error. This flexibility, while non-precedential, signals the IRS’s willingness to accommodate good-faith oversights—a trend that may extend to similar cases.

For partnerships and estate planners, the decision carries three key takeaways. First, proactive election filing remains the safest path; even with potential relief, the IRS’s scrutiny of missed elections is intensifying, particularly in high-stakes sectors like private equity and real estate. Second, meticulous documentation of basis adjustments under § 734(b) and § 743(b) is essential to withstand IRS challenges, as failures can result in unexpected tax liabilities for transferee partners. Third, the ruling serves as a cautionary tale about the strict conditions tied to § 301.9100-3 relief, which requires full compliance with retroactive basis adjustments and does not guarantee eligibility for the election itself. Practitioners should treat this as a limited lifeline, not a blanket exemption, and prioritize timely filings to avoid the pitfalls of basis misalignment and IRS penalties.