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

IRS Allows Late § 754 Election After Partner’s Death: What Happened?

The IRS granted a 120-day extension for a late § 754 election after a State limited partnership inadvertently failed to file the election following a partner’s death. In a non-precedential ruling (PLR-120159-25), the IRS addressed a taxpayer’s request for relief under §§ 301.9100-1 and 301.9100-3, allowing the partnership to retroactively elect to adjust the basis of its property under § 754 of the Internal Revenue Code. The decision hinged on the partnership’s failure to act after the partner’s death on Date 2, leaving the election unfiled for the taxable year ended Date 3.

The Taxpayer’s Dilemma: Why Was the § 754 Election Missed?

The partnership, X, was formed as a State limited partnership on Date 1 and classified as a partnership for federal tax purposes. Partner A, a key member of the partnership, died on Date 2. In the aftermath of this loss, the partnership’s operations and administrative processes were disrupted. During the preparation of its tax return for the year ended Date 3, the partnership’s tax advisors or internal team inadvertently overlooked the requirement to file a § 754 election—a critical election under Internal Revenue Code (IRC) § 754 that allows a partnership to adjust the basis of its property following certain transactions, such as the death of a partner.

Section 754 permits a partnership to elect to adjust the basis of its assets to reflect the fair market value of a transferred partnership interest, ensuring that the transferee partner’s outside basis aligns with the partnership’s inside basis in its assets. This election is particularly relevant in the context of a partner’s death, as it addresses the potential mismatch between the deceased partner’s share of the partnership’s basis in its assets and the fair market value of those assets at the time of death. The oversight occurred despite the partnership’s awareness of the § 754 election requirement, as the administrative burden and emotional strain following Partner A’s death contributed to the inadvertent failure to file the election for the taxable year ended Date 3.

IRS Rationale: Why Grant the Extension?

The IRS granted the late § 754 election under § 301.9100-3, which allows discretionary relief for regulatory elections filed after the deadline. To qualify, the taxpayer had to meet two core standards: first, they must demonstrate they acted reasonably and in good faith, and second, the IRS had to conclude that granting relief would not prejudice the government’s interests.

The IRS found the taxpayer satisfied the first requirement because the failure to file stemmed from administrative oversight and emotional strain following Partner A’s death, not tax avoidance or negligence. The partnership’s awareness of the § 754 requirement did not negate relief, as the regulatory relief provisions under § 301.9100-3 do not penalize honest mistakes—even those involving procedural lapses. The IRS emphasized that the taxpayer’s conduct reflected reasonable reliance on internal processes that broke down due to extraordinary circumstances.

As for the second requirement, the IRS determined that granting the extension would not harm its interests. The late election did not create a tax benefit for the partnership or a loss of revenue for the government, since the basis adjustment would have been the same had the election been filed on time. The IRS also noted that no third parties were prejudiced, as the partnership had not yet filed its return for the subsequent tax year, leaving no completed transactions to reconsider. This absence of harm to the fisc—a cornerstone of § 301.9100-3—sealed the decision.

Mechanics of the Relief: How to File the Late Election

The IRS granted the partnership a 120-day extension from the date of the PLR to file the late § 754 election. To comply with the relief, the partnership must file a written statement with its amended return or administrative adjustment request (AAR) for the taxable year in question. This statement must be filed using Form 1065-X (Amended Return or AAR) or Form 8082 (Notice of Inconsistent Treatment or AAR), as appropriate, and must include a copy of the PLR attached to the submission.

The written statement must clearly declare the § 754 election and specify the taxable year for which it applies. The partnership must also adjust the basis of its properties to reflect any § 734(b) or § 743(b) adjustments that would have been made had the election been filed on time. These adjustments must account for any additional deductions related to the recovery of basis, regardless of whether the statutory period for assessment or refund claims has expired for any affected year. The IRS emphasized that these basis adjustments are mandatory and not subject to limitations on assessment or refund claims.

Implications for Partnerships: What Does This Mean for Others?

The IRS’s decision to grant late § 754 election relief in this case does not establish binding precedent for other partnerships, as Section 6110(k)(3) of the Code explicitly states that PLRs "may not be used or cited as precedent." However, the ruling offers practical insights for partnerships facing similar timing issues.

The case underscores the critical importance of timely § 754 elections, which must be filed with a partnership’s timely filed tax return (including extensions) to avoid basis mismatches under § 734(b) (distributions) or § 743(b) (transfers). Partnerships that fail to file the election risk permanent disallowance of basis adjustments, even if the error is later discovered, unless they qualify for relief under § 301.9100-3.

For partnerships seeking relief for an inadvertent failure to file the election, § 301.9100-3 provides a pathway, but success hinges on demonstrating reasonable cause. The IRS’s willingness to grant relief in this case—where the failure stemmed from a partner’s death—suggests that unforeseen circumstances (e.g., administrative oversight, professional errors, or extenuating events) may strengthen a request. However, partnerships must still prove that the omission was not due to negligence or tax avoidance motives.

Taxpayers should consult a tax advisor before relying on this ruling, as each case turns on its specific facts and the IRS’s discretionary analysis under § 301.9100-1(a), which clarifies that granting an extension does not constitute a broader determination of eligibility.