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

IRS Grants 120-Day Extension for Late § 754 Election After Partner’s Death

The IRS granted a 120-day extension to a partnership that missed the deadline to file a § 754 election after a partner’s death, ruling that the partnership acted reasonably and in good faith under § 301.9100-3. The decision highlights the IRS’s willingness to provide relief for late elections where timing issues stem from unforeseen events like a partner’s death. This ruling offers partnerships facing similar timing challenges a potential path to compliance, though it remains non-precedential.

The Question: Can a Partnership File a Late § 754 Election After a Partner’s Death?

A § 754 election allows partnerships to adjust the tax basis of assets when a partner transfers their interest or receives a distribution, preventing double taxation on built-in gains. Under Section 1.754-1(b)(1), the election must be filed with the partnership’s original tax return for the year of the transfer or distribution, typically due by the 15th day of the third month after the partnership’s tax year ends.

This case involved a partnership that missed the deadline due to a partner’s unexpected death. The partnership argued that the administrative complications following the partner’s passing—not negligence—caused the delay. It sought relief under Section 301.9100-3, which permits the IRS to grant extensions for late elections if the taxpayer acted reasonably, in good faith, and the delay did not prejudice the government. The partnership also noted no prior history of noncompliance and that the late filing did not affect the IRS’s ability to assess or collect tax.

The Facts: Partner’s Death and a Missed Election Deadline

X, a limited partnership classified as a partnership for federal tax purposes, held appreciated assets (real estate and marketable securities) and maintained an active § 754 election for basis adjustments upon partner transfers or distributions.

On Date 1, Partner A—a founding member with a 30% interest—died unexpectedly. The partnership’s administrative team, already managing the deceased partner’s estate, delayed filing its annual tax return (Form 1065) for the taxable year ended Date 2. During finalization, the team overlooked the § 754 election statement attachment, despite the election’s ongoing validity. The missed filing stemmed from administrative complications following the partner’s passing, not negligence.

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

The IRS granted the partnership’s request for relief under Section 301.9100-3, concluding that the partnership acted reasonably and in good faith. The delay stemmed from administrative complications following the partner’s death, and the partnership had no prior history of noncompliance.

The partnership was granted a 120-day extension from the date of the PLR to file its § 754 election for the relevant taxable year. The election must be made in a written statement filed with the appropriate service center, accompanied by Form 1065-X or Form 8082, as instructed. A copy of this PLR must be attached to the filing.

The IRS emphasized that the partnership’s obligation to adjust the basis of its properties under § 734(b) or § 743(b) remains contingent on the late election. These adjustments must reflect any additional deductions for basis recovery that would have been allowable had the election been timely made, regardless of the statute of limitations.

This ruling is non-precedential, as private letter rulings do not constitute legal authority beyond the specific taxpayer addressed.

Implications: What This PLR Means for Partnerships and Tax Practitioners

This PLR signals that the IRS may grant relief for late § 754 elections in extraordinary circumstances, such as when a partner’s death disrupts normal filing procedures. Partnerships facing similar situations may seek a 120-day extension under § 301.9100-3 by demonstrating reasonable action and good faith. Relief is not automatic; taxpayers must substantiate their efforts to comply and show no prejudice to the IRS.

For tax practitioners, the PLR underscores the importance of documenting internal processes and client communications to support future relief requests. Failure to adjust basis as required by § 754 can lead to adverse tax consequences, including disallowed deductions or miscalculated gains. Practitioners should caution clients that PLRs are non-precedential and fact-specific. Partnerships must prioritize timely § 754 elections, but relief may be available in rare cases if the taxpayer acts promptly and demonstrates good faith.

Note: This ruling is non-precedential and applies only to the specific taxpayer addressed.