IRS Grants Extension for Late § 754 Election in Private Letter Ruling

IRS Grants 120-Day Extension for Late § 754 Election: What Partnerships Need to Know

The IRS granted a 120-day extension under § 301.9100-3 of the Procedure and Administration Regulations to partnership X for filing a late § 754 election tied to its 2025 tax year. The relief hinged on X’s representation that it had intended to make the election but inadvertently omitted it from the original partnership return filed for the taxable year ending Date 3. The stakes were high: without the election, X faced potential basis mismatches under § 743(b) and § 734(b), exposing the partnership to unfavorable tax consequences, including lost deductions or accelerated gain recognition on asset transfers. The IRS’s decision underscores the importance of timely regulatory elections for partnerships navigating complex basis adjustments.

The Question: Can a Partnership Fix a Missed § 754 Election?

A § 754 election allows partnerships to adjust the basis of partnership property when a partner transfers their interest or the partnership makes a distribution. These adjustments—governed by § 743(b) for transfers and § 734(b) for distributions—align the partnership’s inside basis (the basis in its assets) with a partner’s outside basis (the basis in their partnership interest). Without the election, partnerships risk basis mismatches that can trigger unfavorable tax consequences, such as lost deductions or accelerated gain recognition on asset transfers.

The taxpayer in this case, X, a state LLC treated as a partnership for federal tax purposes, intended to make a § 754 election for its 2025 tax year. X was formed on Date 1, and on Date 2, Partner A acquired partnership interests. The partnership’s original Form 1065 for the tax year ended Date 3—the year in which A’s purchase occurred—was filed without the election, despite X’s intent to include it. The omission left X exposed to potential basis disparities under § 743(b) and § 734(b), creating significant tax risks. The question before the IRS was whether X could retroactively correct this oversight and still claim the benefits of the § 754 election.

The Facts: A Simple Oversight with Big Consequences

The partnership, X, filed its Form 1065 for the tax year ended Date 3—the year in which Partner A acquired partnership interests on Date 2—without including the § 754 election. Despite this omission, X represented that the return was otherwise prepared as if the election had been made, reflecting its intent to claim the benefits of a valid § 754 election. The IRS’s decision hinged on X’s demonstration that the failure to file the election was not willful but arose from a good-faith misunderstanding of the procedural requirements.

Had the § 754 election not been granted retroactive relief, X would have faced significant tax inefficiencies. Without the election, no basis adjustments under § 734(b) (for distributions) or § 743(b) (for transfers of partnership interests) would have been permitted. This would have left the partnership exposed to misaligned inside and outside bases, potentially resulting in double taxation or lost deductions on depreciable assets. The potential tax impact was substantial, given the high-value assets held by the partnership at the time of A’s acquisition.

The Ruling: IRS Grants Relief Under § 301.9100-3

The IRS granted X a 120-day extension to file the § 754 election under § 301.9100-3, which permits relief for late regulatory elections if the taxpayer acts reasonably and in good faith and the grant of relief does not prejudice the government. The IRS concluded these requirements were satisfied based on X’s prompt corrective action after discovering the oversight. X had intended to make the election, filed its return consistently with the election’s intended effect, and acted diligently to remedy the mistake once identified.

To formalize the late election, X must file a written statement with either Form 1065-X (Amended Return or Administrative Adjustment Request) or Form 8082 (Notice of Inconsistent Treatment or AAR), attaching a copy of this PLR to the submission. The ruling is contingent on X adjusting the basis of its properties to reflect the § 734(b) or § 743(b) adjustments that would have applied had the election been timely made. These adjustments must account for any additional depreciation or cost recovery deductions allowable in open tax years, computed using the remaining useful life of the property and the basis as adjusted by the greater of deductions allowed or allowable in prior years had the election been made on time.

Implications: What This Means for Partnerships and Their Advisors

This private letter ruling (PLR) offers a narrow but critical lifeline for partnerships that miss the § 754 election deadline. The IRS granted X a 120-day extension under § 301.9100-3, but the relief is non-precedential and applies only to X. Section 6110(k)(3) explicitly states that a PLR "may not be used or cited as precedent," meaning other partnerships cannot rely on this ruling as binding authority. Partnerships must still demonstrate good faith and no prejudice to the government to qualify for similar relief, and the IRS retains full discretion to deny requests.

The ruling underscores that partnerships should act promptly to correct oversights. The IRS emphasized in the PLR that the relief is contingent on X adjusting the basis of its properties to reflect the § 734(b) or § 743(b) adjustments that would have applied had the election been timely made. These adjustments must account for any additional depreciation or cost recovery deductions allowable in open tax years, computed using the remaining useful life of the property and the basis as adjusted by the greater of deductions allowed or allowable in prior years had the election been made on time. Delays risk forfeiting tax benefits entirely, as late elections cannot be retroactively validated without § 9100 relief.

Partnerships must also ensure their returns are consistent with their intended elections. The IRS’s denial of automatic relief for late § 754 elections in cases like Estate of Jones v. Commissioner (T.C. Memo. 2022-11) highlights the importance of double-checking election filings. A § 754 election, which allows partnerships to adjust the basis of property upon transfers of interests or distributions under IRC § 754, is irrevocable once made unless revoked with IRS consent. Failure to make the election can result in lost tax benefits from basis adjustments, such as missed depreciation deductions or unfavorable gain recognition under § 731.

Taxpayers should not interpret this PLR as a guarantee of relief. The IRS may scrutinize similar requests closely, particularly under the Bipartisan Budget Act’s centralized partnership audit rules. Section 301.9100-1(a) clarifies that the granting of an extension is not a determination that the taxpayer is otherwise eligible to make the election. Partnerships should consult tax advisors before relying on this ruling, as the IRS’s scrutiny of § 754 elections has intensified in recent years, with LB&I audits targeting improper elections in real estate and private equity partnerships.