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 under § 301.9100-3 for a partnership to file a late § 754 election after a partner’s death caused the missed filing deadline. The agency ruled that the taxpayer’s failure to elect was excusable under the reasonable cause standard, providing relief despite the missed statutory deadline. The decision hinges on the specific facts of the partner’s death, which the IRS determined constituted an event beyond the partnership’s control, triggering eligibility for discretionary relief. While the ruling is non-precedential, it offers critical insight for partnerships navigating late elections tied to unforeseen events.

The Facts: How a Partner’s Death Led to a Missed Election

X, a limited liability company classified as a partnership for federal tax purposes, was formed under the laws of State. On Date 1, partner A died, triggering an inadvertent failure to file a § 754 election with the partnership’s return for its taxable year ended Date 2. The § 754 election, authorized under § 754 of the Internal Revenue Code, allows a partnership to adjust the basis of its property in the event of a distribution or transfer of a partnership interest. Under § 1.754-1(b)(1) of the Income Tax Regulations, the election must be made in a written statement filed with the partnership return for the taxable year in which the distribution or transfer occurs, no later than the extended due date of the return.

The partnership’s failure to file the election arose from the administrative disruption caused by partner A’s death. The taxpayer subsequently sought an extension under § 301.9100-1 and § 301.9100-3 of the Procedure and Administration Regulations, which permit the Commissioner to grant relief for late regulatory elections when the taxpayer demonstrates reasonable cause and good faith. The request for relief was submitted in a letter dated September 25, 2025, followed by subsequent correspondence, seeking an extension to file the § 754 election for the taxable year ended Date 2.

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

The IRS’s decision to grant relief hinged on two distinct legal analyses: first, the requirements for a valid § 754 election under § 1.754-1(b)(1) of the Income Tax Regulations, and second, the standards for discretionary relief under § 301.9100-3. The IRS concluded that the taxpayer met both sets of requirements.

Under § 1.754-1(b)(1), a § 754 election must be made in a written statement filed with the partnership’s return for the taxable year in which the transfer or distribution occurs, and the return must be filed no later than the time prescribed by § 1.6031(a)-1(e), including extensions. The election is not valid if filed late, absent relief. Here, the election was missed because partner A’s death disrupted the partnership’s administrative processes, preventing timely filing. The IRS acknowledged that the failure to file was not due to willful neglect but rather an unforeseen event that prevented compliance with the regulatory deadline.

Turning to § 301.9100-3, the IRS evaluated whether the taxpayer established reasonable cause, good faith, and no prejudice to the government. The regulation requires the taxpayer to provide evidence—including affidavits—to satisfy the Commissioner that the delay was reasonable and the grant of relief would not harm the IRS’s interests. The IRS found that the taxpayer acted reasonably by promptly seeking relief after discovering the missed election, demonstrating good faith through its diligent efforts to correct the oversight, and showing no prejudice to the government, as the partnership’s tax liability remained unchanged. The IRS’s conclusion was explicitly grounded in the taxpayer’s compliance with the evidentiary standards set forth in § 301.9100-3(e), which mandates affidavits to substantiate the request. The agency determined that these conditions were met, warranting the grant of discretionary relief.

What Partnerships Must Do Now: Basis Adjustments and Compliance

The IRS’s grant of relief under § 301.9100-3 imposes strict compliance obligations on X to retroactively correct the missed § 754 election. Partnerships receiving similar relief must file the election within 120 days of the IRS’s letter date, submitting a written statement with the appropriate service center and attaching a copy of the IRS’s relief letter to the partnership’s return for the affected taxable year.

The election triggers mandatory basis adjustments under § 734(b) for distributions and § 743(b) for partner transfers, regardless of whether the statute of limitations has expired. The partnership must adjust the inside basis of its properties to reflect the adjustments that would have applied had the election been timely made, including any additional deductions for recovery of basis related to its property. These adjustments must account for the remaining useful life or recovery period of the assets, using the basis as adjusted by the greater of deductions allowed or allowable in prior years had the election been filed on time. Failure to perform these adjustments risks disallowance of deductions and potential IRS adjustments in future audits.

Affected partners must similarly adjust their outside basis in the partnership to reflect what it would have been if the § 754 election had been timely made, irrespective of the statute of limitations. This ensures consistency between inside and outside basis, preventing double taxation or unintended gain recognition. Non-compliance with these basis adjustments—even in closed tax years—can result in the IRS reallocating income or disallowing deductions during examinations, as the adjustments are not time-barred by the statute of limitations. Partnerships should document these adjustments meticulously to substantiate compliance in the event of an audit.

Implications for Partnerships: When Can You Rely on This Ruling?

This ruling offers no precedential value beyond the taxpayer’s specific facts. Per Section 6110(k)(3) of the Code, private letter rulings "may not be used or cited as precedent," meaning no other partnership can rely on this PLR as binding authority. The IRS explicitly states that the ruling is "directed only to the taxpayer requesting it," leaving partnerships in similar situations without a guaranteed path to relief. Courts and practitioners may cite this PLR for persuasive value, but the IRS retains full discretion to deny identical requests in future cases.

The IRS granted relief under § 301.9100-3 because the taxpayer demonstrated reasonable cause—in this case, the partner’s death created an unforeseeable delay in filing the § 754 election. The ruling hinged on the taxpayer’s good faith effort to comply once the error was discovered and the absence of prejudice to the government’s interests. Partnerships seeking similar relief must meet these same conditions: a credible explanation for the delay (e.g., death, legal disputes, or reliance on professional advice) and prompt corrective action upon discovery. The IRS’s denial in PLR 202212003 (March 2022), where relief was denied due to a three-year delay with no explanation, underscores the importance of acting swiftly. Partnerships cannot assume the IRS will grant relief if they wait until an audit forces their hand.

Relying on late § 754 relief carries substantial risks. Even if the IRS grants a § 301.9100-3 extension, the election’s effects are prospective only—it does not retroactively cure missed basis adjustments in prior years. The IRS’s position, confirmed in CCA 202122008 (May 2021), is that § 754 elections apply only from the year filed onward, leaving partnerships exposed to double taxation or disallowed deductions in closed tax years. Non-compliance with § 754 can trigger IRS reallocations of income or deductions during examinations, as basis adjustments are not time-barred by the statute of limitations—a point reiterated in the prior section. Partnerships should document every attempt to file the election, including communications with tax professionals and return receipts, to substantiate good faith in the event of an audit.

Best practices begin with proactive compliance. Partnerships should file § 754 elections by default unless there is a compelling reason not to, such as minimal built-in gains or administrative burdens. Implementing a compliance calendar with deadlines for regulatory elections—including § 754, § 704(c), and check-the-box elections—reduces the risk of missed filings. For partnerships that discover a late election, the 12-month window under § 301.9100-1 offers an automatic extension if the delay was reasonable and the partnership acted diligently. Beyond that, a private letter ruling under § 301.9100-3 is the only recourse, but success is not guaranteed. The IRS’s recent trend of denying relief for procrastination or lack of documentation (as seen in PLR 202212003) signals that partnerships must treat election deadlines as immovable. When in doubt, consult a tax advisor to assess whether the benefits of an election outweigh the risks of non-compliance.