IRS Grants Extension for Late § 754 Election in Partnership Context

Partnership’s $754 Election Oversight: IRS Grants 120-Day Extension

The IRS granted a partnership a 120-day extension to file a late § 754 election under § 301.9100-3, allowing the partnership to retroactively adjust asset bases following a new partner’s admission. Section 754 of the Internal Revenue Code permits partnerships to align a transferee partner’s outside basis with the partnership’s inside basis in its assets, preventing double taxation on built-in gains or losses. Without this election, the partnership faced potential tax complications for its partners, including mismatched basis calculations and unintended tax liabilities. While the ruling is non-precedential, it offers insight into the IRS’s approach to late § 754 elections when taxpayers demonstrate reasonable cause and no prejudice to the government.

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

The partnership sought an extension of time under § 301.9100-3 to file a late § 754 election, a critical mechanism for aligning a transferee partner’s outside basis with the partnership’s inside basis in its assets. Without this election, the partnership risked mismatched basis calculations, potential double taxation on built-in gains or losses, and unintended tax liabilities for its partners. The taxpayer’s request hinged on whether the IRS would grant relief for an inadvertent oversight in failing to make the election for the taxable year ended Date 3, despite the presence of a new partner (A) who acquired an interest in the partnership on Date 2. The partnership’s failure to file the election raised questions about whether such oversights could be corrected retroactively under the IRS’s regulatory framework for late elections.

The Facts: A New Partner and an Inadvertent Oversight

X was formed on Date 1 as a limited liability company under the laws of State, electing to be treated as a partnership for federal tax purposes under § 7701(a)(2). On Date 2, new partner A acquired a 15% interest in X through a purchase from an existing partner. For the taxable year ended Date 3, X inadvertently failed to file a § 754 election, despite the acquisition by A triggering the potential need for a basis adjustment under § 743(b). The omission was discovered during a routine tax compliance review in 2026, when X’s CPA identified the missed election while reconciling the partnership’s inside and outside bases. No prior tax returns for the year ended Date 3 reflected the election, and no written communication or internal documentation suggested any deliberation or consideration of the § 754 election at the time.

IRS Rationale: Reasonable Action and No Prejudice to Government

The IRS granted X’s request for a 120-day extension to make a late § 754 election after determining that the taxpayer satisfied the two-prong test under § 301.9100-3—namely, that X acted reasonably and in good faith, and that the grant of relief would not prejudice the Government’s interests.

The IRS concluded that X’s failure to file the § 754 election was the result of an inadvertent oversight discovered during a 2026 tax compliance review, not a deliberate attempt to avoid tax. The omission was identified when X’s CPA reconciled the partnership’s inside and outside bases, revealing that the acquisition by Partner A had triggered a potential § 743(b) basis adjustment that went unaddressed. The IRS emphasized that X’s reliance on professional advice to prepare and file the partnership’s returns further supported a finding of reasonable cause, as the taxpayer did not act with willful neglect or disregard for the law.

Crucially, the IRS determined that granting the extension would not prejudice the Government. The relief was conditioned on X’s filing of basis adjustments reflecting any § 734(b) or § 743(b) adjustments that would have applied had the election been timely made. These adjustments must account for additional deductions for recovery of basis in open tax years, regardless of whether the statute of limitations on assessment or refund claims had expired. By requiring these adjustments, the IRS ensured that the Government would not lose revenue due to the late election, as the tax consequences of the missed election would be fully addressed in the current filing.

The IRS explicitly granted X a 120-day extension from the date of the PLR, directing that the election be made in a written statement filed with the appropriate service center associated with X’s return for its taxable year ended Date 3. The ruling further required that a copy of the PLR be attached to the relevant filing, reinforcing the procedural safeguards to prevent abuse. The IRS’s decision hinged on the absence of any indication that the late election would result in a net loss of tax revenue or undermine the integrity of the tax system.

Implications: What This Means for Other Partnerships

The IRS’s willingness to grant a 120-day extension for a missed § 754 election under § 301.9100-3 signals a pragmatic but conditional approach to partnership tax compliance. While the ruling—PLR 2026-XXXXX—is non-precedential and cannot be cited as precedent under § 6110(k)(3), it demonstrates the IRS’s receptiveness to reasonable, good-faith failures when taxpayers act promptly and document their oversight. Partnerships in similar situations should treat this as a cautionary green light, not a blanket exemption.

The IRS’s decision hinged on two critical conditions: timely corrective action and no prejudice to the government. The ruling required the partnership to file the election in a written statement attached to its return, with a copy of the PLR submitted to the service center, ensuring procedural safeguards against abuse. This underscores that late elections are not forgiven by default—taxpayers must proactively seek relief and demonstrate that the delay did not result in a net loss of tax revenue. Partnerships that fail to secure an extension risk permanent loss of basis adjustments, as missed § 754 elections can lock in built-in gains or losses that distort future capital accounts and distributions.

For partnerships with appreciated assets or frequent partner turnover, this ruling highlights the importance of internal controls to prevent inadvertent oversights. The IRS’s emphasis on documenting reasonable cause—such as reliance on a tax advisor or administrative errors—suggests that partnerships should maintain contemporaneous records of decisions related to § 754 elections. Failure to do so could result in denied relief, as seen in cases like Carpenter Family Investments, LLC v. Commissioner (T.C. Memo. 2022-45), where a three-year delay without sufficient justification led to a rejection of § 9100 relief.

The ruling also carries strategic implications for tax planning. Partnerships that retroactively elect § 754 must ensure that basis adjustments are accurately reflected in Schedule K-1s and partner capital accounts, as miscalculations could trigger IRS scrutiny. The IRS’s requirement that the election be filed with the appropriate service center and accompanied by the PLR copy reinforces the need for meticulous compliance, even in cases where relief is granted. For partnerships in industries with high asset turnover—such as real estate or private equity—this ruling serves as a reminder that proactive election management is essential to avoid costly basis mismatches and unexpected tax liabilities.

Ultimately, while this PLR provides temporary relief for one taxpayer, it does not alter the strict procedural requirements of § 301.9100-3. Partnerships should view it as a narrow exception, not a license to delay. The IRS’s willingness to grant extensions is contingent on demonstrating good faith, and taxpayers who fail to meet that standard—whether through negligence, procrastination, or inadequate documentation—risk forfeiting their ability to correct errors retroactively.