Partnership Granted Extension for Basis Adjustment After Partner's Death

IRS Grants Relief for Missed Basis Adjustment Election

In a recent private letter ruling (PLR), the IRS granted Partnership X a 120-day extension to file an election under Section 754 of the Internal Revenue Code. Section 754 allows a partnership to adjust the basis of its assets when certain events occur, such as the death of a partner. Failing to make this election typically prevents the partnership from stepping up the basis of its assets to match the deceased partner's estate value, potentially leading to higher taxes for the heirs.

IRS Grants Relief for Missed Basis Adjustment Election

In a recent private letter ruling (PLR), the IRS granted Partnership X a 120-day extension to file an election under Section 754 of the Internal Revenue Code. Section 754 allows a partnership to adjust the basis of its assets when certain events occur, such as the death of a partner. Failing to make this election typically prevents the partnership from stepping up the basis of its assets to match the deceased partner's estate value, potentially leading to higher taxes for the heirs.

The Inadvertent Error Following Partner A's Death

The ruling involved Partnership X, a limited liability limited partnership (LLLP). The triggering event was the death of Partner A on 'Date 1'. Following A's death, X inadvertently failed to attach the election under Section 754 to its partnership return for the taxable year ending 'Date 2'. This Section allows the partnership to adjust the basis of partnership property following certain events. Without this election, the basis of the partnership's assets would not reflect the fair market value of the deceased partner's interest, potentially creating adverse tax consequences for the heirs.

Regulatory Standards for Late Relief

Following A's death, X inadvertently failed to attach the election under Section 754 to its partnership return for the taxable year ending 'Date 2'. This Section allows the partnership to adjust the basis of partnership property following certain events. Without this election, the basis of the partnership's assets would not reflect the fair market value of the deceased partner's interest, potentially creating adverse tax consequences for the heirs.

Section 754 of the Internal Revenue Code (IRC) provides that if a partnership files an election, the basis of partnership property is adjusted. This adjustment occurs, in the case of a distribution of property, under Section 734, and in the case of a transfer of a partnership interest, under Section 743. The election applies to all distributions and transfers during the taxable year it's filed and all subsequent years.

However, partnerships can seek relief for a late election. Treasury Regulation § 301.9100-3 outlines the requirements for obtaining an extension of time to make a regulatory election. To be granted relief, the taxpayer must provide evidence establishing to the IRS's satisfaction that they acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government.

Conditions of the 120-Day Extension

The IRS granted Partnership X a 120-day extension from the date of the letter ruling to make the election under Section 754, which allows a partnership to adjust the basis of its assets following certain events, such as the death of a partner or the transfer of a partnership interest. This election, once made, triggers Section 743(b), which dictates how the inside basis of the partnership assets is adjusted to reflect the transferee's outside basis in the partnership. The IRS stipulated that the election must be made via a written statement filed with the appropriate service center, and a copy of the private letter ruling (PLR) must be attached to the statement filed with Partnership X's return for the taxable year that ended on Date 2.

The ruling is specifically contingent on Partnership X adjusting the basis of its properties to reflect any Section 734(b) or Section 743(b) adjustments that would have been made had the Section 754 election been timely filed. Section 734(b) provides for basis adjustments to partnership property when a distribution is made to a partner, while Section 743(b) adjusts the basis of partnership property in the case of a transfer of a partnership interest. These basis adjustments must reflect any additional deductions for recovery of basis related to Partnership X’s property that would have been allowable if the Section 754 election had been timely made, regardless of whether the statute of limitations on assessment or filing a claim for refund has expired for any year subject to this late relief. Affected partners must also reduce their basis in Partnership X to reflect any additional deductions that would have been claimed if the election were timely. The IRS emphasized that this relief extends only to the Section 754 election and does not imply approval of any other tax consequences.