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 to a partnership that missed a timely § 754 election after a partner’s death, ruling the failure was inadvertent and not prejudicial to the government. Section 754 allows partnerships to adjust asset bases when a partner transfers an interest, preventing tax distortions from disparities between inside and outside basis. Here, the partnership’s inadvertent omission—coupled with the partner’s death—constituted reasonable cause for relief. This non-precedential ruling (per § 6110(k)(3)) signals the IRS may show leniency for late elections tied to unforeseen events, but partnerships must still demonstrate good faith and no prejudice.

The Question: Can a Partnership Fix a Missed § 754 Election After a Partner’s Death?

The taxpayer—a partnership—faced a dilemma after a partner’s death: it had failed to file a timely § 754 election, which would have adjusted the partnership’s asset bases to reflect the step-up in the deceased partner’s interest. Section 754 allows partnerships to align the inside basis (the partnership’s basis in its assets) with the outside basis (a partner’s basis in their partnership interest) when a partner transfers an interest, either through sale, exchange, or death. Without this election, disparities between inside and outside basis can lead to tax distortions, such as phantom income or double taxation when assets are sold.

In this case, the partnership’s oversight occurred during the year of the partner’s death, a period often marked by administrative disruption. The partnership sought relief under § 301.9100-3, which allows taxpayers to request an extension for making certain tax elections if they can demonstrate reasonable cause and no prejudice to the government. The legal basis for the request hinged on whether the partnership’s failure to file the election was due to circumstances beyond its control—such as the partner’s death—and whether the IRS would consider the omission as having no adverse impact on tax collections.

The IRS’s Ruling: Good Faith and No Prejudice to the Government

The IRS evaluated the partnership’s request for late relief under § 301.9100-3, which permits extensions for regulatory elections if the taxpayer demonstrates reasonable cause and no prejudice to the government. The legal framework requires proof that the taxpayer acted in good faith and that granting relief would not undermine tax collections.

The partnership met these requirements by showing the failure to file the § 754 election was inadvertent and tied to the partner’s death, an event beyond its control. The IRS accepted this as reasonable cause, noting the partnership had no prior history of noncompliance and acted promptly upon discovering the omission.

As relief, the IRS granted a 120-day extension from the date of the ruling to file the § 754 election, effective for the taxable year in question and all subsequent years. The election must be made via a written statement attached to the partnership’s return, with a copy of this ruling included. The relief is contingent on the partnership making § 734(b) and § 743(b) basis adjustments to reflect what would have occurred had the election been timely filed. These adjustments must account for any additional deductions for recovery of basis related to the partnership’s property, regardless of whether the statute of limitations for assessment or refund claims has expired.

Implications: What This PLR Means for Partnerships and Their Advisors

The IRS’s granting of late § 754 election relief in this case underscores the importance of timely elections to avoid basis disparities that distort tax outcomes. Partnerships must recognize that § 754 elections—while optional in many cases—become critical when transfers or distributions create mismatches between a partner’s outside basis and the partnership’s inside basis. The failure to make a timely election risks forcing partners to recognize phantom income or forgo valuable deductions, particularly in scenarios involving death or asset sales where basis step-ups or step-downs are pivotal.

This ruling also highlights the potential for relief under § 301.9100-3, which allows partnerships to request an extension for late elections if they can demonstrate reasonable cause and no prejudice to the government. The IRS’s willingness to grant relief in this case—particularly where the missed election stemmed from a partner’s death—suggests that personal hardship or third-party errors (such as reliance on a tax advisor) may suffice as reasonable cause. However, partnerships should not assume automatic relief. The IRS’s discretionary standard requires meticulous documentation, including evidence of good faith reliance on professional advice or unforeseen circumstances. Without such proof, late election requests face heightened scrutiny and potential denial.

Critically, this ruling is non-precedential and cannot be cited as precedent under § 6110(k)(3). Partnerships and advisors should treat it as a fact-specific concession rather than a broad expansion of relief opportunities. The IRS’s stance remains stringent, and future requests for similar relief will likely hinge on the unique facts of each case. Advisors must counsel clients to avoid relying on this ruling as a safety net for missed deadlines.

To prevent such issues, partnerships should implement proactive safeguards, including:

• Annual reviews of partnership agreements and tax elections, particularly before partner exits or asset distributions.
• Automated reminders tied to key deadlines (e.g., transfer events, tax filing dates) using tax compliance software.
• Engagement letters with tax advisors explicitly outlining responsibilities for election filings.
• Protective elections filed with tax returns when uncertainty exists about the need for a § 754 election.

Looking ahead, the IRS’s willingness to grant relief in this case signals a narrow but growing openness to late elections in scenarios involving unforeseen events, such as death or advisor errors. However, the agency’s emphasis on no prejudice to the government and full basis adjustments suggests that future relief will remain contingent on precise compliance with adjustment requirements. Partnerships that prioritize timely elections and rigorous documentation will minimize exposure to costly disputes and ensure alignment with the IRS’s evolving expectations.