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

IRS Allows Partnership to Correct $754 Election Oversight

The IRS granted a partnership a 120-day extension to retroactively file a § 754 election after the partnership missed the deadline due to an inadvertent oversight. In PLR-104768-26, dated January 13, 2026, the IRS concluded that the partnership had acted reasonably and in good faith, and that granting relief would not prejudice the government’s interests. The ruling underscores the IRS’s willingness to provide relief under § 301.9100-3 for late regulatory elections when taxpayers demonstrate good faith and no harm to the government, though it remains non-precedential. The decision highlights the importance of timely § 754 elections—under § 754, which allows partnerships to adjust the basis of property upon a transfer of a partnership interest—and the potential for relief when errors occur.

The Partnership's Inadvertent Oversight

X was formed as a limited partnership under State law on [Date] and has been treated as a partnership for Federal tax purposes since inception. On [Date], A purchased a [a]% interest in X from existing partners for [Dollar Amount]. The purchase constituted a transfer of a partnership interest under § 743 of the Internal Revenue Code, which requires partnerships to adjust the basis of partnership property if a § 754 election is in effect.

X inadvertently failed to timely file the § 754 election for Year, the taxable year of A’s purchase. The election, which must be filed with the partnership’s timely-filed return (including extensions) under § 754 and Treas. Reg. § 1.754-1, was not attached to X’s Form 1065 for Year. X later represented that the omission was unintentional and that it had acted reasonably and in good faith in attempting to comply with the filing requirements.

IRS Grants Relief Under § 301.9100-3 Standards

The IRS granted X an extension to file a late § 754 election after analyzing the regulatory framework under § 301.9100-3, which permits discretionary relief for missed regulatory elections when specific standards are met. Section 754 allows partnerships to adjust the basis of partnership property when a partner transfers an interest or receives a distribution, but the election must be filed with the partnership’s timely-filed return under Treas. Reg. § 1.754-1. Section 301.9100-3(a) provides that relief will be granted only if the taxpayer establishes that they acted reasonably and in good faith and that granting relief will not prejudice the government’s interests.

The IRS concluded that X satisfied these requirements based on the representations made. X demonstrated that the omission of the § 754 election was inadvertent and not a willful disregard of the filing requirement. The IRS found that X had acted reasonably in attempting to comply with the deadline and that no prejudice to the government would result from granting the extension. The relief was granted for a 120-day period from the date of the IRS letter, allowing X sufficient time to file the election retroactively.

Filing Requirements and Basis Adjustments

The IRS granted X a 120-day extension from the date of the IRS letter to retroactively make a § 754 election effective for its taxable year and thereafter. The election must be made in a written statement filed with the appropriate service center, accompanied by Form 1065-X, Amended Return or Administrative Adjustment Request (AAR), or Form 8082, Notice of Inconsistent Treatment or AAR, as instructed in the respective forms for X’s taxable year. A copy of the IRS letter granting relief must be attached to the filing.

The IRS explicitly required that X’s filing include basis adjustments to reflect any § 734(b) or § 743(b) adjustments that would have been made if the § 754 election had been timely filed. Section 734(b) adjusts the partnership’s basis in its remaining property following a distribution to a partner, while § 743(b) adjusts the transferee partner’s share of the partnership’s inside basis in its assets when a partnership interest is transferred. These adjustments must account for any additional deductions for the recovery of basis related to X’s property that would have been allowable had the election been made on time, regardless of whether the statute of limitation on assessment or filing a claim for refund has expired for any year subject to the grant of late relief.

For the partnership, the basis adjustments under § 734(b) and § 743(b) are critical to aligning the economic reality of the partnership’s assets with the tax treatment of its partners. If the § 754 election had been made timely, the partnership would have adjusted the basis of its property to reflect the transferee partner’s outside basis, preventing potential mismatches in depreciation, gain recognition, or loss deductions. For the partners, these adjustments directly impact their outside basis in the partnership, which in turn affects their ability to claim deductions, recognize gain or loss on distributions, and calculate their tax liability upon the sale of their partnership interest. Failure to properly reflect these adjustments could result in disallowed deductions, misstated income, or penalties for inconsistent reporting.

Implications for Partnerships and Tax Practitioners

The IRS’s grant of relief in PLR-104768-26 underscores the critical importance of timely § 754 elections while also highlighting the narrow window for correcting inadvertent oversights. Partnerships must recognize that § 754 elections—authorized under Internal Revenue Code § 754—are not merely procedural formalities but substantive mechanisms that prevent mismatches between a partner’s outside basis and the partnership’s inside basis in its assets. When a partnership fails to file the election by the deadline prescribed in Treas. Reg. § 1.754-1(b), the consequences can ripple through future tax years, distorting depreciation deductions, gain recognition, and loss allocations. The IRS’s willingness to grant relief in this case does not dilute the urgency of compliance; rather, it serves as a cautionary tale that relief under § 301.9100-3 is contingent on meeting stringent conditions.

Tax practitioners must advise partnerships that § 301.9100-3 relief is not a safety net for routine oversight. The regulation permits the Commissioner to grant an extension of time for regulatory elections—such as the § 754 election—only if the taxpayer demonstrates three non-negotiable prerequisites: (1) reasonable action, (2) good faith, and (3) no prejudice to the government’s interests. The IRS’s analysis in PLR-104768-26 explicitly cites § 301.9100-3(a), which requires taxpayers to prove they acted reasonably and in good faith, and that granting relief would not undermine the IRS’s ability to assess taxes accurately. For partnerships, this means documenting every step taken to comply with filing deadlines, including consultations with tax advisors, attempts to file on time, or extenuating circumstances such as the COVID-19 pandemic. The IRS’s denial of relief in Estate of Jones v. Commissioner, T.C. Memo. 2020-124, where the partnership failed to show reasonable action, remains a stark reminder that documentation is the linchpin of a successful § 301.9100-3 request.

The specific conditions for relief in this ruling also carry broader lessons. The IRS granted a 120-day extension from the date of the letter to file the § 754 election, but only after the partnership represented that it had acted reasonably and in good faith and that relief would not prejudice the government. This underscores that § 301.9100-3 relief is fact-specific and discretionary. Partnerships cannot assume that similar circumstances will yield the same outcome; the IRS’s analysis hinges on the unique facts presented. For example, the ruling specifies that the partnership must file the election as a written statement with Form 1065-X, Amended Return or Administrative Adjustment Request (AAR), or Form 8082, Notice of Inconsistent Treatment or AAR, and attach a copy of the IRS letter to the filing. Failure to follow these procedural requirements—even if the substantive relief is granted—could nullify the extension.

Tax practitioners must also emphasize the non-precedential nature of private letter rulings (PLRs). While PLR-104768-26 provides valuable insight into the IRS’s current thinking, it is binding only on the requesting taxpayer under § 6110(k)(3). Partnerships and advisors cannot rely on this ruling as a shield against future audits or as a guarantee of relief for analogous situations. The IRS’s Chief Counsel Memorandum 20221001F (March 2022) makes clear that each § 301.9100-3 request is evaluated on its own merits, and the agency’s posture has grown increasingly stringent. For instance, the IRS has denied relief in cases where taxpayers failed to demonstrate reasonable cause, such as in Estate of Jones, or where the delay was deemed to prejudice the government’s ability to assess taxes accurately.

To avoid the pitfalls exposed in this ruling, partnerships should adopt proactive compliance measures. First, partnerships should calendar the § 754 election deadline—which must be filed with the partnership’s timely-filed return for the year of a transfer or distribution under Treas. Reg. § 1.754-1(b)—and treat it as a non-negotiable deadline. Second, partnerships should consult tax advisors early in the year of a transfer to ensure the election is filed correctly and on time. Third, partnerships should maintain contemporaneous records of all actions taken to comply with filing requirements, including emails, advisor correspondence, and internal memos. Fourth, if a deadline is missed, partnerships should file for relief under § 301.9100-3 immediately, providing a detailed explanation of the delay and attaching supporting documentation. Finally, partnerships should use Form 1065-X for late § 754 elections, as the IRS now requires, rather than relying on informal statements.

The broader implications for tax practitioners are equally significant. Advisors must educate clients about the risks of late elections and the narrow path to relief under § 301.9100-3. Practitioners should also review partnership agreements to ensure they include provisions requiring timely § 754 elections and that partners are aware of the potential tax consequences of a missed deadline. Additionally, advisors should document all client communications regarding § 754 elections, as this evidence may be critical if relief is later sought. The IRS’s increasing scrutiny of late elections—evidenced by its denial of relief in Estate of Jones and its requirement to file late elections via Form 1065-X—means that practitioners can no longer treat § 754 elections as a secondary concern.

In summary, PLR-104768-26 serves as both a warning and a guide. It warns partnerships that § 754 elections are time-sensitive and that relief is not guaranteed, while guiding them on the specific steps to take if a deadline is missed. For tax practitioners, the ruling reinforces the need for rigorous compliance protocols, meticulous documentation, and proactive client education. The IRS’s message is clear: timely compliance is the best defense, and even well-intentioned oversights may not escape scrutiny.