Late elections available under Section 754 for tiered partnerships

Tax Hot Topics newsletterThe IRS has released private letter rulings (PLR 2018-51-006 and PLR 2018-51-007) granting both upper-tier partnership and lower-tier partnerships an extension of time to make a Section 754 election in connection with the death of a partner in an upper-tier partnership.

The private letter rulings contain only limited facts, indicating in each case that an upper-tier partnership held an interest in a lower-tier partnership. An individual partner in the upper-tier partnership died, and both the upper-tier partnership and the lower-tier partnership inadvertently failed to make timely elections under Section 754 in connection with the partner’s death.

If a partnership makes an election under Section 754, then the basis of partnership property is adjusted distribution of property by the partnership under Section 734 and for a transfer of an interest in the partnership or upon the death of partner under Section 743. In order to be valid, a Section 754 election generally must be filed within the time for filing the partnership’s return (including extensions) for the year in which the transfer of a partnership interest or partnership distribution occurs. A partnership that fails to make a timely Section 754 election may seek a private letter ruling granting an extension of time to make the election.

In the private letter rulings, the IRS granted both the upper-tier and lower-tier partnerships an extension of time to make a Section 754 election in connection with the death of a partner in the upper-tier partnership. The rulings were contingent on the partnerships making all Section 734 and 743 adjustments that would have been made if the Section 754 election had been filed in a timely manner. Further, those basis adjustments must reflect any depreciation that would have been allowable, even if such depreciation would have been taken in a taxable year that was now closed. The rulings also state that the partners of the upper-tier partnership must reduce the outside basis of their partnership interest by any depreciation that would be been allowable had the Section 754 election been timely made.

The PLRs also confirm that the death of a partner may constitute a transfer of an interest in an upper-tier partnership within the scope of Revenue Ruling 87-115. The IRS ruled in Rev. Rul. 87-115 that the optional basis adjustment to partnership property under Section 743 is available to both an upper-tier partnership and a lower-tier partnership where there is a transfer of an interest in the upper-tier partnership and both partnerships have a Section 754 election in place. Proposed regulations under Section 743 would codify this result.

Grant Thornton Insight: Private letter rulings 201851006 and 201851007 serve as a reminder of the ability to obtain an adjustment to the bases of partnership assets through tiered partnership structures on the death of an upper-tier partner. Partnerships and practitioners should be diligent in ensuring that any desired Section 754 election is made in a timely fashion; even if administrative relief is later available, missed elections could potentially lead to forgone deductions where tax years have subsequently closed.
Grace Kim
Principal, Washington National Tax Office
T +1 202 521 1590

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