The 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.
Principal, Washington National Tax Office
+1 202 521 1590
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.