Category: Partnerships
Subject: Termination/754 Election
Title: Late 754 Elections
IRC Sections: 754, 708(b)(1)(B), 9100
Filename: 1002.html
Date Produced: 3/98

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Taxpayer is a limited liability company (LLC) properly treated as a partnership for tax purposes. At October 31, 1997, the taxpayer experienced a technical termination of the partnership under Section 708(b)(1)(B). Accordingly, the final partnership return for the terminated entity was due February 15, 1998. Neither the return nor an extension was filed by that deadline.

The taxpayer did not have a Section 754 election in effect at the time of the termination. An election under Section 754 must be filed with a timely return. Under the new technical termination regulationsReg. Section 1.708-1 effective for terminations after May 8, 1997the assets and liabilities of a terminated partnership are deemed contributed to a new partnership either for winding up or continuation. The new partnership is considered a brand-new tax entity. A new federal identification number is required, and the tax elections made by the old entity do not carry over to the new.

Since there is no longer a deemed distribution of partnership assets as under the old technical termination rules, the basis of partnership assets is not affected by a technical termination unless there is a Section 754 election in effect. Also, since there is no deemed asset distribution, it is no longer possible to use Section 732(d) at the partner level to cure a missed Section 754 election in the terminated partnership.

Absent a Section 754 election in the terminated partnership, the inside basis of partnership assets will simply carry over from the terminated partnership, although under the anit-churning rules the assets will be treated as newly acquire by the new partnership. This deprives the continuing partnership of the ability to take depreciation deductions on any step-up in basis. In addition, if partnership property is subsequently sold, the purchasing partners must recognize their share of gain from the property even though those partners have paid for some or all of that gain when they purchased their interests.

For example, suppose the ABC partnership has three equal partnersA, B, and C. The partnership owns land with a basis of $30,000 and a fair market value of $90,000. Partner C sells his interest to D for $30,000. No Section 754 election is made. Immediately after D is admitted, the partnership sells the land for $90,000. D must recognize $20,000, his one-third share of the gain. This increases the basis of his interest from $30,000 to $50,000. If the partnership is immediately liquidated, D would get one-third of the cash$30,000against $50,000 of basis thereby producing a $20,000 loss to offset his $20,000 gain pass-through. Absent a liquidation, however, D would be forced to pay tax on the $20,000 gain pass- through and defer the ability, possibly indefinitely, to enjoy the increase in basis related to that gain.

Fortunately, there is an easy, cost-free way around the missed Section 754 election problem. Regulation Section 301.9100-1 et. seq. provides a procedure to mitigate the effect of missing nonstatutory deadlines. There are two categories of 9100 relief, automatic and non-automatic. Automatic relief is cost-free and requires no additional paperwork. Non-automatic relief requires a letter ruling request and a user fee of up to $3,650.

Section 301.9100-2 provides an automatic extension for specified elections and deadlines for taxpayers who take corrective action within 12-months of the due date. Section 754 elections are eligible for this relief. Regulation Section 301.9100- 2(a)(2)(vi).

Corrective action means filing the return or election in accordance with the regulation or other pronouncement under which the election or return is required to be filed. The returns of all taxpayers affected by the regulation must be filed in manner consistent with the election having been made. Otherwise, the election may be invalidated. Regulation Section 301.9100-2(c).

In order to be obtain 9100 relief, qualifying taxpayers simply file the election or return including the election as required by the relevant regulation or other pronouncement. The words "FILED PURSUANT TO SECTION 301.9100-2" must appear and at the top of the document. Regulation Section 301.9100-2(d).