Rev. Proc. 99-32: Automatic Relief for a Late 754 Election
Understand the IRS guidance providing a simplified path for partnerships to correct a missed Section 754 election and secure a retroactive basis adjustment.
Failing to make a timely Section 754 election can lead to unfavorable tax consequences, such as a partner paying tax on gains that accrued before they joined the partnership. Treasury Regulations offer a way to correct this oversight if the error is caught within 12 months. This process avoids the need for a complex and costly private letter ruling from the IRS, allowing a partnership to retroactively gain the benefits of the election for unintentional mistakes.
Eligibility for Automatic Relief
To qualify for an automatic 12-month extension for a late Section 754 election, a partnership must meet the requirements in Treasury Regulation § 301.9100-2. A primary requirement is that the partnership must demonstrate it acted reasonably and in good faith when it failed to make the election. This relief is for genuine oversights, not for partnerships that intentionally bypassed the election and later changed their minds.
Additionally, granting the relief must not prejudice the interests of the government, meaning the partnership cannot use the late election to achieve a lower tax liability than if the election were made on time. The request for this automatic relief must be made within 12 months of the original due date of the partnership’s return for the election year. If more than 12 months have passed, the partnership must request a private letter ruling under Treasury Regulation § 301.9100-3, which is not guaranteed.
Required Statements and Information
To use the automatic 12-month extension, a partnership must prepare a statement to file with its tax return. At the top of this document, it must clearly state “FILED PURSUANT TO § 301.9100-2.”
The submission must include the original Section 754 election statement that should have been filed. This statement requires the partnership’s name, address, and a declaration that the partnership elects under Section 754.
A separate statement must also be attached that explains the reason for the failure to file the election on time. The explanation must be sufficient to establish that the partnership acted reasonably and in good faith, though it does not require the extensive, sworn affidavits needed for a private letter ruling.
The Filing Procedure
The required statements must be attached to an amended partnership tax return, Form 1065-X, for the year the election should have been made. This amended return is filed with the IRS service center where the partnership normally files its returns.
Relief is granted automatically if the submission is complete. The partnership will not receive a formal notification of approval from the IRS, and the election is considered effective for the year of the triggering event and all subsequent years.
After filing, the partnership must implement the effects of the Section 754 election by adjusting the basis of its assets. These adjustments will carry forward and affect calculations for depreciation, amortization, and gain or loss on future asset sales, impacting the tax liabilities of partners in subsequent years. The partnership must also provide adjusted K-1s to the affected partners.