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operated as a partnership. The partner- in their respective assets allocable to the had inadvertently omitted the elec-
ship generated losses that were allocated transferred interests under Sec. 743(b). tion when filing its return. The IRS
to the S corporation and then to the tax- The adjustments allowed the taxpayer reasoned that the partnership in each
payer. The taxpayers deducted the losses group to claim increased depreciation case acted reasonably and in good faith,
on their personal tax return. The IRS and amortization deductions, which sig- and it granted an extension to file the
disallowed the loss deduction because nificantly reduced its taxable income. In election under Regs. Secs. 301.9100-1
the taxpayers could not document that the CCA, the IRS focused on how the and 301.9100-3. In these rulings, each
either the S corporation or the husband, Regs. Sec. 1.1502-13 rules applied to the partnership had 120 days after the rul-
who owned the other 1% of the partner- increased deductions the group took on ing to file the election. In some cases,
ship individually, had sufficient basis in its consolidated tax return. the IRS granted the partnerships the
their partnership interest to deduct their In this situation, the IRS concluded extension even though they had relied
pro rata share of the partnership’s loss. that Regs. Sec. 1.1502-13 redetermines on a professional tax adviser or preparer
The Tax Court agreed with the IRS. the taxpayer’s increased deductions to when they failed to timely make the
It found that while the S corporation be noncapital, nondeductible amounts. election.58 In most cases, the missed
had made contributions to the partner- This redetermination is required by election occurred when a new partner
ship, based on the record, they were the fundamental purpose of Regs. Sec. purchases a partnership interest. How-
less than the amount claimed by the 1.1502-13: “to clearly reflect the income ever, in one situation, the partnership
taxpayers and less than the distribu- (and tax liability) of the group as a whole failed to make the election after it had
tions the partnership made to the S by preventing intercompany transactions made a liquidating distribution to a
corporation. In addition, no credible from creating, accelerating, avoiding, or partner.59
evidence in the record showed that the deferring consolidated taxable income In two situations during 2022, a
husband had made any contributions to (or consolidated tax liability).”56 Thus, partnership failed to make the proper
the partnership. the partnerships could not claim in- election. In the first situation,60 one of
creased deductions for depreciation and the owners of an upper-tier partnership
Sec. 754 elections amortization attributable to the Sec. (UTP) died. The UTP made the proper
There have been some recent IRS rul- 743(b) adjustments. Sec. 754 election; however, the lower-
ings on elections under Sec. 754 to tier partnership (LTP) did not. The
adjust the basis of partnership property. Extensions of time to make Service granted the LTP an extension
When a partnership distributes property the election to file the election.
or a partner transfers his or her interest, A partnership must file the Sec. 754 The second situation61 dealt with a
the partnership can make a Sec. 754 election by the due date of the return multistep transaction. In this instance,
election. The election allows a step-up for the year the election is effective, the taxpayer formed an LLC that was
or step-down in basis under either Sec. normally with the return. Currently, if classified for federal income tax pur-
734(b) or Sec. 743(b) to reflect the FMV a partnership inadvertently fails to file poses as a partnership. Afterward, other
at the time of the exchange. This elec- the election, the only way to remedy the entities contributed assets to one of the
tion has the advantage of not taxing the failure is to ask for relief under Regs. owners of the LLC, which caused the
new partner on gains or losses already Secs. 301.9100-1 and 301.9100-3, owner to become a partnership for
reflected in the purchase price of his or either through automatic relief if the federal income tax purposes. Later,
her partnership interest. error is discovered within 12 months the new members of the partnership
In Chief Counsel Advice (CCA) or through a private letter ruling. To sold part of their partnership interests
202240017, the taxpayer made inter- be valid, the election must be signed by to the other owner of the LLC and
company transfers of interests in tiered a partner. had the rest of their interest in the
partnerships among members of the In several letter rulings during partnership redeemed. The purchase
taxpayer’s consolidated group and did this period,57 the IRS granted an agreement required the partnership to
not report any gain on the transactions. extension of time to make a Sec. 754 make a Sec. 754 election; however, the
As a result of these intercompany trans- election. In each case, the partnership partnership failed to make the election.
fers, the partnerships adjusted the basis was eligible to make the election but As with the other situations during

56. Regs. Sec. 1.1502-13(a)(1). 59. IRS Letter Ruling 202201004.
57. IRS Letter Rulings 202215008, 202216007, and 202219010. 60. IRS Letter Ruling 202219004.
58. E.g., IRS Letter Rulings 202150011 and 202222002. 61. IRS Letter Ruling 202144016.

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