FAQs for Internal Revenue Code (IRC) Sec. 754 Election and Revocation

 

Benefit of the Election

Q1. What’s the purpose of an IRC Section 754 election?

A1. An IRC Section 754 election allows a partnership to adjust the basis of the property within a partnership under IRC Sections 734(b) and 743(b) when one of two triggering events occur: 1) a distribution of partnership property or 2) certain transfers of a partnership interest. These adjustments can only be made if the partnership has made an election under IRC Section 754.

Making the Election

Q2. How is the IRC Section 754 election made?

A2. To make the election, a partnership must attach a statement to the partnership’s timely filed return (including any extensions) for the tax year during which a distribution or transfer occurs.  The statement must include (1) the name and address of the partnership, and (2) a declaration that the partnership elects under IRC Section 754 to apply the provisions of IRC Sections 734(b) and 743(b). See Proposed Treasury Regulation Section 1.754-1(b)(1).
 
The election applies to all distributions and transfers during the tax year with respect to which the election is initially filed, and to all such transactions in any subsequent years. It cannot be revoked without permission from the Commissioner.  See “Revocation of Election” below.

Late Election

Q3. Is there relief for filing the election late?

A3. Yes. If the partnership fails to make the election, it can file for late relief under Treasury Regulation Section 301.9100-2, which is an automatic 12-month extension for IRC Section 754 elections. If more than 12 months have passed, late relief can still be requested but must be approved by the Commissioner. See Treasury Regulation Section 301.9100-3.

Revocation of Election

Q4. How can the IRC Section 754 election be revoked?

A4. Once the election is made, it can only be revoked with permission of the Commissioner. A partnership wishing to revoke the election must file a request on Form 15254, Request for Section 754 Revocation, no later than 30 days after the close of the partnership year for which the revocation is intended to take effect. The request must be signed by one of the partners. Form 15254 must state the reason(s) for requesting the revocation. Treasury Regulation Section 1.754-1(c) provides examples of situations which may warrant approving an application for revocation. These examples include situations where the IRC Section 754 election results in an administrative burden, such as:

  1. a change in the nature of the partnership’s business,
  2. a substantial increase in the partnership’s assets,
  3. a change in the character of the partnership’s assets, or
  4. an increased frequency of retirements or shifts of partnership interests.

 No application for revocation of an election shall be approved when the purpose of the revocation is primarily to avoid a reduction in the basis of partnership assets upon a transfer or distribution.

Q5. What documentation must the partnership submit with the revocation request?

A5. The partnership must provide all information relating to the reasons for the revocation request and a statement of whether the election, if not revoked, would result in a reduction in the basis of the partnership’s property under IRC Section 734(b) or 743(b). See the Form 15254 instructions for additional information.

Q6. Where is the request for permission to revoke the IRC Section 754 election filed?

A6. The revocation request must be filed at the Ogden, UT IRS submission processing center identified in the Instructions for Form 1065 U.S. Return of Partnership Income. The request must be mailed to:

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0011