Late 754 Election Relief: Automatic Fix, PLR, and AARs

If your partnership missed the Section 754 election deadline, late 754 election relief comes through one of two paths. Within 12 months of the return’s due date (including extensions), you can fix it yourself by filing an amended return with the election attached — no fee, no ruling request. Once that window closes, your only option is a private letter ruling under Treasury Regulation 301.9100-3, which carries an IRS user fee between $3,450 and $14,500 and can take months or longer to resolve.¹²

Both routes get you to the same place: the partnership is treated as if the election had been in effect from the original due date, and the basis of partnership assets can be adjusted to reflect what the buying partner actually paid.

Why the Missed Election Matters

A Section 754 election activates the basis adjustments under Section 743(b) when a partnership interest is transferred and Section 734(b) when property is distributed to a partner.³ Without it, a partner who bought in at fair market value stays saddled with the partnership’s older, lower internal basis in its assets, which typically means paying tax on gains that were already priced into the purchase and losing depreciation deductions that should have followed the purchase price.

One consequence to weigh before pursuing relief: once made, a Section 754 election applies to every future transfer and every future distribution, and it cannot be revoked without IRS permission.⁴ Fixing one missed year commits the partnership to basis adjustments on every qualifying event going forward, including downward ones. Confirm the long-run math works before spending time and money on either path below.

The Automatic 12-Month Fix

Treasury Regulation 301.9100-2 gives partnerships an automatic 12-month extension to make a Section 754 election.¹ No user fee. No ruling request. If you’re inside the window, this is the route.

The 12 months run from the due date of the return for the year the election should have been made. If the partnership got a filing extension, the clock starts from the extended due date, not the original one.¹ A calendar-year partnership that extended its 2025 return to September 15, 2026 has until September 15, 2027 to use automatic relief.

To take corrective action within the window, the partnership must:

File an amended Form 1065 (or, for partnerships under the centralized audit regime, an administrative adjustment request) for the tax year the election was due.
Attach the same election statement that should have appeared on the original return: the partnership’s name and address, and a declaration that it is electing under Section 754 to apply Sections 734(b) and 743(b).
Attach a separate statement noting that the partnership qualifies for automatic relief under Treasury Regulation 301.9100-2 and that the partnership and all affected partners have reported their tax items consistently with the election being in effect.
Incorporate the Section 743(b) or 734(b) basis adjustments into the amended return and issue corrected Schedules K-1 to affected partners.

Send the amended package to the IRS Service Center where the original return was filed.

The Private Letter Ruling Route

Once the 12-month window has closed, the partnership must request a private letter ruling under Treasury Regulation 301.9100-3.⁵ The IRS will grant relief only if the partnership shows three things: it acted reasonably, it acted in good faith, and granting relief will not prejudice the government’s interests.

Reasonable Action and Good Faith

The regulation lists safe harbors. A partnership is generally treated as having acted reasonably and in good faith if any of the following apply:⁵

The partnership asks for relief before the IRS discovers the missed election on its own. This is the strongest posture, because it shows proactive compliance rather than reaction to enforcement.
Events beyond the partnership’s control caused the failure, such as a natural disaster or the death of a key individual.
The partnership exercised reasonable diligence given the complexity of the return and still didn’t know the election was necessary.
The partnership reasonably relied on written advice from the IRS.
The partnership reasonably relied on a qualified tax professional who either failed to make the election or failed to advise that it be made. This is the most frequently invoked safe harbor, but it works only if the professional was competent to advise on the issue and knew the relevant facts.

The regulation also identifies situations where the IRS will not treat the partnership as having acted reasonably or in good faith:

The partners were fully informed about the election and its consequences and chose not to elect. Deliberate passes cannot be reversed later.
Hindsight is driving the request. If facts changed after the deadline in a way that made the election newly attractive, the IRS presumes the request is opportunistic and requires strong proof otherwise.
The partnership is trying to change a return position that could trigger an accuracy-related penalty under Section 6662, and the new position requires the election. Relief is presumptively denied.

No Prejudice to the Government

Even a partnership that acted reasonably will be denied relief if granting it would produce lower total tax across all affected taxpayers than a timely election would have. The IRS looks at this in the aggregate and factors in the time value of money.⁵

Closed years are the single biggest threat. If the statute of limitations has expired on any affected year before the ruling issues, the IRS ordinarily views its interests as prejudiced. The IRS may ask for a certification from an independent auditor that no prejudice exists, and the partnership may offer to extend the statute of limitations on affected years to keep the request alive.⁵ The longer you wait to file, the more likely a closed year will sink the request entirely.

User Fees

For 2026, the IRS user fees for a Section 301.9100-3 ruling request are:²

Standard fee: $14,500
Reduced fee if gross income is under $10 million but at least $400,000: $9,775
Reduced fee if gross income is under $400,000: $3,450

What Goes in the Request

The ruling request needs a detailed statement of facts, presented as a chronology, explaining how the election was missed and when the error surfaced. It needs a legal analysis tying those facts to the reasonable-action, good-faith, and no-prejudice standards. The partnership representative (or, for tax years under the pre-BBA rules, the tax matters partner) signs a declaration under penalties of perjury that the facts are true, correct, and complete.⁶ Affidavits from the people involved in the failure, such as the tax professional who missed the election, meaningfully strengthen the submission.

Fees are paid through pay.gov, and the request itself is mailed to the IRS Office of Chief Counsel. Once assigned to an attorney-advisor, expect several months to more than a year for a decision, and expect to answer follow-up requests along the way. If the ruling is granted, it specifies the conditions under which the partnership may file the election retroactively. The ruling is permission to make the election, not the election itself.

Cleaning Up Prior Returns

Whether relief comes automatically or by ruling, the partnership is treated as if the election had been in place from the original due date of the return for the triggering year. Every affected year since needs recalculating.

For a transfer, the Section 743(b) adjustment is the difference between what the buying partner paid for the interest and their proportionate share of the partnership’s existing asset basis.⁷ If that adjustment increases the basis of depreciable assets, the partnership recalculates the additional depreciation that should have flowed to the buying partner in each affected year.

The partnership then files corrected returns for every affected year and issues revised Schedules K-1. Each partner files their own amended individual or entity returns to pick up the corrected K-1 figures. A single missed election spanning multiple years can generate a cascade of amended filings across many partners; that downstream work is where most of the real cost lives.

BBA Partnerships Use an AAR, Not an Amended Return

Partnerships subject to the centralized audit regime under the Bipartisan Budget Act, which generally covers tax years beginning in 2018 and later, cannot file traditional amended returns to correct partnership-level items like basis adjustments. They file an administrative adjustment request instead.⁸ Electronic filers submit Form 8082 with a Form 1065 marked as an amended return. Paper filers use Form 1065-X. The partnership representative, not the older “tax matters partner,” is the point of contact.⁶

The AAR process changes how corrected amounts flow to partners and interacts with the BBA’s imputed underpayment rules. If your partnership is under BBA, get a tax advisor who works with both the 754 mechanics and the AAR process before filing anything.

When Relief Isn’t the Right Question

Not every basis adjustment depends on a Section 754 election. For transfers after October 22, 2004, if the partnership has a “substantial built-in loss” right after the transfer — meaning total asset basis exceeds total fair market value by more than $250,000 — the Section 743(b) adjustment is mandatory whether or not an election was ever made.⁷ A parallel rule applies to distributions: if a distribution would create a “substantial basis reduction” over $250,000, the Section 734(b) adjustment kicks in automatically.⁹

If your situation involves a substantial built-in loss or substantial basis reduction, the adjustment was required from the start. That’s a different compliance problem than a missed election, and relief under 301.9100-2 or 301.9100-3 is not the fix.

1
eCFR. 26 CFR 301.9100-2 – Automatic Extensions
2
Internal Revenue Service. 2026-1 Internal Revenue Bulletin
3
Office of the Law Revision Counsel. 26 USC 754 – Manner of Electing Optional Adjustment to Basis of Partnership Property
4
Internal Revenue Service. FAQs for Internal Revenue Code (IRC) Sec. 754 Election and Revocation
5
eCFR. 26 CFR 301.9100-3 – Extensions of Time for Making Regulatory Elections
6
Internal Revenue Service. BBA Centralized Partnership Audit Regime
7
Office of the Law Revision Counsel. 26 U.S. Code 743 – Special Rules Where Section 754 Election or Substantial Built-In Loss
8
Internal Revenue Service. File an Administrative Adjustment Request for a BBA Partnership
9
Office of the Law Revision Counsel. 26 U.S. Code 734 – Adjustment to Basis of Undistributed Partnership Property