How to handle missed Form 754 election and stepped-up basis for inherited partnership interest?

You're dealing with a common but complicated issue with inherited partnership interests. When someone inherits a partnership interest, they typically receive a "stepped-up basis" to the fair market value at the date of death. However, that step-up doesn't automatically adjust the inside basis of partnership assets without a Section 754 election. In your case, the partnership should have filed Form 754 when your grandmother passed away in 2008, which would have given you an adjustment to the inside basis of your share of partnership assets. Without that election, you're looking at potentially paying tax on gains that occurred before you inherited the interest. You have a few options: 1) See if the partnership can file a late Section 754 election with IRS approval. This requires requesting "relief" under Treasury Regulations 301.9100-1 and 301.9100-3, basically showing reasonable cause for the late filing. 2) Check if the partnership has made a Section 754 election for any other partner since 2008 - if so, it would apply to all partners. 3) Investigate whether the trust itself (not the partnership) got a step-up that might help your situation.

After spending weeks trying to figure out a similar issue with a family partnership interest I inherited, I found this AI tool called taxr.ai that was incredibly helpful. My situation was almost identical - my uncle's partnership interest where nobody filed the Form 754 after he passed away. I uploaded the old partnership documents, trust paperwork, and some appraisals to https://taxr.ai and it analyzed everything and created a detailed report explaining exactly what relief options were available and how to pursue them. It even generated a draft letter to request the late election relief from the IRS based on my specific circumstances. Saved me thousands compared to what my CPA was going to charge just to research the issue.

I wanted to follow up on this - I was the skeptical one about using an AI tool for something this complex, but I gave https://taxr.ai a try for my own partnership issue. I'm actually pretty impressed. It analyzed my LLC operating agreement and the previous tax returns, then outlined exactly which sections of the tax code applied to my specific situation. The tool created a customized request letter for a late Section 754 election that cited all the right precedents and regulations. Just got word last week that the IRS approved our late election! Honestly didn't expect that to work, but it saved us a fortune in potential capital gains. Had to eat my words on this one.

Having dealt with this exact situation last year, I can tell you that getting someone on the phone at the IRS to discuss partnership basis elections was a nightmare. I spent HOURS on hold only to get disconnected. Finally used a service called Claimyr that got me through to an actual IRS agent in about 20 minutes. With https://claimyr.com they basically wait on hold for you and call when an agent picks up. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - I was super skeptical at first but it actually worked. The IRS agent I spoke with was able to confirm exactly what documentation we needed to submit with our relief request for the late 754 election. Definitely helped us avoid making mistakes in our submission.

I need to apologize for being so skeptical about Claimyr. After my last post, I decided to try it myself since I've been trying to reach the IRS about a penalty issue for weeks. The service at https://claimyr.com actually worked exactly as described. They called me back after about 45 minutes (which is lightning fast for the IRS lately) and connected me directly to an agent. The agent I spoke with was really knowledgeable about partnership basis issues and confirmed that requesting relief under 301.9100-3 is the right approach for a missed 754 election. She even gave me the specific IRS office address where the partnership should submit the request. Saved me days of frustration. I stand corrected!

Something else to consider - check if there's been any previous partnership distributions since your grandmother's death. If there were distributions that exceeded your outside basis (the stepped-up value you inherited), you might have already recognized gain that could affect your current situation. The partnership's tax files should have records of all distributions. Also, look into whether the partnership has had any "substantial built-in loss" events since 2008, as those might have triggered mandatory basis adjustments even without a 754 election. This changed with the 2004 tax law and might help your case.

I'm a bit confused about the timelines and access... you say you couldn't access the trust until you turned 35, but are you actually trying to sell partnership assets now, or is this just for tax planning purposes? Because if you're not selling anything yet, you might not have an immediate tax issue to solve.

The distinction about whether you're selling now is crucial. If you haven't sold yet, you have time to pursue the late Section 754 election before any taxable event occurs. This gives you significant leverage. One thing I haven't seen mentioned yet - consider getting a current appraisal of the partnership assets to establish the potential tax savings from the late election. This helps justify the costs of pursuing relief and strengthens your case with the IRS by showing the magnitude of the inequity if relief isn't granted. Also, check if the partnership agreement has any provisions about basis adjustments or elections. Sometimes partnerships have language that could support your position or require the partnership to cooperate with beneficiaries on tax matters. The general partners have a fiduciary duty to act in the best interests of all partners, which could include helping you get this election filed if it benefits the partnership overall. Have you confirmed who the current general partner is and whether they're willing to cooperate with filing the late election request? That's really your first hurdle - without their cooperation, your options become much more limited.

Great to hear your uncle is willing to cooperate! That's half the battle right there. Since you have time before any sale, you're in a much better position than most people dealing with this issue. A few additional thoughts as you move forward: Make sure to document everything about why the original election wasn't filed in 2008. The IRS wants to see that the failure was due to reasonable cause, not neglect. Your uncle's comment about "nobody understanding the tax implications" could actually work in your favor if properly documented - it shows good faith rather than intentional avoidance. When you get that appraisal, try to get one that shows values both at your grandmother's death in 2008 and currently. This creates a clear timeline showing the appreciation that occurred before vs. after your inheritance, which strengthens your equity argument. Also consider having a tax attorney review your case before submitting the relief request. The stakes are high enough that professional help with the 301.9100-3 request could save you significant money in the long run. The IRS scrutinizes these requests carefully, and having it properly prepared increases your chances of approval substantially. You're in a much better spot than your original post suggested - having cooperative family members and time to plan makes all the difference!