Making a valid sec. 754 election following a transfer of a partnership interest.

• Author: Bilsky, Jeffrey N.

To adjust the basis of partnership property upon the transfer of an interest under Sec. 743(b) or to adjust the basis of partnership property following a distribution under Sec. 734(b), a taxpayer must generally make a Sec. 754 election. Although making the election seems simple, it is not uncommon for a partnership to attempt to make a valid Sec. 754 election, only to find that it inadvertently failed to satisfy all of the regulatory requirements. Where a partnership failed to properly make the Sec. 754 election, limited recourse may be available to pursue corrective action.

Regs. Sec. 1.754-1(b)(1) provides that an election under Sec. 754 to adjust the basis of partnership property under Secs. 734(b) and 743(b) shall be made in a written statement filed with the partnership return for the tax year during which the distribution or transfer occurs. For the election to be valid, the return must be filed no later than the time prescribed for filing the return (including extensions) for the tax year. Further, a valid Sec. 754 election must (1) set forth the name and address of the partnership making the election, (2) be signed by any one of the partners, and (3) contain a declaration that the partnership elects under Sec. 754 to apply the provisions of Secs. 734(b) and 743(b).

IRS Publication 4163, Modernized e-File (MeF) Information for Authorized IRS e-file Providers for Business Returns (rev. December 2014), which provides guidance to taxpayers on including forms and elections that require signatures when e-filing a tax return, indicates that, where a taxpayer is making an election that requires a signature, a signed election may be attached to the e-filed return in a PDF. It is worth noting that IRS Counsel reviewed regulations to identify forms and elections that require a separate signature to determine whether the signature requirements could be changed. T.D. 9300 and T.D. 9329 contain amendments to the income tax regulations and the procedure and administration regulations. While these regulations eliminate certain third-party signature requirements considered to have been impediments to the electronic submission of tax returns and other forms, no changes appear to have been made to the Sec. 754 election requirements, including the requirement that the election contain a partner's signature.

Automatic Relief for Failure to Timely Elect Under Sec. 754

If the taxpayer fails to timely file a valid Sec. 754 election, automatic relief may be available under Regs. Sec. 301.9100-2. Under this regulation, a taxpayer is granted an automatic extension of 12 months from the due date for making certain regulatory elections. To obtain relief under these provisions, the regulation mandates that the taxpayer take the steps required to correctly file the election in accordance with the statute or the applicable regulation. Required steps include...