Requesting a revocation of a partnership election under sec. 754 when it becomes disadvantageous to the partners and the partnership.

• Author: Ellentuck, Albert B.

Facts: In early 1998, Harry Edsel and Kenny Corvair formed a calendar-year general partnership to acquire a 50-acre tract of land on the outskirts of Houston, Texas. Harry, a brilliant architect (with a poorly developed business sense), had drawn plans for Space City Park, a state-of-the-art office, retail and residential development. Kenny, a heart surgeon with more money and surgical technique than financial acumen, agreed to invest $1 million in the project. * In May 1998, Space City Partners started construction of the Space City Inn, a futuristic hotel they hoped would be the drawing card to make Space City Park a reality. During construction, Harry fell from the 15th floor and was killed. The partnership made an election under Sec. 754 to step up the basis of the partnership assets on behalf of his widow, Annie Edsel. In 1999, the hotel was completed at a cost of $40 million. The additional $39 million needed to complete the hotel was loaned to the partnership by a savings and loan owned by Kenny's brother-in-law. * After occupancy of the hotel had averaged 12% for the first 18 months of operations, Kenny and Annie agreed the timing had not been right for Space City. After consulting with their financial advisers, they decide to retain a joint 67% interest in the partnership and try to sell 33% to outside investors (to provide additional funding). The new partnership plans to abandon the idea of developing Space City Park. Instead, they will operate the hotel and hold the additional land for eventual sale to other developers. * The tax adviser for the potential investors has indicated that, because the value of the partnership assets is only 50% of its basis, the basis of the partnership assets attributable to their partnership interest will be stepped down, and thus his clients will not become partners unless Space City Partners revokes its Sec. 754 election. The partnership's tax adviser warns Kenny and Annie that the sale of the building would be financially disastrous, and a partnership termination would result in extending the hotel's depreciable life. Issue: Can Space City Partners revoke its previous election under Sec. 754?

Analysis

Regs. Sec. 1.754-1(c) provides for the revocation of a Sec. 754 election under certain circumstances. A request for revoking the election must be filed with the District Director for the district in which the partnership files its return. The request must be filed no later than 30 days after the...