The IRS has released proposed regulations that would eliminate the signature requirement for making a Code Sec. 754 election (section 754 election). Taxpayers may rely on these proposed regulations.
Election Signature Requirement
A partnership can elect to adjust the basis of partnership property in the event the inside and outside bases are unequal. A partnership does this by making a section 754 election. If an election is filed, a property distribution or partnership interest transfer that disturbs the equality of inside and outside bases will trigger an adjustment to restore basis equality. After the election is filed, it applies to all partnership property distributions and to transfers of partnership interests.
Under the current regulations, a section 754 election must be made in a written statement filed with the partnership return for the year during which the distribution or transfer occurs. For the election to be valid, the return must be filed by the due date for the return, including extensions.
The current regulations require that the section 754 election statement:
(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 section 754 to apply the provisions of Code Sec. 734(b) and Code Sec. 743(b).
Accordingly, a partnership filing an unsigned section 754 election statement has not made a valid section 754 election.
Remedy for Improper Election
Currently, the remedy for failing to make a proper section 754 election is to request relief to make a late section 754 election. Partnerships case seek relief either: (1) through automatic relief pursuant to Reg. §301.9100-2, if the error is discovered within 12 months; or (2) through a private letter ruling request pursuant to Reg. §301.9100-3.
The IRS has received numerous requests for relief due to unsigned section 754 election statements. The Treasury Department and the IRS are proposing to amend the current regulations to remove the signature requirement to eliminate the need to seek relief. The amended regulations will provide that a taxpayer making a section 754 election must file a statement with its return that: (1) sets forth the name and address of the partnership making the section 754 election, and (2) contains a declaration that the partnership elects under section 754 to apply the provisions of Code Sec. 734(b) and Code Sec. 743(b).
The proposed regulations will apply to tax years ending on or after the date the final regulation is published in the Federal Register. However, taxpayers may rely on the proposed rules for periods before the proposed applicability date. Accordingly, partnerships filing a timely partnership return containing an otherwise valid unsigned section 754 election statement will not need to seek relief.
Proposed Regulations, NPRM REG-116256-17