Under proposed regulations on which taxpayers may rely upon immediately, elections made by partnerships under IRC §754 will no longer have to be signed by a partnership representative (REG-116256-17; 82 F.R. 47408-47409, October 12, 2017). The current regulations require that the election be signed, which has created issues with electronically filed partnership income tax returns.
In certain situations, a partnership may elect to adjust the basis of partnership property upon the occurrence of certain actions, such as a transfer of a partnership interest (as provided for in IRC §743) or upon distributions of property (as provided for in IRC §734).
The IRS describes the current regulation, which this proposed regulation would change, as follows:
The current regulation requires that the section 754 election statement (i) set forth the name and address of the partnership making the election, (ii) be signed by any one of the partners, and (iii) contain a declaration that the partnership elects under section 754 to apply the provisions of section 734(b) and section 743(b). Accordingly, under the current regulation, a partnership that files an unsigned section 754 election statement with its partnership return (whether filed electronically or in paper) has not made a valid section 754 election.
A partnership that failed to attach a signed election to the partnership tax return had to resort to one of the relief provisions under the regulations for IRC §9100. That relief consisted of:
- Automatic relief if the error were discovered and corrected within 12 months under Reg. §301.9100-2 or
- Filing and paying for a private letter ruling request asking for relief under the provisions of Reg. §301.9100-3.
The result has been a rather significant number of private letter rulings granting late §754 election relief over the past few years. As often happens when the IRS begins to see many virtually identical rulings being issued, the IRS has decided to take steps to eliminate the need for having to deal with all the ruling requests.
In this case the IRS determined that removing the signature requirement would serve to eliminate a lot of these requests. The IRS explains the proposed change as follows:
To ease the burden on partnerships seeking to make a valid section 754 election and to eliminate the need to seek 9100 relief, the Treasury Department and the IRS are proposing to amend the current regulation to remove the signature requirement in § 1.754-1(b)(1). The amended regulation will provide that a taxpayer making a section 754 election must file a statement with its return that: (i) sets forth the name and address of the partnership making the section 754 election, and (ii) contains a declaration that the partnership elects under section 754 to apply the provisions of section 734(b) and section 743(b).
Note that the language will now become standard for every partnership, with only the partnership identifying information changing for each taxpayer.
While the guidance was issued as a proposed regulation, the IRS has provided that taxpayers “may rely on this proposed regulation for periods preceding the proposed applicability date.”
While this doesn’t solve all the manners in which a taxpayer may fail to properly make an election under §754, it does make it a lot simpler to file such elections electronically.