In a taxpayer-friendly development, the IRS on Wednesday issued proposed regulations that would eliminate the regulations’ requirement that a partnership’s Sec. 754 election must be signed by a partner to be valid (REG-116256-17).
Sec. 754 provides that if a partnership files a Sec. 754 election in accordance with IRS regulations, the basis of partnership property is adjusted, in the case of a distribution of property, as provided in Sec. 734, and, for a transfer of a partnership interest, as provided in Sec. 743. The elections apply to all distributions of property by the partnership and to all transfers of interests in the partnership during the tax year for which the election was filed and all subsequent tax years.
Currently, IRS regulations require the Sec. 754 election be made in a written statement filed with the partnership’s tax return for the tax year in which the distribution or transfer occurs. The return must be filed by the due date (including extensions), and the election statement must contain (1) the name and address of the partnership making the election; (2) the signature of one of the partners; and (3) a declaration that the partnership elects under Sec. 754 to apply the provisions of Sec. 734(b) and Sec. 743(b). A partnership that files an unsigned election with its return has not made a valid Sec. 754 election.
Previously, the only relief available for partnerships that failed to make valid elections because they lacked a signature (which has been occurring more often as electronic filing has become the norm), was to seek “9100 relief” either through Regs. Sec. 301.9100-2, which allows taxpayers who discover the error within 12 months to seek automatic relief, or through a private letter ruling request under Regs. Sec. 301.9100-3 if they do not qualify for automatic relief.
As noted, the proposed regulations remove the requirement that the Sec. 754 statement be signed by a partner. The amendments to the regulations are proposed to apply to tax years on or after the date final regulations are published, but taxpayers may rely on the proposed regulation for periods before the proposed applicability date. Thus, taxpayers who filed an otherwise valid Sec. 754 election statement without a signature do not need to seek 9100 relief.