United States

Proposed regulations reduce regulatory burden on partnership election

Burden eased on election to adjusted basis of partnership property

TAX ALERT  | 

The IRS has recently released new proposed regulations (REG-116256-17) that eliminate the requirement that a section 754 election statement be signed by a partner in order for the partnership’s section 754 election to be considered valid.

In order for a partnership to adjust the basis of partnership property, upon either the transfer of a partnership interest or following a distribution of the property, the partnership must generally make an election under section 754 of the Code, a so-called “section 754 election.” Under the current rules, several statutory requirements must be met in order for a section 754 election to be considered valid, including a requirement that the election statement, a written statement that must be filed with the partnership’s return for the year in which the transfer or distribution occurs, be signed by at least one of the partners. The only remedy for a partnership failing to make a valid section 754 election, including by reason of unsigned election statement, is to request late filing relief under certain administrative relief procedures. 

However, in order to ease the burden of making a section 754 election and to reduce the need for taxpayers to seek administrative relief for an otherwise valid section 754 election, the IRS has issued proposed regulations that remove the signature requirement contained in the current rules. Accordingly, under the new proposed regulations, a partnership making a section 754 election will no longer be required to file a signed copy of the election statement with their tax return in order for the section 754 election to be considered valid.

These proposed regulations are set to take effect for tax years ending on or after the date the final regulations are published in the Federal Register. However, according proposed regulations, taxpayers may begin relying on these new rules for periods beginning prior to the proposed applicability date.

Accordingly, taxpayers that have made an otherwise valid section 754 election, except for a missing partner signature on the election statement, will find this comes as a welcome reprieve, as they will no longer need to go through the process of requesting administrative relief in order to obtain a valid section 754 election.

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