Partnership final regulations remove signature requirement for Section 754 elections
On August 4, the IRS issued final regulations (TD 9963) that remove the signature requirement associated with making a Section 754 election to adjust the basis of partnership property. The final regulations, which adopt proposed rules issued in 2017, reduce regulatory burdens by eliminating partnership relief requests for unsigned Section 754 elections.
Background
Section 754 provides that if a partnership files an election in accordance with regulations prescribed by the Secretary, then the basis of partnership property shall be adjusted:
- in the case of a distribution of property, in the manner provided in Section 734.
- in the case of a transfer of a partnership interest, in the manner provided in Section 743.
Such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the tax year with respect to which such election was filed and all subsequent tax years.
The regulations in effect prior to the current final regulations provided that a Section 754 election is made in a written statement that is included in a timely filed partnership return for the tax year in which the distribution or transfer occurs. Under the former regulations, the election must (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 Section 734(b) and Section 743(b).
In the event of a failure to make a timely Section 754 election, taxpayers have two avenues of corrective relief (collectively, “9100 relief”): (1) automatic relief under Reg. Section 301.9100-2 if the error is discovered and corrected within 12 months from the due date of the partnership return (including extensions) or (2) relief through a private letter ruling request pursuant to Reg. Section 301.9100-3.
Historically, the IRS has received numerous requests for 9100 Relief with respect to inadvertently unsigned Section 754 elections, especially where returns had been electronically filed. To alleviate the administrative burden associated with the filing of Section 754 elections under the former regulations, the IRS issued proposed regulations in October 2017 that would remove the signature requirement.
Final rules
The final regulations remove the requirement that the Section 754 election must be signed by a partner in the partnership. In so doing, the regulations finalize without substantive change the 2017 proposed rules.
Accordingly, under the final regulations, partnerships can make a valid Section 754 election by filing a statement with a timely filed partnership tax return for the tax year in which the distribution or transfer occurs that contains (1) the name and address of the partnership making the Section 754 election and (2) a declaration that the partnership elects under Section 754 to apply the provisions of Section 734(b) and 743(b).
The updated rules apply to tax years ending on or after the August 5, 2022. However, taxpayers may rely on the final regulations for periods preceding their applicability date. Consequently, partnerships that timely filed a partnership return containing a Section 754 election consistent with the requirements of the final regulations will be treated as having made a valid Section 754 election, notwithstanding the lack of a partner’s signature.
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