March 07, 2016
Partnerships Granted Extension to Make Basis Election
By Jana Teich, Seinor, Tax & Business Services
Under IRC Section 754, a partnership may elect to adjust the basis of partnership property to fair market value when it distributes property or when a partnership interest is transferred.
For example, if someone purchases a partnership interest from an existing partner, the fair market value of the partnership's assets (as opposed to the adjusted basis of partnership assets) will be used determine the purchase price. Without a 754 election in place, the incoming partner's inside and outside basis will not be the same, since there is a difference in the fair market value and the adjusted basis. To avoid this difference, the partnership can elect to increase the inside basis of the assets in order to reconcile the new partner's outside and inside basis in the partnership. This reconciliation can be advantageous to the new partner when the basis adjustment or the "step up" is attributed to depreciable or amortizable property. The election will allow the new partner to be directly allocated the depreciation expense derived from the step up in basis.
This election is permanent and is only revocable with IRS consent. Once the election is made, it will apply to all distributions of property and to all transfers made during the tax year and in all subsequent tax years. The election is made by including a statement with the tax return for the year during which the distribution of property or transfer of interest took place. In order to be valid, the statement must include the name and address of the partnership, a declaration that the partnership elects under Section 754 to apply the provisions of Sections 734(b) and 743(b), and it must be signed by at least one of the partners.
If a partnership fails to file a properly executed Section 754 election with its timely-filed tax return, there may be some relief available. The partnership may be granted an extension of time to file a basis election, commonly known as a 754 election, if certain requirements are met. The IRS grants an automatic 12-month extension to file the election. To benefit from the automatic extension, the partnership would have to file an amended tax return, with the election attached, within 12 months of the original (or extended) due date of the return. Even if the 12-month extension period has passed, a partnership can request an additional extension of time (not to exceed six months) if the partnership can provide evidence that it acted reasonably and in good faith. A taxpayer is considered to have acted reasonably and in good faith if the taxpayer requests relief from the IRS before the IRS discovers the failure to make the election, or if the taxpayer reasonably relied on the written advice of the IRS. To obtain the additional extension, the taxpayer must submit a detailed sworn affidavit describing the events that led to the failure to make a valid election and the tax years that would have been affected if the election were timely made.