Section 754 Elections on Form 1065: Making Valid Elections, Seeking Relief for Missed or Invalid Elections

Description

The Section 754 election is complex and critical for tax advisers serving partnerships and their partners. Section 754 allows a partnership to make an election to adjust the tax bases of its assets under certain circumstances. In essence, the election provides for a "rebalancing" of the partnership's tax bases in partnership assets under Sections 734 and/or 743 to prevent distortions between the entity’s inside bases in its assets and the partners’ outside bases in their partnership interests. Understanding the Section 754 election is thus an integral and critical part of partnership tax practice.

Missed or incorrect Section 754 elections can easily result in substantial, negative tax consequences to the taxpayers, and thus potential liability claims against tax practitioners and their respective advisory firms. Despite the election’s importance, the calculation and reporting of the requisite tax basis adjustments often challenges and confounds even the most experienced tax practitioners. Tax compliance professionals must not only master the mechanics of calculating and reporting an election on Form 1065, but they must also understand exactly when and how to obtain relief if an attempted election is incorrect or defective, or simply not made on time.

Making the initial election requires that a special statement be filed, that partners be identified, and that specific (and often complex) calculations be done so as to correctly document the tax bases adjustments to be reported on each partner's Schedule K-1. The §734(b) and §743(b) basis adjustments must be correctly allocated pursuant to Section 755.

The Code and Treasury regulations contain both automatic and discretionary relief provisions in the case of missed or defective Section 754 elections. In cases where the taxpayer is seeking relief that is discretionary with the Government, tax advisers must usually show how their client’s situation meets certain requisite criteria and benchmarks in order to qualify their clients for the remedies requested--the elements of which have been delineated in U.S. court cases. There are also specific procedures to correct prior tax basis adjustments, and to request that a prior Section 754 election be revoked or treated as never made.

Listen as our expert panel provides a practical guide to the key tax considerations inherent in determining whether or not a Section 754 election should be made, the mechanics of making a valid Section 754 election, the alternative ways to seek relief for missed or late elections, and the sanctioned methods available for correcting defects in such elections.