Jones v. United States United States Court of Claims, 1977 Bobbie Waters TX 8020

Background  Citations: 553 F.2d 667 Tres. Reg (b)  Judge: Kashiwa

Facts  Carl T. Jones died on October 7, At the time of his death, he was a partner in three firms located in Huntsville, AL.  At time of death, no election under Sec. 754 to adjust the basis of parthership property under Sec. 734(b) or 743(b) was in effect for any of the partnerships.  In 1968 his total real estate holdings were appraised to be $3.5M, this value was used for the estate tax return for Carl T. Jones filed on January 6,  August 20, 1969 a Sec. 754 election to adjust basis of partnership property was filed by the partnership to be applied to calendar year 1967 and each subsequent year.  Estate claimed additional depreciation deductions on assets held by the partnerships, and also claimed additional deductions for inherited basis in partnership assets (cattle) that were sold. Deductions were attributable to the estate taking a stepped-up basis in their partnership property  No extension to file Sec. 754 was ever requested by or granted to partnerships or the estate.

Facts  IRS disallowed the additional deductions attributable to the adjustments to basis of the partnership property. Sec. 754 elections were not timely filed based upon Tres. Reg (b)  Regulatory requirement states election must be filed for the taxable year of the partnership in which a transfer of an interest in the partnership occurs.  Plaintiff assessed income tax deficiencies totaling $43K for fiscal years ended October 31 – 1968, 1969 and 1970  Plaintiff made payments of the assessed deficiencies to the IRS  The estate filed timely claims for refund, after such claims were not acted upon by the IRS for more than 6 months after the date of filing, the estate filed the instant suit.

Issue  Does the Jones estate qualify for a Sec. 754 election which would allow the estate to take a stepped-up basis in their partnership property?

Argument  Plaintiff claims regulation is unreasonable since the value of the partnership interest is not likely to be finally determined in the year of death.

Conclusion  Since federal income tax returns were filed on a calendar year basis, the partnership had over six months to determine whether they wished to file elections under Sec. 754, even without requesting any extension of time.  By February 10, 1969 the plaintiff clearly had all necessary info and yet the partnership did not file elections under Sec. 754 until August 20,  A valid Sec. 754 exception for the taxable year 1970 does not permit any adjustments to basis resulting from a 1967 transfer of partnership interests occasioned by the death of the decedent partner.  Court agreed with the government that the elections filed August 20, 1969 were too late to be effective for the year Plaintiff is not entitled to use a stepped-up basis in the partnership assets.