Atlantic Veneer Corp. v. C.I.R.

• Decision Date: 20 February 1987
• Docket Number: No. 86-2046,86-2046
• Citation: 812 F.2d 158
• Parties: -637, 87-1 USTC P 9192 ATLANTIC VENEER CORPORATION, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 158

812 F.2d 158

59 A.F.T.R.2d 87-637, 87-1 USTC P 9192

ATLANTIC VENEER CORPORATION, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 86-2046.

United States Court of Appeals Fourth Circuit.

Argued Dec. 9, 1986.

Decided Feb. 20, 1987.

Bertrand Morrison Harding, Jr. (Dennis I. Meyer, Thomas A. O'Donnell, Baker & McKenzie, Washington, D.C., on brief) for petitioner-appellant.

Mary Frances Clark (Roger M. Olsen, Asst. Atty. Gen., Michael L. Paup, David English Carmack, Tax Div., Dept. of Justice, Washington, D.C., on brief) for respondent-appellee.

Before ERVIN and CHAPMAN, Circuit Judges and BUTZNER, Senior Circuit Judge.

CHAPMAN, Circuit Judge:

Taxpayer has appealed the Tax Court's decision, 85 T.C. 1075, upholding the Commissioner's denial of depreciation deductions arising out of taxpayer's interest in a foreign partnership. The Commissioner denied the deductions because taxpayer took the deductions from a stepped-up basis, despite the apparent absence of an election under Sec. 754 ¹, which permits taxpayers pursuant to Sec. 743(b) to take a step-up in basis resulting from the transfer of interest in a partnership by sale or exchange. We affirm the Tax Court, holding that, despite the somewhat confusing statutory and regulatory requirements, taxpayer could not step up its basis without making an appropriate election under Sec. 754, and that taxpayer has failed to comply substantially with the election requirements.

Taxpayer, Atlantic Veneer Corporation, is a North Carolina corporation. On January 1, 1973, taxpayer acquired a one-third interest in a German partnership known as "K. Heinz Mohring (KG)" (the "German partnership"). The German partnership was organized under the laws of the Federal Republic of Germany in a form which, both litigants agree, is essentially identical to a limited partnership under United States law. The interest acquired by taxpayer in the German partnership was equivalent to a limited partner's interest. The other partners were K. Heinz Mohring, who was both the general partner for the German partnership and taxpayer's chief executive officer, and Transworld Walnut Company, Limited, a Canadian corporation of which taxpayer is a wholly owned subsidiary.

From 1973 to 1978, the German partnership carried on no trade or business within the United States and derived no income from sources within the United States. The German partnership did not file a United States partnership return with the Service during this period. Under the German partnership's Articles of Partnership, the limited partners were not authorized to represent the partnership without a special power of attorney. No such special power was ever requested by or granted to taxpayer that would have authorized it to file a United States tax return on behalf of the German partnership.

Taxpayer paid approximately $5,000,270.00 for its interest in the German partnership, which amount exceeded by approximately $3,000,255.00 the adjusted basis of taxpayer's allocable one-third interest in the German partnership's assets as of January 1, 1973. Under German tax law, if a partnership interest is acquired for an amount in excess of the acquiring partner's allocable basis in the partnership's assets, the acquiror need not file an election to increase his basis in his share of the partnership's assets. The German partnership, rather, pursuant to German law, simply increased on its books and in its tax returns filed in Germany taxpayer's basis in its share of the partnership's assets by the amount of $3,000,255.00 and allocated this excess among the partnership's assets owned as of January 1, 1973. Thus, German law mandates an automatic step-up in basis of partnership assets when a partnership interest is transferred. The German partnership used this increased adjusted basis in computing taxpayer's distributive share of income and deductions for the German partnership's taxable years from 1973 to 1977.

Taxpayer filed with its United States corporate income tax returns for each of its taxable years from 1974 to 1978 a copy of the German partnership's German income tax return (in German) for its preceding taxable year. Taxpayer did not provide translations of any portion of the German tax returns to the Commissioner for any of the years. Each return did contain a schedule clearly identifying taxpayer's distributive share of the German partnership's income, the rate of exchange used in converting deutsche marks to United States dollars, and a direct reference to the page in the attached German tax return that evidenced that distributive share. This distributive share was computed using a stepped-up basis in the partnership assets. Each appended German partnership tax return, moreover, included a supplement which set forth, on an annual basis, the amount of each partner's allocable adjusted basis in each partnership asset attributable to the excess amount of his purchase price for the partnership interest.

Taxpayer argues that no specific election was required in order for taxpayer to increase its basis in the German partnership's assets because the German partnership was not required to file a United States partnership return. Section 754 grants taxpayers the option of electing out of the rule established in Sec. 743(a), which provides for no step-up in basis upon transfer of partnership property, and into the stepped-up basis treatment in Sec. 743(b). Section 754 specifically requires the statement of election to be filed with a United States partnership tax return. Treas. Reg. Sec. 1.754.1. Treasury Regulation Sec. 1.6031-1 governs when a partnership is required to file a tax return. Subsection (d) states that a "partnership carrying on no business in the United States and deriving no income from sources within the United States need not file a partnership return." Thus, taxpayer asserts that because the German partnership was carrying on no business in the United States, it need not have filed a United States partnership tax return, and because a Sec. 754 election must be filed with the partnership tax return, the German partnership could...