Atlantic Veneer Corp. v. Comm'r of Internal Revenue

• Citation: 85 T.C. No. 63,85 T.C. 1075
• Decision Date: 31 December 1985
• Docket Number: Docket No. 2870-83.
• Parties: ATLANTIC VENEER CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

85 T.C. 1075

85 T.C. No. 63

ATLANTIC VENEER CORPORATION, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2870-83.

United States Tax Court

Filed December 31, 1985.

Petitioner purchased a limited partnership interest in a German partnership, effective January 1, 1973. The German partnership stepped up the basis of its assets, as required by German law, to take into account the amount by which the petitioner's purchase price exceeded the adjusted basis of its allocable share of the German partnership's assets. In its June 30, 1974 fiscal year U.S. tax return, petitioner reported its distributive share of income of the German partnership for calendar year 1973, which was computed by using the stepped-up basis for purposes of depreciation. To that return, petitioner attached a copy of the 1973 German partnership return and schedules without any English translations. Held, the required election was not made which would permit petitioner to have the benefit of the adjustments to basis pursuant to the provisions of sections 754 and 743, I.R.C. 1954 Code. DENNIS I. MEYER, BERTRAND M. HARDING, Jr. and THOMAS A. O'DONNELL, for the petitioner.

KRISTINE A. ROTH and MARLENE GROSS, for the respondent.

TANNENWALD, JUDGE:

Respondent determined the following deficiencies in petitioner's Federal income taxes:

+-------------------------+
                ¦Taxable year ¦Deficiency ¦
                +-------------+-----------¦
                ¦1976         ¦$102,784.30¦
                +-------------+-----------¦
                ¦1977         ¦115,452.54 ¦
                +-------------+-----------¦
                ¦1978         ¦145,469.77 ¦
                +-------------------------+
                

The sole issue for decision is whether a valid election was filed pursuant to section 754 ¹, thus permitting petitioner to benefit from an adjustment to the basis of partnership property under section 743(b). ²

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. This reference incorporates the stipulation of facts and attached exhibits.

Petitioner, a North Carolina corporation, had its principal place of business in Beaufort, North Carolina, at the time it filed its petition in this case. Petitioner timely filed its Federal corporate income tax returns for the taxable years ending June 30, 1974 through June 30, 1978 with the Internal Revenue Service Center in Memphis, Tennessee. In addition, petitioner filed amended corporate income tax returns for the taxable years ending June 30, 1974 and June 30, 1976.

On December 29, 1972, petitioner entered into a contract with two limited partners of K. Heinz Mohring (KG), a limited partnership organized under the laws of the Federal Republic of Germany (the ‘German partnership‘), to purchase their combined one-third interest in the German partnership, effective January 1, 1973. The purchase price paid by petitioner was approximately $5,270,000, which exceeded by approximately $3,255,000 the adjusted basis of petitioner's allocable share of the German partnership's assets as of the January 1 acquisition date. Pursuant to German law, on its books and in its tax returns filed with the Federal Republic of Germany, the German partnership increased petitioner's basis in its share of the partnership's assets by the aforementioned $3,255,000 and allocated such excess amount among the partnership's assets owned as of January 1, 1973. ³

During its taxable years 1973 through 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 filed neither a United States partnership return Form 1065 nor a statement electing stepped-up treatment under section 743(b) with the Internal Revenue 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 of attorney was ever requested by or granted to petitioner that would have permitted it to file a U.S. tax return on behalf of the German partnership.

The first taxable year for which petitioner was required to report any distributive share of income or loss from the German partnership was petitioner's taxable year ending June 30, 1974. Petitioner reported on its corporate income tax return Form 1120 for each of its taxable years from 1974 through 1978 its distributive share of income from the German partnership, which was computed using the stepped-up basis in the partnership assets. Petitioner attached to each corporate return a copy of the German tax return of the German partnership, with attached schedules, for the German partnership's year ending December 31 of the preceding year. These partnership returns were in German and petitioner did not provide translations of any portion of them to the Internal Revenue Service. ⁴ However, each Form 1120 contained a schedule which clearly identified petitioner's distributive share of the German income, the exchange rate utilized by petitioner in converting from German Deutsche marks to U.S. dollars and a direct reference to the page in the attached German tax return that evidenced this distributive share.

Each German partnership tax return included a document entitled ‘Enclosure to the Profit Assessment Statement.‘ On page 2 of the ‘Enclosure to the Profit Assessment Statement 1973‘ was a schedule entitled ‘Supplementary Balance for Tax Purposes as of December 31, 1973‘ (‘Enclosure‘), which pertained only to petitioner and listed as the value of each of the German partnership's assets as of 1, 1973, the amount by which petitioner's basis in its partnership interest in the German partnership immediately after its acquisition of such interest exceeded petitioner's allocable adjusted basis in each of the German partnership's assets. The return of the German partnership containing said schedule was attached to petitioner's Form 1120 for the taxable year ended June 30, 1974. An English translation of the Enclosure ⁵ revealed that the German partnership did in fact step up the basis of the partnership's assets to reflect the excess of petitioner's purchase price over the allocable adjusted basis in each of the German partnership's assets prior to petitioner's acquisition.

The corporate tax returns of petitioner filed for the taxable years ending June 30, 1974 and June 30, 1975 were never audited by respondent. Other than requests for statements and information made during the course of the audit leading to the issuance of the notice of deficiency in this case, at no time during the taxable years in question did respondent exercise his authority under section 1.6031-1(d)(2), Income Tax Regs., to require petitioner to render statements or other information to determine whether petitioner was liable for a tax on income from the German partnership, nor has he ever questioned the accuracy or legitimacy of the allocation computations on the partnership returns.

OPINION

Under section 743(b), a partner who acquires a partnership interest at a purchase price in excess of the adjusted basis of his allocable share in the partnership's assets is permitted to step up the basis of these assets if the partnership so elects under section 754. ⁶ Pursuant to section 754—

If a partnership files an election, in accordance with regulations prescribed by the Secretary, the basis of partnership property shall be adjusted, * * * in the case of a transfer of a partnership interest, in the manner provided in section 743. * * *

In order to make a valid election, the regulations promulgated under section 754 clearly state that ‘(a)n election * * * shall be made in a WRITTEN STATEMENT FILED WITH THE PARTNERSHIP RETURN taxable for the year during which the distribution or transfer occurs.‘ ⁷ Section 1.754-1(b)(1), Income Tax Regs., (emphasis added).

Turning to the partnership information return requirements of section 6031(a), that section provides that,

Every partnership (as defined in section 761(a)) shall make a return for each taxable year, stating specifically the items of gross income and the deductions allowable by subtitle A, and such other information for the purpose of carrying out the provisions of subtitle A as the Secretary may by forms and regulations prescribe, and shall include in the return the names and addresses of the individuals who would be entitled to share in the taxable income if distributed and the amount of the distributive share of each individual.

This requirement is satisfied by the filing of a Form 1065 by the partnership (see section 1.6031-1(a)(1), Income Tax Regs.), but section 1.6031-1(d)(1), Income Tax Regs., stating a general exception, specifies 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. ‘ However, with respect to such a foreign partnership that has a United States citizen or resident as one of its partners, the general exception from filing is modified by the provision that—

Where a United States citizen or resident is a partner in a partnership described in subparagraph (1) of this paragraph which is not required to file a partnership return, the district director or director of the service center may require such person to render such statements or provide such information as is necessary to show whether or not such person is liable for tax or income derived from such partnership. IN ADDITION, IF AN ELECTION IN ACCORDANCE WITH THE PROVISIONS OF SECTION 703 (RELATING TO ELECTIONS AFFECTING THE COMPUTATION OF TAXABLE INCOME DERIVED FROM A PARTNERSHIP) OR SECTION 761 * * * IS TO BE MADE BY OR FOR THE PARTNERSHIP, A RETURN ON FORM 1065 SHALL BE FILED FOR SUCH PARTNERSHIP. * * * (Emphasis added. Sec. 1.6031- 1(d)(2), Income Tax Regs.)

To complete the delineation of the statutory and regulatory framework, we look to section 703(b) which provides—

ANY ELECTION AFFECTING THE COMPUTATION OF TAXABLE INCOME DERIVED FROM A...