Jones v. United States

• Decision Date: 20 April 1977
• Docket Number: No. 160-74.,160-74.
• Citation: 553 F.2d 667
• Parties: Elizabeth B. JONES, as Executrix of the Estate of Carl T. Jones, Deceased, v. The UNITED STATES.
• Court: U.S. Claims Court

553 F.2d 667

Elizabeth B. JONES, as Executrix of the Estate of Carl T. Jones, Deceased, v. The UNITED STATES.

No. 160-74.

United States Court of Claims.

April 20, 1977.

Louis Salmon, Huntsville, Ala., attorney of record, for plaintiff; Watts, Salmon, Roberts, Manning & Noojin, Huntsville, Ala., of counsel.

Kenneth R. Pike, Washington, D.C., with whom was Acting Asst. Atty. Gen., Myron C. Baum, Washington, D.C., for defendant; Theodore D. Peyser, Jr., and Robert S. Watkins, Washington, D.C., of counsel.

Before DAVIS, SKELTON and KASHIWA, Judges.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANT'S CROSS MOTION FOR SUMMARY JUDGMENT

KASHIWA, Judge:

This tax refund action involving the timeliness of an I.R.C. § 754 election to adjust the basis of partnership property as provided by I.R.C. § 743(b) is properly before the court on cross motions for summary judgment.¹ Upon consideration of each party's brief with Stipulation of Facts, after oral argument, we agree with the defendant that the decedent's estate in computing its distributive share of income from two partnerships in which decedent was interested is not entitled to use a stepped-up basis in the partnership assets. The partnerships failed timely to elect the basis adjustment in the returns filed for the taxable years of the partnerships in which decedent's partnership interests were transferred to his estate upon his death. We, therefore, allow defendant's cross motion for summary judgment.

Decedent, Carl T. Jones, died on October 7, 1967. At the time of his death, decedent was a partner in three firms located in Huntsville, Alabama: G. W. Jones & Sons; Carl T. Jones and Raymond B. Jones; and Jones, Ryan & Blackwell.

At the time of decedent's death, no election under § 754² to adjust the basis of partnership property under §§ 734(b) or 743(b) was in effect for any of the above-named partnerships.³

The three partnerships, each on a calendar year basis, timely filed income tax returns for the calendar years 1967 and 1968. These returns did not contain an election under § 754, nor was there on or attached to these returns a special depreciation schedule attributable to decedent's interests in the partnerships. All partnership depreciation schedules were regular continuations of original cost amounts with no reference to the death of Carl T. Jones.

The Estate of Carl T. Jones succeeded to decedent's partnership interests. The estate retained a member of the Appraisal Institute to appraise the real property of the three partnerships. The appraisals, dated August, September, October and December 1968, valued the total real estate holdings, about 63 parcels, at $3,508,745.55. The appraised values of the real property were used in the estate tax return for the Estate of Carl T. Jones, which was filed on January 6, 1969.⁴

On August 20, 1969, a § 754 election to adjust the basis of partnership property under §§ 734(b) and 743(b) was filed by the two then existing partnerships, G. W. Jones & Sons and Carl T. Jones and Raymond B. Jones.⁵ The election, which did not accompany either a partnership return or an amended return, indicated it was to apply to the calendar year 1967 and each subsequent year. Between October 7, 1967, decedent's date of death, and August 20, 1969, the date on which the elections were filed, no extension of time to file an election under § 754 was ever requested by or granted to the partnerships or the estate.

The Estate of Carl T. Jones timely filed fiduciary income tax returns for the fiscal years October 31, 1968; October 31, 1969; and October 31, 1970. By schedule attached to each return, the estate claimed additional depreciation deductions on assets held by the partnerships of Carl T. Jones and Raymond B. Jones and G. W. Jones & Sons; it also claimed additional deductions for increased basis in partnership assets—cattle—which were sold by G. W. Jones & Sons. These additional deductions were attributable to the estate taking a stepped-up basis in the partnership property.

The Internal Revenue Service, upon audit of the estate's fiduciary income tax returns, disallowed the additional deductions attributable to the adjustments to basis of the partnership property. The Service determined that the § 754 elections were not timely filed based upon Treas. Reg. § 1.754-1(b) and assessed income tax deficiencies totaling $43,363.86 for fiscal years ended October 31, 1968, 1969 and 1970. The plaintiff made payments of the assessed deficiencies, plus interest, totaling $50,937.22, to the Internal Revenue Service. The estate filed timely claims for refund; after such claims were not acted upon by the Internal Revenue Service for more than six months after the date of filing, the estate filed the instant suit.

Basically, plaintiff contends that Treas. Reg. 1.754-1(b) did not give the partnerships a sufficient amount of time to appraise the numerous parcels of real property which appraisals would afford the partnerships the facts to make an intelligent decision whether to elect the optional adjustment to basis of partnership property. To plaintiff the regulation is "patently unreasonable and clearly punitive in nature," is "out of harmony with the statute," and "as such is a nullity and void." Therefore, plaintiff argues, the elections filed by the partnerships were in accordance with the statute and are valid retroactively to the year ending December 31, 1967. Alternatively, plaintiff contends that if the court finds the elections not retroactive to the partnerships' taxable year 1967, the elections should be valid for those years subsequent to the date of filing, which for those years would entitle plaintiff to use a stepped-up basis in the partnership assets.

On the other hand, defendant argues that pursuant to an express grant of authority contained in § 754, the Secretary promulgated Treas. Reg. 1.754-1(b), which prescribes a reasonable time frame within which a partnership must act to elect the optional basis adjustment. Since the partnerships in which decedent was interested did not make timely elections under § 754, defendant argues that the plaintiff is not entitled to the benefit of an optional adjustment to basis in the partnerships' property. With relation to plaintiff's argument that this court should give prospective effectiveness, if not retroactive effectiveness, to the elections filed on August 20, 1969, the defendant contends that an election which is not valid for the taxable year of the transfer is also not valid for subsequent years.

We are, therefore, confronted with the ultimate question of whether an election under § 754 to adjust the basis of a decedent's interest in partnership assets was valid when filed on August 20, 1969, rather than by April 15, 1968, when the first partnership return was due to be filed for the taxable year of the partnership in which decedent's partnership interests were transferred to his estate. This issue requires that we first examine Treas. Reg. § 1.754-1(b) to determine whether that regulation to the extent of the time filing provision is invalid, viz. whether it is inconsistent with the statute upon which it is based or whether it is unreasonable.

The optional adjustment to basis of partnership property on transfer of a partnership interest is specifically conditioned on the filing of an election under § 754.⁶ The election applies both to § 734(b), on distribution of partnership property, and to § 743(b), on transfer of a partnership interest. Unless the election is revoked, the § 754 election applies to all distributions and to all transfers of partnership interests made during the year for which the election is made and in all subsequent years.⁷

Congress by § 754 has delegated to the Secretary specific authority to "legislate" in this area.⁸ Pursuant to this express grant of authority, in 1956 the Secretary promulgated Treas. Reg. § 1.754-1(b)⁹ which provided that the § 754 election to adjust basis had to be filed with the partnership return for the first taxable year to which the election applies. In Rev. Rul. 57-347,¹⁰ the Service stated that the election need not be made before the occurrence of an unforeseen event, such as death of a partner, which would make the election operative. Effective October 2, 1972, the above regulation was amended by T.D. 7208,¹¹ which clarified the Service's interpretation of the time for making the election under § 754. As amended, Treas. Reg. § 1.754-1(b) provides that the election under § 754 "* * shall be made in a written statement filed with the partnership return for the taxable year during which the distribution or transfer occurs." There is nothing in the amended regulation to indicate that it is not applicable to the years involved herein.¹² Hence, from 1956 to the present, the position of the Internal Revenue Service consistently has been that in order for the optional basis adjustment election to be effective as to a transferee partner who acquired a partnership interest on the death of a partner, the election must be filed by the partnership with a timely return for the taxable year in which the transfer occurs.

The regulatory requirement that the election to adjust basis of partnership property, to be effective, must be filed for the taxable year of the partnership in which a transfer of an interest in the partnership occurs, finds support in the legislative history of § 754. Section 743 as initially proposed contained a subsection (d) which provided that a partnership could make an election under § 743 by filing a statement of election with its return for the taxable year in which the partnership interest is transferred.¹³ The Senate Finance Committee replaced this subsection with the present § 754 and in removing from the statute the specifications for making the election, it authorized the Secretary to promulgate regulations governing the manner of election.¹⁴ As a result, Treas. Reg. § 1.754-1(b), in view of its...