I.R.C. § 754 Election and the Ides of March
March 2025
March 15 is the ides of March, which is the midpoint of the month.
In Shakespeare’s tragedy, Julius Caesar, Caesar is warned to beware of the ides of March.
In estate administration, executors should also beware that March 15 is an often overlooked deadline for making an I.R.C. § 754 election.
I.R.C. § 754 Election
If an I.R.C. § 754 election is made for a partnership, then the basis of partnership property (also known as “inside basis”) receives an I.R.C. § 743(b) adjustment on the death of a partner.
With higher basis in partnership property, greater annual depreciation deductions are generated and less gain is recognized on the sale of property.
Death of a partner thus provides a planning opportunity to adjust the basis of partnership property by timely making an I.R.C. § 754 election.
EXAMPLE: A and B are married to each other and A owns a partnership interest as community property. A dies. A’s one half community property interest in the partnership interest is includible in A’s gross estate and receives a new basis under I.R.C. § 1014(a). I.R.C. § 2033; I.R.C. § 1014(b)(9). Additionally, B’s one half community property interest in the partnership interest also receives a new basis under I.R.C. § 1014(a). I.R.C. § 1014(b)(6). The partnership timely makes an election under I.R.C. § 754. The basis of partnership property also receives an I.R.C. § 743(b) adjustment with respect to the partnership interests owned by A and B immediately preceding A’s death. I.R.C. § 743(a); I.R.C. § 754.
A partnership makes an I.R.C. § 754 election by filing a statement meeting the requirements of Treas. Reg. § 1.754-1(b) with the partnership’s timely filed return.
If the partnership fails to make an I.R.C. § 754 election for the year of the partner’s death or a prior year, then partnership property does not receive an I.R.C. § 743(b) adjustment as a result of the partner’s death, regardless of whether the partnership interest is includible in the gross estate or an I.R.C. § 754 election is made for a later year.
EXAMPLE: A and B are married to each other and conduct a farming business as equal partners in a two member partnership owned as community property. The partnership agreement provides that the partnership terminates on the death of A or B, and that the estate of the deceased partner has the power to determine whether to make an I.R.C. § 754 election. In 1973, A dies and A’s will bequeaths all property to B. The executor of A’s estate does not timely make an I.R.C. § 754 election with the partnership’s 1973 return. A’s one half community property interest in the partnership is includible in A’s gross estate and receives a new basis under I.R.C. § 1014(a). I.R.C. § 2033; I.R.C. § 1014(b)(1). Additionally, B’s one half community property interest in the partnership also receives a new basis under I.R.C. § 1014(a). I.R.C. § 1014(b)(6). However, the basis of partnership property is not adjusted under I.R.C. § 743(b) because an I.R.C. § 754 election is not timely made. I.R.C. § 743(a).
Due Date for I.R.C. § 754 Election
The due date for making an I.R.C. § 754 election for the year of a partner’s death is determined independent of the due date for the partner’s estate tax return.
An I.R.C. § 754 election is filed with the partnership’s timely filed income tax return, including extensions, which is due on or before March 15 following the close of the calendar year or, in the case of a partnership with a fiscal year, on or before the 15th day of the third month following the close of the fiscal year. Treas. Reg. § 1.754-1(b)(1); I.R.C. § 6031.
In contrast, an estate tax return is due within nine (9) months after the date of death.
This is a potential trap for the unwary, particularly where the partner dies after June 15 and the executor focuses on filing the estate tax return before addressing other items.
EXAMPLE: A owns a partnership interest. On January 16, A dies. The unextended due date for an I.R.C. § 754 election with respect to the year of death is March 15 of the following year. This falls after the unextended due date for A’s estate tax return, which is October 16 of the year of death.
EXAMPLE: A owns a partnership interest. On June 16, A dies. The unextended due date for an I.R.C. § 754 election with respect to the year of death is March 15 of the following year. This is before the unextended due date for A’s estate tax return, which is March 16 of the following year.
EXAMPLE: A owns a partnership interest. On December 16, A dies. The unextended due date for an I.R.C. § 754 election with respect to the year of death is March 15 of the following year. This is before the unextended due date for A’s estate tax return, which is September 16, of the following year.
For more information about income tax planning in estate planning, please consider the tax treatise, Income Taxation of Property Acquired from a Decedent.