IRS Eliminates Signatures On Section 754 Elections, Offering Tax Regulatory Reform Preview (And Its Complexity?)

In a notice of proposed rulemaking issued on October 11, 2017 (the "NPRM"), the U.S. Department of the Treasury ("Treasury") and the Internal Revenue Service ("IRS") proposed an amendment to existing regulations (the "Proposed Regulation") under Section 754 of the Internal Revenue Code of 1986, as amended (the "Code"). The Proposed Regulation eliminates the requirement under current Treasury regulations (the "Current Regulation") that an election under Code Section 754 be signed in order to be effective.

This is among the first of what may be a long series of notices modifying or eliminating existing Treasury Regulations, as indicated in the Treasury's Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (the "Second Regulatory Reform Report"), which was released by Treasury Secretary Mnuchin on October 2, 2017. The substantive effect of the Proposed Regulation is as simple as it sounds - the literal extent of the change is the deletion of the existing signature requirement in the Current Regulation - but the proposed applicability date provisions in the NPRM contain provisions of interest. Read this blog post for background, information about the Proposed Regulation and its proposed applicability date, and some context relating to the Second Regulatory Reform Report.

Background and the Current Regulation

Very briefly, if a partnership makes a Code Section 754 election, the basis of partnership property is adjusted on certain distributions of property by a partnership and on the transfer of a partnership interest, as provided in Code Sections 734 and 743, respectively. The effect of a Code Section 754 election applies to the year the election is validly made and all subsequent taxable years unless validly revoked by the partnership in the manner prescribed in the Treasury regulations.

The Current Regulation provides that the Code Section 754 election be made by attaching a written statement to the partnership tax return in the year in which the election is made, and that such return be filed no later than the time prescribed for filing the return for such taxable year, including extensions. The Current Regulation requires, among other things, that the written statement be signed by any one of the partners. If unsigned, the Current Regulation would deem the Code Section 754 election for the partnership invalid unless automatic relief under Treas. Regs. Sec. 301.9100-2, if available, is sought ("9100 relief") or a...