1985 U.S. Tax Ct. LEXIS 1">*1
Petitioner purchased a limited partnership interest in a German partnership, effective Jan. 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.
85 T.C. 1075">*1075 Respondent determined the following deficiencies in petitioner's Federal income taxes: 85 T.C. 1075">*1076
| 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 petitioner1985 U.S. Tax Ct. LEXIS 1">*4 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 North1985 U.S. Tax Ct. LEXIS 1">*5 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 85 T.C. 1075">*1077 1985 U.S. Tax Ct. LEXIS 1">*6 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 U.S. 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 file1985 U.S. Tax Ct. LEXIS 1">*7 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 partnership's income, the exchange rate utilized by petitioner in converting from Deutsche marks to 85 T.C. 1075">*1078 U.S. dollars and a direct reference to the page in the attached German tax return that evidenced this distributive share.
1985 U.S. Tax Ct. LEXIS 1">*8 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 January 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.
1985 U.S. Tax Ct. LEXIS 1">*9 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 statutory notice of deficiency in this case, at no time during the taxable years in question did respondent exercise his authority under
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 85 T.C. 1075">*1079 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 1985 U.S. Tax Ct. LEXIS 1">*10 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 "An election * * * shall be made in a
1985 U.S. Tax Ct. LEXIS 1">*11 Turning to the partnership information return requirements of
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
1985 U.S. Tax Ct. LEXIS 1">*12 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 85 T.C. 1075">*1080 information as is necessary to show whether or not such person is liable for tax or income derived from such partnership.
To complete the delineation of the statutory and regulatory framework, we look to section 703(b) which provides --
(1) section 57(c) (defining net lease), (2) subsection (b)(5) or (d)(4) of section 108 relating to income from discharge of indebtedness), 1985 U.S. Tax Ct. LEXIS 1">*13 (3) section 163(d) (relating to limitation of interest on investment indebtedness), (4) section 617 (relating to deduction and recapture of certain mining exploration expenditures), or (5) section 901 (relating to taxes of foreign countries and possessions of the United States), shall be made by each partner separately. [Emphasis added.]
Petitioner's initial position is that no section 754 election statement was required to be filed. Its reasoning is as follows: (1) Section 754 specifically requires the statement to be filed with a U.S. partnership return; (2) under
We acknowledge that a literal interpretation of section 703 may support petitioner's contention that the provisions of the second sentence of
Except as hereafter provided in regulations prescribed by the Secretary of the Treasury or his delegate, nothing in
1985 U.S. Tax Ct. LEXIS 1">*16 Given the less than clear statutory and regulatory framework, we will assume for the purpose of decision herein that neither the German partnership nor petitioner on its behalf was to file a U.S. partnership return. However, contrary to petitioner's contention that the filing of a section 754 election is inextricably linked to the filing of a Form 1065, we find that while
We recognize that the German partnership had in fact made the adjustments to basis of the character contemplated by section 743. But, this action standing alone is not enough; an election must be filed under section 754.
We have examined the cases as to what constitutes a statement of election under various provisions of the Internal Revenue Code and have found that, absent a formal election, a submitted return and its attached schedules must evidence an 85 T.C. 1075">*1083 affirmative intent on taxpayer's part to make the required election and be bound thereby. E.g.,
Applying these standards to the instant case, we find that the documents constituting petitioner's fiscal 1974 tax return do not make clear that a valid election was made to step up the basis of the German partnership's assets for U.S. tax purposes. To be sure, the parties have stipulated that the German partnership return "lists as the value of each of the German partnership's assets as of January 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." But, it is extremely difficult to extrapolate this date from the enclosure pertaining to petitioner. This is especially true in light of the fact that the enclosure (and the entire German tax return) is in German and that petitioner did not furnish respondent with a translation as part of its claimed1985 U.S. Tax Ct. LEXIS 1">*20 election. The difficulty of extrapolation continues to exist, even after the English translation of the enclosure is examined. Concededly, the pertinent figures can be found in the enclosure, but their correlation is far from clear. The hard fact is that petitioner could easily have attached a statement (in English, of course) to its fiscal 1974 return, referring to the attached German partnership return, summarizing what was shown on the return with respect to the adjustments of basis, and affirmatively specifying that it was "electing" to make such adjustments, pursuant to section 754. 9 Such a statement might well, under the circumstances of this case, have been sufficient.
1985 U.S. Tax Ct. LEXIS 1">*21 85 T.C. 1075">*1084 In the context of resolving the question of whether petitioner made a valid election, the fact that the issue of basis adjustment appears to have been easily discovered by respondent's agent, during the audit of the returns involved herein, is beside the point. "The Commissioner needs to know that an election has been made in order to determine whether an audit is necessary in the first place and what its scope should be."
We also reject petitioner's plea that its position in this case be sustained on the general principles of equity and fairness. Even if we were inclined to determine that petitioner was entitled to such equitable1985 U.S. Tax Ct. LEXIS 1">*22 relief, we would be powerless to grant it, for as we have previously stated, this Court does not have equity jurisdiction.
In sum, we conclude that petitioner, who has the burden of proof (Rule 142(a)), has failed to establish that the required election was made which would permit petitioner to have the benefit of the adjustments to basis pursuant to the provisions of sections 754 and 743. If the tables were turned, and respondent was contending over petitioner's objection that those adjustments should be made, petitioner could argue with impunity that the required election had not been made. See
In view of petitioner's concessions of all other issues,
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue, and all Rule references are to the Rules of Practice and Procedure of this Court.↩
2. The statutory notice of deficiency issued to petitioner made several adjustments to petitioner's income for the taxable years in question. Petitioner conceded the correctness of all of these adjustments except the disallowance by respondent of depreciation deductions which were based upon petitioner's use of a stepped-up basis in partnership property. With respect to such use, respondent disallowed depreciation deductions of $ 62,976.48, $ 66,307.27, and $ 282,724.25 for the taxable years 1976, 1977, and 1978, respectively.↩
3. Contrary to the optional election available to taxpayers in the United States under sec. 754, German law mandates an automatic step up in basis of partnership assets when a partnership interest is transferred.↩
4. There was some question at trial whether petitioner had in fact ever attached to its corporate returns translations of the German partnership's returns. We held the record open for 30 days to give petitioner an opportunity to check its files to see if such translations had actually been provided to the Internal Revenue Service. Petitioner, by letter dated May 18, 1984, advised this Court that a review of its files, and of those of petitioner's certified public accountants, revealed that no English translations had been included with the Form 1120 filed by petitioner in each of the taxable years in question.↩
5. During the audit, respondent obtained certified English translations of each of the German partnership's returns from the Language Services Division, U.S. Department of State.↩
6. Sec. 743(b) specifically provides, in relevant part --
In the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partnership with respect to which the election provided in section 754 is in effect shall -- (1) increase the adjusted basis of the partnership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership property, * * *↩
7. The first taxable year of petitioner after the purchase of its partnership interest was the fiscal year ending June 30, 1974.↩
8. The reason given for enacting this provision was "The application of the partnership return filing requirements to certain foreign based partnerships with U.S. partners is unclear." H. Rept. 97-760 (Conf.) (1982),
9. Due to its limited-partner status, petitioner lacked formal authority to make a binding election for U.S. tax purposes on behalf of the German partnership unless it obtained a power of attorney as called for in the partnership agreement. However, in light of the fact that the German partnership had already stepped up the basis of the partnership's property pursuant to German law at the time petitioner's return was filed, and because Karl Mohring, the general partner of the German partnership, was also the president of petitioner, we doubt that petitioner would have had any difficulty in obtaining such authority. In so stating, we recognize that the German partnership may have been unwilling to authorize petitioner to file a U.S. partnership return (Form 1065) on its behalf (see
10. See also
