Unpublished Disposition, 851 F.2d 361 (9th Cir. 1982)

No. 87-7422.

United States Court of Appeals, Ninth Circuit.

Before SCHROEDER and WIGGINS, Circuit Judges, ROBERT J. KELLEHER,^**  District Judge.

MEMORANDUM^* 

John and Della Simons ("Simons" or "taxpayers") appeal the Tax Court's judgment upholding a deficiency of $79,425 for their 1978 tax year. In 1977, taxpayers purchased an interest in Rancho Los Charcos Development Company ("Rancho"), a limited partnership. Rancho's chief asset, a group of condominiums, was sold in 1978. Taxpayers did not include the income they derived from that sale on their individual returns for that year. They claimed that the partnership filed an effective election, under 26 U.S.C. ("I.R.C.") Sec. 754 (1987), in its amended return for 1978. That would have permitted them to take a stepped-up basis in the partnership property. The Tax Court found taxpayers had failed to show that, even if a valid section 754 election had been made, it would have had any effect on their basis in the partnership property, and thus their income. We affirm.

BACKGROUND

The Rancho partnership was formed in June 1974. Its general partner was Lowell J. Simons, the son of the taxpayers. Rancho originally issued 360 limited partnership units to Lowell, his wife, and to entities controlled by Lowell. Each unit was valued at $1,000 and was exchanged for cash or services. On July 24, 1977, the taxpayers purchased 128.5 partnership units from Lowell for $350,000. Rancho sold the condominiums it was developing in 1978, and realized approximately $815,170 in income. Taxpayers' share of that income was $226,617. Taxpayers did not, however, include that amount on their 1978 individual income tax return.

Rancho filed informational partnership returns in each of the years 1974 through 1978. It did not elect on these returns to adjust the basis of partnership property pursuant to I.R.C. Sec. 754. Yet on April 15, 1982, Rancho filed an amended 1978 partnership return wherein it elected to adjust the basis of partnership property pursuant to section 754. The Commissioner nonetheless determined that taxpayers' $226,617 distributive share of Rancho's income should have been included in their 1978 income. The Service thus issued a deficiency notice of $79,425.

Taxpayers, pursuant to I.R.C. Sec. 7442, petitioned the Tax Court for a redetermination of the deficiency. After trial and post-trial briefing, the Tax Court entered an order directing taxpayers to file a supplemental brief that "explain [s] fully how a section 754 election affects [taxpayers'] distributive share of Rancho's ordinary income." Taxpayers submitted a supplemental brief on that issue, but offered no evidence as ordered by the court. In its opinion, the Tax Court, Judge Clapp writing, noted that taxpayers had contended that a section 754 election would increase the bases of various assets of Rancho. The court pointed out, however, that "the record does not indicate which assets' bases would be adjusted, how much they would be adjusted, or how such an adjustment would affect the deficiency in question." The court concluded that because taxpayers bore the burden of proof "the record would not support a finding" for them, "regardless of whether Rancho ... filed a timely section 754 election." The Tax Court then upheld the notice of deficiency. Taxpayers timely appealed to this court, pursuant to I.R.C. Sec. 7482(a) (1).

DISCUSSION

Taxpayers present only one argument on appeal.¹  They contend that their I.R.C. Sec. 754 election for a stepped-up basis in partnership property was valid, even if made on an amended partnership return. Nevertheless, the Tax Court did not decide the question whether a valid section 754 election had been made. Instead, the court assumed there was a valid election, and ruled that taxpayers had failed to present evidence that their basis in partnership property would have been affected by the election. Taxpayers bore this burden of proof. Tax Ct.R.P. 142(a); see also Helvering v. Taylor, 293 U.S. 507, 515 (1935) ("Unquestionably the burden of proof is on the taxpayer to show that the commissioner's determination is invalid."). We review the Tax Court's findings of fact under a clearly erroneous standard. Gillette's Estate v. C.I.R., 182 F.2d 1010, 1013-14 (9th Cir. 1950).

Taxpayers are correct in asserting that if a valid election had been made, and if the basis for taxpayers' partnership interest was higher than the basis for their proportionate share of the partnership assets, the adjustment would increase the basis of their share of the partnership property. They would thus enjoy the benefit of greater depreciation deductions, along with reduced income from the sale of those assets. Unfortunately, they adduced no proof before the Tax Court and could not show whether the basis for the taxpayers' partnership interest was higher than the basis for the proportionate share of the partnership assets. It could have, in fact, been lower or precisely equal. If the two basis calculations had been the same, there would have been no effect on the taxpayers' basis in their interest in the property. It is also possible that a section 754 election would have resulted in a decrease in their basis in the partnership asset and thus they would have had more income from the sale of that asset than the amount reported by the partnership. The Tax Court was correct in finding that on the record presented by taxpayers it was impossible to determine what effect, if any, a valid section 754 election would have had on taxpayers' distributive share of Rancho's income.

Were we to consider if a timely section 754 election had been made, we would find taxpayers' arguments unavailing. A section 754 election is valid if it is made "in accordance with regulations prescribed by the Secretary." I.R.C. Sec. 754. Those regulations provide that an election made under section 754 "shall be made in a written statement filed with the partnership return for the taxable year during which the distribution or transfer occurs." Treas.Reg. Sec. 1.754-1(b) (1) (1987). The regulation also provides that " [f]or the election to be valid, the return must be filed not later than the time prescribed by paragraph (e) of Sec. 1.6031-1 (including extensions thereof) for filing the return for such taxable year...." Id. A partnership return must be filed "on or before the fifteenth day of the fourth month following the close of the taxable year of the partnership...." Treas.Reg. Sec. 1.6031-1(e) (2) (1987).

Rancho had not made a section 754 election until it filed its amended 1978 return on April 15, 1982. That election is invalid for two reasons. First, a section 754 election must be filed "with the partnership return for the taxable year during which the ... transfer occurs." Treas.Reg. Sec. 1.754-1(b) (1). The "transfer" referred to here is the purchase of an interest in the partnership by the taxpayers in 1977. Rancho filed no election with its 1977 return. Accordingly, even if the election filed with Rancho's amended 1978 return were a valid election for the year 1978, such election would not give rise to any adjustments to basis relating to the 1977 transfer of partnership interests to taxpayers. See Gindes v. United States, 661 F.2d 194, 199-200 (Ct. Cl. 1981); Jones v. United States, 553 F.2d 667, 670 (Ct. Cl. 1977) (A section 754 election shall apply with respect to "all transfers of partnership interests made during the year for which the election is made and in all subsequent years").

Moreover, even if an election made for the 1978 taxable year could apply to a transfer made in 1977, the election here was invalid because it was untimely. A section 754 election must be filed with the partnership return within the time for filing that return. Treas.Reg. Sec. 1.754-1(b) (1). An election filed after the time for filing a return for the year is not valid. See Estate of Dupree v. United States, 391 F.2d 753, 758-59 (5th Cir. 1968); Estate of Skaggs v. C.I.R., 75 T.C. 191, 206-07 (1980), aff'd 672 F.2d 756 (9th Cir. 1982), cert. denied sub nom. Fike v. C.I.R., 459 U.S. 1037 (1982). The time for filing Rancho's 1978 return expired on April 15, 1979. The election here was filed with an amended return on April 15, 1982, three years after expiration of the time for filing Rancho's 1978 return. Rancho's section 754 election was thus untimely and void.

CONCLUSION

The judgment of the Tax Court is, therefore, AFFIRMED.