## Facts

- Carl T. Jones died on October 7, 1967, owning partnership interests in three Huntsville, Alabama partnerships: G.W. Jones & Sons; Carl T. Jones and Raymond B. Jones; and Jones, Ryan & Blackwell.
- At the time of Jones’s death, none of the partnerships had an election under I.R.C. § 754 in effect to adjust the basis of partnership property under §§ 734(b) or 743(b).
- Each partnership used a calendar year and timely filed partnership income tax returns for 1967 and 1968.
- The 1967 and 1968 partnership returns did not include a § 754 election, did not request an extension of time to make such an election, and did not attach any special depreciation schedules tied to Jones’s death; the depreciation schedules continued using original cost figures.
- The estate (through Elizabeth B. Jones, executrix) filed its fiduciary income tax return for its 1968 fiscal year in February 1969, claiming deductions computed using a “stepped-up” basis in partnership property, reflecting estate-tax valuation principles.
- The IRS disallowed the claimed deductions because no timely § 754 election had been made by the partnerships for the years at issue.
- The partnerships did not file a § 754 election until August 1969, after the 1967 and 1968 partnership returns had already been filed.
- The estate filed refund claims and then brought a tax refund suit in the United States Court of Claims, arguing in part that a final valuation of the decedent’s partnership interests could not be determined in the year of death.
- The estate and the United States filed cross-motions for summary judgment on stipulated facts.

## Issues

1. Whether an estate may compute partnership-related deductions using a § 743(b) basis adjustment when the partnerships did not make a § 754 election with the partnership return for the taxable year in which the partnership interests transferred at death.
2. Whether difficulty in determining the final value of the decedent’s partnership interests in the year of death permits a late § 754 election (or otherwise allows the estate to claim the functional equivalent of a stepped-up inside basis for earlier years).

## Decision

- The court denied the estate’s motion for summary judgment and granted the government’s cross-motion for summary judgment.
- The court held the partnerships’ August 1969 § 754 election was untimely for the 1967 and 1968 partnership years and could not retroactively produce a § 743(b) adjustment for those years.
- Because no timely partnership-level § 754 election was made for the transfer year, the estate was not entitled to compute its distributive share (and related deductions) using a stepped-up basis in partnership assets.
- Judgment was entered for the United States, and the refund sought by the estate was denied.

## Legal Principles

- A partner’s death does not, by itself, change the partnership’s basis in its assets (inside basis); any adjustment to inside basis for a transferee is available only through the statutory election mechanism.
- A § 743(b) adjustment is available to a transferee of a partnership interest only if the partnership makes a valid § 754 election.
- The § 754 election is made at the partnership level and must be filed with the partnership return for the taxable year in which the relevant transfer occurs (or within the time allowed by statute and regulations, including extensions if properly obtained).
- A late-filed § 754 election generally does not operate retroactively to alter tax results for prior taxable years whose returns were filed without the election.
- Practical problems, including uncertainty in valuing the decedent’s partnership interest during the transfer year, do not excuse the failure to make the election on time and do not permit an estate to claim a stepped-up inside basis without a timely partnership election.

## Conclusion

The Court of Claims held that the estate could not claim deductions computed from a stepped-up basis in partnership property because the partnerships did not timely elect under § 754 for the year in which the decedent’s partnership interests passed to the estate, and the later election filed in August 1969 could not retroactively create a § 743(b) adjustment for the earlier partnership years.


Jones v. United States, 553 F.2d 667 (1977)