assets is for the benefit of the transferee partner only, and the basis adjustment is measured by the difference between the transferee's basis for his partnership interest and his proportionate share of the partnership's basis for its assets at the time of the transfer.
The treasury regulations provide that the Section 754 election "shall be made in a written statement filed with the partnership's return for the first taxable year to which the election applies." 26 C.F.R. § 1.754-1. The statute has no such time requirement and the court holds that such a requirement cannot be validly imposed by the Commissioner, at least not under the facts of this case.
Though treasury regulations are entitled to consideration and respect and may often be persuasive in resolving ambiguities, it is clear that a regulation is invalid if it is inconsistent with the statute upon which it is based or if it is unreasonable. United States v. Whitney Land Co., 8 Cir. 1963, 324 F.2d 33; Abbott v. Commissioner of Internal Revenue, 3 Cir. 1958, 258 F.2d 537; Commonwealth Development Association of Pennsylvania v. United States, M.D. Pa. 1973, 365 F. Supp. 792. The power of an administrative officer or agency to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law -- for no such power can be delegated by Congress -- but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this, but operates to create a rule out of harmony with the statute is a mere nullity. Thus, a regulation to be valid must not only be consistent with the statute but also must be reasonable. Manhattan General Equipment Co. v. Commissioner of Internal Revenue, 1936, 297 U.S. 129, 56 S. Ct. 397, 80 L. Ed. 528; United States v. Whitney Land Co., 8 Cir. 1963, 324 F.2d 33. This principle is no more than a reflection of the fact that Congress, not the Commissioner, prescribes the tax laws. Dixon v. United States, 1965, 381 U.S. 68, 73, 14 L. Ed. 2d 223, 85 S. Ct. 1301.
In Neel v. United States, N.D. Ga. 1966, 266 F. Supp. 7, the court declared regulation 1.754-1(b) void holding that the time limitation with respect to making a Section 754 election was unreasonable and could not be validly imposed by the Commissioner. The court allowed a partnership to file an election under Section 754 on April 1, 1962, to be applied retroactively to the partnership fiscal year which ended June 30, 1959, the year in which the transfer of a partnership interest due to the death of a partner occurred. Thus, the court permitted the transferee partner taxpayer to avail himself of the adjustment to the basis of partnership property provided for in Section 743. The court held that the limitation on the time in which the partnership may exercise its right of election, imposed only by the Commissioner's regulation, § 1.754-1, and not by the statute, had the effect of imposing a penalty and was unreasonable.
In Estate of Dupree v. United States, 5 Cir. 1968, 391 F.2d 753, the court decided that an attempt to make a Section 754 election was too late. As a result of a sale in August 1960 of a motel owned by the partnership, the partnership filed a Section 754 election with respect to a transfer of a partnership interest that had occurred in 1957. The election was filed in an amended partnership return in September 1963 which sought to amend the partnership return for its fiscal year ending on March 31, 1961, which had reported the motel sale of August 1960. The partnership in filing its original return on July 15, 1961, did not make the Section 754 election. Likewise, the election had not been made in the return for 1957, the year of transfer of the partnership interest. The court held that the election could not be by an amendment filed over two years after the original return for 1960 was due. The court stated:
". . . Cases involving elections under other sections of the Internal Revenue Code have permitted an election to be validly exercised only in an original return or in a timely amendment, with 'timely amendment ' meaning if filed within the period provided by the statute for filing the original return. J.E. Riley Investment Company v. Commissioner of Internal Revenue, 311 U.S. 55, 61 S. Ct. 95, 85 L. Ed. 36 (1940); Scaife & Sons Co. v. Commissioner of Internal Revenue, 314 U.S. 459, 62 S. Ct. 338, 86 L. Ed. 339 (1941). We conclude that for a valid election to have been made for the taxable year 1960, it should have been timely made in the original return or by an amended return filed within the statutory time for filing the original return." 391 F.2d at 758-59.