partnership taxation issues in estate planning

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Partnership Taxation Issues

in Estate Planning

By: Carol A. Cantrell Houston, Texas

Top 7 Issues with Partnerships in an Estate

or Trust• IRD of a Deceased Partner

• Section 754 Elections

• Jobs Act Mandatory Negative Basis Adjustments

• Distributions of Marketable Securities

• Determining “Trust Income” from a Partnership

• Allocating Taxes on Partnership K-1 Income

• Partnership K-1 Capital Gains and DNI

IRD for S Corporations

• § 1367(b)(4) – IRD of a deceased S corporation shareholder applies with respect to any item of income in the same manner as if the decedent had directly held his pro rata share of each item. (added in 1996).

Income in Respect of aDeceased Partner

• § 691(e) – For application of this section to IRD of a deceased partner, see § 753.

• § 753 – The amount includible in gross income of a successor in interest of a deceased partner under § 736(a) is IRD under § 691.

§ 736(a) Payments are IRD

§ 736(a) - all payments from an ongoing partnership in liquidation of a deceased or retired partner’s interest except § 736(b) payments.

§ 736(b) – payments for a partner’s interest in partnership property except a general partner’s share of cash basis accounts receivable and unstated goodwill in a service partnership.

Dad’s Inside and Outside Basis

Before Death After Death

Outside basis in partnership

$ 2,500,000 4,000,000

Inside basis of assets

2,500,000 2,500,000

Potential 754 adjustment

1,500,000

Mandatory Negative Basis Adjustment under §

734(b)

No § 754 Election

With § 754 Election

Basis of asset distributed

$ 1,500,000 1,500,000

§ 754 adjustment 1,500,000

Outside basis in partnership

4,000,000 4,000,000

Mandatory § 734(b) negative basis adj.

$ (2,500,000)

(1,000,000)

Distribution ofMarketable Securities

Total Partnership

Estate’s 80%

Value $ 2,000,000 1,600,000

Inside basis 1,500,000 1,200,000

Built-in gain 500,000 400,000

Outside basis @ 65% 1,040,000

Potential §754 adjustment

(160,000)

Gain on Distribution of

Marketable Securities

Estate’s 80%

Value of securities 1,600,000

Less partner’s built-in gain (400,000)

Deemed cash distribution 1,200,000

Outside basis @ 65% 1,040,000

Gain on distribution $ 160,000

With a § 754 Election

Estate’s 80%

Value $ 1,600,000

Inside basis 1,200,000

§ 754 Adj. (160,000) 1,040,000

Built-in gain $ 560,000

With a 754 Election

Estate’s 80%

Value of securities 1,600,000

Less partner’s share of built-in gain

(560,000)

Deemed distribution 1,040,000

Outside basis @ 65% 1,040,000

Gain on distribution $ -0-