“A Firm on the Leading Edge of Client Service” 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 a Deceased 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 DeathAfter Death Outside basis in partnership $ 2,500,000 4,000,000 Inside basis of assets 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 Mandatory § 734(b) negative basis adj. $ (2,500,000) (1,000,000)

Distribution of Marketable 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 Outside 65% 1,040,000 Potential §754adjustment (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 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 65% 1,040,000 Gain on distribution $ -0-