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ESTATES, TRUSTS & GIFTS

Post-death allocation of income Therefore, in many cases, if an estate (or for partnerships subject to centralized
After a partner’s death, the partnership a trust that has made a Sec. 645 elec- partnership audit procedures under the
may be required to allocate all post- tion) that held a partnership has been Bipartisan Budget Act of 201510 for tax
death income to the beneficiary of an opened and closed within the same tax years ending after Dec. 31, 2017) filed
estate that received the interest, even if year, it is likely that the estate would within 12 months of the return’s due
the estate held the interest for a period not receive a Schedule K-1. Instead, date with extensions. The phrase “Filed
of time before the distribution. This is the Schedule K-1 should go to the Pursuant to Reg. Section 301.9100-2”
related to the fact that the changes to decedent up to the date of death and to needs to be included in the header of
Sec. 706 implemented in 1997 did not the beneficiary for the remainder of the the amended return or in the explana-
affect the treatment of a transfer via tax year. However, if the estate holds the tion section of an AAR.
inheritance or testamentary transfer. interest as of the partnership’s year end,
Therefore, a transfer to a beneficiary it would receive a Schedule K-1. Ability to report certain Sec. 743
from an estate (or a trust electing to be adjustments in a later year
taxed as part of an estate under Sec. 645) Time limit on making Sec. 754 Under the Sec. 743 regulations, a
that is not reported as a sale by the estate elections partner in a partnership with a Sec.
does not close the partnership tax year A partnership must have a valid Sec. 754 election is required to notify the
with regard to the estate. The beneficiary 754 election in place or make such an partnership in writing within one year
should receive the Schedule K-1 and be election in the year of death to allow of any transfer, and the partnership is
allocated income for the full portion of the estate or beneficiary to benefit from not required to make or report the Sec.
the tax year that the interest was owned a Sec. 743 step-up. However, relief is 743(b) adjustment until it is notified of
by the estate.8 available for a missed election. The the transfer.11
If non-pro-rata distributions of part- partnership has up to 12 months from If the transferee later provides the
nership interests are made to residuary the extended due date of the tax return required information, the partnership
beneficiaries, consideration should be to make such an election, regardless of must make any adjustments necessary to
given to choosing a termination date of whether an extension was actually filed.9 adjust the basis of the property as of the
Jan. 1. Otherwise, the tax consequences This late election can be made in date of transfer on an amended return
will not be divided evenly based on the the form of an amended return (or ad- (or an AAR) or the next annual return
percentage interests of the beneficiaries. ministrative adjustment request (AAR) of the partnership.

8. Regs. Sec. 1.706-1(c)(2). 10. Bipartisan Budget Act of 2015, P.L. 114-74.
9. Regs. Sec. 301.9100-2. 11. Regs. Secs. 1.743-1(k)(2)(ii) and (4).

EXECUTIVE SUMMARY elections, and Sec. 743 adjustments, using buy-sell agreements, among
among other things. other things.
• When an owner of a passthrough
entity dies, significant tax implica- • For an S corporation, the death of • For individual owners of a
tions can arise both on an entity and a shareholder creates a potential passthrough entity and their estate
individual level. of inadvertently terminating the S and/or trust, tax issues arising upon
election. In particular, the succes- death may involve suspended losses,
• For a partnership, the death of sor shareholder, whether it be the material and active participation of a
a partner can lead to tax issues estate, a testamentary trust, or a trust or estate, and trust accounting
involving the close of a partnership’s beneficiary, might not recognize for simple trusts, among other things.
tax year with respect to the de- that it needs to take certain steps to
ceased partner, a possible change remain a qualifying shareholder. S • Failing to adequately plan for the
in the partnership’s year end, post- corporations can plan for the pos- death of a passthrough entity owner
death allocation of income, Sec. 754 sibility that shareholders might die, can have a high financial cost.

22 March 2022 The Tax Adviser