The Death of a Partner

• Pages: 281-291
• Author: James R. Repetti,William H. Lyons,Charlene D. Luke

281

Chapter Fifteen

THE DEATH OF A PARTNER

The death of a partner presents complex tax challenges. This

chapter reviews the concept of “income in respect of a decedent”

(“IRD”) and shows how classification of an inherite d partnership

interest as a right to receive IRD affects the successor ’s basis in the

partnership interest under § 1014. It then explores different methods

for transferring a deceased partner’s interest in the partnership and

the manner in which those methods affect the income tax liabilities

of the successor and the surviving partners.

A. Income in Respect of a Deceased Partner

1. Introduction

In general, a decedent’s estate (o r other successor) takes the

decedent’s property w ith a basis under § 1014(a) equal to its fair

market value.

1

If § 1014(a) applied to unpaid receipts or deferred

income, it would cause income taxation to disappear for some

taxpayers, while other taxpayers, who used a different method of

accounting, would already have recognized income. For example,

consider two lawyers, Elise and Felix, who each engage in sep arate

law practices. Each performs work for her or his client, sends the

client a bill for $50,000, and then dies. Elise, who reports on an

accrual method of accounting, recognizes income of $50,000 when she

bills her client. Felix, who uses the cash method, rep orts no income

upon billing his client. For the sake of simplicity, assume that each

lawyer’s account receivable is worth $50,000 at the date of death and

that each client pays the estate $50,000 soon after the lawyer’s death.

If each lawyer ’s account receivable took a $50,000 basis under

§ 1014(a), neither estate would have any income when the client

paid. As a result, Elise’s income would be taxed in full (to her before

her death), while Felix’s income would escape taxation entirely.

Section 1014(c) prevents income from the performance of

services (and some other kinds of income as well) from disappearing

from the tax base when the taxpayer dies after earning the income

but before recognizing it under the taxpayer ’s accounting method. It

does so by making § 1014(a) inapplicable to “property which

1

The date for which the property’s fair market value is determined is usually

the day of the decedent’s death (§ 1014(a)(1)), but an estate may elect an alternative

valuation date that is six months after the decedent’s death if the requirements in

§ 2032 are satisfied ( § 1014(a)(2)). Additional special valuation rules may apply. See

§ 2032A (certain farm or business real property) and § 2031(c) (conservation

easements).