Question

D is a one-third general partner in the DEF partnership. Both D and the partnership are cash method, calendar year taxpayers. D dies at a time when the partnership has earned $15,000 for the current year, and his share of the untaxed and undistributed partnership income for the year is $5,000. Under all of the sale or liquidation agreements described below, D is to be paid $30,000 for his interest, which includes his share of income. Immediately prior to D’s death, the DEF partnership has the following balance sheet:

Assets                                             Partners’ Capital

                                               A.B.           F.M.V.                             A.B.           F.M.V.

                  Cash                    $9,000        $9,000             D              $3,000        $30,000

                 Cash (not yet in D

                E, And F’s income) 15,000        15,000              E               3,000          30,000

                Receivables for               0        45,000              F               3,000          30,000

                Services Depreciable

                Section 1245 property     0          3,000

                Goodwill                         0        18,000

                                                $24,000   $90,000                             $9,000        $90,000

Assume, alternatively, that D’s interest: (1) passes to his estate; (2) is subject to a buy-out agreement at his death; (3) is liquidated by the partnership (which is a services partnership); or (4) is liquidated by the partnership in which capital is a material income-producing factor. Under each alternative, consider the following question:

(a) Does the partnership’s taxable year close as to D’s estate?

(b) What is the amount included in D’s gross estate?

(c) To what extent does the interest included in D’s gross estate constitute income in respect of a decedent?

(d) What outside basis does D’s estate take in the partnership interest immediately following D’s death

Answer 1