ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, February 17, 1997 TAG: 9702190009
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: Tax Questions
Q: My husband and business partner (in a husband/wife partnership) died in 1996. For 1996 my tax situation should remain unchanged, but what are my tax options for 1997? We were the only two persons involved in our woodworking business which I am now handling alone with no partners or employees. How do I make the transition to a sole proprietorship or other form of business? I assume I cannot remain a partnership without a partner.
A: Partnership taxation is one of the most complex areas of the Internal Revenue code. Your situation certainly reflects this complexity. For a complete answer to your questions, you should see a tax professional before filing your 1996 income tax returns. But generally, here are some points for you to consider.
First, let's correct your assumptions. Your 1996 tax status has changed and your partnership and personal returns for 1996 change because of your husband's death. Also, federal tax law does allow for partnership status for one-person partnerships in certain situations.
Your partnership agreement, or lack of one, determines how to continue. The possibilities are:
1. There was a partnership agreement that continues the partnership after the death of a partner. The agreement would then determine if ownership of the dying partner's interest passes to the partner's estate or to the remaining partner.
By providing for continuance within the partnership agreement, the partnership would file a return for the whole year. The income would pass to the estate of the deceased partner or to the remaining partner based on the terms of the agreement. The husband's partnership basis would be stepped-up to fair market value at the date of death.
Depending on terms of the agreement, the partnership may continue indefinitely, dissolve with distribution of the assets to the husband's estate and to the wife. Or, if the wife became sole partner, the partnership may dissolve to a sole proprietorship. These distributions can be tax-free.
2. The partnership had no written agreement, or the agreement did not continue the partnership and did not discuss distribution upon the death of a partner.
The partnership dissolves at the date of the death, and the assets are distributed to the estate of the dying partner and to the remaining partner. A partnership return would be filed for the period Jan. 1, 1996, until the date of death.
A new entity would exist from the date of death forward, either as a partnership of the estate and the wife or, if the assets went to the wife, as a sole proprietorship. Assets from the husband's share of the partnership would receive a stepped-up basis. The new entity would either file a new partnership return for the period from the date of death to Dec. 31, 1996, or you would file a Schedule C with your personal return, depending on how the assets of the former partnership were distributed.
3. A third possibility is that a partnership agreement left all interest to the remaining partner but did not continue the life of the partnership, or that all assets were titled jointly with right of survivorship.
In this case, the partnership ended at the date of death, and the business became a sole proprietorship at that time. The husband's portion of the assets receive a stepped-up basis. The partnership reports income from Jan. 1 to the date of death through the partnership, and the wife reports from the date of death until the end of the year as a sole proprietorship. The husband's share of the partnership income is reported to his estate.
4. One more possibility is some combination of the above in which various assets pass in different ways to the estate or the wife. In this case, each asset and the partnership entity must be considered as to entity and how to distribute and report.
The tax effect of the distributions generally would not produce a taxable situation for the wife and would produce a stepped-up basis in one-half of the assets. Title to property, insurance, business registration, identification numbers, etc., have to be changed to reflect the new entity. You should get proper professional help as soon as possible to help you through the changeover.
-Answered by Richard J. Beason of Richard J. Beason, CPA
Tax-related questions from our readers are answered by members of the Roanoke chapter of the Virignia Society of Certified Public Accountants. This feature runs every Monday on the Money Page through April 7. Please send your questions by March 30 to: Tax Questions, The Roanoke Times, P.O. Box 2491, Roanoke, 24010.
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