Practical planning for the decedent's final return.

The preparation of a decedent's final Federal income tax return requires consideration of a number of issues, such as whether and when to file a joint return, what types of income have to be reported, whether medical expenses are deductible, the treatment of gain or lose on property transactions, and the treatment of various carryovers. These and other thorny questions are addressed and illustrated in this article.

Every year, more than two million people residing in the U.S. die.(1) A decedent's business and personal affairs must be settled; a personal representative (PR) is selected to handle them. The PR is appointed by the appropriate court--an executor named in the decedent's will or an administrator (or other title) if the decedent died intestate (i.e., without a valid will) or without naming an executor. The PR takes charge of the decedent's probate property and winds up his affairs.

Among other matters, the PR is responsible under Sec. 6012(b)(1) for filing the decedent's Federal individual income tax return for the year of death ("final return"). Although the Pit's duties include filing all required tax returns due for the decedent (including the estate's Federal income tax return (Form 1041, U.S. Income Tax Return for Estates and Trusts), the Federal estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) and the Federal gift tax return (Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return), this article addresses filing the decedent's final return.

There is surprisingly little guidance on the items to be reported on the decedent's final return. This article discusses the treatment of common types of income and deductions on the final return and various related procedures and elections.

The PR's Duties

Immediately after the decedent's death, the PR should apply for an employer identification number (KIN) for the estate by filing Form SS-4, Application for Employer Identification Number. The KIN is used on the estate income tax return (Form 1041) instead of the decedent's Social Security number(2); it should be given to payors of interest, dividends and other income that will be received by the estate, to be used on information returns (i.e., Forms 1099).

Under Sec. 6903, the IRS District Director should be advised of the decedent's death and of the Pit's identity. Although Regs. Sec. 301.6903-1(b) does not specify the method to be used, the easiest choice is Form 56, Notice Concerning Fiduciary Relationship, which should be filed with the IRS Service Center in which the decedent filed returns.(3) Under Regs. Sec. 1.6091-2(a), the final return is filed in the IRS district of the Pit's residence if the decedent filed single or married filing separately, or in the IRS district of the surviving spouse's residence if the decedent filed jointly.

The filing of Form 56 notifies the IRS to mail correspondence concerning the decedent's taxes to the PR and not to the decedent's last-known address. After filing Form 56, the PR assumes the rights and duties of the decedent with respect to Federal income taxes until advised such fiduciary capacity has been terminated. The fiduciary's liability for income taxes is usually in a representative, rather than a personal, capacity.(4) If such notice is not given to the IRS, Regs. Sec.301.6903-1 (c) provides that any deficiency letter mailed to the decedent's last-known address is sufficient notice; notice need not be sent to the PR.

According to Regs. Sec. 301.6903-1(b), when the Pit's fiduciary capacity has terminated, he should file with the IRS District Director with whom notice of appointment was filed written notice and evidence that such capacity has terminated (on Form 56).

The PR signs the final return and indicates his title (e.g., "Executor") next to the signature. The 1995 Instructions to Form 1040, page 35, state that the deceased taxpayer's name, "DECEASED" and the date of death should be written across the top of the return. Regs. Sec. 1.6072-1(b) indicates that the final return has the same due date as if the decedent had lived.

Example 1: B, a calendar-year taxpayer, died duly 20, 1996. B's 1996 (i.e., final) return is due (unless validly extended) by Apr. 15, 1997, as it would have been had B lived.

Example 2: F, a fiscal-year taxpayer with an October 31 year-end, died on July 20, 1996. If not extended, F's final return is due by Feb. 15, 1997.

Declaration of Estimated Taxes 

Quarterly estimated tax payments need not be made by the PR on the decedent's behalf after death. Sec. 6654(e)(3)(A) permits a waiver of additions to tax for underpayment in unusual circumstances if the imposition would be against equity and good conscience; the taxpayer's death should be a circumstance that permits such a waiver. However, if the death occurs after the due date for an estimated tax payment, an addition to tax could be assessed for that period, under Sec. 6654(a).

Filing a Joint Return

The PR and the surviving spouse together determine whether a joint return should be filed for the year of the decedent's death. Regs. Sec. 1.6013-1(d) permits a joint return if the decedent was married at death, the surviving spouse did not remarry by the close of the tax year and both taxpayers have the same tax year. Regs. Sec. 1.6013-1 (d) states that a joint return may only be made by the PR; if the PR decides a joint return should be filed, the surviving spouse must agree. In making this decision, since Sec. 6013(d)(3) provides for joint and several liability on a joint return, the PR must consider the decedent's and the surviving spouse's tax situations and whether the estate should be exposed to such liability. Under Regs. Sec. 1.6013-1(d)(1), this joint return covers the entire tax year for the surviving spouse and the period ending with the date of death for the decedent. Items that affect the joint return decision, and tax planning suggestions, are discussed below.

If a joint return is filed, the decedent and the surviving spouse have a separate interest, rather than a joint interest, in any tax liability or refund.(5) The tax liability on a joint return is allocated to the decedent based on his relative separate tax liability.

Example 3: On a final return, H's (a decedent) and W's joint tax liability is $30,000. H's and W's separate tax liabilities (had they filed separately) would have been $24,000 and $12,000, respectively; thus H's share of the joint tax liability is $20,000 (($24,000 [divided by] $36,000) x $30,000).

The decedent's share of a refund from a joint return is the tax he paid in excess of his share of the joint tax liability.(6) If the parties file married filing separately, the estimated tax paid on the joint declaration (while the decedent was alive) must be apportioned between the decedent and surviving spouse. The IRS permits the surviving spouse and the PR to divide the estimated payments in any agreed proportion.(7)

The Instructions to Form 1310, Statement of Person Claiming Refund Due to a Deceased Taxpayer, provide that the form must be filed by anyone claiming a refund on behalf of a deceased taxpayer. There are special rules if the claimant is (1) the surviving spouse who fled the original joint return with the decedent or (2) the PR who fled an original return for the decedent.

Accounting Methods and Tax Year

Under Regs. Sec. 1.443-1(a)(2), an individual's tax year ends on his death. Income and deductions through the date of death are included on the final return using the same accounting method that the decedent used before death, according to Regs. Sec. 1.451-1(b). For purposes of this article, the decedent is assumed to have been a cash-basis taxpayer; thus, income received and expenses paid prior to the date of death are reported on the final return. For a cash-basis taxpayer, any accrued but unpaid income at the date of death is income in respect of a decedent(8) (IRD) and excluded from the final return; it is taxable to the estate or heir when actually received.

Under Regs. Sec. 1.451-2(a), income reported on the final return includes income constructively received by (or available without restriction to) the decedent before death--for example, an unclaimed paycheck (or one received, but not cashed, prior to death).(9) Other examples of constructively received income under Regs. Sec. 1.451-2(b) include dividend and interest checks uncashed before death and earned interest on savings or checking accounts that could be claimed, but is not posted to the account, at death.

Specific Types of Income

Salary, Dividends and Interest

Salary, wages and bonuses received before death (including uncashed checks) are included in the final return by Regs. Sec. 1.451-1(a). Accrued but unpaid compensation at the date of death (e.g., salary, bonuses, vacation, sick pay and commissions) constitutes IRD and, according to Regs. Sec. 1.691(a)-1(b), is not properly includible in computing taxable income for the year of death under the cash method. Thus, for a cash-basis decedent, income must be received or available prior to death to be includible in the final return.

Dividend and interest checks received prior to death are included in the final return. If the decedent died after the record date, but before the payment date, the dividend is IRD and reported by the ultimate recipient.(10) On the other hand, if the decedent died on or after the payment date, the doctrine of constructive receipt applies; the dividend is included in the final return, according to Regs. Sec. 1.301-1(b), if the decedent could have demanded the dividend check or if it was available before death. Constructive receipt does not necessarily apply if the date of death coincides with the dividend payment date of a corporation that customarily mails dividend checks to shareholders. For example, if the corporation's practice is to distribute dividend checks such that they do not reach stockholders until after the payment date, the dividend is IRD and would not be reported on the final return because it was not unqualifiedly made subject to the decedent shareholder's demand on the payment date.(11) However, if the decedent was a member of a dividend reinvestment plan and died on or after the payment date, the dividend must be included in the final return, under Regs. Sec.1.301-1(b).

Under Regs. Sec. 1.171-1(c), any interest accruing on corporate bonds before the decedent's death is IRD and not includible in the final return. However, the itemized deduction for the amortizable bond premium for the period before death is taken by the decedent, not by the estate or heir.

If, prior to death, the decedent made a Sec. 454(a) election to include in income the annual increment in the value of U.S. savings bonds, the increase in value of the bonds in the year of death (up to the date of death) must be reported on the final return.(12) The redemption values of U.S. savings bonds are available from banks and savings and loan institutions.

The PR of a decedent who never elected to include in income the annual increment in value of U.S. savings bonds has three choices:

1. To include all interest earned before death in the final return.(13) If the PR fails to do this, the interest earned up to the date of death is IRD and not included in the final return.

2. To report the interest earned prior to death on the estate income tax return.

3. To do nothing; the heir who cashes the bonds at maturity would report the past interest.(14)

The PR may receive Forms 1099 that contain the decedent's Social Security number. These forms often report interest and dividends for the entire year, including the period after death. Unless the decedent died on December 31, only some of the income is the decedent's; the balance should be reported by the successor to the asset. The PR can report the income shown on the Forms 1099 on the final return and then "back out" (i.e., deduct) income earned after the date of death, leaving the net amount received while the decedent was alive. The income received after death should be reported on the estate income tax return, or by the successor to the asset. Alternatively, the PR may request the interest and dividend payors to send separate, corrected Forms 1099 showing the income before and after death.

Partnership, S Corporation and Trust Income

Generally, under Regs. Sec. 1.706-l(c)(3)(ii), a deceased partner's final return includes his distributive share of partnership income or loss and separately stated items for the partnership tax year ending on or before his date of death. The death of a partner does not automatically close the partnership tax year, according to Sec. 706(c)(1). Partnerships and partners generally use calendar years(15); if the death did not occur on the last day of the partnership tax year, the decedent partner's share of partnership income for the year of death generally will not be includible in his final return. The share of partnership items for the partial partnership year of death, along with amounts earned after the date of death, are recognized by the estate or the successor even though the decedent may have actually received the income before death in the form of a cash draw.(16)

Example 4: R, a 20% partner in RFT a calendar-year partnership, died on Sept. 8, 1996. RF has $200,000 of income for the tax year ending Dec. 31, 1996. During 1996 and prior to her death, R withdrew $10,000 from RF. R's distributive share of RF's income, $40,000, is not included on her final return, nor is her withdrawal.(17) R's 1996 distributive share will be recognized by her estate or successor-in-interest.

Guaranteed payments are treated similarly to a distributive share of partnership income or loss and are recognized by the partner in the year in which or with which the partnership tax year ends, under Regs. Sec. 1.701-1(c). For a deceased partner, Regs. Sec. 1.706-1(c)(3)(iii) provides that the guaranteed payments for a partnership tax year ending after death are reported by the estate or successor-in-interest, regardless of when the partner actually received them.

In the absence of partnership termination, there are two ways in which partnership income earned in a partial fiscal year before death can be reported on the final return. First, the surviving spouse may be the successor-in-interest; a joint return can then be filed for the year of death, according to Regs. Sec. 1.706-l(c)(3)(iii). Generally, the successor-in-interest is named in the partnership agreement; if not, a similar result may be obtained by holding the partnership interest in joint tenancy with the spouse. The partnership interest transfers automatically to the spouse on the decedent's death.

Second, a pre-existing buy-sell agreement can trigger the sale of the decedent's partnership interest on death. Under Regs. Sec. 1.706-1(c)(3)(vi), Example (2), the sale closes the partnership tax year for the decedent partner; thus, partnership items through the date of death are reported on the final return. A buy-sell agreement should be considered by an unmarried partner or by a partner not wishing his surviving spouse to be the successor.

A deceased partner's self-employment (SE) tax year closes as of the end of the month of death. If a calendar-year unmarried general partner dies during the year, a ratable share of the partnership's income through the end of the month of death is reported for SE tax purposes, even though none of the distributive share may be reported on the decedent's final return.(18)

Unlike partners (who include their shares of partnership income at the end of the partnership's tax year), an S shareholder reports his share of income or loss on a per-share, per-day basis, under Sec. 1377(a). According to Sec. 1366(a)(1), the final return includes the deceased shareholder's pro rata share of the S corporation's income and separately stated items for the period between the end of the corporation's last tax year and the date of death; thus, there is no IRD.

If the decedent was a cash-basis taxpayer and a trust beneficiary, any trust income actually received prior to death would be includible in his final return.(19)

Gain or Loss From Certain Property Transactions

Under Sec. 453(k)(2)(a), a sale of publicly traded stocks and bonds does not qualify for installment sales treatment. Gains from the sale of publicly traded securities are recognized on the date the trade was executed, not on the settlement date.(20) Payments are deemed received on trade execution.

Example 5: On Nov.1,1996, T directs his broker to sell 100 shares of a listed stock for $20 per share. T's basis is $15 per share. If T died on Nov. 2,1996 (before the settlement date), the $500 gain ($2,000 - $1,500) would be includible in his final return.

Sale of a Principal Residence

According to Sec. 1034(a), individuals may postpone the gain from the sale of a principal residence by purchasing another one within the two years before or after the date of sale. The PR cannot defer a decedent's gain on a pre-death sale of a personal residence by purchasing another residence after death. To qualify for the deferral, both the old and the new residence must be the taxpayer's principal residence before death and the taxpayer must physically occupy the new residence within the required period.(21) The new home cannot be the decedent's principal residence, because the decedent never lived in it; however, the surviving spouse can replace the residence within the required period and postpone recognizing the gain on the decedent's final return under Sec. 1034(g), even if title to the old residence was in the decedent's name and the new residence is in the surviving spouse s name.

If the decedent was at least age 55 at death, the PR can elect the Sec. 121 one-time exclusion to avoid recognizing up to $125,000 of the gain on the sale of the decedent's personal residence; the exclusion is not available if the decedent or spouse previously used it.(22)

Involuntary Conversions

Under Sec. 1033, gain on the disposition of property involuntarily converted into cash or similar property as a result of theft, casualty or condemnation may be postponed, at the taxpayer's election, if similar replacement property is acquired within two years after the end of the year in which the gain is realized. Although the IRS disagrees, the courts generally allow a PR to replace the property within the replacement period, thereby postponing gain recognition on the final return.(23) The basis of the replacement property is its cost, less any unrecognized gain on the conversion. The IRS's position, that the privilege to replace dies with the decedent because there is no continuation of his investment (as required by Sec. 1033(a)), generally has not been upheld by the courts.

Installment Obligations

Under Sec. 453B(a)(2), disposition of an installment obligation generally triggers income to the transferor of the gain not yet recognized on the obligation. However, when a taxpayer dies and an installment obligation is transferred to his estate or beneficiary, the transfer does not cause the unrecognized gain to be reported on the final return; rather, the recipient of such IRD continues to collect the payments and, according to Regs. Sec. 1.691(a)-5(a), uses the decedent's gross profit percentage to compute the taxable portion.

Individual Retirement Accounts

The decedent's individual retirement account (IRA) passes to the surviving spouse, if named as the beneficiary, without any immediate tax consequences. Under Sec. 408(d)(3)(C)(ii), the spouse may roll that IRA over into his own or establish a new IRA in his own name. A person other than a surviving spouse who inherits an IRA has IRD; when he receives a distribution from the decedent's IRA, he is taxed on the distribution, less any basis that the decedent had in the IRA (i.e., aggregate nondeductible contributions under Sec. 408(o)).(24)

Specific Deductions and Carryovers

The general rules for exemptions and deductions allowed to an individual also apply to the final return. The personal exemption and standard deduction (if used) should be taken on the final return.(25) The final return includes deductible items paid before death. A deductible item paid by a check not cashed as of death is deemed paid before death if the check is eventually cashed.(26)

Medical Expenses

Medical expenses of the decedent paid by him before death are deductible on the final return, as long as the amount exceeds the Sec. 213(a) 7.5% adjusted gross income (AGI) floor. Sec. 213(c) provides the PR with two choices for reporting the decedent's unreimbursed medical expenses paid within one year of death. First, such expenses may be deducted on the decedent's income tax return for the year incurred (i.e., an original or amended final or earlier-year return). Alternatively, under Sec. 2053, the medical expense may be deducted on the estate tax return, but under Regs. Sec. 1.642(g)-2, not on the estate income tax return. The deduction of medical expenses originally on the estate tax return is not irrevocable, unless the Form 706 has been subject to final audit. If the medical deduction is taken on the decedent's income tax return, the 7.5% AGI threshold amount cannot be taken on the estate tax return as a claim against the estate.(27) Any later reimbursement of medical expenses deducted on the decedent's return must be reported as IRD on the estate income tax return to the extent of the tax benefit received.(28)

The PR must consider the decedent's and the estate's marginal tax rates to determine on which return to deduct medical expenses paid within a year of death. The expenses can be divided between the Forms 706 and 1040 in any ratio desired. For expenses deducted on the decedent's return, Regs. Sec. 1.213-1(d)(2) requires the PR to attach a statement in duplicate to the return waiving the right to take the deduction on Form 706. The election to deduct these expenses on the decedent's return is irrevocable.

Paying the medical expenses before death reduces the assets potentially subject to estate tax and may produce a deduction on the final return.

Charitable Contributions 

Contributions made in the decedent's final year should be deducted on his final return. A problem may arise, however, if a decedent gave large amounts to charity in the years before death. Under Regs. Sec. 1.170A-10(d)(4)(iv), contribution carryovers and contributions in excess of the decedent's AGI limit for the year of death are lost; thus, the decedent's contribution carryover can be taken on the final return subject to the appropriate AGI limits, but any excess cannot be carried forward. If the surviving spouse had income, the PR can file a joint return with the surviving spouse to increase the joint AGI, allowing more contributions to be deducted on the final return.

The decedent's charitable contribution carryover dies with him; if joint returns were filed prior to death, the total carryover must be allocated between the decedent and the surviving spouse. Each spouse's share of the excess contribution is the ratio of that spouse's separate excess contribution to the total of the separate excess contributions.(29) The separate excess contribution is the contribution carryover that each spouse would have had if separate returns had been filed.

Occasionally, an individual will make large charitable contributions early in the tax year. If death occurs soon after the contributions, and before much AGI has been earned, these contributions may not be deductible. To increase the likelihood of a deduction, a joint return should be filed with the surviving spouse (provided that spouse has income) for the year of death. If a joint return is not filed, the excess contribution is lost.

Unrecovered Costs

Often, an individual will be receiving annuity payments at the time of death. Any unrecovered cost of the decedent's annuity at the time of death is deductible, under Secs. 72(b)(3)(A) and 67(b)(10), on the final return as an itemized deduction not subject to the 2% AGI floor. Additionally, any unamortized mortgage loan costs on investment real estate may be deducted on the final return,(30) even if the mortgaged property is transferred to the estate or a beneficiary who continues to make the mortgage payments.

Carryovers and Carrybacks

Generally, the decedent's carryovers may be used on the final return (regardless of whether it is a joint return), subject to the carryover rules. Any unused carryover of the decedent's not taken on the final return is lost. Net operating loss (NOL) or capital loss carryovers sustained by the decedent before death cannot be deducted on the estate income tax return or on an heir's income tax return.(31)

If an individual dies with a capital loss, capital loss carryover, NOL or NOL carryover, a joint return might be filed in the year of death to enable use of more of the loss or carryover against joint income. Alternatively, if a married decedent had filed separately in prior years, the PR may wish to amend open prior-year returns to file jointly and deduct the NOL.(32) If a couple filed separate returns before the year of death and file jointly in the year of death, any NOL carryovers of the past separate returns can be carried forward combined and deducted against the final return joint income.

A surviving spouse with an NOL in a year after the decedent's death can carry it back to a joint return filed with the decedent; however, only the surviving spouse's portion of the income on the prior-year joint return can be offset by the carryback.(33) If there is an NOL carryforward in the year of death on a joint return, only the surviving spouse's share can be carried forward to future returns.(34)

Because a decedent's capital loss carryover dies with him, it may be wise to file jointly in the year of death to offset the surviving spouse's capital gains against it.(35) The surviving spouse could sell appreciated securities in the year of death and offset the gain with the decedent's loss or loss carryover on a joint return. The surviving spouse can immediately buy the same securities and get a stepped-up basis at no tax cost, because the Sec. 1091 wash sale rules do not apply to gains.

The decedent's investment interest expense carryover can only be deducted on his final return. According to Sec. 163(d)(2), any carryover is treated as paid by the taxpayer in the next tax year, so that neither the estate nor an heir can use it. A joint return may maximize net investment income on the final return and thus reduce the amount of deduction otherwise lost.

Planning With Loss Property

A terminally ill individual may own certain investment property (e.g., real estate or closely held stock) that has declined in value and has a fair market value (FMV) below basis. If the individual wishes these assets to remain in the family, but does not want the heirs to take a stepped-down basis under Sec. 1014 that will not preserve the potential capital loss, he should consider selling the assets to his heirs currently. Sec. 267 bars the deduction of a loss on a sale to a related party. If the asset is later sold at a loss, the loss is capital; if sold at a gain, it is not taxable to the extent of the decedent's previously disallowed loss on sale.

Example 6: M, who is terminally ill, owns real property with a basis of $350,000 and an FMV of $27O,000. If M sold the property to an unrelated party, she would realize an $80,000 capital loss ($350,000 - $270,000). Wishing to keep the property in the family, M sells the property to S, her sister, for $270,000; M's capital loss is disallowed under Sec. 267(a)(1) and S's basis is $270,000. Five years later, S sells the property to Q, an unrelated party, for $420,000. S's realized gain is $150,000 ($420,000 - $270,000); her recognized gain, under Sec. 267(d), is only $70,000 ($420,000 - $270,000 - $80,000 loss disallowed to M).

Passive Activity Losses

The decedent may have suspended passive activity losses (PALs) at death. Under Regs. Sec. 1.469-l(f)(4)(i), PALs in excess of passive income may be carried forward indefinitely, but only to offset the taxpayer's future passive income. If an interest in a passive activity is transferred because of death, the basis of the activity to the transferee under Sec. 1014 is its date of death FMV (if the alternate valuation date is not elected); thus, some or all of the suspended PALs attributable to the activity can offset nonpassive income on the final return.(36) However, under Sec. 469(g)(2), the suspended PAL deductible in the year of death is limited to the excess of such loss over the basis step-up at death.

Example 7: A's basis in a passive activity immediately before death is $100, the FMV is $135 and the activity has a suspended $45 PAL. Only $10 can be deducted on A's final return, the excess of the loss ($45) over the basis step-up in the property ($135-$100). The remaining $35 PAL cannot be deducted on the final return or used by the recipient of the property. However, if at A's death, the activity's FMV is $35, $45 can be deducted on the final return. If the FMV at death equals or exceeds basis plus the suspended PAL (e.g., basis, $100; FMV, $146; suspended PAL, $45), none of the suspended PAL can be deducted on the final return.

On distribution of the activity by the estate, the beneficiary will take under Sec. 469(j)(12) the date of death FMV, increased by any remaining allocated disallowed PALs.

Statute of Limitations; Termination of Fiduciary Responsibility

Under Sec. 6501 (a), the IRS ordinarily has three years from the date an income tax return is filed (or due, if later) to assess additional tax. A PR may request a prompt assessment of tax under Sec. 6501 (d) after the return has been filed, reducing the time for making an assessment against the estate to 18 months from the date that the IRS received the request. The request is made by filing Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d), with the IRS Service Center in which the return was filed. Regs. Sec. 301.6501(d)-1 provides that the request can be made for any of the decedent's returns. The quick assessment may permit an earlier settlement of the estate and distribution of assets to the beneficiaries.

After filing the final return, the PR may apply in writing, under Sec. 6905(a), for discharge of personal liability. According to Regs. Sec. 301.6905-1(a), the discharge is effective if the IRS does not respond within nine months after the application is filed. However, this will not relieve the estate from liability to the extent there are assets in the Pit's control or possession.

Finally, the PR should notify the IRS of termination of the fiduciary relationship, under Sec. 6903(a). Form 56 can be used.

Conclusion

The PR is responsible for timely filing the decedent's final return and paying any tax due up to the date of discharge. As a fiduciary, the PR must act in the decedent's best interest. This article provides guidance and tax planning suggestions to help the PR act in that interest.

RELATED ARTICLE: EXECUTIVE SUMMARY

* The decedent's share of most carryovers dies with him; thus, if the decedent was married at death, it may be wise to file a joint return at death if the surviving spouse had income, so as to be able to maximize use of the carryover.

* Form 56, Notice Concerning Fiduciary Relationship. should be filed to notify the IRS (1) of the personal representative's identity and (2) when the fiduciary relationship is terminated. The initial filing notifies the IRS to mail correspondence concerning the decedents taxes to the PR and not to the decedents last-known address.

* Unlike an S corporation shareholder, who reports corporate-level items on a per-day, per-share basis, if the decedents death did not occur on the last day of the partnership tax year, his share of partnership income for the year of death generally will not be includible in his final return.

(1) Statistical Abstract of the United States 1995 (U.S. Department of Commerce), Vital Statistics, Table No. 117,, p. 88. (2) Sec. 6109; Regs. Sec. 301.6109-1(a)(1)(ii)(B); Instructions to Form 1041, p. 8. (3) See Instructions to Form 56; Regs. Sec. 301.6903-1. (4) Alva Bradley, 56 F2d 728 (6th Cir. 1932)(3 USTC [paragraph]904); see Est. of Modie J. Spiegel, 12 TC 524 (1949), acq.; Est. of Eli B. Witt v. Fahs, 160 F Supp 521 (S.D. Fla. 1956)(56-1 USTC [paragraph]9534); WW Flint, 237 F Supp 551 (D.C. Idaho 1964)(65-1 USTC [paragraph]9169). (5) See Rev Rul. 74-611, 1974-2 CB 399. (6) See Rev. RuL 80-7, 1980-1 cs 296. (7) Although Sec. 6015(b) was repealed by Section 412(a)(1) of the Tax Reform Act of 1984, the IRS,s position is that Regs. Sec 1.601s(b)-1(c)(2), which provides rules for allocation in the absence of an agreement, continues to govern the proper division of estimated tax payments filed jointly but claimed separately; see Geraldine Bell, D.C. Mass., 1993 (73 AFTR2d 94-391, 94-1 USTC [paragraph]50,172). (8) Sec. 691(a); Regs. Sec. 1.691(a)-l(b); see Streer and Strobel, "Income in Respect of a Decedent ' 26 The Tax Adviser 297 (May 1995). (9) Urban A. Lavery, 158 F2d 859 (7th Cir. 1946)(35 AFTR 616, 46-2 USTC [paragraph]9406). (10) Est. of Henry PF Putman, 324 US 393 (1945)(33 AFTR 599, 45-1 USTC [paragraph]9234). (11) Sewell Lee Avery, 292 US 210 (1934)(13 AFTR 1168, 4 USTC [paragraph]1277). (12) Sec. 454; see Regs. Sec. 1.454-l(a)(l). (13) Rev. Rul. 68-145, 1968-1 CB 203. (14) See Rev. Ruls. 64-104, 1964-1 CB 223; 68-145, id.; and 58-435, 1958-2 CB 370. (15) See Sec. 706(b) (1) (B) (iii). (16) See Rev Rul 71-271, 1971-1 CB 206. (17) Withdrawals or distributions may cause gain recognition on the final return if the cash distributed exceeds the partners basis in his partnership interest see Regs Sec. 1.1402(f)-1. (19) Regs. Secs.1.652(c)-2 and 1.662(c)-(2). (20) Rev Rul.93-84, 1993-2 CB 225. (21) John F. Bayley, 35 TC 288 (1960), acq.; Edwin L. Sheahan, 323 F2d 383 (5th Cir. 1963)(63-2 USTC 59720). (22) See Rev. Rul. 82-1, 1982-1 CB 26; GCM 38576 (12/3/80). (23) Compare Rev Rul. 64-161, 1964-1 (Part 1) CB 298, with Est. of Goodman, 199 F2d 895 (3d Cir. 1952)(42 AFTR 877, 52-2 USTC [paragraph]9556). (24) Rev. Rul. 92-47, 1992-1 CB 198. (25) The personal exemption is not allowed, and the standard deduction may be limited, if the decedent is claimed as a dependent by another taxpayer; see 1995 Instructions to Form 1040, p. 23. (26) Spiegel, note 4; Rev. Rul. 54-465, 1954-2 CB 93; Lavery, note 9. (27) See Rev. Rul. 77-357, 1977-2 CB 328. (28) Regs. Sec. 1.213-1(g)(1); see Sec. 111(a). (29) See Regs. Sec. 1.170A-10(d)(4)(i). (30) See Rev Rul. 86-67, 1986-1 CB 238. (31) See Rev Rul. 74-175, 1974-1 CB 52. (32) See Regs. Secs. 1.6013-2(a)(1) and 1.172-l(d). (33) See Virginia York, E.D. Tex., 1964 (18 AFTR2d 5543, 66-2 USTC [paragraph]9628); Audrey L. Zeeman, 275 F Supp 235 (S.D. N.Y. 1967)(21 AFTR2d 679, 67 2 USTC [paragraph]9565); Rev Rul. 71-382, 71-2 CB 156. (34) Vivian W Rose, TC Memo 1973-207. (35) See Rev. Rul. 74-175, note 31. (36) See Tax Clinic, "Disallowed PALs Increase Basis When Estate Distributes the Activity," 25 The Tax Adviser 488 (Aug. 1994).