Almost every individual and trust reports tax information on a calendar year; almost every partnership reports tax information on a calendar year. Matching the K-1 from a partnership to the tax year of an individual or trust is trivial.
However, many estates return their tax information on a fiscal year. When an estate receives a K-1 for a year ending 12/31, but the estate’s fiscal year end’s 9/30, how does the estate report the income?
Year of Death
When a taxpayer dies during the year, what happens to his partnership interests? Income earned by the partnership through the date of death is reported by the decedent on his final 1040 (or on a joint return with the decedent’s spouse). Income earned after the date of death is reported by the estate on its initial 1041.
It is best when the partnership issues separate K-1s to the individual/decedent and the estate; but not all partnerships do this (even when informed of the partner’s death!). If only one K-1 is issued for the year, the income must be allocated on a per-day basis.
Assuming that subsequent K-1s are correctly issued to the estate, when are they reported on the estate’s 1041? For this answer we start with IRC §706(a) which directs partners to include “income, gain, loss, deduction, or credit of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner.” [emphasis added]
In my example above, a K-1 issued 12/31/2009 will be reported by an estate for the estate’s tax year beginning 10/1/2009 and ending 9/30/2010. K-1s issued to an estate are never prorated and reported in different estate fiscal tax years.
See also Reg. §1.706-1(c)(3)(ii) … “The distributive share of partnership taxable income for a partnership taxable year ending after the decedent’s last taxable year is includible in the return of his estate … [T]he distributive share thereof is includible in the taxable year of the estate … within or with which the taxable year of the partnership ends.”