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If either a qualified terminable interest property (QTIP) trust or a marital general power of appointment (GPA) owns a partnership interest at the time a surviving spouse dies, the partnership will not be eligible to adjust its assets' "inside" basis as a result of the death under sec. 754, even though the value of the interest will be included in the spouse's taxable estate under sec. 2044. This is because the QTIP is the partner, not the surviving spouse, and a trust cannot die.
Background
Under sees. 754 and 743, a partnership can adjust the inside basis of its assets on the sale or exchange of a partnership interest or on a partner's death.
Example: Partnership P is owned 60% by J and 40% by K. P owns marketable securities with a $100,000 basis and a $1 million fair market value ( FMV). When J dies, his partnership interest is worth $600,000, creating an additional $540,000 "asset" ($600,000 FMV at death -Js 60% portion of the $100,000 inside basis).Thus, a sec. 754 election increases the total basis of the marketable securities (in P's hands) from $100,000 to $640,000. The marketable securities are later sold for $1.1 million. As a result, P incurs only $460,000 in gain ($1,100,000 - $640,000), rather than $1 million.
The QTIP...