In my previous articles on MLPs I discussed, in great detail, the tax impact of IRC 1245,1250 recapture. These amounts are subject to ordinary income when the units are sold and it can represent a sizable tax.
In one of my earlier articles a reader suggested holding the MLP until death and the heirs would get a step up in basis, thereby avoiding the recapture tax.
My initial response was that this would be viewed as Income in Respect of a Decedent (IRD) and not get any step-up. Additional readers "chimed in" and one reader pointed me to the NAPTP web-site where a respected professional wrote a Forbes article saying there was no 1245 recapture on death.
Back to the drawing boards and more research. I came upon section 1245(b)2, which said there was no recapture for "transfers on death." I gracefully acknowledged the "mea-culpa" and stopped there.
In yet another one of my articles, the subject came up again, as it seems that many are planning the "death route" out of recapture.
I re-iterated my new-found knowledge. In response to this, an SA reader and professional (elliot_mllr)suggested it was IRD and we walked the road over again. This time, however, we both worked on it from the assumption that recapture should be IRD.
After much research, I think it is most proper to conclude the following:
1. There are conflicting code sections that don't mesh well and a definitive answer remains elusive.
2. Reading of all these sections together most likely results is no recapture tax on account of death, but that it would still be imposed, subsequently, to heirs when, and if, the MLP is actually sold. So recapture is not avoided with a step-up in basis, just postponed.
3. If this reading is correct, then there is no "Death Route of Avoidance," other than passing the MLP on for generations and generations.
So, I think the reader needs to consider this in their planning and certainly consult a tax professional. If you want to follow the research and the basis of this conclusion you need only follow the article comments between myself and elliot_mllr, or search out elliot_mllrs' comment profile.
My sincere thanks to elliot_mllr for the fine work he has done on this.