Under Internal Revenue Code section 1041, no gain or loss is recognized on a transfer of property from an individual to a spouse. In addition, the property is treated as if acquired by the transferee by gift (wife) and the basis of the transferee in the property is the same as the adjusted basis of the transferor (husband).
So, if a husband transfers a fishing permit, that has a basis to the husband of $100,000, to his wife, there will be no gain or loss on the transfer. In addition, the wife's basis in the fishing permit will be the same as the husband's basis, or $100,000. The wife's basis in the permit will be $100,000 regardless of the amount she may have paid to the husband for the permit (assuming the transfer was in the form of a sale as opposed to a gift).
Section 1041 applies to any transfer of property between spouses regardless of whether the transfer is a gift or is a sale or exchange between spouses acting at arm's length. A divorce or legal separation need not be contemplated between the spouses at the time of the transfer nor must a divorce or legal separation ever occur.
It is not possible to transfer a permit to a spouse in order to qualify for section 197 amortization if the permit was purchased prior to the section 197 law change. The fishing permit in the wife's hands will remain unamortizable. It will also have the same basis as the husband's basis immediately prior to transfer.
Transfer for Reason Other than Death
If a post-91 limited entry permit is transferred between spouses for any reason other than death, the annual amortization remains as it was.
On July 1, 1995, a husband purchases a permit for $150,000 as a sole proprietor. He claims 6 months amortization. For a disability reason, he transfers the permit to his spouse on May 19, 2000. In 2000, he is entitled to 4 months of amortization on his 2000 tax year Schedule C, or $3,333 ($150,000/15 years = $10,000/year x 4/12 year = $$3,333).
If the wife uses the permit in her fishing business, it will be amortizable to her also. In the 2000 tax year, if her fishing business originates on or before May 19, 2000, she will be entitled to $6,667 of amortization on her Schedule C ($150,000/15 years = $10,000/year x 8/12 year = $6,667). As of January 1, 2001, the wife has 9 1/2 years left to amortize the permit. The amortization will be $10,000/year for the 2001 through 2009 tax years. Tax year 2010 is the last year in the 15 year amortization period, and $5,000 will be allowed in this year as only a half year of amortization is left for this year. Remember that in the initial year, 1995, the husband was only allowed 6 months of amortization.
Transfer Due to Death
If the transfer of property is due to death, generally IRC section 1014 is applicable. IRC Section 1014 entitled "Basis of Property Acquired from a Decedent" lists 10 different types of situations in which property is determined to be acquired from or to have passed from the decedent. The most common is property acquired by bequest, devise, inheritance, or by the decedent's estate from the decedent, or property acquired from a decedent by reason of death, form of ownership or other conditions, if by reason thereof the property is required to be included in determining the value of the decedent's gross estate. Under section 1014, the basis of property acquired from a decedent is the fair market value of the property at the date of the decedent's death or the fair market value of the property on any available alternative valuation date, if elected by the decedent's estate.
If the spouse uses the permit in her Schedule C fishing business she will be entitled to amortize the permit's fair market value over 15 years under section 197 of the Code. Even though a spouse is considered to be a related person, and normally a taxpayer wouldn't be entitled to amortize the permit if transferred from their spouse, IRC section 197(f)(9)(D) states that the anti-churning rules do not apply to the acquisition of any property by the taxpayer if the basis of the property in the hands of the taxpayer is determined by IRC section 1014(a). Due to IRC section 197(f)(9)(D), the spouse is able to amortize the permit.
This answer assumed that the husband was the sole owner of the permit. If both spouses owned the permit, then only 1/2 of the permit will receive a fair market value with a new 15-year amortization period. This is the half that section 1014(a) applies to and is portion the wife acquired from the husband after his death. The other half will continue to be amortized with the original basis and the remaining number of years as it remains the wife's portion of the asset.
Many fishermen are from Washington State which has a community property law. Pursuant to IRC Section 1014(b)(6), they normally receive a step-up for both the deceased and the surviving spouse's interest in property. Several other states may have community property laws, check with your state to find out.
Method of Sale
The method of sale (cash versus installment sale) has no affect on the amortization of the permit. If after August 10, 1993 (or after July 25, 1991, if a valid election is made), a taxpayer acquires a permit from a person that he is considered to be related to under IRC section 267(c)(4), and this related person held or used the permit at any time during the transition period, then the taxpayer will not be eligible to amortize the permit. If the related person did not hold or use the permit at any time during the transition period, amortization will be allowable.
Also, if the taxpayer acquires the permit from a family member who is other than a brother, sister, spouse, parent/grandparent (etc.), and child/grandchild/etc., the permit will be amortizable. However, the anti-abuse rules will operate to disallow amortization in a situation where person #1 transfers a permit to person #2, a family member who is not considered to be related to person #1 under IRC section 267(c)(4), such as a cousin, niece, or nephew. This "unrelated" person #2 then transfers the permit to person #3, someone who is a related person, under the IRC section 267(c)(4) definition, to person #1. If the purpose of this intermediary transfer to person #2 is to achieve a tax result that is inconsistent with the purposes of section 197 (such as making the permit amortizable to person #3 when it wouldn't have been amortizable if transferred directly from person #1 to person #3), the Commissioner can recast the transaction for Federal tax purposes as appropriate to achieve tax results that are consistent with the purposes of section 197. See Temporary Treasury Regulation 1.197-2 (h), IRC section 267(b) and IRC section 267(c)(4).