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IRS Issues Proposed Regs on Estate Basis Reporting; AICPA Pushes for Deadline Extension.

(Parker Tax Publishing MARCH 2016)

Just weeks before an initial filing deadline, the IRS has issued proposed regulations that provide guidance regarding the basis consistency requirements under Code Sec. 1014(f) for reporting property acquired from a decedent, and the reporting requirements under Code Sec. 6035 with respect to the value of such property. REG-127923-15 (3/4/16).

In 2015, Congress enacted a law which imposed on executors of estates additional information reporting requirements. These reporting requirements, which require filing with the IRS and providing to the beneficiary a statement regarding consistent basis reporting between estates and persons acquiring property from a decedent, have caused concern among tax practitioners and executors alike because of the time frame in which the reporting is required and the lack of guidance from the IRS to facilitate proper compliance.

While a new form was released earlier this year on which executors must report the required information, complaints are mounting that the March 31, 2016, deadline to file the form needs to be extended. Some corporate fiduciaries, such as banks and trust companies that have multiple estate tax filings a month, argue that they need time to automate the reporting process. The reporting deadline of 30 days after the estate tax return is filed, practitioners say, is a problem because an executor typically does not know within 30 days of filing the estate tax return which beneficiary will receive what asset.

On March 4, the IRS issued proposed regulations (REG-127923-15) aimed at facilitating compliance with the new rules. However, at press time, there has been no mention from the IRS about extending the March 31 deadline.


In 2015, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Pub. L. 114-41, 7/31/15) enacted Code Sec. 1014(f) and Code Sec. 6035, imposing two new estate tax reporting requirements.

Under Code Sec. 1014(f), the basis of certain property acquired from a decedent may not exceed the value of that property as finally determined for federal estate tax purposes, or if not finally determined, the value of that property as reported on a statement made under Code Sec. 6035. Code Sec. 6035 imposes reporting requirements with respect to the value of property included in a decedent's gross estate for federal estate tax purposes. These new provisions are effective for estate tax returns filed after July 31, 2015.

Compliance Tip: The requirements under Code Sec. 6035 are met by filing Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, with the IRS, and Schedule A, Information Regarding Beneficiaries Acquiring Property From a Decedent, which is part of Form 8971, with the person acquiring an interest in the decedent's property. In Notice 2016-19, the IRS delayed until March 31, 2016, the due date for all Forms 8971 and all Schedules A required to be filed with the IRS or provided to beneficiaries, respectively, after July 31, 2015, and before March 31, 2016. Temporary regulations (T.D. 9757 (3/4/16)) reiterate the transition relief provided in Notice 2016-19.

OBSERVATION: The AICPA, in a letter to the IRS dated March 4, 2016, has requested that the IRS further delay the estate basis reporting due date from March 31, 2016, until May 31, 2016. In its letter, the AICPA observed that the proposed regulations were released for public inspection on March 2, 2016, just 29 days before the March 31 deadline. The AICPA noted that not only will practitioners need more time to work through the many issues presented in the proposed regulations (such as when a supplemental filing is needed or when a zero basis might apply), but also tax software providers will need the time to update their programs for correctly processing the new Form 8971 Schedule A. Of primary concern, the AICPA said, are returns where there is a significant volume of assets (e.g., many securities within numerous brokerage accounts) that require updated software to effectively bridge the data.

Once finalized, the proposed regulations will apply to property acquired from a decedent or by reason of the death of a decedent whose return required by Code Sec. 6018 is filed after July 31, 2015. Taxpayers may rely on the proposed regulations until they are finalized.

General Requirements for Information Return and Statements under Code Section 6035

In general, for purposes of the filing requirements in Code Sec. 6035, the proposed regulations provide that an executor who is required to file an estate tax return is also required to file an "information return" (defined as Form 8971 and a copy of the included Schedule A) with the IRS to report the "final value" of certain property (discussed below), the recipient of that property, and any other information required. The executor also is required to provide a "statement" (defined as the Schedule A) to each beneficiary who has who has received or will receive property from the estate or by reason of the decedent's death.

Compliance Tip: Under Code Sec. 6018, an executor is required to file an estate tax return where the gross estate at the decedent's death exceeds the basic exclusion amount in effect under Code Sec. 2010(c) for the calendar year which includes the date of death ($5,430,000 for 2015). Otherwise, no estate tax return is required. Any applicable exclusion amount that remains unused as of the death of a spouse (the deceased spousal unused exclusion or DSUE amount) generally is available for use by the surviving spouse, as an addition to the surviving spouse's applicable exclusion amount. To elect portability of the DSUE, a Form 706 must be filed even though it is not otherwise required.

The proposed regulations provide that the executor is required to file the information return with the IRS, and is required to provide each beneficiary with that beneficiary's statement, on or before the earlier of the date that is 30 days after the due date of the estate tax return (including extensions actually granted, if any), or the date that is 30 days after the date on which that return is filed with the IRS.

Property Reported on Information Return and Statements

The proposed regulations define the property to be reported on an information return and statement(s) as all property included in the gross estate for estate tax purposes with four exceptions:

(1) Cash (other than coins or paper bills with numismatic value);

(2) Income in respect of a decedent;

(3) Items of tangible personal property for which an appraisal is not required; and,

(4) Property that is sold or otherwise disposed of by the estate (and therefore not distributed to a beneficiary) in a transaction in which capital gain or loss is recognized.

The proposed regulations provide that the filing requirements of Code Sec. 6035 do not apply to a return filed by an estate solely to make the portability election under Code Sec. 2010(c)(5), or a generation-skipping transfer tax election or exemption allocation, because these returns are not required by Code Sec. 6018.

The proposed regulations adopt the definition of the term "executor" found in Code Sec. 2203 and expand it to include a person required to file a return under Code Sec. 6018(b).

Final Value of Property for Purposes of the Basis Consistency Requirements

For purposes of the Code Sec. 1014(f) basis consistency requirements, the proposed regulations provide that a taxpayer's initial basis in property acquired from a decedent may not exceed the "final value" of the property. The limitation applies to the property whenever the taxpayer reports to the IRS a taxable event with respect to the property (for example, depreciation or amortization) and continues to apply until the property is sold, exchanged, or otherwise disposed of in one or more transactions that result in the recognition of gain or loss.

The proposed regulations define the "final value" of property as the value reported on the estate tax return once the period of limitations on assessment has expired. If the IRS determines a value different from the value reported, the final value is that value once it can no longer be contested by the estate. If the value determined by the IRS is contested by the estate, the final value is the value determined in an agreement between the IRS and the estate, or the value determined by a court. The proposed regulations also provide that the recipient of property to which the consistency requirement applies may not claim a basis in excess of the value reported on the statement required to be provided under Code Sec. 6035(a) before the final value of that property has been determined.

Example: At the time of his death, David owned 50 percent of a partnership valued at $8 million and subject to nonrecourse debt of $2 million. His interest in the partnership is reported on his estate tax return as $4 million. The IRS accepts the return as filed and, after the time for assessing the tax under expires, David's sole beneficiary, Claire sells her interest in the partnership for $6 million in cash. The "final value" of David's interest in the partnership is $4 million, and Claire's basis in her interest in the partnership at the time of its sale is $5 million (the final value of David's interest ($4 million) plus 50 percent of the $2 million nonrecourse debt). Following the sale of her interest, Claire reports taxable gain of $1 million, thus complying with the consistency requirement.

Because, under Code Sec. 1014(f)(1), basis cannot exceed the property's final value, the proposed regulations additionally provide that, if the final value differs from the initial basis claimed, a deficiency and an underpayment may result. For purposes of the Code Sec. 6662(b)(8) accuracy related penalty for underpayments due to inconsistent basis reporting, the proposed regulations interpret Code Secs. 1014(f) and 6662(k) to require only that the beneficiary's initial basis of the inherited property cannot exceed the final value of the property for estate tax purposes. The IRS stated that adjustments to the basis of the inherited property permitted by other sections of the Code as a result of post-death events (for example, depreciation or amortization, or a sale, exchange, or disposition of the property) will not cause the taxpayer's basis in the property to be treated as exceeding the final value of the property.

Final Value of After-Discovered or Omitted Property

For property that is discovered after the filing of the federal estate tax return or is otherwise omitted from that return, if such property would have generated an estate tax liability if it had been reported, the proposed regulations provide two different results based on whether the period of limitation on assessment has expired for the estate tax imposed on the estate.

The proposed regulations provide that, if the executor reports the after-discovered or omitted property on an estate tax return filed before the statute of limitations expires, the final value of the property is determined under Prop. Reg. Sec. 1.1014-10(c)(1) or (2). Alternatively, if the after-discovered or omitted property is not reported before the period of limitation on assessment expires, the final value of the after-discovered or omitted property is zero.

In situations in which no federal estate tax return was filed, the proposed regulations provide that the final value of all property includible in the gross estate subject to the consistent basis requirement is zero until the final value is determined under Prop. Reg. Sec. 1.1014-10(c)(1) or (2).

Property Subject to Basis Consistency Requirements

The consistent basis requirement of Code Sec. 1014(f)(1) only applies to property included in the estate that increases the estate tax liability payable by the decedent's estate. The proposed regulations define this property as property includible in the gross estate under Code Sec. 2031, as well as property subject to tax under Code Sec. 2106, that generates an estate tax liability in excess of allowable credits.

The proposed regulations specifically exclude all property reported on a federal estate tax return required to be filed by Code Sec. 6018 if no estate tax is imposed upon the estate due to allowable credits. In cases where the estate tax is imposed on the estate, the proposed regulations exclude property that qualifies for a charitable or marital deduction because this property does not increase the estate tax liability. In addition, the proposed regulations exclude any tangible personal property for which an appraisal is not required under Reg. Sec. 20.2031-6(b) (relating to the valuation of certain household and personal effects) because of its value.

Beneficiaries' Receipt of Statements

The proposed regulations provide that each beneficiary who receives property to be reported on the estate's information return must receive a copy of a statement reporting the property distributable to that beneficiary. In addition, if the beneficiary is a trust, estate, or business instead of an individual, the statement is provided to the entity.

If the executor does not know what property will be used to satisfy the interest of each beneficiary by the due date of the beneficiary's statement, the proposed regulations require the executor to report on the statement all of the property that could be used to satisfy that beneficiary's interest. The IRS noted that although this results in duplicate reporting of those assets on multiple statements, because each beneficiary will have been advised of the final value of each property that may be received by that beneficiary, he or she will be able to comply with the basis consistency requirement, if applicable.

If the executor is unable to locate a beneficiary by the due date of the information return, the proposed regulations require the executor to report that on the information return and explain the efforts taken to locate the beneficiary. If the executor subsequently locates the beneficiary, the executor is required to provide the beneficiary with a statement and file a supplemental information return with the IRS within 30 days of locating the beneficiary. If the executor is unable to locate a beneficiary and distributes the property to a different beneficiary who was not identified in the information return as the recipient of that property, the executor is required to file a supplemental information return with the IRS and provide the successor beneficiary with a statement within 30 days after distributing the property.

Supplemental Reporting

The proposed regulations generally require a supplemental information return and corresponding supplemental statements when there is a change that causes the information reported on the initial information returns and statements to be incorrect or incomplete (e.g. the discovery of property not reported on the estate tax return, or a change in the value of property pursuant to litigation).

In addition, the IRS stated it is concerned that opportunities may exist for the recipient of a decedent's property to circumvent the purpose of the consistent basis reporting requirements (for example, by making a gift of the property to a complex trust for the benefit of the transferor's family). Accordingly, the proposed regulations provide that in general, with regard to property reported on a statement provided to a recipient, when the recipient distributes or transfers (by gift or otherwise) all or any portion of that property to a related transferee, the transferor is required to file with and provide to the IRS and the transferee a supplemental statement documenting the new ownership of this property (subsequent transfers rule).

OBSERVATION: Practitioners have pointed out that the subsequent transfers rule may exceed the IRS's statutory authority, noting that Code Sec. 6035 does not contain provisions relating to subsequent transfers of property.

For a discussion of basis in property inherited from a decedent, see Parker Tax ¶110,530.

For a discussion of the reporting requirements under Code Sec. 6035, see Parker Tax ¶228,925. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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