Proposed Regulations Govern Estate Basis Consistency Reporting

Proposed and temporary regulations the IRS issued govern the requirement enacted last year that there be consistency between a recipient’s basis in certain property acquired from a decedent and the value of the property as finally determined for federal estate tax purposes (REG-127923-15; T.D. 9757). The regulations provide rules regarding the consistent basis reporting requirement and the required statement that must be furnished to the IRS and beneficiaries. They exempt from the reporting requirement estates that file an estate tax return just to claim portability of a deceased spouse’s estate tax exemption.

Consistent Basis Reporting

Sec. 1014(f) requires the basis of property acquired from a decedent to be consistent with the basis reported on the estate tax return. Under Sec. 1014(f)(1), the basis of property acquired from a decedent cannot exceed that property’s final value for purposes of the federal estate tax imposed on the estate of the decedent, or, if the final value has not been determined, the value reported on the statement required under Sec. 6035 (Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent). Sec. 6035 requires that each person required to file a return under Sec. 6018 (an estate tax return) provide a statement to the IRS and to each other person who holds a legal or beneficial interest in the property to which the return relates.

The consistent basis requirement of Sec. 1014(f)(1) applies only to property where the inclusion of that property in the decedent’s gross estate for federal estate tax purposes increases the estate tax liability. The proposed regulations define this property as property includible in the gross estate under Sec. 2031 and property subject to tax under Sec. 2106 that generates a federal estate tax liability in excess of allowable credits. The regulations specifically exclude all property reported on a required estate tax return if no estate tax is imposed on the estate due to allowable credits (other than the credit for tax prepayment).

If federal estate tax is due, the proposed regulations exclude property that qualifies for the marital or charitable deduction because this property does not increase federal estate tax liability. The AICPA had suggested this provision be included in the rules in a comment letter sent to the IRS in January (available at www.aicpa.org). These assets, however, must still be reported under Sec. 6035.

The final value of property is defined in the proposed rules as either (1) the value reported on a federal estate tax return filed with the IRS that the IRS does not contest before the period of limitation on assessment expires; (2) the value the IRS specifies if it is not timely contested by the estate’s executor; or (3) the value as determined by a court or under a settlement agreement with the IRS.

An executor is defined in the proposed regulations as having the same meaning as in Sec. 2203, which includes appointed administrators and executors, and, if there is no administrator or executor, any person who is in actual or constructive possession of any of the decedent’s property, but also includes any beneficiary required to file an estate tax return under Sec. 6018(b).

Information Statement

The statement required under Sec. 6035, as enacted, was due within 30 days of an estate tax return’s being filed, with the result that the first returns could have been due as early as Aug. 31, 2015, 30 days after the July 31, 2015, enactment date. Notice 2015-57 delayed the due date until Feb. 29, 2016, and Notice 2016-19 delayed it until March 31, 2016, in anticipation of the issuance of these regulations. The delayed March 31, 2016, due date was reiterated in both the proposed regulations and the separately issued temporary regulations. After those regulations were issued, in response to comments from the AICPA and others that the March 31 due date imposed an undue burden on tax preparers during busy season, the IRS issued Notice 2016-27 delaying the due date until June 30, 2016.

The proposed regulations exclude from the reporting requirements any estate tax return filed solely to claim a Sec. 2010(c)(5) portability election or a generation-skipping transfer tax election or allocation because these returns are not required to be filed under Sec. 6018. The AICPA had advocated for these exemptions in its January comment letter.

Other exclusions from property required to be reported are cash (other than coins or paper bills with numismatic value); income in respect of a decedent; tangible personal property that need not be appraised under Regs. Sec. 20.2031-6(b) (household and personal effects articles having marked artistic or intrinsic value of a total value less than $3,000); and property that the estate sells or otherwise disposes of in a taxable transaction and does not distribute to a beneficiary. This is another provision to simplify reporting that the AICPA advocated for.

Subsequent Transfers

In the preamble to the proposed regulations, the IRS expressed a concern that opportunities exist for taxpayers to circumvent the purpose of the rules, which is to allow the IRS to determine whether the basis in property claimed by a taxpayer is based on the final value of that property for estate tax purposes. To prevent this, the proposed regulations require additional information reporting by certain subsequent transferors in some circumstances. Prop. Regs. Sec. 1.6035-1(f) provides that, for property that was previously reported or is required to be reported under Sec. 6035, if the recipient distributes or transfers all or any portion of the property to a related transferee (directly or indirectly) in a transaction in which the transferee’s basis for federal income tax purposes is determined in whole or in part by reference to the transferor’s basis, the transferor must file with the IRS and furnish the transferee with a supplemental statement, documenting the new ownership of the property.

Related transferees, for these purposes, include family members, controlled entities, and trusts of which the transferor is deemed the owner. The proposed regulations will be effective when published as final in the Federal Register, but taxpayers may apply them retroactively. When finalized, they will apply to property acquired from a decedent or by reason of the death of a decedent whose estate tax return is filed after July 31, 2015.