Basis Rules for Estates of 2010 Decedents Proposed

On Friday, the IRS issued proposed regulations that would apply to decedents who died in 2010 and whose executors elected under Sec. 1022 (Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, §301(c)) to not have the retroactively reinstated estate tax apply to the decedents’ estates (REG-107595-11). This election requires special basis adjustments that are different from those that apply when the estate’s assets are subject to the estate tax.

Under Sec. 1014(a), the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent is the property’s fair market value (FMV) at the date of the decedent’s death. However, if the decedent died in 2010 and the decedent’s executor made the Sec. 1022 election, then the property’s basis for a person acquiring the property from that decedent is governed by Sec. 1022 and not by Sec. 1014.

Under Sec. 1022(a)(1), property acquired from a decedent is treated as having been transferred by gift. If the decedent’s adjusted basis is less than or equal to the property’s FMV determined as of the decedent’s date of death, the recipient’s basis is the adjusted basis of the decedent. If the decedent’s adjusted basis is greater than FMV, the recipient’s basis is limited to that FMV.

If the decedent’s adjusted basis in the property is less than the property’s FMV on the decedent’s date of death, the executor is allowed to allocate additional basis (basis increase) to certain assets that both are owned by the decedent at death and are acquired from the decedent. However, the property’s total basis may not exceed the property’s FMV on the date of death.

Although Sec. 1022 applied only to decedents dying in calendar year 2010, basis determined under that section is relevant until all property with basis determined under those rules has been sold or otherwise disposed of. To guide the tax treatment of these assets for which a Sec. 1022 election is in effect, the IRS is issuing proposed regulations that incorporate into the existing regulations, as appropriate, references to Sec. 1022 to ensure that where basis is mentioned, the regulations also address basis as determined under that section.

The proposed rules will apply when they are published as final in the Federal Register.