March 15th, 2016
In response to the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Treasury released new proposed regulations requiring consistent estate basis reporting for certain types of property. These new regulations are important for both beneficiaries and executors of estates, as failure to adhere to the new regulations may result in accuracy related penalties.
The general rule of IRC § 1014 is that a beneficiary’s basis in property received from a decedent is the property’s fair market value on the decedent’s date of death. However, newly enacted IRC § 1014(f)(1), as clarified by these new proposed regulations, changes the rule so that the beneficiary’s basis of certain property acquired from a decedent cannot exceed the property’s final value as determined for federal estate tax purposes. The term final value for federal estate tax purposes generally refers to the amount reported on an estate tax return under IRC § 6018.
This new rule only applies to property that would increase the federal estate tax liability payable by the decedent’s estate. The inclusion of such property must generate a federal estate tax liability in excess of allowable credits for it to be subject to this new rule. However, two types of property are excluded: 1) property that qualifies for a charitable or marital deduction; or 2) tangible personal property for which an appraisal is not required (i.e. relating to the valuation of certain household personal effects). Neither of these categories of property increase the federal estate tax liability and therefore are not subject to the new consistent basis reporting requirement.
Commentators have expressed concern over the rigidity of the phrase “final value,” fearing that adjustments to basis as a result of post-death events will not be allowed. However, the regulations clarify that adjustments to basis for certain post-death events, such as depreciation or amortization, or a sale, exchange or disposition of property, will not cause the taxpayer’s basis in the property to be treated as exceeding the final value of the property.
IRC § 6035 requires the executor to report to both the IRS and beneficiary, the value of the property included on a required federal estate tax return. The proposed regulations require executors to file a From 8971 Information Return with the IRS and furnish a statement with the final value of property to each applicable beneficiary. However, the regulations provide four types of property that do not have to be reported on the information return or statement to the beneficiaries: 1) cash; 2) income in respect of a decedent; 3) tangle personal property for which an appraisal is not required; and 4) property that is sold or otherwise disposed of by the estate in a transaction in which capital gain or loss is recognized.
It is important for executors and beneficiaries to be mindful of these new requirements, as inconsistent basis reporting can lead to a 20 percent accuracy related penalty. The regulations and IRC § 2004(c) provide an accuracy-related penalty may be assessed if the basis claimed by the beneficiary exceeds the basis for federal estate tax purposes. Therefore, executors should be mindful of the values they place on the Form 6035, the estate tax return, and the statement provided to the beneficiary. The beneficiary needs to ensure that he/she does not report a basis higher than the final value determined for federal estate tax purposes. For the full text of the regulations, click here.
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