Chapter 21 - § 21.8 • INTERPLAY OF INCOME TAX AND DEATH TAX

• Jurisdiction: Colorado

§ 21.8 • INTERPLAY OF INCOME TAX AND DEATH TAX

§ 21.8.1—Valuations And Alternate Valuation Date — In General

The basis for gain or loss, depreciation, or cost depletion purposes is the final federal estate tax value. I.R.C. § 1014. Hence, election of alternate valuation for estate tax purposes¹⁷ gives a different basis to assets that have changed in value on the alternate valuation date, eliminates capital gains and losses incurred by sales or dispositions during the six-month period after the date of death, and may change the amount of depreciation or cost depletion. The decision whether to elect alternate valuation should be based on these side effects as well as the direct effect on the estate tax and any available marital or charitable deduction. See §§ 21.6.1 and 21.6.2. Note that the provisions of I.R.C. § 2032, which prohibit the election of alternate value unless that election decreases both the value of the gross estate and the taxes due, effectively eliminate the ability to elect higher values for assets in estates where the gross value of the assets is below the exemption equivalent amount for the year of death or where all the assets qualify for the federal estate tax marital or charitable deduction.

The effect on the estate's ability to qualify under I.R.C. §§ 6166 and 303 also should be considered. See §§ 21.6.16 and 21.6.18.

I.R.C. § 6662(b)(5) provides for the imposition of accuracy-related penalties for "valuation understatements" as they relate to estate and gift taxes. A substantial estate or gift tax understatement exists if the amount stated on an estate or gift tax return is 65 percent or less of the amount determined to be correct. I.R.C. § 6662(g)(1). There is no penalty under I.R.C. § 6662(b)(5) unless more than a $5,000 understatement occurred and it was directly related to the substantial estate or gift tax valuation understatement. I.R.C. § 6662(g)(2).

The amount of the penalty is equal to 20 percent of the underpayment of tax to which the valuation understatement applies. I.R.C. § 6662(a). There is an increase in the penalty in the case of a gross valuation misstatement, in which case the tax imposed is equal to 40 percent of the portion of an underpayment. I.R.C. § 6662(h)(1). Gross valuation misstatements are understatements where the amount stated on the estate or gift tax return is 40 percent or less of the amount determined to be correct. I.R.C. § 6662(h)(2)(C).

§ 21.8.2—Valuations And Alternate Valuation Date — Colorado...