Consistent basis reporting between estates and beneficiaries.

• Author: Rosen, Jordon
• Position: Cover story

Federal laws requiring basis consistency of estate property between estate tax returns and the income tax returns of inheritors had been proposed periodically by congressional tax policy writers. Then, suddenly, Congress included provisions addressing the issues in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. (1) The act added Sec. 1014(f), which requires consistent basis reporting between estates and persons acquiring property from a decedent, and Sec. 6035, which requires the executor of an estate that is required to file a return under Sec. 6018 to file with the IRS and provide each person acquiring an interest in property included in the decedent's gross estate with a statement identifying the value of the property as reported on the estate tax return. Beneficiaries who are required to file an estate tax return under Sec. 6018(b) are also subject to this requirement. Also added by the act were new Secs. 6662(k) and 6724(d)(1)(D), which provide for a 20% accuracy-related penalty for inconsistent basis reporting and for failure to file the required information reporting statements, respectively.

This last-minute addition, buried in an otherwise non-tax-related bill, caught both practitioners and the IRS off guard, since the bill was enacted on July 31,2015, and applied to estate tax returns filed on or after Aug. 1, 2015. Consequently, the IRS had yet to develop a form and related instructions for executors and practitioners to comply with these new rules. Furthermore, many questions remained that Congress left to the IRS to address through regulations.

To allow the Service time to provide guidance and implement these new rules and for practitioners and executors to adapt to them, Notice 2015-57 first delayed the original reporting under Sec. 6035 to Feb. 29, 2016, for statements required to be filed and furnished before that date. Notices 2016-19 and 2016-27 effectively delayed the reporting requirement until March 31, 2016, and then June 30, 2016, respectively. A draft of new Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, was issued Dec. 18, 2015, along with instructions (issued Jan. 6, 2016), followed by temporary and proposed regulations.1 2 However, many questions and inconsistencies still remain that executors and practitioners will have to deal with until the IRS has had time to address them.

Basis Consistency Rule

Sec. 1014(f) and the proposed regulations provide that a taxpayer's initial basis in property acquired from a decedent cannot exceed the property's "final value" for estate tax purposes or, if the final value has not been determined, the value reported on the statement required by Sec. 6035. (3) This rule applies only to property that increases the estate's liability (after credits) by reason of inclusion in the gross estate. (4) In a case where the federal estate tax is imposed, the proposed regulations also provide an exception for property that qualifies for the marital or charitable deduction, as well as tangible personal property for which an appraisal is not required under Regs. Sec. 20.2031-6(b). (5)

Final value is determined:

1. If the value has been reported on the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, filed with the IRS, and the value is not adjusted or contested by the IRS before the period of limitation for assessment has expired;

2. In a case where (1), above, does not apply, if the value is specified by the IRS and not contested by the executor of the estate before the period of limitation for assessment has expired;

3. If (1) and (2), above, do not apply, pursuant to a settlement agreement with...