Inherited property: consistent basis required for income & estate taxes.

• Author: Josephs, Stuart R.
• Position: FedTax

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Under IRC. Ser. 1014(f)(1)(A), the income tax basis of property acquired from a decedent cannot exceed the property's value as finally determined for estate tax purposes.

If the property's estate tax value has not been finally determined, its income tax basis cannot exceed the value reported on IRS Form 8971 Schedule A [Sec. 1014(f)(1)(B)].

These requirements apply only to property whose inclusion in the decedent's estate increases the estate's net estate tax (after allowable credits) [Sec. 1014(f)(2)].

Reporting Requirements

The executor of any estate required to file an estate tax return under Sec. 6018(a) must furnish basis information to the IRS and the estate's beneficiaries on Form 8971 and its Schedule A. Sec. 6018(a) requires an estate tax return to be filed if the gross estate exceeds the basic exclusion amount under Sec. 2010(c). This amount is $5,430,000 for 2015 and $5,450,000 for 2016.

Form 8971 and all of its Schedules A must be filed with the IRS. However, only each beneficiary's Schedule A must be provided to that beneficiary.

Under Sec. 6035(a)(3)(A), these forms generally are due by the earlier of:

* 30 days after the estate tax return's due date, including extensions; or

* 30 days after that return is filed.

If this reporting deadline has passed, IRS Notice 2016-27 (IRB 2016-15, April 11, 2016) grants an extension to June .30, 2016.

Effective Date

These basis consistency rules and reporting requirements were included in the 2015 Surface Transportation and Veterans Health Care Choice Improvement Act (the Act) enacted July 31, 2015, as P.L. 114-41 and were effective for property with respect to which an estate tax return was filed after July 31, 2015 (See California CPA, October 2015, Page 23).

Penalties

The Act provides the following penalties for failing to file Form 8971 and Schedule A with the IRS and failing to provide Schedule A to a beneficiary:

* The penalty for failure to file correct information returns under Sec. 6721; and

* The penalty for failure to furnish correct payee statements under Sec. 6722.

In addition, there is a 20 percent accuracy-related penalty under Sec. 6662(b) (8) for any "inconsistent estate basis," which exists if a property's basis claimed on an income tax return exceeds its basis determined under Sec. 1014(f) [Sec. 6662 k)].

Recent IRS Guidance

Temporary and proposed reliance regulations were issued March 2, 2016 (T.D. 9757 and REG-127923-15, respectively). Selected...