No step-up in basis for installment notes.

• Author: Hudson, Boyd D.

Generally, under Sec. 1014(a)(1), property acquired or passed from a decedent has a basis equal to its fair market value at the time of the decedent's death. If the property is sold shortly after its basis has been stepped up, there is usually little or no gain or loss to be recognized, since in most cases the tax basis will approximate the sales price. The basis step-up rule applies to most properties acquired from a decedent. In addition, property that represents a surviving spouse's half share of property held by the decedent and the surviving spouse under the community property laws of any state also receives a basis step-up if at least half of the community interest in that property was includible in determining the value of the decedent's gross estate (Sec. 1014(b)(6)). However, the Code specifically excludes from the application of this rule property that constitutes a right to receive income in respect of a decedent (IRD) under Sec. 691. Included in the definition of IRD is an installment obligation reportable by the decedent under the installment method of reporting of Sec. 453. A taxpayer unsuccessfully tried to obtain a basis step-up in the case of Holt, Ct. Fed. Cls., 11/10/97.

In that case, H and W sold three condominium units in 1986, realizing a gain of $265,000 on the sales. The purchasers of each unit made a down payment, signed a promissory note for the balance of the purchase price, and gave H and W a deed of trust to secure the note. H and W elected to report the gains using the installment method of accounting under Sec. 453, which allowed them to pay the tax due on the gain as the sale proceeds were received each year, rather than as a lump sum in the year of sale.

H died in 1987. W continued to report the gain from the installment sales as the payments were received in accordance with the installment agreement; by 1993, all three notes had been paid in full. In 1994, W and her new husband filed amended returns to claim refunds, contending that they had erroneously included the installment payments received...