Pres. Clinton's proposal to repeal sec. 1014(b) (6) is unfair.

• Author: Josephs, Stuart R.
• Position: Internal Revenue Code

Under current law, property acquired from a decedent generally is assigned a new basis equal to the property's fair market value (FMV) on the date of the decedent's death. In common-law (i.e., noncommunity property) states, property jointly owned by husband and wife at the time the first spouse dies is treated as half owned by the decedent and half-owned by the surviving spouse. Therefore, the surviving spouse receives a stepped-up basis only in the decedent's half of the property that passes to the surviving spouse; the half treated as owned by the surviving spouse is not eligible for a stepped-up basis at the first spouse's death.

In community property states, each spouse also is treated as owning half the community property. However, under Sec. I 014(b) (6), the surviving spouse is entitled to a stepped-up basis for both portions of the property. Thus, there appears to be potentially inconsistent treatment under present law.

Administration's Budget Proposal for FY 2001

The Clinton Administration is proposing to repeal Sec. 1014(b)(6), eliminating the stepped-up basis in the portion of community property owned by the surviving spouse before the decedent's death. Only the portion of community property that passes from the decedent would continue to receive a stepped-up basis.

This proposal would be effective for decedents dying after the date of enactment. The Administration made the same proposal for FY 2000.

Summary of Congressional Joint Committee on Taxation's Staff Analysis

The stepped-up basis for community property was enacted in 1948. As stated in S. Rept. No. 80-1013, 80th Cong., 2d Sess., (1948) p. 26, "the usual case was that practically all the wealth of the married couple was the property of the husband." For example, if a husband died first, having owned "practically all the wealth," the surviving spouse would have had a stepped-up basis in most of the property, because most of it would have passed from the decedent to the surviving spouse by bequest or inheritance.

However, in a community property state, a surviving spouse is deemed to own half the community property; consequently, the surviving spouse's half interest in community property could not pass to the surviving spouse by bequest or inheritance. Only the decedent's half interest would have passed to the surviving spouse from the decedent; therefore, only half the property was eligible for a stepped-up basis.

Sec. 1041(b)(6), which provides a stepped-up basis for the...