Tax trends: preparing and filing form 8939.

• Author: Cantrell, Carol A.

ESTATES. TRUSTS & GIFTS

The IRS has finally issued Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, and long-awaited guidance for executors of decedents who died in 2010 and who are deciding whether to elect out of the estate tax and apply the carryover basis rules of Sec. 1022 (Rev. Proc. 2011-41; Notices 2011--66 and 2011 -76). Rev. Proc. 2011 -41 contains optional safe harbors for the substantive provisions of Sec. 1022, Notice 2011-66 contains the rules for making the carryover basis election and generation-skipping transfer (GST) allocation for 2010, and Notice 2011-76 extends the due date for filing Form 8939 and provides other forms of relief. The carryover basis election is made by filing Form 8939 by January 17, 2012. No further extensions are allowed, despite how late the final Form 8939, instructions, and IRS Publication 4895, Tax Treatment of Property Acquired from a Decedent Dying in 2010, were published.

General Observations

A few general observations are necessary as one prepares the Form 8939. First, the form cannot be viewed in the same light as a Form 706. Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is generally a complete listing of the decedent's assets and h-abilities. In contrast, Form 8939 includes many assets that the decedent does not own, excludes assets that would normally appear on Form 706, and excludes debts, expenses, or claims of the decedent. Second, while Form 8939 appears to be much simpler than Form 706, with fewer schedules and computations, what it gains in simplicity it loses in the volume of detail required for each property. For each property on Form 8939, the executor must provide the date acquired, cost basis, fair market value, amount of gain that the recipient would report as ordinary income if the recipient sold the property, whether the property is eligible for a basis increase, and how much basis increase is allocated to each property.

Executor

Only the executor, if one has been appointed, can make the election. This appears to be a hard and fast rule no matter how little property the executor controls or how much property other fiduciaries hold. Therefore, steps should be taken to appoint or replace the executor so that the "right" person serves.

If no executor has been appointed, the IRS will accept Form 8939 from any person in actual or constructive possession of the decedent's property for the property he or she actually or constructively possesses. If the IRS receives both a Form 8939 and a Form 706 from different authorized filers, the IRS will correspond with each filer and require them to collectively sign and file either a restated Form 706 or Form 8939 within 90 days of the IRS's communication. If they fail to do this, the IRS will decide whether to elect out of the estate tax and will allocate the basis in any manner it deems appropriate. Therefore, it is in the estate's best interest that the parties agree on a method of filing rather than allowing the IRS to determine it.

If the IRS receives more than one Form 8939 for the same decedent from multiple authorized filers attempting to allocate more than the allowable basis increase, it will similarly reject the filings and request a single Form 8939 signed by all persons within 90 days of the IRS notice. Failing receipt of this, the IRS will determine the basis allocations in its sole discretion.

Late Returns

The IRS will not grant an extension of time past January 17, 2012, to file Form 8939 or accept protective or conditional elections, except in the case of individuals serving in the United States Armed Forces under Sec. 7508 or those affected by a presidentially declared disaster or by a terrorist or military act under Sec. 7508A. All others wishing an extension must file a private letter ruling request under Reg. Sec. 301.9100-3 and attach a user fee of $14,000 ($625 and $2,000 for estates with adjusted gross income under $250,000 and $1 million, respectively) (Rev. Proc. 2011-1).

Property Included on Form 8939

The executor making an election must report all property (other than cash) "acquired from the decedent" (Sec. 6018(h)(1)). Property acquired from the decedent includes;

* Property acquired by bequest, devise, or inheritance;

* Property the decedent transferred during his or her lifetime to a qualified revocable trust (whether or not the trust makes a Sec. 645 election) or to any other trust that the decedent had the power to alter, amend, or terminate; and

* Property passing by reason of the decedent's death without consideration (Sec. 1022(e)).

In addition, the statute includes the surviving spouse's one-half share of community property as property acquired from the decedent (Sees. 1022(d)(l)(B)(iv) and 1022(d)(1)(C)). The...