The New Basis Reporting and Consistency Regime (irc Sections 6035 and 1014(f))

• Publication year: 2016
• Author: By Michael C. Gerson, Esq.*

THE NEW BASIS REPORTING AND CONSISTENCY REGIME (IRC SECTIONS 6035 AND 1014(f))

By Michael C. Gerson, Esq.*

INTRODUCTION

The July 2015 enactment of new federal tax laws has complicated the administration of decedents' estates.¹ An executor now may have a federally-imposed mandate to notify beneficiaries of the property and the values on the filed estate tax return.² Beneficiaries of these estates now may have a duty of consistency that prevents claiming an income tax basis greater than the value as finally determined for estate tax purposes.³

This article is the first of two articles on these new duties. In this article, Part I summarizes prior law, Part II details the notification duty, Part III discusses the duty of consistency, and Part IV employs hypotheticals to explain the new duties. The second article will discuss the final regulations under these new statutes once they are issued. On March 4, 2016, the IRS promulgated proposed regulations under section 6035 and section 1014(f).⁴ The proposed regulations are not binding, and are subject to change.⁵ Therefore, this article will not discuss the proposed regulations. If adopted, however, the proposed regulations will answer many of the questions raised by this article and may provide guidance as to those issues in the interim.

I. BACKGROUND

Generally, the basis of an asset received in a death transfer from a decedent or from the decedent's revocable trust will be the fair market value of that asset as reported on the federal estate tax return for the decedent. However, prior to August 1, 2015, federal law did not require an executor to provide the estate tax return to a beneficiary or to notify a beneficiary of any adjustment to values reported on an estate tax return,⁶ although a beneficiary could obtain from the IRS the portions of an estate tax return applicable to the beneficiary. Therefore, a beneficiary's sources for basis information were limited. California law mandates disclosure of valuation in only some circumstances. Executors of probate estates file inventories reporting estate assets at the date-of-death value.⁷The inventory date-of-death value need not equal the estate tax value (because, for example, the executor may elect to value assets at the alternate valuation date).⁸ Beneficiaries who receive a distribution from a decedent's living trust may be provided accountings of the trust's assets, which would include initial date-of-death values;⁹ again those values may not equal estate tax values.

Beginning August 1, 2015, federal law mandates that executors and trustees notify beneficiaries of the estate tax values of estate or trust assets under certain circumstances.¹⁰The federal notification law differs from state inventory law as to the information disclosed and timing of that disclosure, but the federal requirement is similar to state law requirements for inventories and accounts.

Prior to August 1, 2015, a beneficiary had no duty to learn the estate tax value of assets the beneficiary inherits (although, as noted above, the beneficiary could obtain a copy of the estate tax return in many instances).¹¹ Even if the beneficiary knew the estate tax values, the beneficiary could claim a basis for income tax purposes greater than the estate tax value.¹² In that instance, the government would collect estate tax based on the lower value, and income tax based on the higher value. Congress enacted IRC¹³ sections 6035 and 1014(f)¹⁴ in an apparent attempt to combat this perceived abuse. Section 6035 imposes a new notification duty on executors. Section 1014(f) imposes a new duty of consistency on beneficiaries.

This article explores the new notification requirement and duty of consistency where an executor filed an estate tax return (1) where there was no duty to file the return, but one was filed nonetheless, (2) where a return was required, but no estate tax was due, and (3) where a return was required or estate tax was due.

In the first instance, neither the notification duty nor the duty of consistency applies. In the second instance, the executor is subject to the notification duty, but the beneficiaries are not subject to the duty of consistency. In the third instance, the executor is subject to the notification duty and the beneficiaries, other than charitable or qualified spousal beneficiaries, are subject to the duty of consistency.

II. NOTIFICATION DUTY

The new notification duty applies to executors. The term "executor" is defined as the court-appointed executor, or if no court-appointed executor exists, any person in actual or constructive possession of property includible in the decedent's gross estate.¹⁵ If no court-appointed executor exists, the new law does not clarify who has priority to serve as executor or who is deemed to be the executor. A decedent's estate may include assets passing by joint tenancy, assets passing by beneficiary designation, and assets held in the decedent's revocable trust. Each set of assets may pass to a different beneficiary or beneficiaries. Each of those beneficiaries and the trustee of the revocable trust could be executors for purposes of the new law if no court-appointed executor exists. The notification duty may apply to all, some, or one of them. If more than one party having possession of a decedent's property has the notification duty, current guidance does not clarify whether such parties must jointly satisfy the notification duty or if the parties must act separately.

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A. When the New Notification Duty Applies: Effective Date and Threshold Requirements

The new notification duty does not apply to every estate. This new duty has an effective-date rule and a threshold requirement.

1. Effective Date Rules

This new notification duty only applies to executors who file an estate tax return after July 31, 2015.¹⁶ The application depends on the filing date of the return, not the date of death or the due date of the return. If the executor filed the estate tax return before August 1, 2015, the notification requirement does not apply regardless of the values of the assets includable in the decedent's estate.

2. Threshold Requirements - Adjusted Taxable Gifts and Gross Estate Exceed Basic Exclusion Amount

The notification duty also has a threshold requirement. The executor must provide the notification only if the executor is required to file an estate tax return. This filing requirement exists when the total of the decedent's adjusted taxable gifts, plus the decedent's gross estate, exceeds the basic exclusion amount.¹⁷ For United States citizens or residents, the basic exclusion amount is set forth in section 2010, and is subject to an inflation adjustment.¹⁸ In 2016, that basic exclusion amount is $5,450,000.¹⁹ The estate tax return is due nine months after the date of death, although the executor may obtain a six-month extension of time to file.²⁰

3. Notification Duty Does Not Apply to Returns Filed Solely to Elect Portability

An executor not required to file an estate tax return may elect to file an estate tax return.²¹ This commonly occurs when an executor files an estate tax return in order to elect portability of the deceased spousal unused exclusion amount (DSUEA).²² The filing of an estate tax return in this situation is voluntary, even though a failure to file a timely estate tax return prohibits the surviving spouse from claiming the DSUEA of that deceased spouse.²³ Thus, because the executor is not required to file an estate tax return, the new notification requirement does not apply.

B. Notification Duty

An executor of an estate is subject to the new notification requirement when the executor must file an estate tax return, and when that return is filed after July 31, 2015.²⁴ The reporting requirement is based on the obligation to file the estate tax return, not the estate tax liability. An executor of an estate required to file an estate tax return, but not required to pay estate tax (such as when no estate tax is due because of a marital or charitable deduction), is still subject to the new notification requirement.

1. Two Statements: One to the IRS and One to Each Beneficiary

The executor subject to the new notification requirement must provide two statements, one to the IRS and one to each beneficiary.²⁵ If there is more than one beneficiary, the executor must provide a separate statement to each beneficiary. The executor is required to file IRS Form 8971 to comply with this notification requirement, and to furnish each beneficiary with the beneficiary's Schedule A of Form 8971.

a. When the Executor Must Provide the Statements

The executor must provide the statement (Form 8971) within 30 days after the earlier of (1) the due date of the return, including extensions, or (2) the date the return is filed.²⁶ No extension oftime to file and furnish the statement is available.²⁷ (Note, however, for estate tax returns that were filed prior to June 1, 2016, the due date for Form 8971 was June 30, 2016.²⁸)

b. What the Executor Must Provide to the IRS

The executor must notify the IRS on Form 8971 of the estate property and the value of that property reported on the estate tax return.²⁹ The statement must include such other information as the government prescribes.³⁰ Subject to the final regulations, each asset reported on the estate tax return will be reported as passing to at least one beneficiary.³¹

The new notification requirement is in addition to the underlying requirement of filing an estate tax return with the IRS, identifying and valuing the estate property, and identifying the recipients of the property. As has been required for many years, Part 4 of the estate tax return lists the beneficiaries of the estate and the value of the estate property each beneficiary receives by dollar amount.³² Beneficiaries (other than surviving spouses) receiving no more than $5,000 and charities are excluded from that Part 4. By comparison, the new notification duty increases the specificity of reporting beyond that...