On July 31, 2015, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”) was signed into law. Sections 2004 and 2005 of the Act included a number of new tax provisions requiring consistent basis reporting between an estate and persons acquiring property from a decedent. These provisions were made effective immediately and impose new reporting requirements on estates.
As a general rule, the basis of property acquired or passing from a decedent is its fair market value at the date of death or alternative valuation date (i.e., a “step up” or “step down” in basis). IRC Sec. 1014(a). Historically, the value reported on a decedent’s estate tax return was the presumptive value of property acquired from a decedent, however, some taxpayers have successfully taken the position that the property acquired from a decedent had a higher value (and therefore a higher basis) than the property’s estate tax value. See TAM 199933001 where the IRS ruled that an individual who inherited stock may claim a basis in the stock that differs from the value used on the decedent’s estate tax return and may rebut the presumptive value by clear and convincing evidence. The Service, citing Rev. Rul. 54-97, 1954-1 C.B. 113, noted that if an individual is not estopped by his previous actions or statements, there is only a rebuttable presumption that his basis in property acquired from a decedent is its value for federal estate tax purposes (e.g., the individual inheriting stock is not the executor of the estate).
New Code section 1014(f) provides that the basis of any property acquired from a decedent is its value as finally determined for federal estate tax purposes, or if no such determination is made, its value reported to the recipient by the executor. The basis consistency provision only applies to property whose inclusion in the decedent’s estate increased the federal estate tax liability. See IRC 1014(f)(2). Thus, the provision would not apply to property included in estates that are not required to file an estate tax return. The instructions to Form 8971state that “[G]enerally, any property that qualifies for the marital deduction under section 2056 or a charitable deduction under section 2055 will not generate any estate tax.” Steve Akers at Bessemer Trust has noted that the above statement on the Form 8971 instructions indicates that the basis consistency provisions do not apply to an estate with zero estate tax liability due to use of the marital or charitable deduction. Note that Code section 1014(f) applies to property with respect to an estate tax return filed after July 31, 2015.
Requirement to File Form 8971
Even if Code section 1014(f) does not apply due to use of the marital or charitable deduction, the executor may still be required to provide a statement to the IRS and each person acquiring any interest in property included in the decedent’s gross estate with estate tax value information for income tax purposes if the executor is required to file an estate tax return. IRC Sec. 6035.
This discrepancy is due to inconsistent language found in Code sections 1014(f) and 6035. Code section 1014(f)(2) states that Code section 1014(f)(1) “shall only apply to any property whose inclusion in the decedent’s estate increased the liability for tax imposed by chapter 11,” while Code section 6035(a)(1) states that “the executor of any estate required to file [an estate tax return] shall furnish to the Secretary and to each person acquiring any interest in property included in the decedent’s gross estate for federal estate tax purposes a statement identifying the value of each interest in such property as reported on such return and such other information with respect to such interest as the Secretary may prescribe.” Note that the term “executor” includes administrators of intestate property. See Treas. Reg. § 20.6018-2.
It is unclear whether executors of estates below the basic exclusion amount under Code section 2010(c) (i.e., estates below $5,450,000 for 2016) who file an estate tax return to elect portability will be subject to the information reporting requirement of Code section 6035. See Treas. Reg. § 20.2010-2(a)(1).
Form 8971 (Information Regarding Beneficiaries Acquiring Property From a Decedent) with attached Schedule(s) A must be filed with the IRS. Each beneficiary listed on Form 8971 must receive their own Schedule A. Form 8971 consists of Parts I and II which provide general information about the decedent, executor and beneficiary. Each Schedule A includes a description of the property that the beneficiary has acquired from the decedent, whether the asset increased estate tax liability, the valuation date, and the estate tax value.
Any statements required to be provided must be furnished at the time the IRS requires, but in any case no later than 30 days after the estate tax return is due, including extensions. If there is a valuation or other adjustment to the information required to be included on a statement already filed, a supplemental statement must be filed no later than 30 days after the adjustment is made. IRC Sec. 6035(a)(3)(A)(B). Note the administrative burden this creates for large estates. Generally such estates will not have distributed property to beneficiaries within 30 days after the estate tax return has been filed. Therefore, those estates must furnish a statement to the IRS and beneficiaries within 30 days after the estate tax return is filed and then furnish a supplemental statement once property is distributed to the beneficiaries.
Statements required to be filed with the IRS or furnished to beneficiaries are delayed until March 31, 2016. See Notice 2016-19. The delay is to allow the IRS to issue proposed regulations addressing the new information reporting requirements. Proposed regulations are expected to be released shortly. Any Regulations issued within 18 months of July 31, 2015 are retroactive to that date. See IRC Sec. 7805(b)(2).
Code section 6721 imposes penalties on persons that fail to timely file, or provide incorrect information required by an information return. New Code section 6724(d)(1)(D) provides that any statement required to be filed under Code section 6035 is included in the definition of an information return.
Code section 6722 imposes penalties on persons that fail to timely furnish, or provide incorrect or incomplete information required by, most statements required to be provided to payees (payee statements). New Code section 6724(d)(2)(II) provides the term “payee statement” means any statement required to be filed under Code section 6035. Note that the failures to file or furnish penalties are separate and apply to each Form 8971 and Schedule A recipient. The penalty is generally $250 penalty per return with a maximum penalty of $3,000,000 for all failures during the calendar year. The penalty can increase to 10 percent of the aggregate amount of the items required to be reported correctly if the failure to file is due to intentional disregard. See IRC Sec. 6721(e) and 6722(e).
Code section 6662 provides a 20 percent accuracy-related penalty on underpayments attributable to an inconsistent basis. New Code section 6662(k) provides there is an “inconsistent estate basis” if the basis of property claimed on a return exceeds the basis as determined under Code section 1014(f) (i.e., a beneficiary claims a higher basis than the basis reported on the estate tax return).
Statute of Limitations
Under Code section 6501(e) the statute of limitations is extended from three years to six for a substantial omission from gross income (i.e., if a taxpayer omits an amount in excess of 25% of gross income stated on a return). New Code section 6501(e)(1)(B)(ii) provides an understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.
Basis of certain property acquired from a decedent may not exceed the value of that property as finally determined for federal estate tax purposes. The basis consistency provisions are already in effect for estate tax returns filed after July 31, 2015. Executors must provide Form 8971 to the IRS and a Schedule A to each beneficiary no later than 30 days after the estate tax return is due, including extensions. The filing requirement has been delayed until March 31, 2016. The IRS is expected to release proposed regulations pertaining to Code sections 1014(f) and 6035 shortly. The proposed regulations are expected to address many issues such as rules for undistributed assets, rules for cash, IRD items and life insurance proceeds and whether reporting is required for estates under the basic exclusion amount that file to elect portability. The IRS has recommended that executors and other persons required to file an estate tax return wait to prepare the statements required under section 6035 until the Treasury and IRS issue further guidance.
About the Author:
Kyle C. Griffin practices in the areas of estate planning, probate and trust administration and taxation law. In addition, he assists clients with state and local tax issues, including sales and use taxes, corporate tax and property taxes. He may be reached at firstname.lastname@example.org.