On 3/2/16, the IRS issued proposed (click here) and temporary (click here) regulations addressing the basis consistency requirements under §§ 1014 and 6035 of the Code. As discussed in my prior post (click here) on the subject, regulation § 1.6035-2T(b) reiterates the March 31, 2016 due date for filing Form 8971 that would otherwise have been due prior to then.
The purpose of the new code provisions and the regulations thereunder is that the basis of property received from a decedent should match the property’s final value as determined for federal estate tax purposes. I have highlighted a few of the more important provisions below.
Proposed regulation § 1.1014-10(a) provides that a beneficiary’s initial basis in property acquired from a decedent cannot exceed the final value of the property as determined for estate tax purposes. This applies whenever the beneficiary reports a taxable event to the IRS with respect to the property and continues to apply until the property is disposed of in one or more transactions resulting in the recognition of gain or loss. Note that the rules focus on a recipient’s initial basis; accordingly, §§ 1014(f) and 6662(k) do not interfere with adjustments to the basis of property as a result of post-death events that are allowed under other sections of the Code (e.g., depreciation and amortization).
Property Subject to Requirements
Proposed regulation § 1.1014-10(b) begins by subjecting all property includible in the gross estate under § 2031 or subject to tax under § 2106 that generates an estate tax liability greater than the allowable credits to the basis reporting requirements. However, the proposed regulation goes on to exclude all property reported on an estate tax return that does not generate an estate tax liability (e.g., charitable or marital deduction property). Additionally, tangible personal property that is not subject to an appraisal under regulation § 20.2031-6(b) is deemed not to generate an estate tax liability, and is thus excluded.
Proposed regulation § 1-1014-10(c) generally defines “final value” as the final and binding value. Determining the final value is based upon the value as determined (i) at the expiration of the period of limitations for assessment to adjust or contest the value, (ii) by agreement, once the agreement is binding on all parties, or (iii) by court determination. If property does not have a “final value,” then the recipient must use the value reported on Form 8971 as the final value, until such time as a final value is determined, at which point the recipient must use the final value and may be subject to a deficiency and underpayment resulting from the difference.
Of particular note is proposed regulation § 1.1014-10(c)(3), under which property that is either omitted from an estate tax return or discovered after the period of limitations on assessment has expired has a final value of zero. Additionally, in the event that no estate tax return was filed, the final value of all property includible in the gross estate that is subject to the consistency requirement is zero until a return is filed.
Reporting & Form 8971
Proposed regulation § 1.6035-1(a) generally requires an executor who is required to file a federal estate tax return under § 6018 to also file Form 8971 with the IRS and furnish a statement to each beneficiary who has, or will, acquire property from a decedent or by reason of the death of the decedent. There are two exceptions to the general rule. First, executors filing estate tax returns filed solely for the purposes of making a portability election or a generation-skipping transfer tax election or exemption allocation are not required to file Form 8971 or furnish statements to the beneficiaries because they are not required to file an estate tax return under § 6018. Second, under proposed regulation § 1.6035-1(b), executors are not required to file statements for (1) cash, other than coins or paper bills with numismatic value; (2) income in respect of a decedent; (3) items of tangible personal property for which an appraisal is not required under regulation § 20.2031-6(b); and (4) property that is sold or otherwise disposed of by the estate (and thus not distributed to a beneficiary) in a transaction in which capital gain or loss is recognized.
Proposed regulation § 1.6035-1(c) provides that each beneficiary receiving property reported on Form 8971 must receive a copy of the statement reporting the property distributable to that beneficiary. If the beneficiary is a trust, estate or business entity, the executor must furnish the statement to the trustee, executor, or to the business entity—not to the beneficiaries of the trust, estate, or owners of the business entity. In the event that the executor does not know which beneficiary will receive property reported on Form 8971, the executor must report for all potential beneficiaries. If, after reasonable diligence, a beneficiary cannot be located by the due date of the information return, the executor must report the information, explain the efforts undertaken to locate the beneficiary, and file a supplemental return within 30 days of locating the beneficiary.
Form 8971 Due Dates
Proposed regulation § 1.6035-1(d) requires (except for the transitional deadline discussed here) that Form 8971 be filed with the IRS and the statement be furnished to each beneficiary on or before the earlier of the date that is 30 days after the due date of the federal estate tax return (including extensions actually granted) or the date that is 30 days after the date on which the return is filed with the IRS.
Proposed regulation § 1.6035-1(e) explains an executor’s duty to supplement Form 8971 and the statements provided to beneficiaries after a change in the required information that causes the original information to be incorrect or incomplete.
Proposed regulation § 1.6035-1(f) addresses a situation where property that is required to be reported on Form 8971 is distributed or transferred by the recipient to a related transferee in a transaction in which the transferee’s basis for federal income tax purposes is determined wholly or partially in reference to the transferor’s basis. In that situation, the transferor must file a supplemental statement with the IRS and the transferee, indicating the new ownership of the property.
Proposed regulation § 1.6035-1(g) defines certain terms.
Proposed regulation § 1.6035-1(h) explains the applicability of certain code sections in determining applicable penalties.