Non-Existent Form 8939 Due November 15, 2011; I.R.C. §1022 Applicable To Post-2010 Tax Returns
In late 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("Act") became law. The Act contains the most significant changes to transfer taxes (estate, gift and generation-skipping tax) in decades. Indeed, under the Act, the federal estate tax is reinstated retroactively for deaths in 2010, but an executor can make an election out of the estate tax. While the election results in the estate not being subject to estate tax, it also makes applicable to the transferred assets the modified carryover basis rule of I.R.C. §1022. Unfortunately, the Act did not specify when the election had to be made. What is known that executors that make the election do not have to file a Form 706 (Federal Estate Tax Return) or pay federal estate tax. But because the election impacts income tax basis in the hands of the recipients of the decedent’s property the election form (Form 8939) has to provide sufficient information to establish basis in the hands of the recipients of the decedent’s property and show how allowable basis step-ups are allocated.
Under provisions contained in the 2001 law, a 2010 decedent's estate needed to make the income tax basis allocations by the due date of the decedent's income tax return via Form 8939. But that date has long passed without the Form being finalized. In addition, a question had been whether the Form 8939 would be the same Form on which the election out the estate tax for 2010 deaths would be made. If different forms were to be used, it was possible that different filing deadlines would apply to each form. All the 2010 Act says is that the election is irrevocable and that it is "to be made in such time and in such manner as the Secretary of the Treasury or the Secretary's delegate shall provide."
On February 16, 2011, IRS published guidance that attempted to answer the question. In that guidance, IRS noted that Form 8939 had not been finalized, and neither had IRS Publication 4895 (Tax Treatment of Property Acquired From a Decedent Dying in 2010). But, in the guidance, IRS noted that Form 8939 would not be due until at least 90 days after the finalization of Form 8939. In addition, IRS said that guidance on how to make the election will be contained on the final Form 8939 and Publication 4895. The guidance, however, did not clarify whether the election will be able to be made on Form 8939. IRS only said that guidance on how to make the election will be on the form.
Form 8939 Guidance
Now, in Notice 2011-66, 2011 IRB LEXIS 432, IRS has stated that Form 8939 will be due November 15, 2011. That seems strange because Form 8939 has not yet been finalized. In fact, it appeared as late as last week that IRS was still making substantial revisions to Form 8939 and targeting January 6, 2012, as the date the Form will be finalized. If that was indeed the case, it would mean that the Form 8939 would be due before it is finalized. That can’t be right. Maybe the issuance of Notice 2011-66 means that the Final version of Form 8939 will be out by mid-August (90 days before November 15).
In any event, here’s a summary of Notice 2011-66:
- Form 8939 is the form to be used to both elect out of the estate tax and make the income tax basis allocations applicable for deaths in 2010.
- The election, once made, is irrevocable.
- If a filing has already been made purporting to make the election, it must be replaced with a Form 8939 filed by November 15, 2011.
- The filed Form 8939 must show the basis allocations for the assets in the estate.
- A recipient’s basis in property is subject to adjustment upon examination by IRS of any tax return reporting a value dependent on the property’s basis – including those situations where basis increase amounts have been allocated to property. That would appear to mean that IRS is taking the position (contrary to the plain language of the statute) that the EGTRRA provisions could be applied to a tax return that is filed for a tax year beginning after 2010. There is more discussion of this point below.
- If the election out of the estate tax is made, all of the decedent’s property (except cash and IRD property) must be reported and valued on Form 8939, along with all appreciated property the decedent acquired (valued as of date-of-death) that was required to be included on Form 709 if the decedent acquired the property by gift or intervivos transfer for less than adequate and full consideration within three years of the decedent’s death (except transfers from the decedent’s spouse that weren’t acquired by gift).
- If the executor has not been appointed, any person that is in actual or constructive possession of property acquired from the decedent may file Form 8939 for that property.
- For property held in trust, the trustee will file Form 8939 as the party in possession of the decedent's property (referred to as "statutory executor" via I.R.C. § 2203). If there is more than one trustee or party in possession and they cannot agree on allocations, they have 90 days after the filing deadline to decide on allocations. If an agreement cannot be reached, IRS will make the allocations.
- If IRS receives multiple forms 8939 that collectively allocate more basis increase that what is available under the modified carry-over basis rule, IRS will issue a letter to each person filing an 8939. Each person that filed an 8939 must collectively sign and file a single restated Form 8939 within 90 days of receipt of the IRS letters. Otherwise, IRS will allocate the available basis increase at its discretion.
- Within 30 days after filing Form 8939, the executor must provide a statement to each recipient of property from the decedent’s estate that was reported on the form containing the information required in I.R.C. §6018.
- A Form 8939 that is filed before November 15, 2011, may be revoked or amended by a subsequent and timely filed Form 8939.
- An estate tax return and a conditional Form 8939 cannot be filed. An executor might want to do this, for example, if an estate tax audit would result in an upward adjustment that causes the taxable estate value to exceed the exclusion amount available to the estate.
- IRS will not grant extensions of time to file Form 8939, unless:
- I.R.C. §7508A applies;
- The sole purpose is to allocate spousal basis increase, but only if Form 8939 had been timely filed and was complete when filed except for the allocation of the full amount of the spousal property basis increase to the eligible property reported on the form, and the amended Form 8939 is filed no later than 90 days after the date of the distribution of the qualified spousal property to basis increase is allocated;
- An amended Form 8939 is filed on or before May 15, 2012 for any purpose except to make or revoke the election. In this situation, the executor must write “Filed Pursuant to Section 301.9100-2” at the top of the amended Form 8939;
- An extension for relief has been filed in situations where the executor discovers more property that could receive a basis increase, and/or the fair market value of the property reported on Form 8939 is adjusted by IRS. Relief is not available to reduce a basis increase allocation; and
- The executor is applying for an extension of time to file Form 8939.
- The election out of the estate tax does not negate the application of the GSTT to the estate.
- The executor allocates the decedent’s available GSTT exemption by attaching Schedule R of Form 8939 to the Form 8939 for the decedent’s estate. If Form 8939 is timely filed, the allocation will be considered a timely allocation of the decedent’s GST exemption under I.R.C. §2632.
- A 2010 transfer not in trust to a skip person is a direct skip to which the donor would not want to allocate GSTT exemption. Thus, the reporting of an intervivos direct skip in trust occurring in 2010 on a timely filed Form 709 will be an election out of the automatic allocation of GSTT exemption to that direct skip. Otherwise, an election out can be achieve by paying the GSTT with Form 709.
- The due date for filing a return reporting a direct skip, taxable distribution or taxable termination occurring January 1, 2010, through December 16, 2010 is September 19, 2011 (including extensions), unless a Schedule R that is attached to Form 8939 is required. That is due November 15, 2011.
- The due date for Filing Form 709 that does not report a GSTT transfer or that reports a GSTT transfer occurring on or after December 17, 2010, through December 31, 2010, is April 18, 2011, including extensions.
- The due date for filing Form 709 to elect to treat a trust as a GSTT trust or to allocate the GSTT exemption to a transfer occurring during 2010 was April 18, 2011, including extensions.
In the Notice, IRS says it is accepting comments concerning the guidance provided in the Notice, and that submitted comments will be available for public inspection and copying. However, no timeframe for submitting comments is provided. If the Form 8939 filing deadline is to be no earlier than 90 days after finalization of Form 8939, and the deadline has been set at November 15, 2011, that means the Form will be finalized by August 15. That provides only about a week to submit comments.
This all seems very strange. Stay tuned.
Income Tax Basis Guidance
As we have been pointed out for the last 18 months, and teaching at our seminars, a strict reading of the EGTRRA sunset provision indicates that the I.R.C. §1022 basis rule could not be applied for gain computation purposes for gain on sale of inherited assets from a 2010 decedent’s estate reported on a return for a tax year beginning after 2010. We have also pointed out that the statute could potentially be interpreted in a different manner and that there was no way to know for sure which interpretation was correct until the IRS provided guidance on the matter, a court issued a ruling or the Congress clarified the EGTRRA sunset provision. Some criticized that balanced approach, maintaining that the statute was clear in that I.R.C. §1022 applied to all 2010 and later tax years. They maintained that there was no need for guidance on the matter. Well, now we know that our balanced approach was correct. Had the critics been correct, IRS would have remained silent on the matter. However, in a separately issued Revenue Procedure, the IRS has stated (with no statutory analysis) that for an estate for which the executor elects out of the estate tax via Form 8939, the I.R.C. §1022 basis rule “applies to determine a recipient’s basis in all property acquired from that decedent, regardless of the year in which the property is sold or distributed. Accordingly, if property is acquired from the decedent who died in 2010 and the executor makes the Section 1022 Election, then when the property is sold during 2010, 2011 or any subsequent year, the recipient’s (seller’s) basis in the property is determined under section 1022 rather than under section 1014.” It's not surprising that the IRS would interpret the statute in that manner, but the IRS view set forth in the Revenue Procedure does not preclude other interpretations of the statute. The Revenue Procedure is Rev. Proc. 2011-41, 2011 IRB LEXIS 432, and there won't be any regulations to follow-up on the guidance given.
In Rev. Proc. 2011-41, the IRS answered some important questions that have been lingering, by establishing several optional safe harbors:
- When basis step-up amounts are allocated to eligible property, the result is known as the "aggregate basis increase." The allocations are shown on the Form 8939. The IRS, in Rev. Proc. 2011-41, clarified that the aggregate basis increase includes all unrealized losses in capital assets as of the decedent's death. That is the case, IRS said, irrespective of any limitations on immediate deductibility that might apply for income tax purposes if the property were to be sold. That means that the amount of any unrealized losses is available to increase the basis of assets up to (potentially) fair market value. Relatedly, basis increase is available (if a joint return is filed with the surviving spouse) for any unused NOLs or capital losses which would have been (but weren't because of the decedent's death) carried from the decedent's last taxable year to a later taxable year. The decedent's share of such losses is to be computed (presumably) by multiplying the decedent's separate loss carryover by the joint loss carryover.
- The holding period of property that is acquired from the decedent when an election out of the estate tax is made via Form 8939 includes the decedent's holding period. It doesn't matter whether the executor allocates any basis increase amount to the subject property. This will eliminate the possibility of short term capital gains and losses.
- Unused passive losses can be added to the basis of the decedent's property, and, for community property, the surviving spouse's unused passive losses on such property can also be added to the overall basis increase but are deemed to used last. If the executor does not use them to increase basis, the surviving spouse can use them in the future.
- For property used in the decedent's trade or business or property that was depreciable in the decedent's hands, the character of the property stays the same in the recipient's hands. That character could, however, be impacted if the recipient changes the property's use. But, in any event, property that was subject to depreciation recapture (I.R.C. Secs. 1245 or 1250) remains subject to potential recapture upon any eventual sale by the recipient. An end-run around the rule is not achievable by converting the property to personal use. If the property would have been depreciable by the decedent and is depreciable by the recipient, the recipient computes depreciation in the same manner that the decedent did on whatever portion of the decedent's basis carries into the recipient's hands. Any basis increase amount is treated as a separate asset that is placed in service as of the date of the decedent's death.
- For community property, the surviving spouse's one-half share is deemed to be "owned by and acquired from" the decedent for the purpose of the basis increase rule if at least one-half of the property is treated as "owned by and acquired from" the decedent. So, if that rule is satisfied, the property qualifies a basis increase. In addition, such property could received a "stepped-down" basis if its basis is less than its fair market value as of the date of the decedent's death. Also, for community property, built-in losses on the surviving spouse's half of community property are eligible for a basis increase that the executor can allocate to other property.
- The executor can allocate basis to qualified property after the exectuor has disposed or distributed the property.
- Estates of non-resident, non-U.S. citizens are entitled to up to a $3 million spousal basis increase, but are limited to a general basis increase on non-spousal property of $60,000.
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