On March 23, 2016, IRS pushed the deadline for consistent basis reporting to June 30, 2016. See Notice 2016-27.
Key to this guidance is that the proposed regulations clarify that no IRC § 6035 reporting (Form 8971) is required if a return is filed only for the purpose of portability or a generation-skipping transfer tax election or exemption allocation.
On July 31, 2015, the President of the United States signed into law H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Public Law 114-41, 129 Stat. 443 (Act).
Part of the act created a new consistency requirement in reporting basis of inherited property for federal estate tax purposes. The new law applies to property acquired from a decedent who is required to file Form 706 United States Estate (and Generation-Skipping Transfer) after July 31, 2015. IRS issued a draft of the new Form 8971 and instructions in late 2015, but many questions were left unanswered.
IRC §1014(f)(1) provides that the basis of property acquired from a decedent cannot exceed that property’s final value for purposes of the federal estate tax imposed on the estate of the decedent, or if the final value has not been determined, the value reported on a statement under the new IRC §6035(a). This new reporting requirement only applies if the decedent’s gross estate increases the estate tax liability, after all credits have been applied.
New § 6035 requires reporting to both the IRS and the beneficiary. Form 8971 was created to comply with this reporting requirement. The responsibility of providing the reporting falls to the executor of the estate.
The reporting statement is due no later than the earlier of:
- 30 days after the due date of the return under IRC §6018 (including extensions, if any) or
- 30 days after the date the return is filed.
If there is an adjustment to the information required to be included on this statement, IRC § 6035(a)(3)(B) requires the executor (or other person required to file the statement) to provide a supplemental statement to the Secretary and to each affected beneficiary no later than 30 days after the adjustment is made.
Proposed and Temporary Regulations
Notice 2015-57 issued on August 21, 2015 delayed this reporting requirement until February 29, 2016. As we approached that date, Notice 2016-19 was issued which delayed reporting until March 31, 2016. The new temporary regulations, TD 9757, confirm this extension.
The proposed regulations, REG-127923-15, provide that no IRC § 6035 reporting (Form 8971) is required if a return is filed only for the purpose of portability or a generation-skipping transfer tax election or exemption allocation.
The proposed regulations also define many terms including:
- Basis of the property received from a decedent is the property’s fair market value on the decedent’s date of death, or the alternate valuation date, if elected.
- The taxpayer’s initial basis in certain property acquired from a decedent may not exceed the final value as defined by § 1.1014-10(c). This value applies until the property is sold, exchanged or otherwise disposed of in a transaction.
- The proposed regulations explain the penalties in more detail.
- The proposed regulations clarify that adjustments to the basis are permissible and the new code sections do not prohibit adjustment to the basis of the property as a result of post death events.
- The proposed regulations require only that the beneficiary’s initial basis of the inherited property cannot exceed the final value of the property for federal estate tax purposes.
- Adjustments to the basis is permitted by other IRC sections. Examples provided included, “depreciation or amortization, or a sale, exchange or disposition of the property.”
- The term Property is furthered defined as all property included in the gross estate for the federal estate tax purpose with four exceptions:
- Cash (other than coins or paper bills with numismatic value);
- Income in respect of a decedent;
- Those items of tangible personal property for which an appraisal is not required under §20.2031-6(b); and
- Property that is sold or otherwise disposed of by the estate (and therefore not distributed to a beneficiary) in a transaction in which capital gain or loss is recognized.
The proposed regulations also provide guidance as to what to do if the executor cannot determine the exact distribution of the estates property and the beneficiary of the property by the due date of the information reporting requirement.
- The proposed regulations, §1.6035-1(c)(3) provide that, if by the due date the executor does not yet know what property will be used to satisfy the interest of each beneficiary, the executor is required to report on the Statement for each beneficiary all of the property that could be used to satisfy that beneficiary’s interest.
- This results in the duplicate reporting of those assets on multiple Statements, but each beneficiary will have been advised of the final value of each property that may be received by that beneficiary and therefore will be able to comply with the basis consistency requirement, if applicable.
If the executor is unable to locate a beneficiary, by the due date of the Information Return, the executor is required to report that on that Information Return and explain the efforts taken to locate the beneficiary. If the beneficiary is later located, the executor must then furnish the beneficiary with a Statement and file a supplemental Information Return with the IRS within 30 days of locating the beneficiary.
If the executor is unable to locate a beneficiary and distributes the property to a different beneficiary who was not identified in the Information Return as the recipient of that property, the executor is required to file a supplemental Information Return with the IRS and furnish the successor beneficiary with a Statement within 30 days after distributing the property.
Requirements for supplemental reporting include:
- Any change of information previously reported.
- Any change in the identity of the beneficiary.
Supplemental reporting is required 30 days after:
- The final value (within the meaning of proposed §1.1014-10(c)(1)) of property is determined;
- The executor discovers that the information reported on the Information Return or Statement is otherwise incorrect or incomplete; or
- A supplemental Federal estate tax return is filed.
An exception applies if, events occur prior to the distribution to the beneficiary of probate property or of the property of a revocable trust, a supplemental Information Return or Statement is not due until 30 days after the property is distributed.
The basis adjustment to the property is not required to be reported, but the executor can choose to report that information and it must be reported separately from the final value required to be reported.
Treasury is concerned that opportunities may exist in some circumstances for the recipient of such reporting to circumvent the purpose of the statute (for example, by making a gift of the property to a complex trust for the benefit of the transferor’s family).
Therefore the proposed regulations require additional information reporting by certain subsequent transferors in limited circumstances.
The proposed §1.6035-1(f) provides that:
- When the recipient distributes or transfers (by gift or otherwise) all or any portion of that property to a related transferee, whether directly or indirectly, the transferor is required to file and furnish with the IRS and the transferee, respectively, a supplemental Statement documenting the new ownership of this property within 30 days after the distribution.
This proposed reporting requirement is imposed on each such recipient of the property.
- A related transferee means:
- Any member of the transferor’s family as defined in section 2704(c)(2),
- Any controlled entity (a corporation or any other entity in which the transferor and members of the transferor’s family, whether directly or indirectly, have control within the meaning of section 2701(b)(2)(A) or (B)), and
- Any trust of which the transferor is a deemed owner for income tax purposes.
Surviving joint tenants or other recipients under section 6035(b)(2)
A surviving joint tenant or other individual may have better information regarding the basis or fair market value of the property. § 6018(b) requires that if the executor is unable to make a complete return as to any part of the gross estate, the executor must include a description of that part of the gross estate and name every individual holding a legal or beneficial interest in the property. Treasury may require upon notice that an individual named must file an information return if requested.
Finally the proposed regulation clarifies that there is no process available under federal law to allow a beneficiary to challenge the value reported by the executor. The beneficiary’s rights with regard to the estate tax valuation of property are governed by applicable state law. Accordingly, the proposed regulations do not create a new Federal process for challenging the value reported by the executor.
As with any proposed regulations, there will be issues that arise that are not specifically addressed. We can hope that IRS will create and “frequently asked questions listing” (FAQ) that will be able to assist those in complying with the new reporting requirement of Form 8971.