Friday, February 12, 2016

Delay in Need to Report Basis

Currently, taxpayers have until February 29, 2016 to file Forms 8971 for estate tax returns previously filed. Form 8971 is used to report basis to beneficiaries of inherited assets, pursuant to provisions that came into law in 2015.

The IRS is providing taxpayers with a further breather – such forms now need not be filed with the IRS nor furnished to a beneficiary until March 31, 2016.

Notice 2016-19

Wednesday, February 03, 2016

Form 8971 Filing Unhappiness

The IRS has now issued a final Form 8971 and instructions. If you recall, this Form is newly required by executors of estates filing a Form 706 (federal estate tax return). The Form requires a schedule for each beneficiary which lists the assets received by the beneficiary and the estate tax value of those assets. The purpose is to put documentation in the hands of the beneficiary to allow it to calculate basis in the received assets. This will allow the beneficiary to calculate gain or loss on a subsequent sale of the assets received.

The form must be completed within 30 days of the filing of the Form 706. Unfortunately, many estates and related trusts will not have wound down their administration by that point and may not have identified (or be capable of identifying) assets that will be given to each beneficiary. So how should the Form 8971 be filed if the assets going to each beneficiary cannot be identified by the due date?

The instructions give us the unhappy direction to report all potential assets that could go to the beneficiary in this circumstance. More particularly, the instructions provide:

All property acquired (or expected to be acquired) by a beneficiary must be listed on that beneficiary's Schedule A. If the executor has not determined which beneficiary is to receive an item of property as of the due date of the Form 8971 and Schedule(s) A, the executor must list all items of property that could be used, in whole or in part, to fund the beneficiary's distribution on that beneficiary's Schedule A.

Then, when more precise information is known about the allocation of assets, an updated Form 8971 is then filed.

Sounds like fun times for practitioners!

Besides the difficulties in preparing such schedules, can you imagine the questions and concerns that beneficiaries will have upon receiving such a large and misleading schedule? Surely, some of them will think that they are going to receive all the assets listed on the schedule.

Since this is a known problem with the new statute that requires the disclosure form, and the IRS does not provide any real relief in its instructions, perhaps Congress might take up an amendment to the law that the due date for the Form 8971 is deferred until either actual distribution is made to the beneficiary or the assets to be distributed to the beneficiary can be precisely identified.

Form 8971; Form 8971 Instructions

Sunday, January 31, 2016

Not Enough Activity to Be a Developer

If you suffer a loss on the disposition of real property, you want to be treated as a developer for income tax purposes - that is, to be treated as engaged in a trade or business. That way, you can get ordinary loss treatment and not a long termor short term capital  - the ordinary loss will typically be available to offset more types of income than a capital loss.

So how many properties must one be dealing with and how much activity is needed to cross into developer territory? This question comes up a lot - it is a question of facts and circumstances. In a recent Tax Court case, ownership of 3 properties coupled with sporadic development activities was not enough for ordinary loss treatment.

More particularly, the taxpayer had a plan to purchase properties, tear them down, build single or multi-unit residences, and then sell them - alternatively he might rent them out. From 2003 through 2007, he bought one rental property and two tear-down properties. He developed one tear-down into a two-condominium building and sold it. Regarding the subject property he incurred costs to prepare the property for development, paying for architectural, electrical, and mechanical plans, permits, property taxes, and interest. He borrowed money to develop the property - ultimately he defaulted and lost the property in foreclosure.

The court did not find him to be a developer. Some of the court’s observations included:

1. The intent to develop is not enough.

2. Sales activity should be frequent and continuous - not sporadic.

3. Not enough properties involved here.

4. That the property was sold in foreclosure instead of to a regular buyer is a neutral fact.

5. The taxpayer’s primary source of income was elsewhere - the development activities would account only for an insubstantial portion of his income.

6. The taxpayer was lackadaisacal about keeping business records.

Reading the facts, I would have said that the taxpayer was in the trade or business of real estate development - too bad for the taxpayer I wasn’t the judge on his case.

Evans, TC Memo 2016-7