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Saturday, March 05, 2016

New Basis Consistency and Reporting Proposed Regulations - Did the IRS Go Too Far?

The IRS has issued proposed regulations under new Code Sections 1014(f) (relating to requirements that the initial income tax basis of an asset received from a decedent cannot exceed the estate tax basis of that asset) and Section 6035 (relating to the reporting of basis on property acquired from a decedent). You can read those regulations here and here.

The proposed regulations have two requirements which are eyebrow raising (to say the least), and of questionable validity.

Zero Basis for Assets Not Reported on an Estate Tax Return. The regulations provide that if an asset is required to be reported on an estate tax return, is otherwise subject to the basis consistency rules of Section 1014(f) (e.g., assets that do not increase the estate tax after credits are not subject to the rules), and is NOT reported on a return before the expiration of the estate tax statute of limitations, the basis of the asset in the hands of the recipient is adjusted to ZERO!

Looking back at Section 1014(f), I do not see any authority that authorizes an adjustment of basis to zero for such a failure. Perhaps one can argue that the blanket rule of zero can be based on the statutory language of a "value...specified by the Secretary" under Section 1014(f)(2)(B) and thus being the cap on basis under 1014(f)(1)(A), but that appears to be a very strained reading of the statute [I have cut and pasted the entire statute at the end of this posting for those who want to review these provisions themselves]. Section 1014(f)(2)(B) appears to relate to a specific finding of value by the Secretary, per the subsequent language relating a timely contest of that value by the estate executor, and not a blanket regulatory dictate of zero basis for all affected taxpayers. I have not looked to the legislative history of the statute - if there is language there on the subject of a zero basis, then that might provide support for Treasury on this adjustment to zero.

Note that this will complicate the decision whether to file a supplemental estate tax return to report an asset found after an estate tax return is filed if the estate is taxable and the statute of limitations has not yet closed. The estate will need to file a supplemental return to avoid this zero basis, but is it worth it to file and incur estate tax for an income tax benefit that may be taxed at a lower rate (if ever)?

Endless Form 8971 Filings. Code Section 6035 requires executors to issue a statement using Form 8971 to beneficiaries detailing basis information for assets that they will (or may) receive from the estate. This new requirement is a pain to prepare and deal with, but is required by the new Code Section. Treasury was not satisfied with this - their proposed regulations require that the recipients of such assets issue another statement to the IRS and  their subsequent transferees in carryover basis transfers if related to the transferor. And these new transferees will also have similar statement requirements if they later make a related party carryover basis transfer, and on and on ad nauseum - at least that is how many are reading the proposed regulations, but to me the language is not completely clear on that point.

However, Code section 6035 imposes these requirements ONLY on the persons required to file the estate tax return. Where does Treasury find authority to impose notice obligations on the recipients of property, and their subsequent related party transferees? Treasury advises this comes from its authority to prescribe regulations necessary to carry out the section. I fail to see how subsequent reporting by transferees has anything to do with "carry[ing] out the section," which is the regulatory authorization included in Code Section 6035.  While the new requirements may support the policy of the section, is that enough to justify this requirement by regulation alone? If Treasury wanted to impose this reporting obligation then it should have its inclusion in the original statute, or via a new statutory amendment.


Section 1014(f):

(f) Basis must be consistent with estate tax return. For purposes of this section—

    (1) In general. The basis of any property to which subsection (a) applies shall not exceed—

         (A) in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and

         (B) in the case of property not described in subparagraph (A) and with respect to which a statement has been furnished under section 6035(a) identifying the value of such property, such value.

    (2) Exception

         Paragraph (1) shall only apply to any property whose inclusion in the decedent’s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate.

    (3) Determination. For purposes of paragraph (1), the basis of property has been determined for purposes of the tax imposed by chapter 11 if—

         (A) the value of such property is shown on a return under section 6018 and such value is not contested by the Secretary before the expiration of the time for assessing a tax under chapter 11,

         (B) in a case not described in subparagraph (A), the value is specified by the Secretary and such value is not timely contested by the executor of the estate, or

         (C) the value is determined by a court or pursuant to a settlement agreement with the Secretary.

(4) Regulations - The Secretary may by regulations provide exceptions to the application of this subsection.

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