New rules for basis reporting between estate and beneficiary

The IRS recently issued final regulations (T.D. 9991) on consistent basis reporting between an estate and a person acquiring property from a decedent.

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 amended the tax code to require that the basis in property inherited by a taxpayer from a decedent be the same as value reported on the decedent’s estate tax return. This consistency requirement superseded judicial case law and was enacted to prevent inconsistent positions taken regarding the value of property at a decedent’s death.

The estate of a decedent is often motivated to seek a low valuation of a decedent’s asset to reduce the decedent’s estate tax liability, while the beneficiary of an estate has an incentive to use a higher valuation to achieve a higher basis step-up and reduce the beneficiary’s income tax liability on the subsequent sale of the asset by the beneficiary.

Several years ago, the IRS issued proposed regulations implementing the provisions of the basis consistency statute. There were many comments on the proposed regulations expressing concern over various rules. The final regulations addressed several of the issues raised.  

The following provisions significantly changed from the proposed regulations: 

• Omitted property: The proposed regulations provided that property discovered after the estate tax return was filed or omitted from the return would have a zero basis in the hands of the beneficiary. The final regulations do not include this zero-basis rule.
• Statement deadline: The proposed regulations required a statement of the basis of the assets be furnished to the beneficiaries of the estate 30 days after the filing of the estate tax return. Since many estates have not made final distributions of the assets to the beneficiaries 30 days after the filing of the estate tax return, the estate would have been required to provide the beneficiaries with a statement indicating the basis of all the assets that could be potentially distributed to the beneficiary. This caused some confusion on the beneficiaries’ part because they would think that the assets listed as potentially being distributed to them would actually be distributed to them. The final regulations provide that assets distributed to a beneficiary prior to the filing of an estate tax return must be reported to the beneficiary 30 days after the filing of return. For assets distributed after the filing of the return, a statement to the beneficiary is due Jan. 31 of the calendar year following the year of acquisition by the beneficiary. This change will allow executors to provide basis information after they know which beneficiary has received the property.
• Subsequent gifts: The proposed regulations provided that for inherited property acquired by a beneficiary, a subsequent gift transfer would require a report by the beneficiary make the gift.  This provision now only applies to trustees when they distribute inherited property from a trust.   

Commenters also asked for a mechanism allowing a beneficiary to challenge the estate’s valuation. Although the final regulations do not provide for such a mechanism, the IRS is considering future guidance to address this issue.

All taxpayers acting as executors of an estate, trustees and all taxpayers that inherit property from an estate should be aware of these filing requirements.   

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