IRS Issues Proposed Regs Clarifying Code Section 1022 Carryover Basis Rules.

(Parker Tax Publishing May 26, 2015)

The IRS has issued proposed regulations that provide guidance regarding the application of the modified carryover basis rules of Code Sec. 1022 that affect property transferred from certain decedents who died in 2010. REG-107595-11.

Background

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) enacted Code Sec. 2210, which eliminated both the estate tax on the estate of any decedent who died in 2010 and the generation skipping transfer (GST) tax for generation-skipping transfers made in 2010. On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) became law and retroactively reinstated the estate and GST taxes. However, TRUIRJCA allows the executor of an estate of a decedent who died in 2010 to elect not to have the estate tax apply to the decedent's estate, but rather, to have the provisions of Code Sec. 1022 apply (i.e., the Section 1022 election). Code Sec. 1022 applies to estates of decedents dying in calendar year 2010 only if the executor makes the Section 1022 Election.

Generally, under Code Sec. 1014(a), the basis of property acquired from a decedent or to whom the property passed from a decedent is the fair market value of the property at the date of the decedent's death. However, if the decedent died in 2010 and the decedent's executor makes the section 1022 election, then the basis of property in the hands of a person acquiring the property from that decedent is governed by Code Sec. 1022, not Code Sec. 1014.

Under Code Sec. 1022, property acquired from a decedent dying in 2010 is treated as transferred by gift, and the basis of the property is the lesser of the decedent's adjusted basis or the fair market value (FMV) of the property at the date of the decedent's death. The basis of the property is increased by the portion of the aggregate basis increase that is allocated to the property. The aggregate basis increase is $1,300,000, and this limit is increased by certain unused built-in losses and loss carryovers. There is an additional basis increase for property acquired by a surviving spouse.

Although Code Sec 1022 was applicable only to decedents dying in 2010, the IRS notes that basis determined pursuant to that section will continue to be relevant until all of the property whose basis is determined under that section has been sold or otherwise disposed of. Accordingly, the IRS has deemed it necessary to update existing regulations to incorporate appropriate references to basis determined under Code Sec. 1022.

Explanation of Proposed Regulations

The proposed regulations incorporate into the existing regulations, as appropriate, references to Code Sec. 1022 to ensure that references to basis also include basis as determined under that section. Some changes involve simply inserting the words "or section 1022", "and 1022", or similar references. Others (such as Reg. Sec. 1.742-1) require the insertion of a new sentence or an example to expressly address the applicability of Code Sec. 1022. A few changes (such as proposed Reg. Sec. 1.684-3) require the inclusion of a new section to provide a detailed explanation of the application of Code Sec. 1022 in the particular context of the existing regulation. The proposed regulations also provide cross references for section 1022 when appropriate and make other minor, non-substantive changes.

Some of the more significant changes made by the proposed regulations include:

(1) Prop. Reg. Secs. 1.179-4(c)(1)(iv), 1.267(d)-1(a)(3), 1.336-1(b)(5)(i)(A) and 1.355- 6(d)(1)(i)(A)(2) provide that property acquired from a decedent in a transaction in which the recipient's basis is determined under Code Sec. 1022 is not acquired by purchase or exchange for purposes of Code Secs. 179, 267, 336, and 355(d).

(2) Prop. Reg. Sec. 1.742-1(a) provides that the basis of a partnership interest acquired from a decedent whose executor made a Section 1022 Election, is the lower of the adjusted basis of the decedent or fair market value of the interest at the date of decedent's death. The basis of property acquired from a decedent may be further increased under Code Secs. 1022(b) and Code Sec.1022(c), but not above the fair market value of the interest on the date of the decedent's death.

(3) Prop. Reg. Sec. 1.1223-1(b) provides that the holding period under Code Sec. 1223 of the recipient of property acquired from a decedent whose executor made a Section 1022 Election, includes the period that the property was held by the decedent.

(4) Prop. Reg. Sec. 1.1245-4(a)(1) provides that no gain is recognized under Code Sec. 1245(a)(1) upon a transfer of Code Sec. 1245 property from a decedent whose executor made the Section 1022 Election.

(5) Prop. Reg. Sec. 1.1245-3(a)(3) provides that even though certain property is not of a character subject to the allowance for depreciation in the hands of the taxpayer, it may be Code Sec. 1245 property if the taxpayer's basis in the property is determined under Code Sec. 1022 and the property was of a character subject to the allowance for depreciation in the hands of the decedent.

(6) Prop. Reg. Sec. 1.1014-4(a) provides that the basis of property acquired from a decedent, including basis determined under Code Sec. 1022, is uniform in the hands of every person having possession or enjoyment of the property at any time, whether obtained under the will or other instrument or under the laws of descent and distribution.

The changes made by the proposed regulations are effective when finalized.

For a discussion of the section 1022 election, see Parker Tax ¶224,300. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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