IRS Finalizes Regulations on Consistent Basis Reporting Requirement for Estates

(Parker Tax Publishing September 2024)

The IRS issued final regulations that provide guidance on the requirement in Code Secs. 1014(f) and 6035 that a recipient's basis in certain property acquired from a decedent be consistent with the value of the property as finally determined for federal estate tax purposes. In addition, the final regulations provide guidance on the statutory requirements that executors and other persons provide basis information to the IRS and to the recipients of certain property. T.D. 9991.

Background

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (2015 Act) (Pub. L. 114-41) enacted Code Secs. 1014(f), 6035, 6662(b)(8), 6662(k), 6724(d)(1)(D), and Code Sec. 6724(d)(2)(II) to require consistency between a recipient's basis in certain property acquired from a decedent and the value of the property as finally determined for federal estate tax purposes. Code Sec. 1014(f) sets forth the consistent basis requirement, while the procedural rules in Code Secs. 6035, 6662, and Code Sec. 6724 set forth the applicable reporting requirements, penalties, and definitions.

On March 4, 2016, the IRS issued proposed regulations (REG-127923-15) that provide guidance on the consistent basis requirement under Code Sec. 1014(f) applicable to recipients of certain property from a decedent and the reporting requirements under Code Sec. 6035 applicable to executors and other persons required to file an estate tax return. Prop. Reg. Sec. 1.6035-2 cross-references temporary regulations in Reg. Sec. 1.6035-2T (T.D. 9757), published on the same day, which provide transitional relief on the due date for filing Form 8971 and furnishing Schedule A. Specifically, the temporary regulations extended the due date for filing and furnishing Form 8971 and Schedule A to March 31, 2016. In Notice 2016-27, the IRS further extended the deadline to June 30, 2016. The extension until June 30, 2016, was confirmed in final regulations issued on December 2, 2016 (T.D. 9797).

Compliance Tip: The statement which must be provided under Code Sec. 6035 is made on Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and Schedule A, Information Regarding Beneficiaries Acquiring Property From a Decedent.

Final Regulations

On September 16, the IRS issued final regulations (T.D. 9991) that adopt the proposed regulations with certain revisions. According to the IRS, these revisions substantially reduce the burden on both the IRS and taxpayers and increase administrability of the proposed rules. The revisions include:

(1) removing the zero basis rule for unreported property;

(2) adopting a suggested interpretation of the term "acquiring" for purposes of Code Sec. 6035(a)(1) and thereby modifying the reporting requirements applicable in the case of property not acquired by a beneficiary before the estate tax return due date;

(3) eliminating the subsequent transfer reporting requirement for all beneficiaries other than trustees; and

(4) excepting additional types of property interests from the consistent basis requirements and the reporting requirements under Code Sec. 6035.

Zero Basis Rule for Unreported Property

Prop. Reg. Sec. 1.1014-10(c)(3) provides basis rules for property that is discovered after the filing of the estate tax return or otherwise is omitted from the estate tax return. Prop. Reg. Sec.1.1014-10(c)(3)(i)(A) provides that, if the executor reports the after-discovered or omitted (unreported) property on an estate tax return filed before the expiration of the period of limitations on assessment of the estate tax, the final value of the property is determined under Prop. Reg. Sec.1.1014-10(c)(1) or (2). Alternatively, Prop. Reg. Sec.1.1014-10(c)(3)(i)(B) provides that, if the unreported property is not reported before the period of limitations on assessment expires, the final value of that property is zero. To address situations in which no estate tax return was filed, Prop. Reg. Sec. 1.1014-10(c)(3)(ii) provides that the final value of all property includible in the gross estate subject to the consistent basis requirement is zero until the final value is determined under Prop. Reg. Sec.1.1014-10(c)(1) or (2). Because the application of Prop. Reg. Sec. 1.1014-10(c)(3)(i)(B) or 1.1014-10(c)(3)(ii) results in the beneficiary having an initial basis of zero in unreported property, these proposed provisions are collectively referred to as the zero basis rule.

The final regulations do not include the zero basis rule. Instead, Reg. Sec. 1.1014-10(c)(1)(i) of the final regulations clarifies that the consistent basis requirement applies only to included property, a term that is defined in Reg. Sec. 1.1014-10(d)(4) to refer to property, the value of which is included in the value of the decedent's gross estate, as defined in Code Secs. 2031 or 2103. Reg. Sec. 1.1014-10(d)(4) of the final regulations explains that this refers to property whose value is reported on an estate tax return or otherwise is included in the total value of the gross estate so that a final value is or will be determined for that property under the estate tax provisions of the Code. Consequently, the basis of property acquired or passed from a decedent that is not reported on an estate tax return and not otherwise included in the gross estate generally is determined under Code Sec. 1014(a), without regard to the rules of Code Sec. 1014(f). The IRS explained that the rule identifying property subject to the consistent basis requirement in Reg. Sec. 1.1014-10(c)(1)(i) of the final regulations, together with the definition of the term "included property" in Reg. Sec. 1.1014-10(d)(4) of the final regulations, is sufficient to clarify the scope of the consistent basis requirement, and therefore the final regulations do not include a specific rule on the basis of unreported property.

Interpretation the Term "Acquiring" in Code Sec. 6035(a)(1)

Code Sec. 6035(a)(1) requires an executor to furnish Schedule A to each person acquiring any interest in property included in the decedent's gross estate for federal estate tax purposes. Prop. Reg. Sec. 1.6035-1(d)(1) requires that Schedule A be provided to all beneficiaries on or before the earlier of the date that is 30 days after the due date of the estate tax return or the date that is 30 days after the date the estate tax return is filed with the IRS. If, by this due date, the executor has not determined what property will be used to satisfy the interest of each beneficiary, Prop. Reg. Sec. 1.6035-1(c)(3) requires executors to report on the Schedule A for each beneficiary all of the property that the executor could use to satisfy that beneficiary's interest. Prop. Reg. Sec. 1.6035-1(c)(3) further provides that, once the exact distribution has been determined, the executor may, but is not required to, file and furnish a supplemental Form 8791and Schedule A.

Responding to practitioners' comments, the IRS acknowledged that many estates subject to the Code Sec. 6035 reporting requirements are complex and will require a period of time well beyond the estate tax return filing due date to determine the appropriate distributions of property to beneficiaries. In light of these concerns, the final regulations adopt an interpretation of the term "acquiring" in Code Sec. 6035(a)(1) that modifies, and reduces the burden of, the reporting requirements applicable in the case of property not acquired by a beneficiary before the estate tax return due date (or earlier filing date).

Under Reg. Sec. 1.6035-1(c)(3) of the final regulations, the due date for furnishing a Schedule A to a beneficiary who acquired property on or before the due date or earlier filing of the estate tax return is 30 days after the due date or earlier filing of the estate tax return. The due date for furnishing a Schedule A to a beneficiary who acquires property at a later date is January 31 of the calendar year following the year of acquisition. Reg. Sec. 1.6035-1(c)(4) of the final regulations provides that a beneficiary acquires property when title vests in the beneficiary or when the beneficiary otherwise has sufficient control over or connection with the property that the beneficiary is able to take action related to the property for which basis is relevant for federal income tax purposes. Depending upon the particular property and how it was titled at the decedent's death, this could occur at the moment of death, or upon distribution by the executor or a trustee.

Reg. Sec. 1.6035-1(c)(5) of the final regulations provides an option to furnish Schedule A prior to the acquisition of property by a beneficiary. Under this rule, an executor may satisfy the requirement to furnish a statement to a beneficiary acquiring property from the decedent or by reason of the death of the decedent by furnishing the Schedule A prior to the beneficiary's acquisition of the property, but only if the executor has reason to believe that the beneficiary in fact will acquire the property. The Schedule A must identify the property the beneficiary is expected to acquire as well as the value of that property and other information prescribed by Form 8971 and the instructions.

Elimination of Subsequent Transfer Reporting Requirement

Prop. Reg. Sec. 1.6035-1(f) imposes a reporting requirement with regard to certain subsequent transfers of property previously reported (or required to be reported) on Schedule A. Specifically, it requires the recipient of property to which Code Sec. 6035 applies to file with the IRS a supplemental Form 8971, and to furnish to a transferee of the property a Schedule A, if the recipient (who becomes the transferor) distributes or transfers all or any portion of that property in a transaction in which the transferee determines its basis, in whole or in part, by reference to the transferor's basis.

In response to practitioners' comments, the IRS determined that the burden of the proposed subsequent reporting requirement, including the potential penalties for noncompliance, is too heavy a burden to impose on individual beneficiaries who, as a practical matter, may have no way of knowing of the existence of, or how to comply with, the subsequent reporting requirement. However, the IRS also concluded that trustees of trusts are one class of beneficiaries for whom the subsequent reporting requirement would not be sufficiently burdensome to outweigh the needs of, and the benefits to, the IRS and trust beneficiaries.

Accordingly, the final regulations retain a reporting requirement for subsequent transfers, but this requirement is narrowed significantly. Under Reg. Sec. 1.6035-1(h)(1) of the final regulations, reporting requirements are imposed on trustees of beneficiary trusts making a distribution of property that was reported on a Schedule A furnished to those trustees, or of any other property the basis of which is determined, in whole or in part, by reference to the basis of this property. Such a trust distribution includes, for example, a transfer of trust property pursuant to the exercise or lapse of a person's power of appointment (whether general or limited). That section further provides that trustees of trusts that receive a distribution of such property, whether from a beneficiary trust or from any other trust that has received such property, either directly or indirectly, also are subject to these reporting requirements when making a distribution of that property. This reporting obligation imposed on trustees continues to apply for each subsequent transfer or distribution until the property is distributed to a beneficiary not in trust. However, these reporting requirements do not apply if property is disposed of by the trustee in a transaction that is a recognition event for income tax purposes (whether or not resulting in a gain or loss) that results in the entire property having a basis that no longer is related, in whole or in part, to the property's final value or, if applicable, reported value.

Finally, to reduce burden and improve administrability, Reg. Sec. 1.6035-1(h)(2) of the final regulations adopts the same due date for the filing of the Form 8971 and the furnishing of the Schedule A with regard to distributions of property by trustees as is required under Reg. Sec. 1.6035-1(c)(3)(ii) of the final regulations, which is January 31 of the year following the distribution.

Excepting Additional Types of Property Interests from the Consistent Basis Requirements

Prop. Reg. Sec. 1.1014-10(b)(2) provides that property that qualifies for an estate tax charitable or marital deduction under Code Secs. 2055, 2056, or Code Sec. 2056A does not generate an estate tax liability and therefore is excluded from the property subject to the consistent basis requirement. Reg. Sec. 1.1014-10(c)(2)(xi) of the final regulations clarifies that only wholly deductible property, under any of Code Secs. 2055, 2056, 2056A, 2106(a)(2) and (3), is property not subject to the consistent basis requirement. Partially deductible property (property that qualifies for only a partial marital or charitable deduction) is outside the scope of this rule and, therefore, is consistent basis property subject to the consistent basis requirement.

Applicability Date

Prop. Reg. Sec. 1.1014-10(f) provides that, upon publication of the final regulations in the Federal Register, Reg. Sec. 1.1014-10(f) of the final regulations will apply to property acquired from a decedent or by reason of the death of a decedent whose estate tax return is filed after July 31, 2015. The final regulations revise the applicability date of Prop. Reg. Sec. 1.1014-10(f). Accordingly, Reg. Sec. 1.1014-10(f) of the final regulations does not reference the July 31, 2015, effective date of Code Sec. 1014(f), and provides instead that Reg. Sec. 1.1014-10 of the final regulations applies to property described in Reg. Sec. 1.1014-10(c)(1) of the final regulations that is acquired from a decedent or by reason of the death of a decedent if the decedent's estate tax return is filed after the date of publication of the final regulations in the Federal Register.

For a discussion of the consistent basis reporting rule, see Parker Tax ¶110,530.

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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