Wealth Preservation & Estate Planning statement on old paper

FEBRUARY 2, 2016 UPDATE: The final version of Form 8971 and the Instructions have been posted by the IRS.

On July 31, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (the “Act”) to reauthorize the Highway Trust Fund’s spending authority for another three months. To offset the legislation’s costs, the Act makes a number of changes to the tax code, including provisions with respect to the income tax basis of property acquired from a decedent.

The Act amends the Internal Revenue Code by (i) amending Section 1014 to add a new subsection, 1014(f), and (ii) adding Section 6035. With respect to “any interest in property included in the decedent’s gross estate for Federal estate tax purposes” that is reported on a federal estate tax return, new Sections 1014(f) and 6035 operate together to require executors and/or beneficiaries of decedents’ estates to file “statements” with the Internal Revenue Service (and furnish copies to each affected beneficiary) that identify “the value of each interest in such property as reported on such return and such other information with respect to such interest as the Secretary may prescribe.” For convenience, the required new statements are referred to (solely for purposes of this blog) as “Basis Statements,” since such Basis Statements would declare the value of property acquired from a decedent that the filing party believes to be the correct value to be used as the income tax cost basis of the property in the hands of the beneficiary who received the property by reason of a decedent’s death.

A similar duty to furnish a Basis Statement applies to any beneficiary of an estate who is obligated to file an estate tax return because such beneficiary fails to provide the executor with sufficient information to enable the executor to complete a federal estate tax filing with respect to an interest in property held by or on behalf of such beneficiary.

The caption of new Code Section 1014(f) indicates that “Basis Must Be Consistent with Estate Tax Return.” However, the text of new Code Section 1014(f)(1) provides only that “[t]he basis under subsection (a) of any property shall not exceed” [emphasis added] (A) the value of such property as finally determined for federal estate tax purposes and (B) as to property the value of which has not been finally determined for federal estate tax purposes, the value of such property as described in the Basis Statement filed with respect to such property.

To require the filing of Basis Statements in connection with federal estate tax return filings is odd and unnecessary. In cases where federal estate tax returns are filed, each asset reported on the federal estate tax return (Form 706) already is identified with an “estate tax value” (either the date-of-death value or, if elected, the “alternate valuation date” value). Thus, the “value” and any description of a property interest acquired from a decedent that would be included on the newly required Basis Statements will duplicate information already required to be provided on Form 706 itself.

Worse, in addition to burdening an executor with a new filing requirement (which will amount to copying the information from the asset schedules of Form 706 and submitting them as Basis Statements in separate, duplicative filings along with furnishing such information to the affected recipient-beneficiaries), new Code Section 1014(f) will preclude the recipient-beneficiary from arguing that the basis of the property should be higher than what was reported on the decedent’s Form 706 (because the basis of the property “shall not exceed” such reported value), but it will not preclude the IRS from arguing for a lower value/basis for income tax purposes.

The newly required Basis Statements apply to property with respect to which an estate tax return is filed after July 31, 2015, and will be due for filing no later than the earlier of (a) the date which is thirty (30) days after the date the federal estate tax return is filed or (b) the date which is thirty (30) days after the due date (including any extensions) for the decedent’s federal estate tax return. The IRS has issued Notice 2015-57, delaying the filing date until February 29, 2016, at the earliest for any Basis Statements that would otherwise be due before that date. On December 19, 2015, the IRS posted a preliminary draft of Form 8971 – Information Regarding Beneficiaries Acquiring Property from a Decedent – but did not publish instructions for the form at that time.

Adding to the filing burden, new Code Section 6035(a)(3)(B) would require a “supplemental” Basis Statement to be filed within thirty (30) days after any “adjustment” is made to the information required to be included on a Basis Statement. Presumably, an “adjusted” Basis Statement would have to be filed if a federal estate tax audit adjustment resulted in a “finally determined” value for an asset different from the value reported on the decedent’s estate tax return as filed. It is far from clear what the reporting obligations would be if an estate tax audit adjustment is proposed by the IRS but contested by the decedent’s estate.

Code Section 6035(b) opens the door for the Secretary of the Treasury to “prescribe such regulations as necessary to carry out this section, including regulations relating to–

“(1) the application of this section to property with regard to which no estate tax return is required to be filed, and

“(2) situations in which the surviving joint tenant or other recipient may have better information than the executor regarding the basis or fair market value of the property.”

The language of Section 6035(b) would make it possible, by regulations, to extend the requirement for filing Basis Statements to include property passing from decedents’ estates that have no federal estate tax filing obligation. Due to the substantial increase in the estate tax exemption equivalent to $5.45 million (for 2016), most estates no longer have a federal estate tax filing obligation. If the Secretary of the Treasury extends the statutory reach to include estates not required to file estate tax returns, it is possible that these new Basis Statements might have to be filed for virtually every estate asset! As of the date of this posting, no regulations have been issued.

Making a bad situation worse, new Section 6035(b) makes the failure to file Basis Statements equivalent to failing to file a Form 1099 or other “information return,” so the IRS may assert penalties on an executor or beneficiary for failing to timely file Basis Statements (generally to the tune of $250 per Basis Statement).