New Rules Requiring Consistent Basis Reporting Between Estate and Beneficiaries

On July 31, 2015, the President signed into law H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Act). The Act requires, among other things, consistent basis reporting between a decedent’s estate and a person acquiring property from decedent. In general, the basis of property for determining capital gain or loss on the subsequent sale or exchange of the property is the fair market value at the date of the decedent’s death or the alternate valuation date if the decedent’s estate elects. The so-called step-up rule provides a significant benefit to beneficiaries who receive property that has appreciated during the decedent’s life because the appreciation is not subject to tax when the beneficiary subsequently sells the property. On the other hand, if property is gifted during life, the basis of the property for determining capital gain or loss is the transferor’s basis or carry-over basis.

Under the Act, the basis of property reported in a sale or exchange cannot be treated as having a higher basis than the basis reported by the estate for estate tax purposes. Before the Act, the fair market value of the property reported on a decedent’s estate tax return became the basis of the property for purposes of determining gain or loss on the subsequent sale of the property. The value reported on the estate tax return, however, was a presumptive value that could be rebutted by clear and convincing evidence when a beneficiary sold the property years later and reported the sale to IRS. Now, it appears that the estate tax value (and resulting income tax basis) can no longer be challenged.

A new requirement is added that compels executors of estates required to file an estate tax return to furnish a statement identifying the value of each interest in the property that is reported on the estate tax return to IRS and to each person who acquires any interest in property included in the decedent’s gross estate for federal estate tax purposes. These statements will identify the value of each interest in property acquired from the estate as reported on the estate tax return.

These statements must be filed on or before than the earlier of:  (i) the date which is 30 days after the date on which the return was required to be filed (including extensions, if any), or (ii) the date which is 30 days after the date the return is filed. These new reporting provisions apply to property with respect to which an estate tax return is filed after July 31, 2015.

The Act also authorizes the U.S. Treasury to issue regulations relating to the application of these rules to:

• Property in which no estate tax return is required to be filed, and
• Situations in which a surviving joint tenant or other recipient may have better information than the executor of the estate regarding the cost basis or fair market value of the property.

Finally, the Act imposes penalties for failure to file the statements and accuracy-related penalty for inconsistent reporting when the basis of the property claimed on a tax return exceeds the basis determined under the new rules.

The Takeaway

The new legislation has already raised some concern in the estate planning and compliance community. The legislation requires an executor to furnish a statement to IRS and the beneficiary containing information pertaining to the value of the interest included in the estate and the value of the interest that passes to the beneficiary. The information will most likely be used to track the basis from the estate to a beneficiary/taxpayer. When the property is sold, IRS and the taxpayer will have a record of the basis of the property to determine the proper amount of gain or loss from the sale. However, the statute is unclear on what information will be required on this statement. It is likely that future regulations will address issues pertaining to requirements of the statement and other issues that will need to be addressed. For estates that are not required to file an estate tax return, the statute has provided IRS with the authority to issue regulations that pertain to those estates.

Please note that the requirements in this newly enacted legislation are currently in effect.