IRS Publishes Proposed Regulations on Basis Consistency Requirements… What Does It Mean to You?

I recently posted a blog about the Internal Revenue Service’s (“IRS”) new basis consistency requirements. On March 4, 2016 the IRS published related proposed regulations. Remember this law (Section 1014(f) of the Internal Revenue Code (the “Code”)) requires a beneficiary of an estate asset  to use the same value reported for estate tax purposes as the beneficiary’s basis when the beneficiary sells the asset.  The law (Section 6035 of the Code)  also requires reporting to both the Internal Revenue Service (the “Service”) and such beneficiaries on Form 8971, together with a Schedule A, confirming the value of the property (and thus, the basis) on the estate tax return. Thus, the beneficiary knows that, when they sell such asset, the amount on which to calculate their gain or loss. The proposed regulations are 45 pages long. Needless to say, this blog merely points out a few items.

The regulations make clear that the reporting requirements ONLY apply to estate tax returns for which an estate tax is otherwise due. It does NOT apply to estates that are not otherwise required to file a return and does not apply to property that qualifies for a marital or charitable deduction.  Further, the proposed regulations make clear that the reporting requirements do NOT apply if the only reason for filing an estate tax return is for other reasons than paying estate tax; for example, making a generation skipping transfer tax election or allocation, making a protective filing or filing ONLY to elect portability.

An interesting concept in these regulations is the zero basis presumption. If you have filed an estate tax return, and property is discovered after you file the return, it has never been clear whether an amended estate tax return is required to be filed. However, if you do not file an “amended” estate tax return for these newly found assets (and inclusion would create an estate tax), then the basis of such property is zero which means that a beneficiary selling such property will have 100% gain on the property.

Reporting requirements must be met for all property with respect to which a federal estate tax return was filed after July 31, 2015 and  such reporting is required no later than the earlier of 30 days after the due date of the return (including extensions) or 30 days after the date the return is filed.

If you intentionally disregard the filing requirements or fail to file a correct Form 8971 by the due date (absent a showing of reasonable cause), then the estate may be subject to a penalty which depends on when the correct Form 8971 is filed. If a beneficiary reports a basis in property that’s inconsistent with the amount on the Schedule A of Form 8971, then the beneficiary may also be liable for a accuracy-related penalty equal to 20 percent of the underpayment.

ADVICE: If you are the personal representative and/or trustee required to file the Form 706- United States Estate (and Generation-Skipping Transfer) Tax Return, then be sure that your advisor understands these new requirements and that the reporting deadlines for the Form 8971 are met as provided in the law and proposed regulations. If you are an advisor, then read these proposed regulations carefully to be sure that all reporting requirements are met. Proper appraisals and values are even more critical for beneficiaries. Query? The personal representative will probably want the lowest value (to avoid paying estate tax) which will benefit the beneficiary but the beneficiary may want a high value so they receive a high basis when they sell the asset. Who will prevail? A closer look at the tax rates will be critical.

Word of the Week: Registered Agent. In Florida each corporation or other entity designates a “registered agent” which receives service of process in case of a lawsuit or other legal notice. An entity could be a corporation with 1200 shareholders. How could you be  sure as to whom to notice if a person wanted to sue a corporation? The naming of a registered agent advises the public on whom to serve.

GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY! 😎