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December 26, 2015
This is actually about a week late, but it may well still be news to you---a Christmas present from the IRS courtesy of Professor Mark Gillette and your faithful reporter. The IRS has released a draft form 8971 "Information Regarding Beneficiaries Acquiring Property from a Decedent" (attached) in accordance with Section 6035 of the Internal Revenue Code in order to carry out the consistent basis rule imposed by Section 1014(f), also both attached.

Download Form 6035 and 1014(f)

What is this about? Until the passage of Section 1014(f) a taxpayer could legally take the position that their cost basis on sale of property received from a decedent was different (and higher) from that reported on the decedent's federal estate tax return. These statutory changes are intended to limit a taxpayer's ability to do that and impose additional obligations on the executor or other person responsible for tiling the federal estate tax return.

The statutes require the filing of this form with the IRS and the provision of cost basis information to the recipient of property from a decedent.

Basically, if you are required to file a federal estate tax return, you must file the form and provide the information to the beneficiaries receiving the property. So

1. If your estate is over the filing limit of $5,430,000 (soon to be $5,450,000) you must file this form and provide the information to the beneficiaries of the property they receive. This is true even if you owe no tax because of the charitable or marital deduction.

2. If you file a return just to elect portability for a surviving spouse. you don't have to file this form or provide this information (although we would customarily provide cost basis information to beneficiaries in every case because they need it for tax reporting).

And--The taxpayer must use a cost basis that is no higher than that reported if the inclusion of the property increased the liability for the federal estate tax.

The meaning of this last is less than 100% clear. I guess I assume that "liability" means an obligation to actually pay some more tax--not just a liability that is extinguished by the Unified Credit or some other credit or deduction. If an item of property is passing to a charity or a surviving spouse, it would presumably not increase the liability for tax. If the gifts were by formula, you would have to employ the formula and see if it increased the tax. Now this duty of consistency is on the recipient of the property, but the reporting and the determination of whether the value of the property increases the tax is on the executor or other person responsible for filing the form.

Now the Form 8971--Note the Instructions have not yet been released.

Download Form 8971 Draft


Can you file it with the form 706? I would think so, but presumably the instructions will tell us. Clearly it must be done within 30 days of the 706 filing, but I would assume you would file it at the same time.

How do you handle the form's requirement that the item be identified by schedule and number on the 706? That could be more of a problem. What about all of those folks who might file a 706 with a "see attached" with a list of the securities evaluated by the brokerage firm or bank?

Now we don't do that because we use the Lackner 6 in 1 system that tracks the assets and cost bases for accounting purposes and fiduciary income tax purposes as well as 706 and Inheritance Tax purposes, and that requires individual entries for each asset in order to track them, but there is a whole other world out there of folks who may take a short cut method of compiling the report. What do they do? Can they just say "Item 1" even though Item 1 is a brokerage statement that contains 50 securities? I don't know the answer to that. I wouldn't think that the IRS would be too happy with that because they wouldn't be able to match it properly if and when they got a matching program designed up and running.

And what if Schedule B, item 8 is 4,002 shares of A T & T and you have sold 1002 shares and are distributing 1,000 shares each to 3 beneficiaries? The form says "If the beneficiary acquired a partial interest in the property, indicate the percentage acquired here." Is the interest 1,000/4,002ths? It really isn't a partial interest. it is a whole interest in some of the shares. Hopefully the instructions will provide further guidance.

The Notice to beneficiaries on the bottom of the form says "If the property increased the estate tax liability, Internal Revenue Code section 1014(f) applies, requiring the consistent reporting of basis information." That while true isn't very well and clearly stated for the ears of a beneficiary. I would think they might have said "which requires you to use the cost basis reported on the form 706 as stated above in computing gain or loss on sale of the property." Stating the rule, though accurate, almost suggests that beneficiaries might consider doing something different if the inclusion of the asset does not increase the tax liability. And of course they can do that, but the proper basis of inherited property is still the fair market value at the date of death (or alternate value). They are just not bound by the value as reported on the 706.

Now query this--what if the value reported on the 706 is very low, and a beneficiary sees that it is very low and she wants a higher basis (assume that the bequest is specific and the beneficiary of the property will not pay the higher tax), what can the beneficiary do about it? I guess at least the beneficiary should be informed about what it is, but what can they do?

I guess we shall see!

Happy New Year!

Bob Wolf, Moderator, P & T Hot Tip Email List

Tener, Van Kirk, Wolf & Moore, P.C.

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