Application of the Accuracy-Related Penalty to an Inconsistent Estate Basis

Last year, IRC Section 1014 was amended by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 to provide that the basis of inherited property must be consistent with the estate tax return. [Pub L No 114-41, 114th Cong, 1st Sess, § 2004(a) (July 31, 2015); IRC § 1014(f).] In addition to adding this consistent basis requirement, the 2015 act added to IRC Section 6662 an accuracy-related penalty provision relating to the requirement. Under IRC Section 6662(b)(8), the accuracy-related penalty on underpayments pursuant to IRC Section 6662 will apply to the portion of any underpayment which is attributable to any inconsistent estate basis. IRC Section 6662(k) states that for purposes of Section 6662, there is an "inconsistent estate basis" if the basis of property claimed on a return exceeds the basis as determined under IRC § 1014(f). Proposed regulations providing guidance on the consistent basis requirement found in IRC Section 1014(f) and also on the accuracy-related penalty for inconsistent estate basis reporting in IRC Section 6662(k) were issued in the spring of 2016. [81 FR 11486.] 

Accuracy-Related Penalties. A consolidated penalty applies to the portion of any underpayment due to negligence, substantial understatement of income tax, and valuation overstatement. The penalty is referred to as the accuracy-related penalty and is imposed at the rate of 20 percent. [IRC Section 6662(a).] ...

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Negligence. If an underpayment of tax is attributable to negligence, the 20-percent negligence penalty applies only to the portion of the underpayment that is attributable to negligence, rather than to the entire underpayment. [IRC § 6662(c).] ...

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Substantial Understatement of Income Tax. The accuracy-related penalty applies to the portion of an underpayment that is attributable to a substantial understatement of income tax. [IRC § 6662(d)(1).]  ...

Substantial Valuation Overstatement. The accuracy-related penalty applies to the portion of an underpayment that is attributable to a substantial valuation overstatement. An overstatement exists if the value or adjusted basis of any property claimed on a return is 200 percent or more of the correct value or adjusted basis of the property, as the case may be...

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Inconsistent estate basis reporting. Under IRC Section 6662(b)(8), IRC Section applies to the portion of any underpayment which is attributable to any inconsistent estate basis. [IRC § 6662(b)(8).] ...

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What is the consistent basis requirement, and when does it apply? Section 1.1014-10(a)(1) of the proposed regulations restates the general rule of IRC Section 1014(f) and provides that the taxpayer's initial basis in property described in Section 1.1014-10(b) of the proposed regulations may not exceed the property's final value, which is defined in Section 1.1014-10(c) of the proposed regulations. [Prop. Treas. Reg. § 1.1014-10(a)(1).] 

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Proposed Regulations Under IRC Section 6662. Section 1.6662-8 of the proposed regulations states that IRC Section 6662(a) and IRC Section 6662(b)(8) "impose an accuracy-related penalty on the portion of any underpayment of tax required to be shown on a return that is attributable to an inconsistent estate basis." [Prop. Treas. Reg. § 1.6662-8(a) .]

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LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx. 8 pages)

RELATED LINKS: For more on inconsistent basis and the accuracy-related penalty, see:

• 1-14 Save Time & Taxes: Fiduciary Income Tax Returns 14.syn – Basis of Donated and Inherited Property