Consistent Basis Reporting Requirements

Executors of decedents' estates required to file federal estate tax return must also file a form reporting estate tax value of assets distributed to beneficiaries. Certain beneficiaries must use a consistent value for purposes of determining income tax basis and consequently capital gains and depreciation deductions as is used for purposes of determining the estate tax.

 The consistent reporting of basis requirement aims to preclude taxpayers taking a favorable position for purposes of determining the gross estate and then ignoring that position in the determination of capital gain and depreciation deductions. Congress enacted provisions requiring consistent reporting of value for estate tax purposes and for income tax basis as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. [Pub. L. No. 114-41, Title II § 2004(a), 129 Stat. 454 (2015).] ...

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Congress did not adopt the broad reach urged by President Obama's [budget] proposal, but narrowed it to reporting by a decedent's estate. Reporting of basis on the making of a gift is not required. The statute as enacted also generally limits reporting to those estates required to file a federal estate tax return. [IRC §§ 1014(f), 6035.] Given the narrow application of the requirements as adopted, a very small proportion of decedents' estates will be impacted by the basis reporting requirements of IRC § 6035.

The enacting legislation makes the consistent basis reporting provisions applicable to property reported on an estate tax return filed after date of enactment, specifically July 31, 2015. [Pub. L. No. 114-41, Title II § 2004(d), 129 Stat. 454 (2015); Notice 2015-57, 2015-36 I.R.B. 294.] Because Treasury needed time to promulgate reporting forms and instructions, it delayed the earliest due date for reporting until February 29, 2016 for those estate tax returns filed after July 31, 2015 and with basis reporting deadlines prior to February 29, 2016. [Notice 2015-57, 2015-36 I.R.B. 294 ] Treasury, however, clarified that despite the delayed filing deadline the basis reporting requirement nevertheless "applies to executors of estates of decedents and to other persons who are required ... to file a return if that return is filed after July 31, 2015." [Notice 2015-57, 2015-36 I.R.B. 294.]

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The basis consistency rule requires that the income tax basis of an asset in the hands of the decedent's beneficiary not exceed the value of the asset as finally determined for estate tax purposes or, if not finally determined, the value as reported on the Form 8971 as required by IRC § 6035. [IRC § 1014(f)(1).] Value is deemed finally determined for estate tax purposes if the statute of limitations for assessing tax has expired and the Service has not contested the value as reported. [IRC § 1014(f)(3)(A).] It is also deemed finally determined if the Service has determined a value and the taxpayer has not contested, [IRC § 1014(f)(3)(B).] or if the value has been determined by a court or by settlement agreement with the Service. [IRC § 1014(f)(3)(C).] The reporting requirement contemplates adjustments to value from the time the estate tax return is filed to the time a final determination is made. If an adjustment to value occurs, the executor or other person required to report must prepare and file a supplemental Form 8971 and deliver accompanying Schedule A to affected beneficiaries. [IRC § 6035.] Notably, Congress allows Treasury to provide exceptions to the consistency requirement with issuance of regulations. IRC § 1014(f)(4).]

The instructions to the Form 8971 do not indicate any such exceptions.

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