Years Later, 2032A Estate Valuation Election Haunts Heirs

Years Later, 2032A Estate Valuation Election Haunts Heirs

When preparing a Federal estate tax return, the key objective is typically to minimize or completely eliminate the amount of estate tax owed.   Practitioners utilize various kinds of discounting methods, appraisals, and other valuation techniques in an effort to reduce the value of estate assets thereby helping clients pay the smallest amount of estate tax.   However, practitioners must beware that success in obtaining IRS acceptance of lower asset values will translate into the asset’s basis.

In Van Alen v Commissioner, TC Memo 2013-235, two siblings inherited an interest in a family ranch from their father.  Their interest was in a trust, and their stepmother valued that interest at less than $100,000 when she prepared her late husband's estate tax return.* The estate utilized IRC Section 2032A to value the ranch based on its actual use at the time of death, rather than in its hypothetical highest and best use. Some years later, the trust sold a conservation easement on the ranch for more than $900,000. The sale created a capital gain that passed through to the siblings.  The siblings disputed the proper basis to report for that sale and argued that, through no fault of their own, the estate greatly understated the value of their interest in the ranch. The Tax Court found that the estate consciously choose to utilize the IRC Section 2032A valuation method and the estate’s heirs were aware of this special valuation.  The Tax Court also determined that the siblings benefited from the aggressive and successful valuation of the ranch because they received the lion's share of the taxable estate. The basis of inherited property is generally equal to its fair market value at the date of the decedent's death. IRC § 1014(a)(1). However, if there is an IRC Section 2032A election, the basis of property acquired from a decedent is the value as determined under IRC Section 2032A.  The Tax Court held that the siblings were stuck with the lower basis established by the value reported on the estate tax return.

Because inherited assets take a stepped-up basis, balancing the estate’s desire to pay little or no estate taxes with the heirs’ desire to take a higher stepped-up basis can be a tricky one.   Practitioners should discuss with their clients this balance to ensure that clients are prepared for the possibility of future capital gains tax if assets are valued at the lowest possible value.

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* LEXIS users can view

"Siblings Are Liable for Capital Gain Taxes on Sale of Inherited Property," taxanalysts® Tax Notes Today, October 22, 2013.

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