• Consistency in Basis Reporting
  • August 14, 2015 | Author: Thomas N. Lawson
  • Law Firm: Loeb & Loeb LLP - Los Angeles Office
  • A decedent’s beneficiaries receive a new income tax basis for the assets that were included in the decedent’s estate (with some limited exceptions). The new basis is the fair market value of the assets on the date of the decedent’s death or, if a certain election is permitted, on a date six months after the decedent’s death. If the assets have appreciated during the decedent’s lifetime, all the “built in gain” disappears, but conversely, if the assets have depreciated in value, any “built in loss” also disappears.

    The fair market value of the assets on the relevant valuation date are reported on the decedent’s federal estate tax return, commonly known as the “706,” which is the number of the form. Until recently, a beneficiary had the opportunity to report a basis different from the basis reported by the executor on Form 706 if the beneficiary did not participate in determining the value (for example, the beneficiary was not also the executor). The beneficiary had to show by clear and convincing evidence that the value reported on Form 706 was incorrect. Although the beneficiary had a high burden of proof (clear and convincing), there was no formal coordination between the estate tax system and the income tax system, so unless a beneficiary’s income tax return was audited, beneficiaries often were not challenged on the inconsistent basis.

    In the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Congress has now amended the Internal Revenue Code to provide that the basis for income tax purposes of assets inherited from a decedent is determined by the value reported for estate tax purposes, and the beneficiaries do not have the opportunity to argue that the value should be different. To ensure some coordination between the estate tax system and the income tax system, the executor of an estate must report basis information to the beneficiaries and also notify the IRS of the beneficiaries’ basis. A beneficiary can no longer prove that the basis of an asset should be different from the value reported for estate tax purposes. Furthermore, the IRS will now be able to match up the basis reported on the estate tax return with the basis reported by the beneficiaries on their income tax returns when the assets are sold. (We will provide more information when the IRS explains the procedures for reporting basis to beneficiaries.)