By: Steven A. Loeb, Esq. and Leah Del Percio, Esq.
Last summer, President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 into law (P.L. 114-41). This Act added two new sections to the Internal Revenue Code; Sections §§1014(f) and 6035.
Code Sections §§1014(f) and 6035 are interrelated. The intent behind both new code sections is to ensure more consistent reporting of the value of assets between (a) what an executor may report as the value of an asset of an estate for estate tax purposes and (b) how the beneficiary of the asset will report the value of their basis in that asset for income tax purposes.
Section 1014 (f) requires that the basis of certain property comprising an estate shall not exceed the value of that property for federal estate tax purposes. If that value is not yet determined, Section 1014(f) requires that it shall not exceed the value of the property as reported for purposes of the other new code section, Section §6035.
Section §6035 then requires an executor of an estate to accurately report the value of such property not only to the IRS but also to the recipient of that property. The goal of this is that the executor, the IRS and the recipient/beneficiary of the asset all have notice of the value of the asset. In practice, Section §6035 requires the executor or tax preparer to file Form 8971 with the IRS and to provide any schedule A relating to the valuation of the specific property interest(s) held by a beneficiary of the estate to that specific beneficiary. Form 8971 is a separate filing requirement from the respective estate tax return.
The IRS issued the finalized Form 8971 in January of 2016. Instructions were issued with the finalized form. As the initial due date for reporting was February 29, 2016, a number of IRS notices have since been issued that have extended the deadline to June 30, 2016 for all executors and tax preparers that must file Form 8971 or furnish Form 8971 to the beneficiaries. The IRS stated that the reason for the extended deadline was to provide those required to file Form 8971 an opportunity to review the proposed regulations prior to preparation of the form.
The proposed regulations under §1014(f) and §6035 were issued on March 2, 2016 and clarify prior ambiguity relating to a number of issues, some of which are as follows:
Prop. Reg. 1.1014-10(a)(1) provides that the limitation on value in excess of basis applies to the property whenever the taxpayer reports to IRS a taxable event with respect to the property and will continue to apply until the property is sold, exchanged, or otherwise disposed of in one or more transactions that result in the recognition of gain or loss. This rule broadly applies 1014(f) so that any subsequent owner to property subject to the rule is required to file Form 8971 until there is a recognition event.
Estate Tax Exemption Threshold. The proposed regs also interpret the code sections to require only that the beneficiary's initial basis of the inherited property cannot exceed the final value of the property for federal estate tax purposes. Though Section §1014(f)(1) applies only to property, that, if included in a decedent's gross estate would cause a federal estate tax liability (property over the exemption amount), Prop Reg §1.6035-1(b)(1) provides that the following four exceptions need not be reported on Form 8971: cash (other than coins or paper bills with numismatic value); income in respect of a decedent; those items of tangible personal property for which an appraisal is not required under Reg. § 20.2031-6(b) ; and property that is sold or otherwise disposed of by the estate (and therefore not distributed to a beneficiary) in a transaction in which capital gain or loss is recognized..
The proposed regulations also clarified whether the requirement applies to estates filing so called “portability returns” or “gst returns”. Prop Reg §1.6035-1(a)(2) states that if a federal estate tax return is only being filed to make a generation-skipping transfer tax exemption allocation or election, to make the portability election under section 2010(c)(5), or to make a protective filing to avoid any penalty if an asset value is later determined to cause a return to be required or otherwise, then there is no requirement to report under Section §6035 and thus no need to file Form 8971.
For more information please contact via email Steven A. Loeb, Esq. or by phone at 973-538-4700 ext. 229.
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