Wait a Minute: Congress Passes Law Requiring Consistent Basis Reporting Between Estates and Beneficiaries for Estate Tax Purposes

On July 31, 2015, President Obama signed into law H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the "Act"). The Act now requires personal representatives/executors of an estate and other persons who are required to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return; Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return Estate of nonresident not a citizen of the United States; or Form 706-A, United States Additional Estate Tax Return, to report the final estate tax value of property distributed or to be distributed from the estate to a beneficiary, if the estate tax return is filed after July 31, 2015.

Background Information: Internal Revenue Code (the "Code") Section 1014(a) provides the starting point for determining the basis of property acquired from or passing from a decedent. The law requires that the basis of property included in a decedent's gross estate is its fair market value on the date of death or an alternative valuation date. The Act added new Sections 1014(f) and 6035 of the Code. Now, Section 1014(f) of the Code requires the basis of property received by a beneficiary by reason of death under Section 1014(a) of the Code to be the fair market value of the property as determined for federal estate tax purposes.

Congress, presumably, passed this Act because some estates and beneficiaries have been successful in arguing before the IRS and U.S. Tax Court that the fair market value of property acquired from or passed from a decedent is higher than the property's value as shown on the decedent's estate tax return. Upon a successful argument, beneficiaries were then able to increase their basis in the property, and thus decreasing the amount of gain and related income or capital gains taxes the beneficiary would have to pay on the subsequent sale of the property.

Reporting Requirements: In order to determine whether estates are complying with the Act, Section 6035 of the Code imposes new reporting requirements for the value of property included in a decedent's gross estate for federal estate tax purposes. In January, the IRS created new Form 8971 and Schedule A, Information Regarding Beneficiaries Acquiring Property from a Decedent, to allow executors to properly report the value of property received by a beneficiary to the IRS. In addition to preparing Form 8971, a Schedule A must now be provided to each beneficiary receiving property from an estate.

Due Date: The new form is due to the IRS and each beneficiary of the estate 30 days after the earlier of: (1) the due date of the estate tax return, including any extensions or (2) the date the estate tax return is actually filed. Estates, however, are not required to file the new form simply because the estate filed an estate tax return simply to make the portability election for a surviving spouse.

The Treasury Department and the IRS received numerous comments that executors and other persons have not had sufficient time to adopt the systemic changes that would enable the filing of an accurate and complete Form 8971 and Schedule A. The IRS has responded to these comments, and now postponed the date the Form 8971 and Schedule A must be filed with the IRS and furnished to a beneficiary until June 30, 2016.

Penalties Against Executors: If the executor of an estate is required to file Form 8971 and Schedule A and fails to do so or files Form 8971 but fails to furnish a correct Schedule A to beneficiaries by the due date, penalties may be imposed. The penalties may apply if there is a failure to file timely, a failure to include all information required to be shown on the form or schedule, a failure to include correct information on the form or schedule, or a failure to file a correct supplemental Form 8971 and/or Schedule A by the due date. The penalty is $50 per Form 8971 or Schedule A not filed within 30 days after the due date, and a higher penalty of $260 per Form 8971 or Schedule A may be imposed if the form is filed more than 30 days after the due date or if the form is not filed at all. All penalty amounts are subject to adjustment for inflation.

An executor may request any assessed penalty to be abated if reasonable cause and not willful neglect can be shown for failing to file correct Form 8971 and Schedules A or correct Schedules A to beneficiaries. Instructions to Form 8971 and Schedule A state that an executor must show that the failure was due to an event beyond his or her control or due to significant mitigating factors. It must also be shown that the executor or other person required to file acted in a responsible manner and took steps to avoid the failure.

Penalties Against Beneficiaries: Finally, the IRS may assess penalties against beneficiaries receiving property from an estate if they report a different basis amount in the future. Beneficiaries who report basis in property that is inconsistent with the amount on the Schedule A may be liable for a 20% accuracy-related penalty under Section 6662 of the Code.

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