Wednesday, May 18, 2011

First Look at Draft Form for Basis Allocation

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Although it has yet to appear on the IRS website, a draft version of Form 8939, Allocation of Increase in Basis for Property Received from a Decedent, has been recently circulating among practitioners. Dated June 1, 2010, it is available on the website of Tax Management author Prof. Roger McEowen at the Center for Agricultural Law and Taxation at Iowa State University. www.calt.iastate.edu/form8939.html

Form 8939 will be used to report the allocation of basis adjustments under IRC §1022 for estates of decedents dying in 2010. The due date is April 15, 2011. The draft form, which does not have instructions, is only three pages. Page 1 attempts to capture much the same information as page 1 of Form 706, the estate tax return -- basic identifying information on the decedent, the surviving spouse, other heirs, and the executor.  Schedule A on page 2 provides for the allocation of the $3.0 million spousal basis adjustment and the regular $1.3 million adjustment to transfers to the surviving spouse, while Schedule B on page 3 reports the allocation of the remaining $1.3 million basis increase to other bequests. The Schedules are drafted as to allow reporting for only one recipient, so most estates will file multiple copies of Schedule B.

The lack of instructions leaves a number of important questions unanswered. The draft form assumes that property in the estate will be distributed directly to the heirs; it does not provide for the reporting of property that is sold by the estate, which would seem to require an additional Schedule. The form also gives no indication of whether the IRS will require the appraisal of non-publicly traded property for the purpose of determining fair market value at death. Both Schedules require that this amount be reported for each item of property. There is also no sign of whether certain types of property, such as household goods, can be aggregated on the return. Finally, although page one of the return asks for the decedent's capital loss carryover, NOL carryover, and built-in losses (all of which are added to the $1.3 million basis adjustment), there is no description of the documentation required to support these numbers.

Although the draft form is a helpful first step, much will depend upon the IRS instructions to the return.

Harold W. Pskowski, Managing Editor, Estates, Gifts and Trusts

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