What's Basis Got to Do With It? I'm Just Filing for Portability

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Sept. 24 — Are taxpayers who are only filing an estate tax return to elect portability required to provide the IRS and beneficiaries with valuation statements under the new law on consistency in basis reporting?

That is one of the biggest questions executors and their tax preparers are asking themselves following passage of the Surface Transportation and Veterans Health Care Choice Improvement Act (Pub. L. No. 114-41).
The law requires consistent basis reporting for estates and beneficiaries that receive property from an estate. It also imposes an obligation on executors to give the Internal Revenue Service and beneficiaries statements of valuation on the property received from an estate.

Many clients aren't required to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return—other than to claim portability—because they fall below the current $5.43 million threshold for having to pay estate tax.

Portability allows for the transfer of the unused estate and gift tax exemption from the deceased spouse to a surviving spouse, a popular option that allows spouses to combine their exemptions. However, that could change if estates now have to deal with basis reporting as well.

Portability Deterrent

Where the IRS comes out on requiring statements for returns filed to claim portability may change the decision about whether to use portability at all, Elizabeth Glasgow, counsel with Venable LLP, told Bloomberg BNA Sept. 24.

“It really can cause the cost of filing the estate tax return to be quite a bit higher, and filing estate tax returns is already expensive,” she said. “It may deter people from filing a return who would otherwise take advantage of portability.”

Glasgow said another problem is that the law provided no de minimis exception related to which assets are to be excluded.

It obviously isn't intended that every knick-knack in a home is meant to be covered, Glasgow said, but the law doesn't spell that out. Therefore, it puts an obligation on the executor to determine the value for assets on which a formal evaluation wouldn't historically have been done.

My Basis Versus Your Basis

The provision was brought about because of a disparity between what was being reported on estate tax returns and what beneficiaries were reporting on their income tax returns.

Under prior law, an estate tax return could report the fair market value of property at one amount—say $1 million for a home—at the time of the decedent's death; but the beneficiary who received the property could claim that the fair market value of the property at the decedent's death was higher—say $1.2 million for the same home.

“Since the fair market value at the decedent's date of death determines the income tax basis of the property for the beneficiary, if the beneficiary were to sell the inherited home for $1.2 million, the calculation of the beneficiary's capital gain on the sale would be substantially impacted by which income tax basis was used to report the sale,” Glasgow said.

That could mean a loss of income for the government, which was already having trouble tracking the differences between estate tax returns and beneficiary income tax returns.

New Computer System

At a recent tax conference, Catherine Hughes, Treasury Department estate and gift tax attorney-adviser, offered no clues as to where the IRS might be going on the question of whether portability returns would fall under the new reporting regime. However, she did say administering the new reporting will be difficult (183 DTR G-1, 9/22/15).

“The IRS currently has no computer system that correlates the estate tax regime with the income tax regime,” Hughes said Sept. 18. “Everything is done by hand. So this is requiring the Service to establish a whole new computer system, which takes times and money they don't have.” She described it as “a big push.”

Due Dates—Surprise!

The immediate effective date of the law was as much of a surprise to the IRS as it is was to estates, Hughes said.

The statements are required to be filed no later than the earlier of 30 days after the due date of the estate tax return, or 30 days after the return has actually been filed. That means that the first statements would have been due Aug. 30, she said.

Notice 2015-57 was designed to push the due dates back for any statements that would have been due by Feb. 29, 2016. Those statements won't be due until Feb. 29, 2016. Don't file early, Hughes said, until draft forms and instructions are out. That isn't expected until the first or second week of January.

However, the proposed rules probably won't be out by then, so she said the forms may not answer everyone's questions.

To contact the reporter on this story: Diane Freda in Washington at dfreda@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com