Basis Consistency: Big Reporting Headache for Gifts to Family

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March 3 — Rules the IRS proposed requiring consistency in the reporting of property values between estates and beneficiaries will place a big reporting burden on a new set of property recipients—family members who receive property transfers from an original beneficiary, an attorney told Bloomberg BNA.

Gregg Simon, a principal with Much Shelist, P.C., in Chicago, said March 3 that the “subsequent transfers” provision is the most significant development of the Internal Revenue Service's proposed and temporary rules (REG-127923-15, T.D. 9757) requiring that estates and beneficiaries report the same property values to the Internal Revenue Service(42 DTR G-5, 3/3/16).

“Once there is an asset in the purview of tax code Section 6035, if any family member transfers it to another family member or controlled entities, they have a subsequent reporting requirement—forever,” he said.

Simon is spearheading the American College of Trust and Estate Counsel's comments on the proposed rules to the IRS, which are due June 2.

In explaining this provision, the IRS said it is concerned about opportunities to circumvent the purpose of the statute “for example, by making a gift of the property to a complex trust for the benefit of the transferor's family.”
However, those caught up in this new reporting requirement aren't likely to know about it, advisers said.

Not Paying Attention

The IRS put estate executors on notice through Notice 2016-19 that there was an extension for filing the new Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and for providing statements to beneficiaries about their property values.

However, the subsequent transfers provision in the proposed rules would require “ a whole new universe of people who were never on notice that they had a filing obligation, that they now have a filing obligation,” David Kirk, an executive director at EY LLP, told Bloomberg BNA March 2.

“It now appears these people have to file returns by the end of the month,” he said. The IRS gave those required to file a Form 8971 and provide statements to beneficiaries until March 31(29 DTR G-2, 2/12/16).

“Meanwhile, the universe of people that were paying attention to this is significantly different than the people who are having to file,” Kirk added.

The requirement means that when a recipient of certain property subsequently transfers that property to another family member, the transferring family member will also have to file a Form 8971 with the IRS and make a statement to the recipient family member on the value of the property.

If the transfer occurs before the estate tax values are finally determined (as defined in the proposed regulations), a copy of Form 8971 also needs be provided to the executor with the supplemental statement.

The Mandate

The new requirements were created by the Surface Transportation and Veterans Health Care Choice Improvement Act (Pub. L. No. 114-41) in an effort to ensure that estate executors and beneficiaries who receive property from an estate are reporting the same values to the IRS.

The law, enacted in July, created tax code Section 6035 and said that executors of an estate who are required to file an estate tax return—Form 706, United States Estate (and Generation Skipping Transfer) Tax Return—must provide statements to the IRS and to each beneficiary stating the value of each item of transferred estate property.

The law also amended tax code Section 1014(f) to require consistent basis reporting between an estate and the beneficiary.

Where Are Those Assets?

The rules included another provision advisers found surprising. Under what has been called the “zero basis rule,” beneficiaries won't get a step up in basis for assets discovered later that no one knew about or weren't discovered until after the period of limitations for auditing the estate tax return runs.

“You can no longer rely on the statute of limitations and say ‘I forgot to include this,' or ‘I didn't know this asset existed,' ” James Hogan, managing director with Andersen Tax LLC, told Bloomberg BNA. “Now that basis will be zero. So the government will get the gain out of the other end when the property is sold.”

Normally under Section 1014(a), a beneficiary's basis in “inherited” assets is the date of death value of the assets, which is the amount includible in the decedent's gross estate.

“By this regulation the IRS would be overriding Section 1014(a) in these events with no statutory basis for doing so,” Simon said.

To contact the reporter on this story: Diane Freda in Washington at
To contact the editor responsible for this story: Brett Ferguson at

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