IRS Looking to Ease Concerns About Final Basis Rules

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By Colleen Murphy

July 18 — The IRS is committed to addressing concerns stemming from controversial estate basis consistency regulations, an official said.

To do that, the agency is looking for more comments on “where there is a hitch” with proposed rules (REG-127923-15) issued in March, Theresa Melchiorre, an attorney in the Internal Revenue Service Office of Chief Counsel (Passthroughs and Special Industries), said July 18 at the American Institute of CPAs Advanced Estate Planning Conference. The regulations require that the basis of assets received from a decedent be consistent with the basis reported on the estate tax return.

Melchiorre is part of a working group looking for the “best solutions” for the proposed regulations, which fall under tax code Sections 1014(f) and 6035. Because the information reporting requirement was effective immediately, according to the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Pub. L. No. 114-41), Melchiorre said the IRS “scrambled to get together guidance.”

Attorneys have said the rules may place a burden on family members who receive property transfers from an original beneficiary because the consistent basis duty is attached to the property itself—resulting in potentially time-consuming reporting responsibilities (43 DTR G-5, 3/4/16).

“One of the issues is this could go on for years,” James Hogan, managing director of Andersen Tax LLP, said during the session.

Fixes Coming

Final regulations will address the treatment of retirement accounts that have basis, such as Roth IRAs, Melchiorre said.

The IRS will further clarify in final regulations what property executors must report on Form 8971 Schedule A, Information Regarding Beneficiaries Acquiring Property From a Decedent, she said. The proposed rules say all property must be reported except cash and household goods worth less than $3,000. But commenters have asked whether cash also includes accounts receivable, bonds or promissory notes, she said. Because those types of properties aren’t excluded in the proposed regulations, “we suggest it’s prudent to list these properties,” she said.

Time Limit Concerns

One point of tension is a requirement that property not yet distributed be reported within 30 days following the filing of an estate tax return, under Section 6035. But that mandate could lead to wasteful reporting and there will be few distributions within that time frame, practitioners said during a June 27 hearing on the topic (124 DTR G-1, 6/28/16).

Melchiorre said the IRS tried to be helpful by saying it was sufficient for an executor to tell beneficiaries of the property they could receive within that 30-day time frame, leaving them “off the hook” from other penalties. But commenters raised a red flag: A person who received a small bequest would know the full size of the decedent's estate, which could lead to litigation, she said.

“We thought penalty relief would be a better option, but clearly that’s not the way to go,” she said, adding one suggestion the agency received in comments is for an executor to tell beneficiaries the dollar amount or percentage they will receive, leaving out details about all other assets until after the distribution is made.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

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