Executors (or beneficiaries in certain situations) of estates for which an estate tax return was required to be filed under Section 6018(a) after July 31, 2015 must now supply the IRS and each person acquiring any interest in property included in the decedent’s gross estate for Federal estate tax purposes a statement “identifying the value of each interest in such property as reported on such return and such other information with respect to such interest as the Secretary may require.” This requirement is mandated by Section 6035 which was added to the Tax Code by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.
The statements required to be furnished by Section 6035 must be furnished at the time that the IRS requires but no later than 30 days after the earlier of the date on which the estate tax return was required to be filed or the date that the return was filed. However, on August 31, 2015, in order to give the IRS and Treasury Department time to issue additional guidance and forms to assist taxpayers, the IRS issued Notice 2015-57 which extended the due date to February 29, 2016, for those estates whose due date would otherwise be before February 29, 2016. If the value of property is later adjusted, a supplemental statement reporting the adjustment must be filed not later than 30 days after the adjustment.
Section 6035 gives the Secretary broad authority to adopt regulations, including regulations relating to the application of Section 6035 to estates for which no estate tax return was required to be filed and situations in which the surviving joint tenant or other recipient may have better information than the executor regarding the basis or fair market value of property.
The Surface Transportation and Veterans Health Care Choice Improvement Act also added Section 1014(f) to the Tax Code. Section 1014(f) provides that the income tax basis of property received from a decedent to which the basis adjustment rules of Section 1014(a) applied cannot exceed the value of the property as determined for estate tax purposes or if an estate provides a statement to the beneficiaries under Section 6035, the value reported on that statement. Importantly, Section 1014(f) only applies to property whose inclusion in the estate increased the estate tax liability. The basis of property has been determined for estate tax purposes if the value of the property is shown on the estate tax return and that value isn’t contested by the IRS before the expiration of the time for assessing estate tax, the value is specified by the IRS and the value is not contested by the executor of the estate, or the value is determined by a court under a settlement agreement with the IRS.
Prior to the enactment of Section 1014(f), some taxpayers were able to successfully argue for a basis for property received from a decedent higher than the property’s estate tax value. Section 6662(b)(8) imposes a penalty on a taxpayer who reports a basis that exceeds the basis determined under Section 1014(f) equal to 20% of the portion of the underpayment attributable to the inconsistent basis reporting.