Source: https://www.lexisnexis.com/legalnewsroom/tax-law/b/practitioners-corner/archive/2011/11/04/irc-167-1022-basis-adjustment-rules-for-property-owned-by-and-acquired-from-2010-decedents.aspx?Redirected=true
Timestamp: 2018-02-21 09:43:47
Document Index: 191219965

Matched Legal Cases: ['§1022', '§1022', '§1022', '§1014', '§1022', '§1022', '§6018', '§ 2010', '§ 6716', '§6018', '§1022']

IRC §1022 Basis Adjustment Rules for Property Owned by and Acquired from 2010 Decedents
New IRS Guidance for Opting Out of Estate Tax
11-04-2011 | 09:58 AM
Unless the executor of the estate of an individual who died in 2010 makes the Internal Revenue Code §1022 election, the estate is subject to the federal estate tax. If the executor makes the IRC §1022 election, neither the estate tax law nor IRC §1014 applies, and the basis of property acquired from the decedent is determined under the modified basis rules of §1022 and initially is the property's fair market value as of the date of death or the decedent's adjusted basis, whichever is less. The §1022 election is made by timely filing a Form 8939.
The final version of Form 8939 was only released last month. Many executors and their attorneys are in the process of analyzing the form and its instructions, so that they can timely file the Form 8939 by its due date of January 17, 2012. This article is intended to provide guidance to executors and attorneys in that situation.
Within 30 days after filing Form 8939, the executor must furnish to each recipient of property acquired from the decedent a written statement showing the information required by IRC §6018(e), whether or not the executor allocates any basis increase to that property. Schedule A of Form 8939 is such a statement. Updated statements must be furnished within 30 days after filing an amended or supplemental Form 8939 or receiving notice of an adjustment from the IRS. The executor cannot file a Form 706 and a conditional Form 8939 that would be effective only if an estate tax audit results in an increase in the gross estate above the applicable exclusion amount in IRC § 2010(c), according to the instructions.
IRC § 6716 provides a $10,000 penalty for failing to file Form 8939 on time and for failing to provide the information required, except for reasonable cause. The penalty for failing to provide recipients of property acquired from the decedent with the information required by §6018(e) is $50 for each such failure, or 5% of the fair market value of the property for intentionally failing to do so. "Property acquired from the decedent" does not include the decedent's interest in a QTIP trust previously established by the decedent's spouse.
● Decedent's property: The decedent's ½ of the home, worth $2.5 million, is allocated to the bypass trust with its $1 million of existing basis and its potential to receive up to $1.5 million additional basis. The decedent's ½ of the stock, also worth $2.5 million, is allocated to the bypass trust with its $1.85 million of existing basis and its potential to receive up to $0.65 million of additional basis. In the aggregate, $2.15 million of property exceeding the existing basis is eligible for basis increase. However, since this bypass trust cannot qualify to receive Spousal Property Basis Increase, only $1.3 million of General Basis Increase is available. Therefore, $0.85 million of gain would still be subject to tax on later sales ($2.15-$1.3=$0.85).
● Surviving spouse's property: The surviving spouse owns ½ of the home, worth $2.5 million, with its $1 million of existing basis, and ½ of the stock, also worth $2.5 million, with its $1.85 million of existing basis. In the aggregate, $2.15 million of property exceeding the existing basis is eligible for basis increase. However, this is less than the $3.0 million of Spousal Property Basis Increase that is available for allocation. Therefore $0.85 million of basis adjustment is lost ($3.0-$2.15=$0.85).
Naturally other factors will need to be considered, such as the ability to discount partial interests in assets for estate tax purposes on the surviving spouse's death, but the example illustrates the type of analysis necessary in allocating basis adjustments under §1022 for the estates of decedents who died in 2010 and did not elect out of the federal estate tax system.