2015 Proposed Reg: Estate Tax Basis Rule From 2010 Has Far Reaching Income Tax Consequences Well Into the Future
An estate tax rule that income tax practitioners NEED to know…
The IRS just released proposed regulations implementing the modified carry over basis rules for decedents that died in 2010. If you think this is narrow and limited, you may be right in some sense, but every asset that passed during 2010 under these rules will be affected for many years to come.
In 2010 the estate tax went away. But with the 2010 Tax Act (the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law 111-312 (TRUIRJCA)) (we’re just going with the 2010 Tax Act since I cannot with a straight face use the term TRUIRJCA) it came back. That 2010 Act retroactively reinstated the estate tax, except for those lucky souls dying in 2010.
With an estate tax, as before 2009 and since 2011, the basis of property passing from a decedent is stepped up or down, as the case may be, to the fair market value. However, with the 2010 Act things got more complicated: the executor of the estate of a decedent who died in 2010 was permitted to elect a modified carry over basis (the Section 1022 Election). Under these rules the basis of property in the hands of a person acquiring the property from that decedent is treated as having been transferred by gift. Thus if the decedent's adjusted basis is less than or equal to the property's fair market value (FMV) determined as of the decedent's date of death, the recipient's basis is the adjusted basis of the decedent (i.e. the lower of the two). If the decedent's adjusted basis is greater than that FMV, the recipient's basis is limited to that FMV (i.e. again, the lower of the two). In the former case, where the decedent’s
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adjusted basis in the property is less than the property’s FMV on the decedent’s date of death, the executor may allocate additional basis (Basis Increase) to certain assets that both are owned by the decedent at death and are acquired from the decedent. However, the property’s total basis may not exceed the property’s FMV on the date of death. Failure to elect would result in stepped up or down basis.
With these proposed regulations the Service is applying the modified carryover basis rules of section 1022 to all provisions of the Regulations involving basis rules by including a reference to section 1022 where appropriate.
As reported in Tax Notes today, Catherine Hughes, Attorney-Adviser in the Treasury’s Office of Tax Legislative Counsel, pointed out that even though the repeal of the estate tax and section 1022 had a short life span before itself being repealed, taxpayers could be holding property whose basis would be determined under section 1022 for "a long time."
#section 1022 Election