AICPA Recommends Changes in Estate Tax Basis Rules

The American Institute of CPAs has sent comments to the Internal Revenue Service and the Treasury Department on proposed regulations for estate tax basis reporting.

The proposed regulations implement changes to section 1014 of the Internal Revenue Code mandated by Congress last year under the Surface Transportation and Veterans Health Care Choice Improvement Act to require consistency between the basis of property in the hands of an estate beneficiary and the value reported on the federal estate tax return.  Basis is important for such income tax purposes as determining gain or loss of property and depreciation deductions.

The 2015 law also added IRC section 6035, which requires estate executors to provide a statement identifying the value of each person’s interest in the decedent’s reported property within 30 days from the earlier of the required filing date of the return (including any extensions) or the date the return was actually filed.

AICPA Tax Executive Committee chair Troy Lewis recommended in a comment letter Wednesday that the “zero basis” rule be removed from IRC section 1014 and that a supplemental Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, be allowed to be filed at any time, even if the statute of limitations has expired because it believes “that the position in the regulations is a punitive overreach not intended in the legislation.”

The reporting requirement for subsequent transfers by beneficiaries should be removed, the AICPA stated, because it does not believe the authority granted in section 6035(b)(2) extends to requiring reporting by estate beneficiaries when they subsequently transfer the inherited property. The letter explained that taxpayers frequently transfer property in transactions where the basis of property “carries over” to the transferee, for example in the context of gifts, estate planning and the creation of business organizations.

The transfer can occur soon after the taxpayer receives the property from the decedent or many years later.  The regulations do not include an expiration period on the requirement to report. Therefore, the AICPA wrote, Treasury and IRS are adding a duty to report for estate beneficiaries as long as they own the inherited property.  And presumably Treasury and IRS are obligating the transferee taxpayer to report upon a second transfer since the obligation applies to “all or any portion of property that previously was reported.”  The reporting requirement could continue for generations.

The AICPA also made a number of other recommendations in its letter and outlined its previous correspondence with IRS and Treasury officials about the proposed regulations and draft IRS Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, and the form’s accompanying instructions.