1. THE NEW BASIS CONSISTENCY AND BASIS REPORTING RULES
“IT’S ALL ABOUT THE BASIS”

2. THE ACT
THE SURFACE TRANSPORTATION AND VETERANS HEALTH CARE CHOICE ACT OF 2015
MOST OF IT IS UNRELATED TO OUR PRACTICE
SECTIONS 2004, 2005 AND 2006 – MAJOR IMPACT
CREATES NEW RULES RELATIVE TO BASIS AND BASIS REPORTING

3. FORM 706, SECTION 1014 AND BASIS
BACKGROUND – IF AN ASSET IS INCLUDED IN THE GROSS ESTATE OF A DECEDENT (EXCEPT IRD), BASIS OF ASSET IS ADJUSTED TO FMV OF ASSET -- IRC SECTION 1014
There is a misunderstanding of the rule. It is mistakenly believed by many that “whatever is reported on the 706 is the basis in the hands of the beneficiary”.
That is not what the Statute states. Section 1014 states that the BASIS = FMV OF THE ASSET, NOT THE AMOUNT STATED ON FORM 706

4. SECTION 1014 - APPLICATION EXAMPLES OF WHY THIS DIFFERENCE MAKES SENSE
706 IS WRONG AND BENEFICIARY CAN PROVE IT.
For example, A inherits a building valued on the 706 at $1,000,000. A sells the building 2 months later for $3,000,000 with no other intervening factors affecting the value of the building for the two month period.
The FMV of the building is obviously $3,000,000. A should not be saddled with a $2,000,000 gain merely because the 706 incorrectly reported the value.

5. SECTION APPLICATION
AUDIT ADJUSTMENTS For example, the 706 value of a building is reported at $1,000,000, but the IRS believes (and perhaps is right) that the value is $1,500,000. However, the Service has issues with other items subject to valuation and agrees to concede the $1.5 million value in exchange for a lesser discount in connection with another asset. The beneficiary should not be saddled with a $1.0 million basis and a $500,000 gain.

6. BASIS CONSISTENCY RULE
NOW – FOR THE FIRST TIME - FOR CERTAIN ESTATES – THE LAW IS CHANGED.
IF:
THE ESTATE IS REQUIRED TO FILE A 706
AND
THE ASSET CAUSES AN INCREASE IN ESTATE TAX LIABLITY
THEN – THE BASIS IN THE HANDS OF THE BENEFICIARY CANNOT EXCEED THE 706 VALUE

7. BASIS CONSISTENCY RULE - EXAMPLES
The simplest way to explain the rule is by Examples to which the rule does not apply!! A dies with a $30 million estate and leaves the entire estate to the surviving spouse. The Estate is required to file a 706, but since the entire estate qualifies for the marital deduction, there is no INCREASE in the ESTATE TAX LIABILITY with respect to ANY ASSET of the estate. Therefore, the Basis Consistency Rule does not apply and the surviving spouse is not automatically bound by any values stated on the 706.

8. BASIS CONSISTENCY RULES - EXAMPLES
A dies with a $30 million estate and leaves a building worth $8 million to the surviving spouse and the other $22 million of assets to the his or her children. The estate is required to file a 706 and there is clearly estate tax due. HOWEVER, there is no increase in estate tax liability with respect to the building left to the surviving spouse. Therefore, the Basis Consistency Rule does not apply to the building and the surviving spouse is not automatically bound by the value of the building as stated on the 706. However, the children of A are subject to the Basis Consistency Rules with respect to the $22 million in assets inherited by them.

9. REPORTING RULES
ESTATES REQUIRED TO FILE A 706 UNDER 6018(a) ARE SUBJECT TO THE REPORTING REQUIREMENTS
THESE ARE ESTATES IN WHICH THE GROSS ESTATE AND ADJUSTED TAXABLE GIFTS EXCEED THE BASIC EXCLUSION AMOUNT ($5,450,000 for 2016).
DOES NOT INCLUDE ESTATES WHICH ARE LESS THAN THE BASIC EXCLUSION AMOUNT AND ARE FILING SOLELY FOR PORTABILTIY OR GST ALLOCATION OR OTHERWISE
THIS IS A BROADER CATEGORY OF ESTATES THAN THOSE SUBJECT TO THE BASIS CONSISTENCY RULES. THE REPORTING RULES APPLY IF THE ESTATE IS REQUIRED TO FILE A 706 UNDER SECTION 6018(a) WHETHER OR NOT THERE IS AN INCREASE IN ESTATE TAX LIABILITY – OR ANY ESTATE TAX LIABILITY.
Example – A dies with an estate worth $8,000,000, all of which is left to the surviving spouse or alternatively has a typical marital/non-marital disposition such that there is no estate tax liability due. The Basis Consistency Rules previously described do not apply -- but the Basis Reporting Rules described hereafter do.

10. REPORTING RULES – WHICH FORMS?
FORM REQUIRED TO BE FILED WITH IRS
“SCHEDULE A” - REQUIRED TO BE GIVEN TO EACH BENEFICIARY WITH COPIES TO THE IRS
EXECUTOR (AS DESRIBED IN IRC 2203) IS RESPONSIBLE FOR FILING AND NOTICE
Each form effectively discloses the basis of each asset and certain other information about the estate and the beneficiaries.

11. REPORTNG RULES – THE BENEFICIARY
Each Beneficiary gets a SCHEDULE A which discloses the basis of the assets reported on the 706 – but issues arise.
TRUST OR ENTITY AS BENEFICIARY – If a trust is a beneficiary, who gets the Schedule A, the trustee or each beneficiary of the trust? The Regs. state (fortunately) that the Trustee receives the Schedule A.
CANNOT LOCATE BENEFICIARY – If the beneficiary cannot be located, the Executor must disclose that fact on Form 8971 and inform IRS of what has been done to try and locate the beneficiary. Once the beneficiary is found, the Executor has 30 days to supplement Form 8971 and provide the discovered beneficiary with Schedule A.

12. REPORTING RULES – THE BENEFICIARY
CANNOT DETERMINE WHICH ASSETS GO TO WHICH BENEFICIARY
If the beneficiary cannot be determined as of the date the filings and notice are required, the Regs. state that every beneficiary who could possibly receive the asset receives the notice.
For example, A leaves his entire estate in equal shares to his or her 7 children. If by the required filing and notice date it is unclear which children get which assets, all 7 children must receive a Schedule A with respect to every asset.

13. REPORTING RULES – WHICH ASSETS ARE SUBJECT TO REPORTING
THE STATUTE STATES THAT ALL ASSETS IN GROSS ESTATE SHOULD BE REPORTED
THE REGULATIONS SENSIBLY EXCLUDE SOME ASSETS
CASH
INCOME IN RESPECT OF A DECEDENT (IRD)
SMALL TANGIBLE PERSONAL PROPERTY
ASSETS SOLD BY ESTATE BEFORE FILING AND NOTICE DATE

14. REPORTING RULES - CHANGES
SUPPLEMENTAL REPORTING REQUIRED FOR CHANGES
VALUE ADJUSTMENT VIA AUDIT
SUBSEQUENT DISCOVERY OF AN ASSET
CHANGE IN BENEFICIARY
CHANGE OF ASSET VIA A TAX FREE TRANSACTION – FOR EXAMLE - SECTION 1031 TAX-FREE EXCHANGE
NORMAL ADJUSTMENTS ARE EXEMPT – FOR EXAMPLE, POST-DEATH DEPRECIATION NEED NOT BE CALCULATED AND DISCLOSED TO THE BENEFICIARY. ONLY THE DATE OF DEATH 706 VALUE IS REPORTED.

15. BASIS REPORTING – SUBSEQUENT TRANSFER RULE
NOT IN STATUTE – A REGULATORY BOMBSHELL!!!! If the beneficiary transfers an asset to a family member or to a grantor trust, the beneficiary must inform the new owner of the asset via Schedule A and File Form There is no time limit – if the beneficiary transfers the asset several years later, the Filing and Notice requirements are applicable If the beneficiary transfers the assets BEFORE the executor provides that beneficiary with a Schedule A, the beneficiary must inform the Executor who in turn will file Form 8971 and provide the new owner with Schedule A

16. THE BASIS CONSISTENCY RULES AND OMITTED PROPERTY
ADDRESSES ASSETS FIRST DISCOVERED AFTER FORM 8971 AND SCHEDULE A HAVE BEEN FILED FOR THE OTHER KNOWN ASSETS
SUCH ASSETS SHOULD BE REPORTED ON A SUPPLEMENTAL FORM 8971 AND SCHEDULE(S) A
HOWEVER, IF THE AFTER-DISCOVERED ASSET IS SUBJECT TO THE BASIS CONSISTENCY RULE:
IF THE ASSET IS REPORTED WITHIN THE STATUTE OF LIMITATIONS WITH RESPECT TO THE ESTATE, THEN “NO HARM NO FOUL”. THE ASSET GETS REPORTED, THE ESTATE TAX IS PAID AND THE BENEFICIARY RECEIVES THE BASIS
IF THE ASSETIS REPORTED AFTER THE STATUTE OF LIMIITATIONS HAS RUN, THE BASIS IN THE HANDS OF THE BENEFICIARY = ZERO!!!
IF THE ASSET IS NEVER REPORTED, THE BASIS = 0 UNTIL REPORTED OR IF REPORTED BY THE IRS IF THE SERVICE FILES THE RETURN UNDER THE STATUTE

17. EFFECTIVE DATES AND TIMING OF REPORTING
EFFECTIVE FOR ALL FORMS 706 FILED ON OR AFTER AUGUST 1, 2015
REPORTING REQUIRED 30 DAYS AFTER EARLIER OF FILING OF RETURN OR DUE DATE (INCLUDING EXTENSIONS)
REPORTING RULES DELAYED UNTIL JUNE 30, 2016
CONSISTENCY RULES EFFECTIVE AUGUST 1, 2015

18. PENALTIES
FAILURE TO TIMELY FILE – THERE ARE PER OCCURRENCE PENALTIES OF $50 OR $250 DEPENDENT UPON DEGREE OF LATENESS, SUBJECT TO A MAXIMUM OF $3,000,000 INDEXED FOR INFLATION PER YEAR (NOT A TYPO) - $3,143,000 FOR 2016
SECTION 6662 ACCURACY RELATED PENALTIES APPLY TO SUBSTATIAL OVERSTATEMENT OF BASIS
STATUTE OF LIMITATIONS WILL INCREASE TO SIX YEARS IF INCOME IS UNDERSTATED BY MORE THAN 25% AS A RESULT OF OVERSTATEMENT OF BASIS

19. BASIS CONSISTENCY AND REPORTING RULES
RICHARD GREENBERG
GREENBERG & SCHULMAN
90 WOODBRIDGE CENTER DRIVE SUITE 200
WOODBRIDGE NJ 07095