New York Estate Planning & Elder Law Blog
FURTHER CHANGES MAY BE NEEDED
When a person receives an asset via the probate process, the transaction must be reported to the IRS, even if it does not trigger any tax liability as to the estate or the recipient. This is because the IRS needs to track the basis of the asset to determine any net capital gains or other calculations for tax liability purposes. Price minus basis equals profit is the rough calculation to determine how much a person realized in a sale, which in turn determines the capital gain on the sale of the asset.
There is a tension built into the system whereby the executor wants to assign the lowest possible value to the asset, so as to keep the value of the estate low, while the beneficiary wants to have the highest possible value assigned so when they dispose of the asset in the future it will incur less tax liability. The IRS sought to address this tension when they lobbied Congress create 26 U.S.C. § 6035, which in turn enabled them to create the new IRS form 8971. Form 8971 requires an executor to notify the IRS which beneficiary receives what and the value of the asset. Part of the same legislation also created 26 U.S.C. § 1014 which requires beneficiaries to use the value of the asset at the date of death for purposes of reporting basis. This value cannot be greater than the amount that the executor reported on the estate tax return.
The combination of redundant reporting and the prohibition against valuing an asset at an amount greater than the executor reported will likely eliminate the perceived abuse and lost revenue that the IRS alleged occurred by allowing a beneficiary to claim a higher basis. If the executor grossly undervalued the asset, the beneficiary has the right to challenge this amount. Under Revenue Ruling 54-97 a taxpayer can rebut this evaluation by presenting clear and convincing evidence that the value was lower. At the same time, the new form will likely reduce costs associated with conflicting valuations that beneficiaries obtain to show a higher basis value. There are strict timelines that the IRS imposes on the executor, which still complicates and delays full implementation of the law and the new form.
These issues only rear themselves when there is an asset that is difficult to value. Form 8971 also requires the executor to report distribution of cash, any unrealized (unrecieved) income of the decedent, tangible or physical property that was of de minimis value such that the executor did not obtain an evaluation as well as any transaction whereby property was sold or exchanged by the estate which resulted in a net gain or loss. IRS regulations in regards to the form are complicated and have strict requirements for when it is required and the time in which must be filed. While the IRS has not issued a definitive statement in regards to the matter, it seems as if the form is not needed when a spouse elects to utilizes their portability option.