What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal Revenue Code Section 1022?
To obtain a step-up in basis for appreciated assets, it appears that a Federal Estate Tax Return must be filed for any decedent who dies during 2010. Internal Revenue Code Section 1022(d)(3) states that basis increases must be allocated “on the return required by Section 6018.” Internal Revenue Code Section 6018 pertains to the filing of Federal Estate Tax Returns, but, unfortunately, no such return is actually required for anybody who dies during 2010.
A Federal Estate Tax Return is due 9 months after a decedent’s death, and can normally be placed on extension for no more than 6 months, but a temporary amendment to Internal Revenue Code Section 6075 provides that the Federal Estate Tax Return will normally be due (unless Internal Revenue regulations provide otherwise) when the decedent’s final federal income tax return is due. The requirement in Internal Revenue Code Section 1022 that basis increases be allocated on a Federal Estate Tax Return poses a potentially huge tax trap for the unwary, as Section 1022 does not state whether a basis increase can be allocated on a late-filed return. Unfortunately, many persons may not even become aware of this basis issue until they have sold appreciated assets that they inherited and are preparing to file their income tax returns, and, if assets had been inherited in any year before the sale, the deadline for the executor of the decedent’s estate to allocate the basis increase may well have passed by then.
Reportedly, the Internal Revenue Service is working on a new version of the Federal Estate Tax Return. Estate planning professionals should soon begin the process of informing the executors of the estates of all 2010 decedents about the need to file this return, and accountants should revise their annual questionnaires to ask about assets that were inherited during 2010.
Only an “executor” can allocate the basis increase, and that term is not defined within Section 1022, but under Treasury Regulation 20.2203-1, the term “executor” includes an executor or administrator, but if there is no executor or administrator, the term means “any person in actual or constructive possession of any property of the decedent, ” and the term can actually include “the decedent’s agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding, as collateral, securities belonging to the decedent; and debtors of the decedent in this country.” Thus, the lack of an executor or administrator being appointed for a decedent’s estate can mean the possibility exists for different persons or entities to file competing Federal Estate Tax Returns with different basis adjustments.