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What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal Revenue Code Section 1022?

June 7, 2010
No bill to reform the federal estate tax has gathered political steam.  No federal estate tax compromise appears imminent. When a Republican Senator, commenting on the status of federal estate tax reform, pulls out the “small business and farmer” violin, we have to wonder whether anything will get done before this year’s November elections.  Republican Senator Grassley forgets it was the 2001 Republican Congress that caused this tax mess. It appears that we’re stuck with the modified carryover basis rules for a while, so I’m continuing to analyze Internal Revenue Code Section 1022.  (My earlier blog posts regarding the capital gains taxation of life estates, powers of appointment and revocable trusts can be found at http://elderlawblog.info/category/internal-revenue-code-section-1022-2/)

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.

Internal Revenue Code Section 1022 causes a giant paperwork headache.  For example, my experience has been that many persons who sell their homes or vacation homes later    find themselves searching their records for proof of their expenditures on capital improvements that add to the basis for capital gains tax purposes, and now the executor of a person’s estate is placed in the difficult position of attempting to locate all of those records.  The 2001 Republican Congress that passed this law may have created a perverse incentive for everybody to become paper hoarders, and the executor of a decedent’s        estate will now have potential liability for getting rid of any of the decedent’s paperwork without having reviewed it thoroughly.

EDIT:  See 9/14/2010 update: http://elderlawblog.info/2010/09/14/more-about-the-mechanics-of-obtaining-a-step-up-in-basis-in-2010-under-internal-revenue-code-section-1022

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EDIT:

Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths

10 Comments leave one →
  1. Peter Stanley permalink
    June 8, 2010 11:24 am

    Is it your thought that the surviving spouse in a very modest estate (say, less than $200,000) needs to file a 706 for a spouse’s death in 2010 in order to get a partial step up in basis for an appreciated joint mutual fund account? Does this essentially mean that for every single death occurring in 2010 in which the decedent owned appreciated property an estate tax extension is filed within nine months of date death to further wait and see what Congress does? From the literal language of the statute it seems the default is carryover basis and that to get appreciated basis the return has to be filed, even if there is no need for allocation because the appreciation is less than the $1.3/$3 million threshold for allocation.

    • June 8, 2010 11:27 pm

      No timely-filed Federal Estate Tax Return, no proof of step-up in basis. Doesn’t matter how small the estate is. It appears from the Code that only large estates ($1,300,000+) are required to file the return, but without such a filing how would the recipient be able to prove many years later that the estate didn’t need to file and that the step-up had been obtained?

  2. Patricia permalink
    June 21, 2010 7:49 pm

    Isn’t the due date of the information return April 15, 2011, per IRC Section 6075?

  3. Tom Gorlinager permalink
    June 30, 2010 11:24 am

    It was the Democrats that got us in the current mess. In 2001, they refused to support a full repeal, leaving us instead with the one year phaseout. Also, they refused to support proposed legislation that would have, at the time, established a permanently higher exemption and lower rate. As you can plainly see, the current mess is the Democrats creation and handiwork.

  4. Mike Mauro permalink
    September 16, 2010 10:50 am

    This nonsense of who got us into this mess is true nonsense. Why is any elected official getting us into any mess? As for the people who play the violin and cry about “death tax” — I’d sure rather be taxed at death than during my lifetime. The theory that I made money only because I was part of the free enterpirse system we have and now have to pony up with my partner (try making this kind of money in Slovenia, why don’t you?), namely the US Free Enterprise system as it exists under our government, and only have to do so after I am dead, is fine with me.

  5. Cathy permalink
    May 13, 2012 12:04 am

    What steps are required, if any, when an heir has recived property from a T.O.D.. Do they get the new step up price? A person suggested to me that the T.O.D. negated the steped up benefit when transfering proeprty.

    • May 15, 2012 7:30 am

      Sorry, but this blog is not intended to give legal advice to anybody. You should obtain specific advice geared to your own particular situation from a CPA or an estate planning or elder law attorney in your state.

  6. Jude permalink
    May 7, 2013 7:19 am

    Hey there! I just wish to give you a big thumbs up for
    your great info you’ve got right here on this post. I will be coming back to your web site for more soon.

Trackbacks

  1. New Form 8939 Required to Be Filed with the Internal Revenue Service for Step-up in Basis for Estates of Persons Who Die During 2010 « Massachusetts Estate Planning, Probate & Elder Law
  2. Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths « Massachusetts Estate Planning, Probate & Elder Law

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