July 3, 2012
Carryover basis forms (Form 8939) for 2010 estates that elected out of the federal estate tax may be amended through July 17, 2012, but not thereafter.
The Election out of Federal Estate Tax for 2010 Decedents
When Congress reinstated the federal estate tax in December 2010, retroactive to January 1, 2010, it permitted executors of decedents who died in 2010 to elect out of the estate tax back into the “modified carryover basis” system that had been in place for 2010, thereby, in the view of some, avoiding a constitutional challenge to a “retroactive tax.” Although the carryover basis rules had been enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, they had received little technical attention because few people seriously expected to get to 2010 without further congressional action, either to make the repeal of the estate tax (and thus its replacement by carryover basis) permanent or to permanently reform the estate tax and abandon carryover basis. As a result, the first substantive guidance regarding carryover basis and the election for 2010 decedents was published by the IRS on August 5, 2011 (Notice 2011-66, 2011-35 I.R.B. 184, and Revenue Procedure 2011-41, 2011-35 I.R.B. 188) and amplified and modified on September 13, 2011 (Notice 2011-76, 2011-40 I.R.B. 479).
Under the 2001 Act — and thus under the 2010 Act for estates electing out of the estate tax — the basis of property received from a decedent who died in 2010 would be the lower of the date-of-death fair market value or the decedent’s basis. Each estate was allowed a “General Basis Increase” equal to $1.3 million plus the decedent’s unused capital loss and net operating loss carryovers and all unrealized losses in capital assets at the time of the decedent’s death. An additional $3 million of “Spousal Property Basis Increase” was allowed for property that passed to the decedent’s surviving spouse. These basis increases could be allocated by the executor among the eligible assets, but could not increase the basis of any asset above its date-of-death fair market value.
The vast majority of executors did not need or want such an election because they were perfectly satisfied with the reinstated estate tax and a stepped-up basis for appreciated assets. That included executors of most estates that would not pay estate tax anyway, such as estates under $5 million (at least in states without a state estate tax), estates that passed largely to charity, and some estates that passed largely to a surviving spouse. In most estates significantly larger than $5 million, the election out of the estate tax and into carryover basis was the clear choice because it avoided an estate tax paid sooner and at a presumably higher rate than any additional income tax on the sale of appreciated assets. But that was a small percentage of 2010 estates, and Revenue Procedure 2011-41 stated that the IRS expected only 7,000 executors to make the election out of the estate tax.
Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, is the form to be used to elect out of the federal estate tax, to report the values and bases of assets received from a decedent, and to allocate the basis increases. The IRS had released a draft of Form 8939 in 2010, dealing only with carryover basis before the election was provided for in December 2010. The ultimate version of Form 8939 for actual use was not released until September 2011.
After several postponements, the final due date of Form 8939, and thus of the election out of the estate tax, was January 17, 2012. Although the IRS indicated that in general it would not grant extensions of time to file Form 8939 and would not accept a Form 8939 filed late, Notice 2011-66 allows an executor to make any changes to a timely filed Form 8939, except making or revoking the election, within six months after the due date — that is, on or before July 17, 2012.
Occasions for Amending a Form 8939
Even though Form 8939 was due more than a year after the end of 2010, many of the rules were novel, and the IRS’s substantive guidance and the Form 8939 itself were available for study for less than six months. As a result, some timely filed Forms 8939, even though carefully prepared by experienced professionals, may have been somewhat tentative and may have been subjected to further review by executors and their advisors after the initial filing. Some may be candidates for amendment.
Here are a few — certainly not all — of the occasions for amending a Form 8939:
- Property subject to carryover basis or eligible for basis increases has been more accurately identified. For example, property acquired by a decedent within three years before death by gift from anyone other than the decedent’s spouse did not qualify for the basis increases. Likewise, property subject to a general power of appointment was subject to carryover basis but not eligible for basis increases. Property in a QTIP trust for the benefit of a 2010 decedent was not subject to carryover basis at all. These results departed significantly from the estate tax rules with which return preparers had been familiar.
- Historical bases and date-of-death values have been more accurately determined. As expected, many executors had difficulty reconstructing the decedent’s bases in assets. Even the familiar estate tax concept of date-of-death fair market value may have been a challenge in the 2010 economy. Many executors and their advisors got a late start in a climate of rumors that Congress might change the rules.
- The decedent’s tax profile has been more thoroughly studied. For example, before 2010 many taxpayers may have had little reason to distinguish between capital assets and other assets, especially when those assets, if sold, would have produced a loss and not a gain. Even some taxpayers with loss carryovers may have had little reason to keep strict track of them. Death in 2010 may have made such tax accounting notions relevant for the first time.
- Equitable treatment of respective beneficiaries has been more appropriately determined. Because the burdens of the estate tax and the income tax might not affect all beneficiaries the same way, some executors may have found it difficult both to allocate assets among beneficiaries and to allocate basis increases among assets. Since January 17, more equitable approaches may have been crafted, disagreements among beneficiaries may have been addressed, or necessary court approvals may have been obtained.
Regardless of the reason for amending a Form 8939, however, after July 17 a Form 8939 in most instances cannot be amended.
Still More Reasons to Give Attention to Form 8939, Even After July 17
Supplemental or amended Forms 8939 are allowed in other very limited circumstances, such as to make additional allocations of Spousal Property Basis Increase as additional property is distributed to the surviving spouse and to reallocate basis increases if the values or bases of assets received from a 2010 decedent are later revalued in an income tax audit.
Notice 2011-66 also confirmed that the IRS retains the discretion, under “9100 relief” procedures, to allow an executor to amend or supplement a Form 8939 or even to file a Form 8939 (and thus make the election) late. The IRS has already exercised that discretion to excuse an executor who missed the January 17 deadline, but as time passes we should expect its standards for such relief to become increasingly strict. Any executor with that situation should act very promptly indeed.
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