IRS Releases Zero 2010 Estate Tax Form

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IRS Releases Zero 2010 Estate Tax Form

Form 8939, Allocation of Increase in Basis for property Acquired From a Decedent and its instructions

Under Sec. 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, P.L. 111-312), estates of decedents who died in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents’ basis plus certain increases under Code Sec. 1022. In early August, IRS issued detailed guidance on how this election is made. The guidance, in the form of a notice, revealed that the election is made by filing a Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, which IRS did not release at that time. IRS has now released this long-awaited Form 8939 and its instructions. In general, as discussed in more detail below, Form 8939 is due by Jan. 17, 2012.

Background. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax was to have been repealed for individuals dying in 2010, and the rules allowing a step-up in basis for property acquired from a decedent were to have been replaced with a modified carryover basis regime. The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per-person exemption and a maximum rate of 35%. It also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, Sec. 301(c) of the 2010 Tax Relief Act allows estates of individuals dying in 2010 to elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed.

Even though an executor may elect out of the estate tax, the generation-skipping transfer (GST) tax provisions continue to apply. Section 302(c) of the 2010 Tax Relief Act, however, provides that the applicable tax rate for each GST occurring during 2010 is zero.

In Notice 2011-66, 2011-35 IRB 179, IRS provided detailed guidance on how to make the election (see Federal Taxes Weekly Alert 08/11/2011). At that time, it said that the Form 8939 would have to be filed on or before Nov. 15, 2011. Subsequently, it extended the due date to Jan. 17, 2012 (see Federal Taxes Weekly Alert 09/15/2011).

Code Sec. 1022 applies to the estate of a decedent who died in 2010 only if the executor makes the Section 1022 Election. Code Sec. 1022(a)(1) generally provides that property acquired from the decedent (within the meaning of Code Sec. 1022(e)) is treated as having been transferred by gift. If the decedent’s basis is less than or equal to the property’s fair market value (FMV) determined as of the decedent’s date of death, the recipient’s basis is the decedent’s basis. (Code Sec. 1022(a)(2)(A)) If the decedent’s basis is greater than that FMV, the recipient’s basis is limited to that FMV. (Code Sec. 1022(a)(2)(B))

Code Sec. 1022(b) and Code Sec. 1022(c) allow the executor to allocate additional basis (Basis Increase) to increase the basis of certain assets that both are acquired from the decedent and are owned by the decedent at death (within the meaning of Code Sec. 1022(d)). If the property is acquired from and owned by the decedent, and if the decedent’s basis in the property is less than the property’s FMV on the decedent’s date of death, then the executor generally may allocate Basis Increase to the property, provided that the property’s total basis may not exceed the property’s FMV on the date of death.

Basis Increase consists of the sum of the General Basis Increase (Aggregate Basis Increase and Carryovers/Unrealized Losses Increase) under Code Sec. 1022(b) and the Spousal Property Basis Increase under Code Sec. 1022(c).

The General Basis Increase is the sum of the Aggregate Basis Increase and the Carryovers/Unrealized Losses Increase under Code Sec. 1022(b). The Aggregate Basis Increase is $1,300,000 under Code Sec. 1022(b)(2)(B).

Simultaneously with the issuance of Notice 2011-66, IRS issued Rev Proc 2011-41, 2011-35 IRB 188, providing safe harbor basis rules for purposes of the election. For discussion of these safe harbor rules and additional background on Code Sec. 1022 (see Federal Taxes Weekly Alert 08/11/2011).

Purpose of form. As revealed in the instructions, Form 8939 is an information return used by the executor of a decedent who died in 2010:

(1) to make the Section 1022 Election;

(2) to report information about property acquired from a decedent; and

(3) to allocate Basis Increase to certain property acquired from a decedent.

Section 1022 election. The instructions explain the meaning of the Section 1022 Election and make it clear that if the election is made, the estate will not be subject to federal estate tax and won’t have to file Form 706. As a result, Code Sec. 1022 will apply to determine the recipient’s basis in most (but not all) property acquired from a decedent.

Making the election. The election is made by filing a timely Form 8939. Generally, once the executor has made the election, it is irrevocable. However, the executor can revoke a prior Section 1022 election on a subsequent Form 8939 filed before the due date.

Required disclosure. Generally, if the executor makes the election, the executor must report all the information required by Form 8939 and its instructions about all property acquired from the decedent other than cash. The executor filing Form 8939 must furnish to each person whose name is required to be set forth in Form 8939 (other than the executor) a written statement showing the information required by Code Sec. 6018(e) with respect to property acquired from the decedent to the person required to receive the statement. Schedule A of Form 8939 should be used to provide this information.

Makeup of the form. Part 1 is used to enter information about the decedent and the executor. Part 2 contains entries for the basis allocation computation. As noted above, Schedule A is used to provide information to property recipients. A separate Schedule A should be completed for each recipient, including the estate.

GST exemption. Schedule R of Form 8939 is used to allocate the GST exemption. Schedule R-1 is used to inform the trustee of certain trusts of the amount of GST exemption allocated to such trusts. Because the GST tax rate for 2010 is zero, these schedules are not used to compute the GST tax.

Due date. Form 8939 must be filed by Jan. 17, 2012. There are only a few limited circumstances where IRS will accept an amended form 8939. One circumstance is to allocate Spousal Property Basis Increase but only if certain requirements are met, as detailed in the instructions. See Notice 2011-66 for other instances in which an amended return may be allowed.

Form 8939 can be viewed on the IRS website at http://www.irs.gov/pub/irs-pdf/f8939.pdf. The instructions can be viewed at http://www.irs.gov/pub/irs-pdf/i8939.pdf.