Application of Modified Carryover Basis to General Basis Rules, 26873-26882 [2015-11210]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 90 (Monday, May 11, 2015)]
[Proposed Rules]
[Pages 26873-26882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11210]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-107595-11]
RIN 1545-BK09


Application of Modified Carryover Basis to General Basis Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding the application of the modified carryover basis 
rules of section 1022 of the Internal Revenue Code (Code). 
Specifically, the proposed regulations will modify provisions of the 
Treasury Regulations involving basis rules by including a reference to 
section 1022 where appropriate. The regulations will affect property 
transferred from certain decedents who died in 2010. The regulations 
reflect changes to the law made by the Economic Growth and Tax Relief 
Reconciliation Act of 2001 and the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010.

DATES: Written or electronic comments and requests for a public hearing 
must be received by August 10, 2015.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-107595-11), Room 5205, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
107595-11), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (REG-107595-11).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Mayer R. Samuels, (202) 317-6859; concerning submissions of comments or 
a request for a public hearing, Oluwafunmilayo Taylor, (202) 317-6901 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Subtitle A of title V of the Economic Growth and Tax Relief 
Reconciliation Act of 2001, Public Law 107-16 (EGTRRA) enacted section 
2210 of the Code, which made chapter 11 (the estate tax) inapplicable 
to the estate of any decedent who died in 2010. Subtitle E of title V 
of EGTRRA enacted section 1022 regarding a modified carryover basis 
system applicable during 2010. On December 17, 2010, the Tax Relief, 
Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 
Public Law 111-312 (TRUIRJCA) became law, and section 301(a) of 
TRUIRJCA retroactively reinstated the estate and generation-skipping 
transfer taxes. However, section 301(c) of TRUIRJCA allows the executor 
of the estate of a decedent who died in 2010 to elect to apply the Code 
as though section 301(a) of TRUIRJCA did not apply with respect to 
chapter 11 and with respect to property acquired or passing from the 
decedent (within the meaning of section 1014(b) of the Code). Thus, 
section 301(c) of TRUIRJCA allows the executor of the estate of a 
decedent who died in 2010 to elect not to have the provisions of 
chapter 11 apply to the decedent's estate, but rather to have the 
provisions of section 1022 apply (Section 1022 Election).
    Generally, under section 1014(a), the basis of property in the 
hands of a person acquiring the property from a decedent or to whom the 
property passed from a decedent is the fair market value of the 
property at the date of the decedent's death. However, if the decedent 
died in 2010 and the decedent's executor, as defined in section 2203, 
makes the Section 1022 Election, then the basis of property in the 
hands of a person acquiring the property from that decedent is governed 
by section 1022 and not by section 1014.
    Section 1022(a)(1) generally provides that property acquired from a 
decedent

[[Page 26874]]

(within the meaning of section 1022(e)) is treated as having been 
transferred by gift. If the decedent's adjusted 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 adjusted basis 
of the decedent. If the decedent's adjusted basis is greater than that 
FMV, the recipient's basis is limited to that FMV. See section 
1022(a)(2).
    If the decedent's adjusted basis in the property is less than the 
property's FMV on the decedent's date of death, sections 1022(b) and 
1022(c) allow the executor of a decedent's estate to allocate 
additional basis (Basis Increase) to certain assets that both are owned 
by the decedent (within the meaning of section 1022(d)) at death and 
are acquired from the decedent (within the meaning of section 1022(e)). 
However, the property's total basis may not exceed the property's FMV 
on the date of death.
    Although section 1022 was applicable only to decedents dying in 
calendar year 2010, basis determined pursuant to that section will 
continue to be relevant until all of the property whose basis is 
determined under that section has been sold or otherwise disposed of. 
Accordingly, the existing regulations need to be updated to incorporate 
appropriate references to basis determined under section 1022.

Explanation of Provisions

    These proposed regulations incorporate into the existing 
regulations, as appropriate, references to section 1022 to ensure that 
references to basis also include basis as determined under that 
section. Some changes involve simply inserting the words ``or section 
1022'', ``and 1022'', or similar references. Others (such as Sec.  
1.742-1) require the insertion of a new sentence or an example to 
expressly address the applicability of section 1022. A few changes 
(such as proposed Sec.  1.684-3) require the inclusion of a new section 
to provide a detailed explanation of the application of section 1022 in 
the particular context of the existing regulation. The proposed 
regulations also provide cross references for section 1022 when 
appropriate and make other minor, non-substantive changes. Language 
revisions serve solely to conform the existing regulations to the 
provisions of section 1022 and no additional changes are intended. The 
more significant changes are briefly described below.
    Section 1.48-12(b)(2)(vii)(B) of the proposed regulations provides 
that, if a transferee's basis is determined under section 1022, any 
qualified rehabilitation expenditures incurred by the decedent under 
section 48 within the measuring period that are treated as having been 
incurred by the transferee decrease the transferee's basis for purposes 
of the substantial rehabilitation test.
    Section 1.83-4(b)(1) of the proposed regulations provides that, if 
property to which section 83 applies is acquired by any person while 
such property is substantially nonvested, such person's basis in the 
property reflects any adjustments to basis provided under section 1022, 
as well as under sections 1015 and 1016.
    Sections 1.179-4(c)(1)(iv), 1.267(d)-1(a)(3), 1.336-1(b)(5)(i)(A) 
and 1.355-6(d)(1)(i)(A)(2) of the proposed regulations provide that 
property acquired from a decedent in a transaction in which the 
recipient's basis is determined under section 1022 is not acquired by 
purchase or exchange for purposes of sections 179, 267, 336, and 
355(d).
    Section 1.197-2(h)(5)(i) of the proposed regulations provides that 
the anti-churning rules of Sec.  1.197-2(h) do not apply to the 
acquisition of a section 197(f)(9) intangible if the acquiring 
taxpayer's basis in the intangible is determined under section 1022.
    Section 1.306-3(e) of the proposed regulations provides that 
section 306 stock continues to be classified as section 306 stock if 
the basis of such stock is determined by reference to the decedent-
stockholder's basis under section 1022. In addition, the revision of 
the last sentence of the existing regulation clarifies the reference to 
``the optional valuation date under section 1014'' by changing the 
language to refer expressly to the election to use the alternate 
valuation date under section 2032.
    Section 1.382-9 of the proposed regulations provides that for 
purposes of Sec.  1.382-9(d)(5)(i), the definition of qualified 
transfer is expanded to include situations where the transferee's basis 
in the indebtedness is determined under section 1022.
    Section 1.421-2(c)(4) of the proposed regulations provides that an 
option granted under an employee stock purchase plan acquires a basis, 
determined under section 1014 (or section 1022, if applicable), only if 
the transfer of the share pursuant to the exercise of such option 
qualifies for the special tax treatment provided by section 421(a).
    Section 1.423-2(k)(2) of the proposed regulations provides that if 
the special rules provided under Sec.  1.423-2(k) are applicable to a 
share of stock upon the death of an employee, then the basis of the 
share in the hands of the estate or the person receiving the stock by 
bequest or inheritance shall be determined under section 1014 (or 
section 1022, if applicable).
    Section 1.467-7(c)(2) of the proposed regulations provides that 
section 467 recapture does not apply to a disposition on death of the 
transferor if the basis of the property in the hands of the transferee 
is determined under section 1022. However, section 467 recapture does 
apply to property that constitutes a right to receive an item of income 
in respect of a decedent. Section 1.467-7(c)(4) of the proposed 
regulations provides that, if the transferee subsequently disposes of 
the property in a transaction to which Sec.  1.467-7(a) applies, the 
prior understated inclusion is computed by taking into account the 
amounts attributable to the period of the transferor's ownership of the 
property prior to the first disposition.
    Section 1.617-3(d)(5)(ii)(b) of the proposed regulations provides 
that the amount of the adjusted exploration expenditures for mining 
property in the hands of the transferee immediately after a disposition 
of property that is subject to section 1022 is equal to the amount of 
the adjusted exploration expenditures for mining property in the hands 
of the transferor immediately before the disposition, minus the amount 
of any gain taken into account under section 617(d). In addition, under 
Sec.  1.617-4(c)(1)(i), no gain is recognized on the gift of mining 
property. For purposes of determining gain from the disposition of 
certain mining property, the term ``gift'' is expanded to include 
disposition of property with a basis that is determined under section 
1022.
    Section 684 generally requires gain to be recognized on any 
transfer of appreciated property by a U.S. person to a foreign non-
grantor trust or foreign estate. For decedents dying in 2010, section 
684 also applies to certain transfers of property by reason of death to 
nonresident aliens. Gain is determined by reference to the fair market 
value of the property over the adjusted basis of such property in the 
hands of the transferor. Section 1.684-3(c) currently provides that, in 
the case of a transfer of property by reason of death of a U.S. 
transferor to a foreign non-grantor trust, no gain recognition is 
required if the basis of the property in the hands of the trust is 
determined under section 1014(a).
    Section 1.684-3(c) of the proposed regulations provides that this 
rule is modified to clarify the application of section 684 to transfers 
of property by reason of death of U.S. transferor decedents dying in 
2010. If the executor

[[Page 26875]]

of a U.S. decedent does not make a Section 1022 Election, the proposed 
regulations confirm that the general exception to gain recognition will 
apply. If the executor of a U.S. decedent does make a Section 1022 
Election, the proposed regulations provide, consistent with Rev. Proc. 
2011-41 (2011-35 IRB 188 (August 29, 2011)) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) and Notice 2011-66 (2011-35 IRB 
184 (August 29, 2011)) (see Sec.  601.601(d)(2)(ii)(b) of this 
chapter), that there is gain recognition. Any basis increase that the 
executor allocates under section 1022 will reduce the amount of gain in 
that property for purposes of section 684.
    Section 1.742-1(a) of the proposed regulations provides that the 
basis of a partnership interest acquired from a decedent who died in 
2010, and whose executor made a Section 1022 Election, is the lower of 
the adjusted basis of the decedent or fair market value of the interest 
at the date of decedent's death. The basis of property acquired from a 
decedent may be further increased under section 1022(b) and/or 1022(c), 
but not above the fair market value of the interest on the date of the 
decedent's death.
    Section 1.995-4(d)(2) of the proposed regulations provides that the 
period during which a shareholder of stock in a DISC has held stock 
includes the period he is considered to have held it by reason of the 
application of section 1223 and, if his basis is determined in whole or 
in part under the provisions of section 1022, the holding period of the 
decedent.
    Section 1.1014-4(a) of the proposed regulations provides that the 
basis of property acquired from a decedent, including basis determined 
under section 1022, is uniform in the hands of every person having 
possession or enjoyment of the property at any time, whether obtained 
under the will or other instrument or under the laws of descent and 
distribution.
    Section 1.1014-5(b) of the proposed regulations provides that, in 
determining gain or loss from the sale or other disposition of a term 
interest in property the adjusted basis of which is determined pursuant 
to section 1022, that part of the adjusted uniform basis assignable 
under the rules of Sec.  1.1014-5(a) to the interest sold or otherwise 
disposed of is disregarded to the extent and in the manner provided by 
section 1001(e).
    Section 1.1223-1(b) of the proposed regulations provides that the 
holding period under section 1223 of the recipient of property acquired 
from a decedent who died in 2010, and whose executor made a Section 
1022 Election, includes the period that the property was held by the 
decedent.
    Sections 1.1245-2(c)(2)(ii)(d) and 1.1245-3(a)(3) of the proposed 
regulations provide that, if section 1245 property is acquired from a 
decedent who died in 2010 and whose executor made a Section 1022 
Election, the amount of the adjustments reflected in the adjusted basis 
of the property in the hands of the transferee immediately after the 
transfer is equal to the amount of the adjustments reflected in the 
adjusted basis of the property in the hands of the transferor 
immediately before the transfer, minus the amount of any gain taken 
into account under section 1245(a)(1) by the transferor upon the 
transfer. Further, even though property is not of a character subject 
to the allowance for depreciation in the hands of the taxpayer, the 
property is section 1245 property if the taxpayer's basis in the 
property is determined under section 1022 and the property was of a 
character subject to the allowance for depreciation in the hands of the 
decedent.
    Section 1.1245-4(a)(1) of the proposed regulations provides that no 
gain is recognized under section 1245(a)(1) upon a transfer of section 
1245 property from a decedent whose executor made the Section 1022 
Election.
    Section 1.1250-4(c)(5) of the proposed regulations provides that 
the holding period under section 1250(e) for the recipient of property 
acquired from a decedent who died in 2010, and whose executor made a 
Section 1022 Election, includes the period that the property was held 
by the decedent.
    Section 1.1254-2(a)(1) of the proposed regulations provides that no 
gain is recognized under section 1254(a)(1) upon a transfer of natural 
resource recapture property from a decedent who died in 2010 and whose 
executor made a Section 1022 Election.
    Sections 1.1254-3(b), 1.1254-4(e)(4), and 1.1254-5(c)(2)(iv) of the 
proposed regulations provide that, for purposes of determining the 
amount of section 1254 costs from the disposition of natural resource 
recapture property, the term ``gift'' is expanded to include the 
transfer of property with a basis that is determined under section 
1022.
    Section 1.1296-1(d)(4) of the proposed regulations provides that 
the basis of stock of a passive foreign investment company for which a 
section 1296 election was in effect as of the date of the decedent's 
death that is acquired from a decedent is the lower of the adjusted 
basis of the stock in the hands of the decedent immediately before his 
death or the basis that would have been determined under section 1014 
or section 1022, as applicable, without regard to this paragraph.
    Section 1.1312-7(b) of the proposed regulations provides that the 
taxpayer with respect to whom the erroneous treatment occurred must be 
a taxpayer who had title to the property at the time of the erroneously 
treated transaction and from whom, mediately or immediately, the 
taxpayer with respect to whom the determination is made derived title, 
if the basis of the property in the hands of the taxpayer with respect 
to whom the determination is made is determined under section 1022.

Proposed Effective/Applicability Date

    These regulations are proposed to apply on and after the date the 
regulations are published as final regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and, because these regulations do 
not impose a collection of information requirement on small entities, 
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 
Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. All comments will be available at www.regulations.gov or upon 
request for public inspection and copying. A public hearing will be 
scheduled if requested in writing by any person that timely submits 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these regulations is Mayer R. Samuels, 
Office of the Associate Chief Counsel

[[Page 26876]]

(Passthroughs and Special Industries). However, other personnel from 
the IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section 1.48-12 is amended by revising the last sentence of 
paragraph (b)(2)(vii)(B) and adding paragraph (g) to read as follows:


Sec.  1.48-12  Qualified rehabilitated building; expenditures incurred 
after December 31, 1981.

* * * * *
    (b) * * *
    (2) * * *
    (vii) * * *
    (B) * * * If a transferee's basis is determined under section 1014 
or section 1022, any expenditures incurred by the decedent within the 
measuring period that are treated as having been incurred by the 
transferee under paragraph (c)(3)(ii) of this section shall decrease 
the transferee's basis for purposes of the substantial rehabilitation 
test.
* * * * *
    (g) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  1.48-
12 as contained in 26 CFR (revised as of the April 1 preceding the date 
these regulations are published as final regulations in the Federal 
Register).
0
Par. 3. Section 1.83-4 is amended by revising the last sentence of 
paragraph (b)(1) and adding paragraph (d) to read as follows:


Sec.  1.83-4  Special rules.

* * * * *
    (b) * * *
    (1) * * * Such basis shall also reflect any adjustments to basis 
provided under sections 1015, 1016, and 1022.
* * * * *
    (d) Effective/applicability date. The provisions in this section 
are applicable for taxable years beginning on or after July 21, 1978. 
The provisions of paragraph (b)(1) of this section relating to section 
1022 are effective on and after the date these regulations are 
published as final regulations in the Federal Register.
0
Par. 4. Section 1.179-4 is amended by revising the first sentence of 
paragraph (c)(1)(iv) to read as follows:


Sec.  1.179-4  Definitions.

* * * * *
    (c) * * *
    (1) * * *
    (iv) The property is not acquired by purchase if the basis of the 
property in the hands of the person acquiring it is determined in whole 
or in part by reference to the adjusted basis of such property in the 
hands of the person from whom acquired, is determined under section 
1014(a), relating to property acquired from a decedent, or is 
determined under section 1022, relating to the basis of property 
acquired from certain decedents who died in 2010. * * *
* * * * *
0
Par. 5. Section 1.179-6 is amended by:
0
a. Revising the section heading and the first sentence of paragraph 
(a).
0
b. Adding paragraph (d).
    The revision and addition read as follows:


Sec.  1.179-6  Effective/applicability dates.

    (a) * * * Except as provided in paragraphs (b), (c), and (d) of 
this section, the provisions of Sec. Sec.  1.179-1 through 1.179-5 
apply for property placed in service by the taxpayer in taxable years 
ending after January 25, 1993. * * *
* * * * *
    (d) Application of Sec.  1.179-4(c)(1)(iv). The provisions of Sec.  
1.179-4(c)(1)(iv) relating to section 1022 are effective on and after 
the date these regulations are published as final regulations in the 
Federal Register.
0
Par. 6. Section 1.197-2 is amended by revising paragraphs (h)(5)(i) and 
(h)(12)(viii) and adding paragraph (l)(5) to read as follows:


Sec.  1.197-2  Amortization of goodwill and certain other intangibles.

* * * * *
    (h) * * *
    (5) * * *
    (i) The acquisition of a section 197(f)(9) intangible if the 
acquiring taxpayer's basis in the intangible is determined under 
section 1014(a) or 1022; or
* * * * *
    (12) * * *
    (viii) Operating rule for transfers upon death. For purposes of 
this paragraph (h)(12), if the basis of a partner's interest in a 
partnership is determined under section 1014(a) or 1022, such partner 
is treated as acquiring such interest from a person who is not related 
to such partner, and such interest is treated as having previously been 
held by a person who is not related to such partner.
* * * * *
    (l) * * *
    (5) Application of section 1022. The provisions of Sec.  1.197-2 
relating to section 1022 are effective on and after the date these 
regulations are published as final regulations in the Federal Register.
0
Par. 7. Section 1.267(d)-1 is amended by revising paragraph (a)(3) to 
read as follows:


Sec.  1.267(d)-1  Amount of gain where loss previously disallowed.

    (a) * * *
    (3) The benefit of the general rule is available only to the 
original transferee but does not apply to any original transferee (for 
example, a donee or a person acquiring property from a decedent where 
the basis of property is determined under section 1014 or 1022) who 
acquired the property in any manner other than by purchase or exchange.
* * * * *
0
Par. 8. Section 1.267(d)-2 is amended by revising the section heading 
and adding a sentence to the end of the paragraph to read as follows:


Sec.  1.267(d)-2  Effective/applicability dates.

    * * * The provisions of Sec.  1.267(d)-1(a)(3) relating to section 
1022 are effective on and after the date these regulations are 
published as final regulations in the Federal Register.
0
Par. 9. Section 1.273-1 is revised to read as follows:


Sec.  1.273-1  Life or terminable interests.

    (a) In general. Amounts paid as income to the holder of a life or a 
terminable interest acquired by gift, bequest, or inheritance shall not 
be subject to any deduction for shrinkage (whether called by 
depreciation or any other name) in the value of such interest due to 
the lapse of time. In other words, the holder of such an interest so 
acquired may not set up the value of the expected future payments as 
corpus or principal and claim deduction for shrinkage or exhaustion 
thereof due to the passage of time. For the treatment generally of 
distributions to beneficiaries of an estate or trust, see Subparts A, 
B, C, and D (section 641 and following), Subchapter J, Chapter 1 of the 
Code, and corresponding regulations. For basis of property

[[Page 26877]]

acquired from a decedent and by gifts and transfers in trust, see 
sections 1014, 1015, and 1022, and corresponding regulations.
    (b) Effective/applicability date. The provisions in this section 
are applicable for taxable years beginning on or after September 16, 
1958. The provisions of this section relating to section 1022 are 
effective on and after the date these regulations are published as 
final regulations in the Federal Register.
0
Par. 10. Section 1.306-3 is amended by removing the last sentence of 
paragraph (e) and adding two sentences in its place to read as follows:


Sec.  1.306-3  Section 306 stock defined.

* * * * *
    (e) * * * Section 306 stock ceases to be so classified if the basis 
of such stock is determined by reference to its fair market value on 
the date of the decedent-stockholder's death under section 1014 or the 
optional valuation date under section 2032. Section 306 stock continues 
to be so classified if the basis of such stock is determined under 
section 1022.
* * * * *
0
Par. 11. Section 1.306-4 is added to read as follows:


Sec.  1.306-4  Effective/applicability date.

    The provisions of Sec. Sec.  1.306-1 through 1.306-3 are applicable 
on or after June 22, 1954. The provisions of Sec.  1.306-3 relating to 
section 1022 are effective on and after the date these regulations are 
published as final regulations in the Federal Register.
0
Par. 12. Section 1.336-1 is amended by revising paragraph (b)(5)(i)(A) 
to read as follows:


Sec.  1.336-1  General principles, nomenclature, and definitions for a 
section 336(e) election.

* * * * *
    (b) * * *
    (5) * * *
    (i) * * *
    (A) The basis of the stock in the hands of the purchaser is not 
determined in whole or in part by reference to the adjusted basis of 
such stock in the hands of the person from whom the stock is acquired, 
is not determined under section 1014(a) (relating to property acquired 
from a decedent), or is not determined under section 1022 (relating to 
the basis of property acquired from certain decedents who died in 
2010);
* * * * *
0
Par. 13. Section 1.336-5 is amended by revising the section heading and 
adding a sentence to the end of the paragraph to read as follows:


Sec.  1.336-5  Effective/applicability dates.

    * * * The provisions of Sec.  1.336-1(b)(5)(i)(A) relating to 
section 1022 are effective on and after the date these regulations are 
published as final regulations in the Federal Register.
0
Par. 14. Section 1.355-6 is amended by revising paragraphs 
(d)(1)(i)(A)(2) and (g) to read as follows:


Sec.  1.355-6  Recognition of gain on certain distributions of stock or 
securities in controlled corporation.

* * * * *
    (d) * * *
    (1) * * *
    (i) * * *
    (A) * * *
    (2) Under section 1014(a) or 1022; and
* * * * *
    (g) Effective/applicability dates. This section applies to 
distributions occurring after December 20, 2000, except that they do 
not apply to any distributions occurring pursuant to a written 
agreement that is (subject to customary conditions) binding on December 
20, 2000, and at all later times. The provisions of paragraph 
(d)(1)(i)(A)(2) of this section relating to section 1022 are effective 
on and after the date these regulations are published as final 
regulations in the Federal Register.
0
Par. 15. Section 1.382-9 is amended by revising paragraphs 
(d)(5)(ii)(D) and (d)(6)(i) to read as follows:


Sec.  1.382-9  Special rules under section 382 for corporations under 
the jurisdiction of a court in a title 11 or similar case.

* * * * *
    (d) * * *
    (5) * * *
    (ii) * * *
    (D) The transferee's basis in the indebtedness is determined under 
section 1014, 1015, or 1022 or with reference to the transferor's basis 
in the indebtedness;
* * * * *
    (6) Effective/applicability date--(i) In general. This paragraph 
(d) applies to ownership changes occurring on or after March 17, 1994. 
The provisions of paragraph (d)(5)(ii)(D) of this section relating to 
section 1022 are effective on and after the date these regulations are 
published as final regulations in the Federal Register.
* * * * *
0
Par. 16. Section 1.421-2 is amended by:
0
a. Revising paragraphs (c)(4)(i)(a) and (c)(4)(ii).
0
b. Revising paragraph (f) heading and adding paragraph (f)(3).
    The revisions and addition read as follows:


Sec.  1.421-2  General rules.

* * * * *
    (c) * * *
    (4)(i)(a) In the case of the death of an optionee, the basis of any 
share of stock acquired by the exercise of an option under this 
paragraph (c), determined under section 1011, shall be increased by an 
amount equal to the portion of the basis of the option attributable to 
such share. For example, if a statutory option to acquire 10 shares of 
stock has a basis of $100, the basis of one share acquired by a partial 
exercise of the option, determined under section 1011, would be 
increased by 1/10th of $100, or $10. The option acquires a basis, 
determined under section 1014(a) or under section 1022, if applicable, 
only if the transfer of the share pursuant to the exercise of such 
option qualifies for the special tax treatment provided by section 
421(a). To the extent the option is so exercised, in whole or in part, 
it will acquire a basis equal to its fair market value (or the basis as 
determined under section 1022, if applicable) at the date of the 
employee's death or, if an election is made under section 2032, its 
value at its applicable valuation date. In certain cases, the basis of 
the share is subject to the adjustments provided by paragraphs 
(c)(4)(i)(b) and (c) of this section, but such adjustments are only 
applicable in the case of an option that is subject to section 423(c).
* * * * *
    (ii) If a statutory option is not exercised by the estate of the 
individual to whom the option was granted, or by the person who 
acquired such option by bequest or inheritance or by reason of the 
death of such individual, the option shall be considered to be property 
that constitutes a right to receive an item of income in respect of a 
decedent to which the rules of sections 691 and 1014(c) (or section 
1022(f), if applicable) apply.
* * * * *
    (f) Effective/applicability date. * * *
* * * * *
    (3) Application of section 1022. The provisions of Sec.  1.421-2(c) 
relating to section 1022 are effective on and after the date these 
regulations are published as final regulations in the Federal Register.
0
Par. 17. Section 1.423-2 is amended by:
0
a. Revising the third sentence of paragraph (k)(2).
0
b. Adding a sentence to the end of paragraph (l).
    The revision and addition read as follows:

[[Page 26878]]

Sec.  1.423-2  Employee stock purchase plan defined.

* * * * *
    (k) * * *
    (2) * * * If the special rules provided in this paragraph (k) are 
applicable to a share of stock upon the death of an employee, then the 
basis of the share in the hands of the estate or the person receiving 
the stock by bequest or inheritance shall be determined under section 
1014 or under section 1022, if applicable, and shall not be increased 
by reason of the inclusion upon the decedent's death of any amount in 
the decedent's gross income under this paragraph (k). * * *
* * * * *
    (l) * * * The provisions of Sec.  1.423-2 relating to section 1022 
are effective on and after the date these regulations are published as 
final regulations in the Federal Register.
0
Par. 18. Section 1.424-1 is amended by revising the last sentence of 
paragraph (c)(2) and adding paragraph (g)(3) to read as follows:


Sec.  1.424-1  Definitions and special rules applicable to statutory 
options.

* * * * *
    (c) * * *
    (2) * * * For determination of basis in the hands of the survivor 
where joint ownership is terminated by the death of one of the owners, 
see section 1014 or section 1022, if applicable.
* * * * *
    (g) * * *
    (3) Application of section 1022. The provisions of Sec.  1.424-
1(c)(2) relating to section 1022 are effective on and after the date 
these regulations are published as final regulations in the Federal 
Register.
0
Par. 19. Section 1.467-7 is amended by revising paragraph (c)(2) and 
revising the first sentence of paragraph (c)(4) to read as follows:


Sec.  1.467-7  Section 467 recapture and other rules relating to 
dispositions and modifications.

* * * * *
    (c) * * *
    (2) Dispositions at death. Paragraph (a) of this section does not 
apply to a disposition if the basis of the property in the hands of the 
transferee is determined under section 1014(a) or section 1022. 
However, see paragraph (c)(4) of this section for dispositions of 
property subject to section 1022 by transferees. This paragraph (c)(2) 
does not apply to property that constitutes a right to receive an item 
of income in respect of a decedent. See sections 691, 1014(c), and 
1022(f).
* * * * *
    (4) * * * If the recapture amount with respect to a disposition of 
property (the first disposition) is limited under paragraph (c)(1), 
(c)(2) (if the basis of the property in the hands of the transferee is 
determined under section 1022), or (c)(3) of this section and the 
transferee subsequently disposes of the property in a transaction to 
which paragraph (a) of this section applies, the prior understated 
inclusion determined under paragraph (b)(2) of this section is computed 
by taking into account the amounts attributable to the period of the 
transferor's ownership of the property prior to the first disposition. 
* * *
* * * * *
0
Par. 20. Section 1.467-9 is amended by revising the section heading and 
adding paragraph (f) to read as follows:


Sec.  1.467-9  Effective/applicability dates and automatic method 
changes for certain agreements.

* * * * *
    (f) Application of section 1022. The provisions of Sec.  1.467-7(c) 
relating to section 1022 are effective on and after the date these 
regulations are published as final regulations in the Federal Register.
0
Par. 21. Section 1.617-3 is amended by revising paragraph (d)(5)(ii)(b) 
to read as follows:


Sec.  1.617-3  Recapture of exploration expenditures.

* * * * *
    (d) * * *
    (5) * * *
    (ii) * * *
    (b) The transactions referred to in paragraph (d)(5)(ii)(a) of this 
section are: (1) A disposition that is in part a sale or exchange and 
in part a gift;
     (2) A disposition that is described in section 617(d) through the 
incorporation by reference of the provisions of section 1245(b)(3) 
(relating to certain tax free transactions); or
    (3) A transfer at death where basis of property in the hands of the 
transferee is determined under section 1022.
* * * * *
0
Par. 22. Section 1.617-4 is amended by revising the second sentence of 
paragraph (c)(1)(i) to read as follows:


Sec.  1.617-4  Treatment of gain from disposition of certain mining 
property.

* * * * *
    (c) * * *
    (1)(i) * * * For purposes of this paragraph (c), the term ``gift'' 
means, except to the extent that paragraph (c)(1)(ii) of this section 
applies, a transfer of mining property that, in the hands of the 
transferee, has a basis determined under the provisions of section 
1015(a) or 1015(d) (relating to basis of property acquired by gift) or 
section 1022 (relating to the basis of property acquired from certain 
decedents who died in 2010). * * *
* * * * *
0
Par. 23. Section 1.617-5 is added to read as follows:


Sec.  1.617-5  Effective/applicability date.

    Sections 1.617-3 and 1.617-4 apply on and after the date these 
regulations are published as final regulations in the Federal Register. 
For rules before the date these regulations are published as final 
regulations in the Federal Register, see Sec. Sec.  1.617-3 and 1.617-4 
as contained in 26 CFR (revised as of the April 1 preceding the date 
these regulations are published as final regulations in the Federal 
Register).
0
Par. 24. Section 1.684-3 is amended by revising paragraph (c) to read 
as follows:


Sec.  1.684-3  Exceptions to general rule of gain recognition.

* * * * *
    (c) Certain transfers at death--(1) Section 1014 basis. The general 
rule of gain recognition under Sec.  1.684-1 shall not apply to any 
transfer of property to a foreign trust or foreign estate or, in the 
case of a transfer of property by a U.S. transferor decedent dying in 
2010, to a foreign trust, foreign estate, or a nonresident alien, by 
reason of death of the U.S. transferor, if the basis of the property in 
the hands of the transferee is determined under section 1014(a).
    (2) Section 1022 basis election. For U.S. transferor decedents 
dying in 2010, the general rule of gain recognition under Sec.  1.684-1 
shall apply to any transfer of property by reason of death of the U.S. 
transferor if the basis of the property in the hands of the foreign 
trust, foreign estate, or the nonresident alien individual is 
determined under section 1022. The gain on the transfer shall be 
calculated as set out under Sec.  1.684-1(a), except that adjusted 
basis will reflect any increases allocated to such property under 
section 1022.
* * * * *
0
Par. 25. Section 1.684-5 is revised to read as follows:


Sec.  1.684-5  Effective/applicability dates.

    (a) Sections 1.684-1 through 1.684-4 apply to transfers of property 
to foreign trusts and foreign estates after August 7, 2000, except as 
provided in paragraph (b) of this section.
    (b) In the case a U.S. transferor decedent dying in 2010, Sec.  
1.684-3(c) applies to transfers of property to foreign trusts, foreign 
estates, and

[[Page 26879]]

nonresident aliens after December 31, 2009, and before January 1, 2011.
0
Par. 26. Section 1.691(a)-3 is amended by revising the last two 
sentences of paragraph (a) and adding paragraph (c) to read as follows:


Sec.  1.691(a)-3  Character of gross income.

    (a) * * * The provisions of section 1014(a), relating to the basis 
of property acquired from a decedent, and section 1022, relating to the 
basis of property acquired from certain decedents who died in 2010, do 
not apply to these amounts in the hands of the estate and such persons. 
See sections 1014(c) and 1022(f).
* * * * *
    (c) Effective/applicability dates. The last two sentences of 
paragraph (a) of this section apply on and after the date these 
regulations are published as final regulations in the Federal Register. 
For rules before the date these regulations are published as final 
regulations in the Federal Register, see Sec.  1.691(a)-3 as contained 
in 26 CFR (revised as of the April 1 preceding the date these 
regulations are published as final regulations in the Federal 
Register).
0
Par. 27. Section 1.742-1 is revised to read as follows:


Sec.  1.742-1  Basis of transferee partner's interest.

    (a) In general. The basis to a transferee partner of an interest in 
a partnership shall be determined under the general basis rules for 
property provided by part II (section 1011 and following), Subchapter 
O, Chapter 1 of the Internal Revenue Code. Thus, the basis of a 
purchased interest will be its cost. Generally, the basis of a 
partnership interest acquired from a decedent is the fair market value 
of the interest at the date of his death or at the alternate valuation 
date, increased by his estate's or other successor's share of 
partnership liabilities, if any, on that date, and reduced to the 
extent that such value is attributable to items constituting income in 
respect of a decedent (see section 753 and Sec. Sec.  1.706-1(c)(3)(v) 
and 1.753-1(b)) under section 691. See section 1014(c). However, the 
basis of a partnership interest acquired from a decedent is determined 
under section 1022 if the decedent died in 2010 and the decedent's 
executor elected to have section 1022 apply to the decedent's estate. 
For basis of contributing partner's interest, see section 722. The 
basis so determined is then subject to the adjustments provided in 
section 705.
    (b) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.742-1 as contained in 26 CFR (revised as of the April 1 preceding the 
date these regulations are published as final regulations in the 
Federal Register).
0
Par. 28. Section 1.743-1 is amended by revising paragraphs (k)(2)(ii) 
and (l) to read as follows:


Sec.  1.743-1  Optional adjustment to basis of partnership property.

* * * * *
    (k) * * *
    (2) * * *
    (ii) Special rule. A transferee that acquires, on the death of a 
partner, an interest in a partnership with an election under section 
754 in effect for the taxable year of the transfer, must notify the 
partnership, in writing, within one year of the death of the deceased 
partner. The written notice to the partnership must be signed under 
penalties of perjury and must include the names and addresses of the 
deceased partner and the transferee, the taxpayer identification 
numbers of the deceased partner and the transferee, the relationship 
(if any) between the transferee and the transferor, the deceased 
partner's date of death, the date on which the transferee became the 
owner of the partnership interest, the fair market value of the 
partnership interest on the applicable date of valuation set forth in 
section 1014 or section 1022, the manner in which the fair market value 
of the partnership interest was determined, and the carryover basis as 
adjusted under section 1022 (if applicable).
* * * * *
    (l) Effective/applicability date. The provisions in this section 
apply to transfers of partnership interests that occur on or after 
December 15, 1999. The provisions of this section relating to section 
1022 are effective on and after the date these regulations are 
published as final regulations in the Federal Register.
0
Par. 29. Section 1.755-1 is amended by:
0
a. Revising paragraphs (a)(4)(i)(C) and the first sentence of 
(b)(4)(i).
0
b. Revising the heading of paragraph (e) and paragraph (e)(2).
    The revisions read as follows:


Sec.  1.755-1  Rules for allocation of basis.

    (a) * * *
    (4) * * *
    (i) * * *
    (C) Income in respect of a decedent. Solely for the purpose of 
determining partnership gross value under this paragraph (a)(4)(i), 
where a partnership interest is transferred as a result of the death of 
a partner, the transferee's basis in its partnership interest is 
determined without regard to section 1014(c) or section 1022(f), and is 
deemed to be adjusted for that portion of the interest, if any, that is 
attributable to items representing income in respect of a decedent 
under section 691.
* * * * *
    (b) * * *
    (4) * * *
    (i) * * * Where a partnership interest is transferred as a result 
of the death of a partner, under section 1014(c) or section 1022(f), 
the transferee's basis in its partnership interest is not adjusted for 
that portion of the interest, if any, that is attributable to items 
representing income in respect of a decedent under section 691. * * *
* * * * *
    (e) Effective/applicability dates. * * *
    (2) Special rules. Paragraphs (a) and (b)(3)(iii) of this section 
apply to transfers of partnership interests and distributions of 
property from a partnership that occur on or after June 9, 2003. The 
provisions of paragraphs (a)(4)(i)(C) and (b)(4)(i) of this section 
relating to section 1022 are effective on and after the date these 
regulations are published as final regulations in the Federal Register.
0
Par. 30. Section 1.995-4 is amended by revising the first sentence of 
paragraph (d)(2) and adding paragraph (f) to read as follows:


Sec.  1.995-4  Gain on disposition of stock in a DISC.

* * * * *
    (d) * * *
    (2) * * * For purposes of this section, the period during which a 
shareholder has held stock includes the period he is considered to have 
held it by reason of the application of section 1223 and, if his basis 
is determined in whole or in part under the provisions of section 
1014(d) (relating to special rule for DISC stock acquired from 
decedent) or section 1022 (relating to property acquired from certain 
decedents who died in 2010), the holding period of the decedent. * * *
* * * * *
    (f) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.995-4 as contained in 26 CFR (revised as of the April 1 preceding the 
date these regulations are published as final regulations in the 
Federal Register).

[[Page 26880]]

0
Par. 31. Section 1.1001-1 is amended by revising the last sentence of 
paragraph (a), revising paragraph (f)(1), and adding paragraph (f)(5) 
to read as follows:


Sec.  1.1001-1  Computation of gain or loss.

    (a) * * * Section 1001(e) and paragraph (f) of this section 
prescribe the method of computing gain or loss upon the sale or other 
disposition of a term interest in property the adjusted basis (or a 
portion) of which is determined pursuant, or by reference, to section 
1014 (relating to the basis of property acquired from a decedent), 
section 1015 (relating to the basis of property acquired by gift or by 
a transfer in trust), or section 1022 (relating to the basis of 
property acquired from certain decedents who died in 2010).
* * * * *
    (f) * * *
    (1) General rule. Except as otherwise provided in paragraph (f)(3) 
of this section, for purposes of determining gain or loss from the sale 
or other disposition after October 9, 1969, of a term interest in 
property (as defined in paragraph (f)(2) of this section), a taxpayer 
shall not take into account that portion of the adjusted basis of such 
interest that is determined pursuant, or by reference, to section 1014 
(relating to the basis of property acquired from a decedent), section 
1015 (relating to the basis of property acquired by gift or by a 
transfer in trust), or section 1022 (relating to the basis of property 
acquired from certain decedents who died in 2010) to the extent that 
such adjusted basis is a portion of the adjusted uniform basis of the 
entire property (as defined in Sec.  1.1014-5). Where a term interest 
in property is transferred to a corporation in connection with a 
transaction to which section 351 applies and the adjusted basis of the 
term interest:
    (i) Is determined pursuant to sections 1014, 1015, or 1022; and
    (ii) Is also a portion of the adjusted uniform basis of the entire 
property, a subsequent sale or other disposition of such term interest 
by the corporation will be subject to the provisions of section 1001(e) 
and this paragraph (f) to the extent that the basis of the term 
interest so sold or otherwise disposed of is determined by reference to 
its basis in the hands of the transferor as provided by section 362(a). 
See paragraph (f)(2) of this section for rules relating to the 
characterization of stock received by the transferor of a term interest 
in property in connection with a transaction to which section 351 
applies. That portion of the adjusted uniform basis of the entire 
property that is assignable to such interest at the time of its sale or 
other disposition shall be determined under the rules provided in Sec.  
1.1014-5. Thus, gain or loss realized from a sale or other disposition 
of a term interest in property shall be determined by comparing the 
amount of the proceeds of such sale with that part of the adjusted 
basis of such interest that is not a portion of the adjusted uniform 
basis of the entire property.
* * * * *
    (5) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1001-1 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
* * * * *
0
Par. 32. Section 1.1014-1 is amended by revising paragraph (a) and 
adding paragraph (d) to read as follows:


Sec.  1.1014-1  Basis of property acquired from a decedent.

    (a) General rule. The purpose of section 1014 is, in general, to 
provide a basis for property acquired from a decedent that is equal to 
the value placed upon such property for purposes of the Federal estate 
tax. Accordingly, the general rule is that the basis of property 
acquired from a decedent is the fair market value of such property at 
the date of the decedent's death, or, if the decedent's executor so 
elects, at the alternate valuation date prescribed in section 2032, or 
in section 811(j) of the Internal Revenue Code (Code) of 1939. However, 
the basis of property acquired from certain decedents who died in 2010 
is determined under section 1022, if the decedent's executor made an 
election under section 301(c) of the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010, Public Law 111-312 (124 
Stat. 3296, 3300 (2010)). See section 1022. Property acquired from a 
decedent includes, principally, property acquired by bequest, devise, 
or inheritance, and, in the case of decedents dying after December 31, 
1953, property required to be included in determining the value of the 
decedent's gross estate under any provision of the Code of 1954 or the 
Code of 1939. The general rule governing basis of property acquired 
from a decedent, as well as other rules prescribed elsewhere in this 
section, shall have no application if the property is sold, exchanged, 
or otherwise disposed of before the decedent's death by the person who 
acquired the property from the decedent. For general rules on the 
applicable valuation date where the executor of a decedent's estate 
elects under section 2032, or under section 811(j) of the Code of 1939, 
to value the decedent's gross estate at the alternate valuation date 
prescribed in such sections, see Sec.  1.1014-3(e).
* * * * *
    (d) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1014-1 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 33. Section 1.1014-4 is amended by revising the first sentence of 
paragraph (a)(1), revising the second sentence of paragraph (a)(2), and 
adding paragraph (d) to read as follows:


Sec.  1.1014-4  Uniformity of basis; adjustment to basis.

    (a) * * *
    (1) The basis of property acquired from a decedent, as determined 
under section 1014(a) or section 1022, is uniform in the hands of every 
person having possession or enjoyment of the property at any time under 
the will or other instrument or under the laws of descent and 
distribution. * * *
    (2) * * * Accordingly, there is a common acquisition date for all 
titles to property acquired from a decedent within the meaning of 
section 1014 or section 1022, and, for this reason, a common or uniform 
basis for all such interests. * * *
* * * * *
    (d) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1014-4 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 34. Section 1.1014-5 is amended by revising paragraph (b), adding 
and reserving paragraph (d), and adding paragraph (e) to read as 
follows:


Sec.  1.1014-5  Gain or loss.

* * * * *
    (b) Sale or other disposition of certain term interests. In 
determining gain or loss from the sale or other disposition after 
October 9, 1969, of a term interest in property (as defined in Sec.  
1.1001-1(f)(2)) the adjusted basis of which is

[[Page 26881]]

determined pursuant, or by reference, to section 1014 (relating to the 
basis of property acquired from a decedent), section 1015 (relating to 
the basis of property acquired by gift or by a transfer in trust), or 
section 1022 (relating to the basis of property acquired from certain 
decedents who died in 2010), that part of the adjusted uniform basis 
assignable under the rules of paragraph (a) of this section to the 
interest sold or otherwise disposed of shall be disregarded to the 
extent and in the manner provided by section 1001(e) and Sec.  1.1001-
1(f).
* * * * *
    (d) [Reserved]
    (e) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1014-5 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 35. Section 1.1223-1 is amended by adding a sentence to the end of 
paragraph (b) and adding paragraph (l) to read as follows:


Sec.  1.1223-1  Determination of period for which capital assets are 
held.

* * * * *
    (b) * * * Similarly, the period for which property acquired from a 
decedent who died in 2010 was held by the decedent must be included in 
determining the period during which the property was held by the 
recipient, if the recipient's basis in the property is determined under 
section 1022.
* * * * *
    (l) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1223-1 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 36. Section 1.1245-2 is amended by revising paragraph (c)(2)(ii) 
and adding paragraph (d) to read as follows:


Sec.  1.1245-2  Definition of recomputed basis.

* * * * *
    (c) * * *
    (2) * * *
    (ii) The transactions referred to in paragraph (c)(2)(i) of this 
section are:
    (a) A disposition that is in part a sale or exchange and in part a 
gift (see Sec.  1.1245-4(a)(3));
    (b) A disposition (other than a disposition to which section 
1245(b)(6)(A) applies) that is described in section 1245(b)(3) 
(relating to certain tax-free transactions);
    (c) An exchange described in Sec.  1.1245-4(e)(2) (relating to 
transfers described in section 1081(d)(1)(A)); or
    (d) A transfer at death where the basis of property in the hands of 
the transferee is determined under section 1022.
* * * * *
    (d) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1245-2 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 37. Section 1.1245-3 is amended by revising paragraph (a)(3) and 
adding paragraph (d) to read as follows:


Sec.  1.1245-3  Definition of section 1245 property.

    (a) * * *
    (3) Even though property may not be of a character subject to the 
allowance for depreciation in the hands of the taxpayer, such property 
may nevertheless be section 1245 property if the taxpayer's basis for 
the property is determined by reference to its basis in the hands of a 
prior owner of the property and such property was of a character 
subject to the allowance for depreciation in the hands of such prior 
owner, or if the taxpayer's basis for the property is determined by 
reference to the basis of other property that in the hands of the 
taxpayer was property of a character subject to the allowance for 
depreciation, or if the taxpayer's basis for the property is determined 
under section 1022 and such property was of a character subject to the 
allowance for depreciation in the hands of the decedent. Thus, for 
example, if a father uses an automobile in his trade or business during 
a period after December 31, 1961, and then gives the automobile to his 
son as a gift for the son's personal use, the automobile is section 
1245 property in the hands of the son.
* * * * *
    (d) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1245-3 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 38. Section 1.1245-4 is amended by revising the second sentence of 
paragraph (a)(1) and adding paragraph (i) to read as follows:


Sec.  1.1245-4  Exceptions and Limitations.

    (a) * * *
    (1) * * * For purposes of this paragraph (a), the term ``gift'' 
means, except to the extent that paragraph (a)(3) of this section 
applies, a transfer of property that, in the hands of the transferee, 
has a basis determined under the provisions of section 1015(a) or 
1015(d) (relating to basis of property acquired by gifts) or section 
1022 (relating to basis of property acquired from certain decedents who 
died in 2010). * * *
* * * * *
    (i) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1245-4 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 39. Section 1.1250-4 is amended by adding paragraphs (c)(5) and 
(h) to read as follows:


Sec.  1.1250-4  Holding period.

* * * * *
    (c) * * *
    (5) A transfer at death where the basis of the property in the 
hands of the transferee is determined under section 1022.
* * * * *
    (h) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1250-4 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).
0
Par. 40. Section 1.1254-2 is amended by revising the second sentence of 
paragraph (a)(1) to read as follows:


Sec.  1.1254-2  Exceptions and limitations.

    (a) * * *
    (1) * * * For purposes of this paragraph (a), the term ``gift'' 
means, except to the extent that paragraph (a)(2) of this section 
applies, a transfer of natural resource recapture property that, in the 
hands of the transferee, has a basis determined under the provisions

[[Page 26882]]

of section 1015(a) or 1015(d) (relating to basis of property acquired 
by gift) or section 1022 (relating to the basis of property acquired 
from certain decedents who died in 2010). * * *
* * * * *
0
Par. 41. Section 1.1254-3 is amended by revising paragraphs (b)(2)(ii) 
and (iii) and adding paragraph (b)(2)(iv) to read as follows:


Sec.  1.1254-3  Section 1254 costs immediately after certain 
acquisitions.

* * * * *
    (b) * * *
    (2) * * *
    (ii) A transaction described in section 1041(a);
    (iii) A disposition described in Sec.  1.1254-2(c)(3) (relating to 
certain tax-free transactions); or
    (iv) A transfer at death where basis of property in the hands of 
the transferee is determined under section 1022.
* * * * *
0
Par. 42. Section 1.1254-4 is amended by revising paragraph (e)(4) 
introductory text to read as follows:


Sec.  1.1254-4  Special rules for S corporations and their 
shareholders.

* * * * *
    (e) * * *
    (4) * * * If stock is acquired in a transfer that is a gift, in a 
transfer that is a part sale or exchange and part gift, in a transfer 
that is described in section 1041(a), or in a transfer at death where 
the basis of property in the hands of the transferee is determined 
under section 1022, the amount of section 1254 costs with respect to 
the property held by the corporation in the acquiring shareholder's 
hands immediately after the transfer is an amount equal to--
* * * * *
0
Par.43. Section 1.1254-5 is amended by revising paragraph (c)(2)(iv) 
introductory text to read as follows:


Sec.  1.1254-5  Special rules for partnerships and their partners.

* * * * *
    (c) * * *
    (2) * * *
    (iv) * * * If an interest in a partnership is transferred in a 
transfer that is a gift, in a transfer that is a part sale or exchange 
and part gift, in a transfer that is described in section 1041(a), or 
in a transfer at death where the basis of property in the hands of the 
transferee is determined under section 1022, the amount of the 
transferee partner's section 1254 costs with respect to property held 
by the partnership immediately after the transfer is an amount equal 
to--
* * * * *
0
Par. 44. Section 1.1254-6 is revised to read as follows:


Sec.  1.1254-6  Effective/applicability date.

    (a) Sections 1.1254-1 through 1.1254-3 and 1.1254-5 are effective 
with respect to any disposition of natural resource recapture property 
occurring after March 13, 1995. The rule in Sec.  1.1254-
1(b)(2)(iv)(A)(2), relating to a nonoperating mineral interest carved 
out of an operating mineral interest with respect to which an 
expenditure has been deducted, is effective with respect to any 
disposition occurring after March 13, 1995, of property (within the 
meaning of section 614) that is placed in service by the taxpayer after 
December 31, 1986. Section 1.1254-4 applies to dispositions of natural 
resource recapture property by an S corporation (and a corporation that 
was formerly an S corporation) and dispositions of S corporation stock 
occurring on or after October 10, 1996. Sections 1.1254-2(d)(1)(ii), 
1.1254-3(b)(1)(i), (b)(1)(ii), (d)(1)(i), and (d)(1)(ii) are effective 
for dispositions of property occurring on or after October 10, 1996.
    (b) The provisions of Sec. Sec.  1.1254-2(a)(1), 1.1254-3(b)(2), 
1.1254-4(e)(4), and 1.1254-5(c)(2)(iv) that relate to section 1022 are 
effective on and after the date these regulations are published as 
final regulations in the Federal Register.
0
Par. 45. Section 1.1296-1 is amended by revising paragraphs (d)(4) and 
(j) to read as follows:


Sec.  1.1296-1  Mark to market election for marketable stock.

* * * * *
    (d) * * *
    (4) Stock acquired from a decedent. In the case of stock of a PFIC 
that is acquired by bequest, devise, or inheritance (or by the 
decedent's estate) and with respect to which a section 1296 election 
was in effect as of the date of the decedent's death, notwithstanding 
section 1014 or section 1022, the basis of such stock in the hands of 
the person so acquiring it shall be the adjusted basis of such stock in 
the hands of the decedent immediately before his death (or, if lesser, 
the basis that would have been determined under section 1014 or section 
1022 without regard to this paragraph (d)).
* * * * *
    (j) Effective/applicability date. The provisions in this section 
are applicable for taxable years beginning on or after May 3, 2004. The 
provisions of paragraph (d)(4) of this section relating to section 1022 
are effective on and after the date these regulations are published as 
final regulations in the Federal Register.
0
Par. 46. Section 1.1312-7 is amended by revising paragraph (b) and 
adding paragraph (d) to read as follows:


Sec.  1.1312-7  Basis of property after erroneous treatment of a prior 
transaction.

* * * * *
    (b)(1) For this section to apply, the taxpayer with respect to whom 
the erroneous treatment occurred must be:
    (i) The taxpayer with respect to whom the determination is made; or
    (ii) A taxpayer who acquired title to the property in the 
erroneously treated transaction and from whom, mediately or 
immediately, the taxpayer with respect to whom the determination is 
made derived title in such a manner that he will have a basis 
ascertained by reference to the basis in the hands of the taxpayer who 
acquired title to the property in the erroneously treated transaction; 
or
    (iii) A taxpayer who had title to the property at the time of the 
erroneously treated transaction and from whom, mediately or 
immediately, the taxpayer with respect to whom the determination is 
made derived title, if the basis of the property in the hands of the 
taxpayer with respect to whom the determination is made is determined 
under section 1015(a) (relating to the basis of property acquired by 
gift) or section 1022 (relating to the basis of property acquired from 
certain decedents who died in 2010). (2) No adjustment is authorized 
with respect to the transferor of the property in a transaction upon 
which the basis of the property depends, when the determination is with 
respect to the original transferee or a subsequent transferee of the 
original transferee.
* * * * *
    (d) Effective/applicability date. This section applies on and after 
the date these regulations are published as final regulations in the 
Federal Register. For rules before the date these regulations are 
published as final regulations in the Federal Register, see Sec.  
1.1312-7 as contained in 26 CFR (revised as of the April 1 preceding 
the date these regulations are published as final regulations in the 
Federal Register).

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-11210 Filed 5-8-15; 8:45 am]
 BILLING CODE 4830-01-P