Consistent Basis Reporting Between Estate and Person Acquiring Property From Decedent, 11486-11496 [2016-04718]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 43 (Friday, March 4, 2016)]
[Proposed Rules]
[Pages 11486-11496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04718]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-127923-15]
RIN 1545-BM97


Consistent Basis Reporting Between Estate and Person Acquiring 
Property From Decedent

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking, and notice of proposed 
rulemaking by cross-reference to temporary regulations.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding the requirement that a recipient's basis in certain 
property acquired from a decedent be consistent with the value of the 
property as finally determined for Federal estate tax purposes. In 
addition, these proposed regulations provide guidance on the reporting 
requirements for executors or other persons required to file Federal 
estate tax returns. Temporary regulations in the Rules and Regulations 
section of this issue of the Federal Register provide transition relief 
to executors and other persons required to file or furnish certain 
statements. The text of those temporary regulations (TD 9757) published 
in the Rules and Regulations section of this issue of the Federal 
Register also serves as the text of the proposed regulations regarding 
the transition relief. These proposed regulations as well as TD 9757 
published elsewhere in the Rules and Regulations section of this issue 
of this Federal Register affect executors or other persons who file 
estate tax returns after July 31, 2015. The proposed regulations also 
affect beneficiaries who acquire certain property from these estates, 
and subsequent transferees to whom beneficiaries transfer the property 
in transactions that do not result in the recognition of gain or loss 
for Federal income tax purposes.

DATES: Written or electronic comments and requests for a public hearing 
must be received by June 2, 2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-127923-15), Internal 
Revenue Service, Room 5203, 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-
127923-15), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224; or sent electronically via the 
Federal eRulemaking Portal at https://www.regulations.gov (IRS-REG-
127923-15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Theresa M. Melchiorre, at (202) 317-6859; concerning submissions of 
comments or, to request a hearing, Regina Johnson, at (202) 317-6901 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by May 3, 2016.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service 
(IRS), including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The reporting requirements in these proposed regulations are in 
Sec.  1.6035-1(a) and (d) and require executors and other persons 
required to file a return under section 6018 to furnish a statement to 
the IRS and to each beneficiary providing information regarding the 
value of the property the beneficiary acquires from the decedent. The 
IRS will use this information to determine whether the beneficiary (or 
transferee) reports a basis for that property that is consistent with 
the value of that property as finally determined for Federal estate tax 
purposes when the beneficiary (or transferee) depreciates the property, 
or sells, exchanges, or otherwise disposes of some or all of that 
property in transactions that result in the recognition of gain or loss 
for Federal income tax purposes.
    The collection of information may vary depending on the property 
includible in the gross estate and the number of beneficiaries 
receiving the property. The following estimates are based on the 
information that is available to the IRS. A respondent may require more 
or less time, depending on the circumstances.
    Estimated total annual reporting burden. The estimated total annual 
reporting burden per respondent is 5.31 hours.
    Estimated annual number of respondents. The estimated annual number 
of respondents is 10,000.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

1. Overview

    On July 31, 2015, the President of the United States signed into 
law H.R. 3236, the Surface Transportation and Veterans Health Care 
Choice Improvement Act of 2015, Public Law 114-41, 129 Stat. 443 (Act). 
Section 2004 of the Act enacted sections 1014(f), 6035, 6662(b)(8), 
6662(k), 6724(d)(1)(D), and 6724(d)(2)(II) of the Internal Revenue Code 
(Code). This document contains proposed regulations that amend 26 CFR 
parts 1 and 301 under those Code provisions to achieve consistency 
between a recipient's basis in certain property acquired from a

[[Page 11487]]

decedent and the value of the property as finally determined for 
Federal estate tax purposes. This notice of proposed rulemaking also 
cross-references to temporary regulations (TD 9757) published in the 
Rules and Regulations section of this issue of the Federal Register, 
which provide transition relief to certain persons required to file or 
furnish statements under section 6035. This document also proposes to 
remove from 26 CFR part 1 regulations under former section 6035 as a 
result of the repeal of that Code provision in 2004.

2. Summary of New Statutory Framework

A. Section 1014(f)
    Section 1014(f) imposes an obligation of consistency between the 
basis of certain inherited property and the value of that property for 
Federal estate tax purposes.
    Section 1014(f)(1) provides that the basis of property acquired 
from a decedent cannot exceed that property's final value for purposes 
of the Federal estate tax imposed on the estate of the decedent, or, if 
the final value has not been determined, the value reported on a 
statement required by section 6035(a).
    Section 1014(f)(2) provides that section 1014(f)(1) only applies to 
property the inclusion of which in the decedent's gross estate 
increased the estate's liability for the Federal estate tax (reduced by 
credits allowable against the tax).
    Section 1014(f)(3) provides that, for purposes of section 
1014(f)(1), the basis of property has been determined for Federal 
estate tax purposes if (A) the value of the property is shown on a 
return under section 6018 and that value is not contested by the 
Secretary before the expiration of the time for assessing the estate 
tax; (B) in a case not described in (A), the value is specified by the 
Secretary and that value is not timely contested by the executor of the 
estate; or (C) the value is determined by a court or pursuant to a 
settlement agreement with the Secretary.
B. Section 6035
    Section 6035 requires the reporting, both to the IRS and the 
beneficiary, of the value of property included on a required Federal 
estate tax return.
    Section 6035(a)(1) provides that the executor of any estate 
required to file a return under section 6018(a) must furnish, both to 
the Secretary and to the person acquiring any interest in property 
included in the estate, a statement identifying the value of each 
interest in the property as reported on the return and any other 
information as the Secretary may prescribe.
    Section 6035(a)(2) provides that each person required to file a 
return under section 6018(b) must furnish to the Secretary and to each 
other person who holds a legal or beneficial interest in the property 
to which the return relates a statement identifying the information 
described in section 6035(a)(1).
    Section 6035(a)(3)(A) provides that this statement is due no later 
than the earlier of (i) 30 days after the due date of the return under 
section 6018 (including extensions, if any) or (ii) 30 days after the 
date the return is filed. If there is an adjustment to the information 
required to be included on this statement, section 6035(a)(3)(B) 
requires the executor (or other person required to file the statement) 
to provide a supplemental statement to the Secretary and to each 
affected beneficiary no later than 30 days after the adjustment is 
made.
    Section 6035(b) authorizes the Secretary to prescribe regulations 
to carry out section 6035, including regulations relating to (1) the 
application of this section to property to which no Federal estate tax 
return is required to be filed, and (2) situations in which the 
surviving joint tenant or other recipient may have better information 
than the executor regarding the basis or fair market value of the 
property.
C. Penalties Under Sections 6662, 6721, and 6722
    Section 2004(c) of the Act added a new accuracy-related penalty for 
underpayments attributable to an inconsistent estate basis. See section 
6662(b)(8).
    Section 6662(k) provides that there is an inconsistent estate basis 
if the basis of property claimed on a return exceeds the basis as 
determined under section 1014(f).
    Section 2004(c) of the Act adds statements under section 6035 to 
the list of information returns and payee statements subject to the 
penalties under section 6721 and section 6722, respectively. 
Specifically, the Act adds new paragraph (D) to section 6724(d)(1) to 
provide that the term information return means any statement required 
to be filed with the Secretary under section 6035. The Act also adds 
new paragraph (II) to section 6724(d)(2) to provide that the term payee 
statement means any statement required to be furnished under section 
6035 (other than a statement described in section 6724(d)(1)(D)).

3. Notice 2015-57

    On August 21, 2015, the Treasury Department and the IRS issued 
Notice 2015-57, 2015-36 IRB 294. That notice delayed until February 29, 
2016, the due date for any statements required under section 
6035(a)(3)(A) to be provided before February 29, 2016. The notice also 
stated that the Treasury Department and the IRS expect to issue 
additional guidance to assist taxpayers in complying with sections 
1014(f) and 6035 and invited comments. The Treasury Department and the 
IRS received numerous comments in response to the notice and considered 
all comments in the drafting of the proposed regulations. The comments 
are discussed in more detail in this preamble.

4. Notice 2016-19

    On February 11, 2016, the Treasury Department and the IRS issued 
Notice 2016-19, 2016-09 IRB 362. That notice provides that executors or 
other persons required to file or furnish a statement under section 
6035(a)(1) or (a)(2) before March 31, 2016, need not do so until March 
31, 2016.

Summary of Comments on Notice 2015-57 and Explanation of Provisions

1. Section 1014(f)(1)--Consistency of Basis With Estate Tax Return

    The general rule of section 1014 is that the basis of property 
received from a decedent (or as a result of a decedent's death) is that 
property's fair market value on the decedent's date of death (or the 
alternate valuation date, if elected). Newly enacted section 1014(f)(1) 
provides that the basis of certain property acquired from a decedent 
cannot exceed that property's final value as determined for Federal 
estate tax purposes. If no final value has been determined when the 
taxpayer's basis in the property becomes relevant for Federal tax 
purposes, for example, to calculate depreciation or amortization, or to 
calculate gain or loss on the sale, exchange or disposition of the 
property, the taxpayer uses the value reported on the statement 
required by section 6035(a) (the fair market value reported on the 
Federal estate tax return) to determine the taxpayer's basis for 
Federal tax purposes.
    Proposed Sec.  1.1014-10(a)(1) provides that a taxpayer's initial 
basis in certain property acquired from a decedent may not exceed the 
final value of the property as that term is defined in Sec.  1.1014-
10(c). This limitation applies to the property whenever the taxpayer 
reports to the IRS a taxable event with respect to the property (for 
example, depreciation or amortization) and continues to apply until the 
property is sold, exchanged, or otherwise disposed of in one or more 
transactions that result

[[Page 11488]]

in the recognition of gain or loss for Federal income tax purposes. The 
property for this purpose includes any other property the basis of 
which is determined in whole or in part by reference to the basis of 
the property acquired from the estate or as a result of the death of 
the decedent (for example as the result of a like-kind exchange or 
involuntary conversion).

2. Effect of Other Provisions of the Code That Govern Basis

    Section 6662(b)(8) imposes an accuracy-related penalty on the 
portion of any underpayment of tax required to be shown on a return 
that is attributable to an inconsistent estate basis. Under newly 
enacted section 6662(k), an inconsistent estate basis arises if the 
basis of property claimed on a return exceeds its final value as 
determined under section 1014(f).
    Commenters have expressed concern that section 1014(f) and section 
6662(k) appear to prohibit otherwise permissible adjustments to the 
basis of property as a result of post-death events. In response, 
proposed Sec. Sec.  1.1014-10(a)(2) and 1.6662-8(b) clarify that 
sections 1014(f) and 6662(k) do not prohibit adjustments to the basis 
of property as a result of post-death events that are allowed under 
other sections of the Code, and provide that such basis adjustments 
will not cause a taxpayer to violate the provisions of section 1014(f) 
or section 6662(k) on the date of sale, exchange, or disposition. The 
proposed regulations interpret sections 1014(f) and 6662(k) to require 
only that the beneficiary's initial basis of the inherited property 
cannot exceed the final value of the property for Federal estate tax 
purposes. Adjustments to the basis of the inherited property permitted 
by other sections of the Code as a result of post-death events (for 
example, depreciation or amortization, or a sale, exchange, or 
disposition of the property) will not cause the taxpayer's basis in the 
property on the date of a taxable event with respect to the property to 
be treated as exceeding the final value of the property. As a result, 
there cannot be an underpayment attributable to an inconsistent estate 
basis arising from these basis adjustments, and the accuracy-related 
penalty under section 6662(b)(8) cannot apply solely as a result of 
these basis adjustments.

3. Section 1014(f)(2)--Property That Increases Estate Tax Liability

    The consistent basis requirement of section 1014(f)(1) applies only 
to property the inclusion of which in the decedent's gross estate for 
Federal estate tax purposes increases the Federal estate tax liability 
payable by the decedent's estate. Proposed Sec.  1.1014-10(b) defines 
this property as property includible in the gross estate under section 
2031, as well as property subject to tax under section 2106, that 
generates a Federal estate tax liability in excess of allowable 
credits. The proposed regulations specifically exclude all property 
reported on a Federal estate tax return required to be filed by section 
6018 if no Federal estate tax is imposed upon the estate due to 
allowable credits (other than a credit for a prepayment of that tax). 
In cases where Federal estate tax is imposed on the estate, the 
proposed regulations exclude property that qualifies for a charitable 
or marital deduction under section 2055, 2056, or 2056A because this 
property does not increase the Federal estate tax liability. In 
addition, the proposed regulations exclude any tangible personal 
property for which an appraisal is not required under Sec.  20.2031-
6(b) (relating to the valuation of certain household and personal 
effects) because of its value. Thus, if any Federal estate tax 
liability is incurred, all of the property in the gross estate (other 
than that described in the preceding two sentences) is deemed to 
increase the Federal estate tax liability and is subject to the 
consistency requirement of section 1014(f).

4. Section 1014(f)(3)--Final Value of Property Acquired From a Decedent

    Section 1014(f)(3) provides that, for purposes of section 
1014(f)(1), the final value of property has been determined for Federal 
estate tax purposes if: (A) The value is reported on a Federal estate 
tax return filed with the IRS and is not contested by the IRS before 
the period of limitation on assessment expires; (B) the value is 
specified by the IRS and is not timely contested by the executor of the 
estate; or (C) the value is determined by a court or pursuant to a 
settlement agreement with the IRS.
    Proposed Sec.  1.1014-10(c)(1) defines the final value of property 
that is reported on a Federal estate tax return filed with the IRS. 
That value is the value reported on the Federal estate tax return once 
the period of limitations on assessment for adjusting or contesting 
that value has expired. The IRS may specify a value for the property by 
determining a value in the course of carrying out its responsibilities 
under section 7803(a)(2). If the IRS determines a value different from 
the value reported, the final value is the value determined by the IRS 
once that value can no longer be contested by the estate. If the value 
determined or specified by the IRS is timely contested by the estate, 
the final value is the value determined in an agreement that is binding 
on all parties, or the value determined by a court once the court's 
determination is final.
    Proposed Sec.  1.1014-10(c)(2) provides that the recipient of 
property to which the consistency requirement applies may not claim a 
basis in excess of the value reported on the statement required to be 
furnished under section 6035(a) (the value shown on the Federal estate 
tax return) if the taxpayer's basis in the property is relevant for any 
purpose under the Internal Revenue Code before the final value of that 
property has been determined under proposed Sec.  1.1014-10(c)(1). 
However, under section 1014(f)(1), basis cannot exceed the property's 
final value. Therefore, proposed Sec.  1.1014-10(c)(2) provides that, 
if the final value is determined before the period of limitation on 
assessment expires for any Federal income tax return of the recipient 
on which the taxpayer's basis is relevant and the final value differs 
from the initial basis claimed with respect to that return, a 
deficiency and an underpayment may result.

5. After-Discovered or Omitted Property

    Commenters requested that the regulations clarify how the 
consistent basis requirement applies to property that is discovered 
after the filing of the Federal estate tax return or is otherwise 
omitted from that return. If this property would have generated a 
Federal estate tax liability if it had been reported on the Federal 
estate tax return that was filed with IRS, proposed Sec.  1.1014-
10(c)(3)(i) provides two different results based upon whether the 
period of limitation on assessment has expired for the Federal estate 
tax imposed on the estate. Proposed Sec.  1.1014-10(c)(3)(i)(A) 
provides that, if the executor reports the after-discovered or omitted 
property on an estate tax return filed before the expiration of the 
period of limitation on assessment of the estate tax, the final value 
of the property is determined under proposed Sec.  1.1014-10(c)(1) or 
(2). Alternatively, proposed Sec.  1.1014-10(c)(3)(i)(B) provides that, 
if the after-discovered or omitted property is not reported before the 
period of limitation on assessment expires, the final value of the 
after-discovered or omitted property is zero.
    Finally, to address situations in which no Federal estate tax 
return was filed, proposed Sec.  1.1014-10(c)(3)(ii) provides that the 
final value of all property includible in the gross estate subject to 
the consistent basis requirement is zero until the final value is 
determined under proposed Sec.  1.1014-10(c)(1) or (2).

[[Page 11489]]

6. Definition of Executor for Purposes of Sections 1014(f) and 6035

    The proposed regulations adopt the definition of the term executor 
found in section 2203 applicable for Federal estate tax purposes and 
expand it to include a person required to file a return under section 
6018(b).

7. Requirement To Provide Information Return and Statement(s) Under 
Section 6035

    The proposed regulations define the term Information Return as the 
Form 8971, Information Regarding Beneficiaries Acquiring Property from 
a Decedent, which includes a copy of a Schedule A (Statement) for each 
person who has received or will receive property from the estate or by 
reason of the decedent's death.
    Proposed Sec.  1.6035-1(a)(1) provides that an executor who is 
required to file a Federal estate tax return also is required to file 
an Information Return with the IRS to report the final value of certain 
property, the recipient of that property, and other information 
prescribed by the Information Return and the related instructions. The 
executor also is required to furnish a Statement to each beneficiary 
who has acquired (or will acquire) property from the decedent or by 
reason of the death of the decedent to report the property the 
beneficiary has acquired (or will acquire) and the final value of that 
property.

8. Circumstances Under Which No Information Return or Statement(s) Is 
Required Under Section 6035

    Commenters expressed concern that the section 6035 filing 
requirements might extend to a return filed by an estate solely to make 
the portability election under section 2010(c)(5), or a generation-
skipping transfer tax election or exemption allocation. The proposed 
regulations provide that the filing requirements of section 6035 do not 
apply to such returns because these returns are not required by section 
6018.

9. Property To Be Reported on an Information Return and Statement(s)

    Commenters requested that the regulations clarify the types of 
property to be reported on the Information Return and one or more 
Statements. In response, proposed Sec.  1.6035-1(b) defines the 
property to be reported on an Information Return and Statement(s) as 
all property included in the gross estate for Federal estate tax 
purposes with four exceptions: Cash (other than coins or paper bills 
with numismatic value); income in respect of a decedent; those items of 
tangible personal property for which an appraisal is not required under 
Sec.  20.2031-6(b); and property that is sold or otherwise disposed of 
by the estate (and therefore not distributed to a beneficiary) in a 
transaction in which capital gain or loss is recognized.

10. Beneficiaries

    Proposed Sec.  1.6035-1(c)(1) provides that each beneficiary 
(including a beneficiary who is also the executor of the estate) who 
receives property to be reported on the estate's Information Return 
must receive a copy of the Statement reporting the property 
distributable to that beneficiary. Proposed Sec.  1.6035-1(c)(2) 
provides that, if the beneficiary is a trust, estate, or business 
entity instead of an individual, the executor is to furnish the 
entity's Statement to the trustee, executor, or to the business entity 
itself, and not to the beneficiaries of the trust or estate or to the 
owners of the business entity.
    Commenters requested guidance on how to comply with the section 
6035 reporting requirements when the executor cannot determine the 
exact distribution of the estate's property and thus the beneficiary of 
each property by the due date of the Information Return and the related 
Statements. This situation can arise, for example, when tangible 
personal property defined in Sec.  20.2031-6 is to be distributed among 
a group of beneficiaries as that group determines, the residuary estate 
is distributable to multiple beneficiaries, or when multiple residuary 
trusts are to be funded. In response, proposed Sec.  1.6035-1(c)(3) 
provides that, if by the due date the executor does not yet know what 
property will be used to satisfy the interest of each beneficiary, the 
executor is required to report on the Statement for each beneficiary 
all of the property that could be used to satisfy that beneficiary's 
interest. This results in the duplicate reporting of those assets on 
multiple Statements, but each beneficiary will have been advised of the 
final value of each property that may be received by that beneficiary 
and therefore will be able to comply with the basis consistency 
requirement, if applicable.
    Proposed Sec.  1.6035-1(c)(4) provides that, if the executor is 
unable to locate a beneficiary by the due date of the Information 
Return, the executor is required to report that on that Information 
Return and explain the efforts taken to locate the beneficiary. If the 
executor subsequently locates the beneficiary, the executor is required 
to furnish the beneficiary with a Statement and file a supplemental 
Information Return with the IRS within 30 days of locating the 
beneficiary. If the executor is unable to locate a beneficiary and 
distributes the property to a different beneficiary who was not 
identified in the Information Return as the recipient of that property, 
the executor is required to file a supplemental Information Return with 
the IRS and furnish the successor beneficiary with a Statement within 
30 days after distributing the property.

11. Due Date for Information Return and Statements

    Proposed Sec.  1.6035-1(d)(1) provides that the executor is 
required to file the Information Return with the IRS, and is required 
to furnish each beneficiary with that beneficiary's Statement, on or 
before the earlier of the date that is 30 days after the due date of 
the Federal estate tax return (including extensions actually granted, 
if any), or the date that is 30 days after the date on which that 
return is filed with the IRS. In response to comments, proposed Sec.  
1.6035-1(d)(2) provides a transition rule for any Federal estate tax 
return that was due on or before July 31, 2015, but that is filed after 
July 31, 2015. In this case, the due date of the Information Return and 
all Statements is 30 days after the date on which the return is filed. 
Otherwise, as commenters noted, the due date for the Information Return 
and Statement(s) may be prior to the effective date of section 6035.

12. Supplemental Information Return and Statement(s)

    Proposed Sec.  1.6035-1(e)(1) and (2) generally requires a 
supplemental Information Return and corresponding supplemental 
Statement(s) upon a change to the information required to be reported 
on the Information Return or a Statement that causes the information as 
reported to be incorrect or incomplete. Such changes include, for 
example, the discovery of property that should have been, but was not, 
reported on the Federal estate tax return, a change in the value of 
property pursuant to an examination or litigation, or (except as 
provided by proposed Sec.  1.6035-1(e)(3)(B)) a change in the identity 
of the beneficiary to whom the property is to be distributed (for 
example, pursuant to a death, disclaimer, bankruptcy, or otherwise).
    Proposed Sec.  1.6035-1(e)(3) provides that a supplemental 
Information Return and Statement(s) may be filed, but they are not 
required, to correct an inconsequential error or omission within the 
meaning of Sec.  301.6722-1(b) or to specify the actual distribution of 
assets previously reported as being available to satisfy the interests 
of

[[Page 11490]]

multiple beneficiaries in the situation described in proposed Sec.  
1.6035-1(c)(3).
    Proposed Sec.  1.6035-1(e)(4) provides that the due date for the 
supplemental Information Return and each supplemental Statement is 30 
days after: (i) The final value (within the meaning of proposed Sec.  
1.1014-10(c)(1)) of property is determined; (ii) the executor discovers 
that the information reported on the Information Return or Statement is 
otherwise incorrect or incomplete; or (iii) a supplemental Federal 
estate tax return is filed. However, at the suggestion of a commenter, 
if these events occur prior to the distribution to the beneficiary of 
probate property or of the property of a revocable trust, a 
supplemental Information Return or Statement is not due until 30 days 
after the property is distributed. This is likely to be approximately 
the same time when the executor would provide the beneficiary with 
information as to changes, if any, to the basis of the property that 
have occurred since the decedent's death and prior to the distribution. 
Because that basis adjustment information is not part of what is 
required to be reported under section 6035, however, if the executor 
chooses to provide that basis adjustment information on the Schedule A 
provided to the beneficiary, the basis adjustment information must be 
shown separately from the final value required to be reported on the 
beneficiary's Statement.

13. Subsequent Transfers

    As discussed earlier in this preamble, section 6035(a)(2) imposes a 
reporting requirement on the executor of the decedent's estate and on 
any other person required to file a return under section 6018. The 
purpose of this reporting is to enable the IRS to monitor whether the 
basis claimed by an owner of the property is properly based on the 
final value of that property for estate tax purposes. The Treasury 
Department and the IRS are concerned, however, that opportunities may 
exist in some circumstances for the recipient of such reporting to 
circumvent the purpose of the statute (for example, by making a gift of 
the property to a complex trust for the benefit of the transferor's 
family).
    Accordingly, pursuant to the regulatory authority granted in 
section 6035(b)(2), the proposed regulations require additional 
information reporting by certain subsequent transferors in limited 
circumstances. Specifically, proposed Sec.  1.6035-1(f) provides that, 
with regard to property that previously was reported or is required to 
be reported on a Statement furnished to a recipient, when the recipient 
distributes or transfers (by gift or otherwise) all or any portion of 
that property to a related transferee, whether directly or indirectly, 
in a transaction in which the transferee's basis for Federal income tax 
purposes is determined in whole or in part with reference to the 
transferor's basis, the transferor is required to file and furnish with 
the IRS and the transferee, respectively, a supplemental Statement 
documenting the new ownership of this property. This proposed reporting 
requirement is imposed on each such recipient of the property. For 
purposes of this provision, a related transferee means any member of 
the transferor's family as defined in section 2704(c)(2), any 
controlled entity (a corporation or any other entity in which the 
transferor and members of the transferor's family, whether directly or 
indirectly, have control within the meaning of section 2701(b)(2)(A) or 
(B)), and any trust of which the transferor is a deemed owner for 
income tax purposes.
    In the event such transfer occurs before a final value is 
determined within the meaning of proposed Sec.  1.1014-10(c), the 
transferor must provide the executor with a copy of the supplemental 
Statement filed with the IRS and furnished to the transferee reporting 
the new ownership of the property. When a final value is determined, 
the executor will then provide a supplemental Statement to the new 
transferee instead of to the transferor. The supplemental Statements 
are due no later than 30 days after the transferor distributes or 
transfers all or a portion of the property to the transferee.

14. Surviving Joint Tenants or Other Recipients Under Section 
6035(b)(2)

    Section 6035(b)(2) authorizes the IRS to prescribe regulations 
relating to situations in which the surviving joint tenant or other 
recipient may have better information than the executor regarding the 
basis or fair market value of the property received by reason of the 
decedent's death. Section 6018(b) addresses these situations. Section 
6018(b) generally requires that, if the executor is unable to make a 
complete return as to any part of the gross estate of the decedent, the 
executor must include on the return a description of that part of the 
gross estate and the name of every person holding a legal or beneficial 
interest in it. Upon notice from the Secretary, any such person must in 
like manner make a return as to this part of the gross estate. Section 
6035(a)(2) and these proposed regulations require a person required to 
file a return under section 6018(b) to file an Information Return with 
the IRS and to furnish the Statement(s) to each beneficiary of that 
property. Therefore, the Treasury Department and the IRS have 
determined that no additional regulations applicable only to surviving 
joint tenants or other recipients are necessary for this purpose.

15. Removal of Regulations Under Former Section 6035

    The American Jobs Creation Act of 2004 (Pub. L. 108-357, 118 Stat. 
1418) (Jobs Act) repealed former section 6035, effective for taxable 
years of foreign corporations beginning after December 31, 2004, and 
for taxable years of United States shareholders with or within which 
the tax years of foreign corporations end. Prior to repeal, former 
section 6035 set forth information reporting requirements for certain 
United States persons that were officers, directors, or 10-percent 
shareholders of a foreign personal holding company. Section 1.6035-1 
(TD 8573), Sec.  301.6035-1 (TD 6498), Sec.  1.6035-2 (TD 8028), and 
Sec.  1.6035-3 (TD 8028) (collectively, the FPHC regulations) provide 
guidance on the information reporting required under former section 
6035, as in effect prior to amendment by the Tax Equity and Fiscal 
Responsibility Act of 1982 (Pub. L. 97-248, 96 Stat. 328), and prior to 
its repeal by the Jobs Act.
    This document proposes to withdraw the FPHC regulations. However, 
the FPHC regulations referenced above contained in 26 CFR parts 1 and 
301, revised as of April 1, 2015, continue to apply for taxable years 
of foreign corporations beginning on or before December 31, 2004, and 
for taxable years of United States shareholders in which former section 
6035 applies with or within which the tax years of foreign corporations 
end.

16. Request for New Process

    One commenter requested the creation of a process to allow an 
estate beneficiary to challenge the value reported by the executor. 
There is no such process under the Federal law regarding returns 
described in section 6018. The beneficiary's rights with regard to the 
estate tax valuation of property are governed by applicable state law. 
Accordingly, the proposed regulations do not create a new Federal 
process for challenging the value reported by the executor.

Proposed Effective/Applicability Date

    Upon the publication of the Treasury Decision adopting these rules 
as final in the Federal Register, these proposed regulations will apply 
to property acquired from a decedent or by reason

[[Page 11491]]

of the death of a decedent whose return required by section 6018 is 
filed after July 31, 2015. Persons may rely upon these rules before the 
date of publication of the Treasury Decision adopting these rules as 
final in the Federal Register.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings notices, notices and other 
guidance cited in this preamble are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS Web site at https://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It is hereby certified that the collection of information 
in these regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that this rule primarily affects individuals (or their 
estates) and trusts, which are not small entities as defined by the 
Regulatory Flexibility Act (5 U.S.C. 601). Although it is anticipated 
that there may be an incremental economic impact on executors that are 
small entities, including entities that provide tax and legal services 
that assist individuals in preparing tax returns, any impact would not 
be significant and would not affect a substantial number of small 
entities. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking will be 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. Comments are requested on all aspects of the proposed rules. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Theresa M. 
Melchiorre, Office of Associate Chief Counsel (Passthroughs and Special 
Industries). Other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

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

    Section 1.1014-10 also issued under 26 U.S.C. 1014(f).
    Section 1.6035-1 also issued under 26. U.S.C. 6035(a).
    Section 1.6035-2 also issued under 26. U.S.C. 6035(a).

0
Par. 2. Section 1.1014-10 is added to read as follows:


Sec.  1.1014-10  Basis of property acquired from a decedent must be 
consistent with Federal estate tax return.

    (a) Consistent basis requirement--(1) In general. The taxpayer's 
initial basis in property described in paragraph (b) of this section 
may not exceed the property's final value within the meaning of 
paragraph (c) of this section. This requirement applies whenever the 
taxpayer reports a taxable event with respect to the property to the 
Internal Revenue Service (IRS) (for example depreciation or 
amortization) and continues to apply until the property is sold, 
exchanged, or otherwise disposed of in one or more transactions that 
result in the recognition of gain or loss for Federal income tax 
purposes, regardless of whether the owner on the date of the sale, 
exchange, or disposition is the same taxpayer who acquired the property 
from the decedent or as a result of the decedent's death.
    (2) Subsequent basis adjustments. The final value within the 
meaning of paragraph (c) of this section is the taxpayer's initial 
basis in the property. In computing at any time after the decedent's 
date of death the taxpayer's basis in property acquired from the 
decedent or as a result of the decedent's death, the taxpayer's initial 
basis in that property may be adjusted due to the operation of other 
provisions of the Internal Revenue Code (Code) governing basis without 
violating paragraph (a)(1) of this section. Such adjustments may 
include, for example, gain recognized by the decedent's estate or trust 
upon distribution of the property, post-death capital improvements and 
depreciation, and post-death adjustments to the basis of an interest in 
a partnership or S corporation. The existence of recourse or non-
recourse debt secured by property at the time of the decedent's death 
does not affect the property's basis, whether the gross value of the 
property and the outstanding debt are reported separately on the estate 
tax return or the net value of the property is reported. Therefore, 
post-death payments on such debt do not result in an adjustment to the 
property's basis.
    (b) Property subject to consistency requirement--(1) In general. 
Property subject to the consistency requirement in paragraph (a)(1) of 
this section is any property that is includable in the decedent's gross 
estate under section 2031,any property subject to tax under section 
2106, and any other property the basis of which is determined in whole 
or in part by reference to the basis of such property (for example as 
the result of a like-kind exchange or involuntary conversion) that 
generates a tax liability under chapter 11 of subtitle B of the Code 
(chapter 11) on the decedent's estate in excess of allowable credits, 
except the credit for prepayment of tax under chapter 11.
    (2) Exclusions. For purposes of paragraph (b)(1) of this section, 
property that qualifies for an estate tax charitable or marital 
deduction under section 2055, 2056, or 2056A, respectively, does not 
generate a tax liability under chapter 11 and therefore is excluded 
from the property subject to the consistency requirement in paragraph 
(a)(1) of this section. For purposes of paragraph (b)(1) of this 
section, tangible personal property for which an appraisal is not 
required under Sec.  20.2031-6(b) is deemed not to generate a tax 
liability under chapter 11 and therefore also is excluded from the 
property subject to

[[Page 11492]]

the consistency requirement in paragraph (a)(1) of this section.
    (3) Application. For purposes of paragraph (b)(1) of this section, 
if a liability under chapter 11 is payable after the application of all 
available credits (other than a credit for a prepayment of estate tax), 
the consistency requirement in paragraph (a)(1) of this section applies 
to the entire gross estate (other than property excluded under 
paragraph (b)(2) of this section) because all such property contributes 
to the liability under chapter 11 and therefore is treated as 
generating a tax liability under chapter 11. If, however, after the 
application of all such available credits, no tax under chapter 11 is 
payable, the entire gross estate is excluded from the application of 
the consistency requirement.
    (c) Final value--(1) Finality of estate tax value. The final value 
of property reported on a return filed pursuant to section 6018 is its 
value as finally determined for purposes of the tax imposed by chapter 
11. That value is--
    (i) The value reported on a return filed with the Internal Revenue 
Service (IRS) pursuant to section 6018 once the period of limitations 
for assessment of the tax under chapter 11 has expired without that 
value having been timely adjusted or contested by the IRS,
    (ii) If paragraph (c)(1)(i) of this section does not apply, the 
value determined or specified by the IRS once the periods of 
limitations for assessment and for claim for refund or credit of the 
tax under chapter 11 have expired without that value having been timely 
contested;
    (iii) If paragraphs (c)(1)(i) and (ii) of this section do not 
apply, the value determined in an agreement, once that agreement is 
final and binding on all parties; or
    (iv) If paragraphs (c)(1)(i), (ii), and (iii) of this section do 
not apply, the value determined by a court, once the court's 
determination is final.
    (2) No finality of estate tax value. Prior to the determination, in 
accordance with paragraph (c)(1) of this section, of the final value of 
property described in paragraph (b) of this section, the recipient of 
that property may not claim an initial basis in that property in excess 
of the value reported on the statement required to be furnished under 
section 6035(a). If the final value of the property subsequently is 
determined under paragraph (c)(1) of this section and that value 
differs from the value reported on the statement required to be 
furnished under section 6035(a), then the taxpayer may not rely on the 
statement initially furnished under section 6035(a) for the value of 
the property and the taxpayer may have a deficiency and underpayment 
resulting from this difference.
    (3) After-discovered or omitted property--(i) Return under section 
6018 filed. In the event property described in paragraph (b)(1) of this 
section is discovered after the estate tax return under section 6018 
has been filed or otherwise is omitted from that return (after-
discovered or omitted property), the final value of that property is 
determined under section (c)(3)(i)(A) or (B) of this section.
    (A) Reporting prior to expiration of period of limitation on 
assessment. The final value of the after-discovered or omitted property 
is determined in accordance with paragraph (c)(1) or (2) of this 
section if the executor, prior to the expiration of the period of 
limitation on assessment of the tax imposed on the estate by chapter 
11, files with the IRS an initial or supplemental estate tax return 
under section 6018 reporting the property.
    (B) No reporting prior to expiration of period of limitation on 
assessment. If the executor does not report the after-discovered or 
omitted property on an initial or supplemental Federal estate tax 
return filed prior to the expiration of the period of limitation on 
assessment of the tax imposed on the estate by chapter 11, the final 
value of that unreported property is zero. See Example 3 of paragraph 
(e) of this section.
    (ii) No return under section 6018 filed. If no return described in 
section 6018 has been filed, and if the inclusion in the decedent's 
gross estate of the after-discovered or omitted property would have 
generated or increased the estate's tax liability under chapter 11, the 
final value, for purposes of section 1014(f), of all property described 
in paragraph (b) of this section is zero until the final value is 
determined under paragraph (c)(1) or (2) of this section. Specifically, 
if the executor files a return pursuant to section 6018(a) or (b) that 
includes this property or the IRS determines a value for the property, 
the final value of all property described in paragraph (b) of this 
section includible in the gross estate then is determined under 
paragraph (c)(1) or (2) of this section.
    (d) Executor. For purposes of this section, executor has the same 
meaning as in section 2203 and includes any other person required under 
section 6018(b) to file a return.
    (e) Examples. The following examples illustrate the application of 
this section.

    Example 1.  (i) At D's death, D owned 50% of Partnership P, 
which owned a rental building with a fair market value of $10 
million subject to nonrecourse debt of $2 million. D's sole 
beneficiary is C, D's child. P is valued at $8 million. D's interest 
in P is reported on the return required by section 6018(a) at $4 
million. The IRS accepts the return as filed and the time for 
assessing the tax under chapter 11 expires. C sells the interest for 
$6 million in cash shortly thereafter.
    (ii) Under these facts, the final value of D's interest is $4 
million under paragraph (c)(1)(i) of this section. Under section 742 
and Sec.  1.742-1, C's basis in the interest in P at the time of its 
sale is $5 million (the final value of D's interest ($4 million) 
plus 50% of the $2 million nonrecourse debt). Following the sale of 
the interest, C reports taxable gain of $1 million. C has complied 
with the consistency requirement of paragraph (a)(1) of this 
section.
    (iii) Assume instead that the IRS adjusts the value of the 
interest in P to $4.5 million, and that value is not contested 
before the expiration of the time for assessing the tax under 
chapter 11. The final value of D's interest in P is $4.5 million 
under paragraph (c)(1)(ii) of this section. Under section 742 and 
Sec.  1.742-1, C claims a basis of $5.5 million at the time of sale 
and reports gain on the sale of $500,000. C has complied with the 
consistency requirement of paragraph (a)(1) of this section.
    Example 2.  (i) At D's death, D owned (among other assets) a 
private residence that was not encumbered. D's sole beneficiary is 
C. D's executor reports the value of the residence on the return 
required by section 6018(a) as $600,000 and pays the tax liability 
under chapter 11. The IRS timely contests the reported value and 
determines that the value of the residence is $725,000. The parties 
enter into a settlement agreement that provides that the value of 
the residence for purposes of the tax imposed by chapter 11 is 
$650,000. Pursuant to paragraph (c)(1)(iii) of this section, the 
final value of the residence is $650,000.
    (ii) Several years later, C adds a master suite to the residence 
at a cost of $45,000. Pursuant to section 1016(a), C's basis in the 
residence is increased by $45,000 to $695,000. Subsequently, C sells 
the residence to an unrelated third party for $900,000. C claims a 
basis in the residence of $695,000 and reports a gain of $205,000 
($900,000-$695,000). C has complied with the consistency requirement 
of paragraph (a)(1) of this section.
    Example 3.  (i) The facts are the same as in Example 2 but, 
after the expiration of the period for assessing the tax imposed by 
chapter 11, the executor discovers property that had not been 
reported on the return required by section 6018(a) but which, if 
reported, would have generated additional chapter 11 tax on the 
entire value of the newly discovered property. Pursuant to paragraph 
(c)(3)(i)(B) of this section, C's basis in the residence of $695,000 
does not change, but the final value of the additional unreported 
property is zero.
    (ii) Alternatively, assume that no return was required to be 
filed under section 6018 before discovering the additional property 
(and none in fact was filed) but, after the application of the 
applicable credit amount, D's taxable estate including the 
unreported

[[Page 11493]]

property would have been $200,000. Pursuant to paragraph (c)(3)(ii) 
of this section, the final value of all property included in D's 
gross estate that is described in paragraph (b) of this section is 
zero until the executor files an estate tax return with the IRS 
pursuant to section 6018 or the IRS determines a value for the 
property. In either of those events, the final value of property 
described in paragraph (b) of this section reported on the return is 
determined in accordance with paragraph (c)(1) or (c)(2) of this 
section.
    Example 4.  (i) At D's death, D's gross estate includes a 
residence valued at $300,000 encumbered by nonrecourse debt in the 
amount of $100,000. Title to the residence is held jointly by D and 
C (D's daughter) with rights of survivorship. D provided all the 
consideration for the residence and the entire value of the 
residence was included in D's gross estate. The executor reports the 
value of the residence as $200,000 on the return required by section 
6018 filed with the IRS for D's estate and claims no other deduction 
for the debt. The statement required by section 6035 reports the 
value of the residence as $300,000. C sells the residence before the 
final value is determined under paragraph (c)(1) of this section for 
$375,000 and claims a gain of $75,000 on C's Federal income tax 
return.
    (ii) A court subsequently determines that the value of the 
residence was $290,000 and the time for contesting this value in any 
court expires before the expiration of the period for assessing C's 
income tax for the year of C's sale of the property. The final value 
of the residence is $290,000 pursuant to paragraphs (c)(1)(iv) and 
(c)(2) of this section. Because C claimed a basis in the residence 
that exceeds the final value, C may have a deficiency and 
underpayment.

    (f) Effective/applicability date. Upon the publication of the 
Treasury Decision adopting these rules as final in the Federal 
Register, this section will apply to property acquired from a decedent 
or by reason of the death of a decedent whose return required by 
section 6018 is filed after July 31, 2015. Persons may rely upon these 
rules before the date of publication of the Treasury Decision adopting 
these rules as final in the Federal Register.

0
Par. 3. Section 1.6035-1 is revised to read as follows:


Sec.  1.6035-1  Basis information to persons acquiring property from 
decedent.

    (a) Required Information Return and Statement(s)--(1) In general. 
An executor (defined in paragraph (g)(1) of this section) required to 
file a return under section 6018 for an estate must file an Information 
Return (defined in paragraph (g)(2) of this section) with the Internal 
Revenue Service (IRS) to report the value of certain property 
(described in paragraph (b)(1) of this section) included in the 
decedent's gross estate for purposes of the tax imposed by chapter 11 
of subtitle B of the Internal Revenue Code (chapter 11) and other 
information prescribed by the Information Return and the instructions 
thereto. The value to be reported is the final value of the property as 
described in Sec.  1.1014-10(c). This executor also must furnish a 
Statement (defined in paragraph (g)(3) of this section) to each 
beneficiary who has (or will) acquire, whether from the decedent or by 
reason of the death of the decedent, property reported on the 
Information Return to identify the property the beneficiary is to 
receive and to report the value of that property and other information 
prescribed by the Statement and instructions thereto. The Information 
Return and each Statement are required to be filed and furnished by the 
date provided in paragraph (d) of this section. If, after the 
Information Return and Statement are filed and furnished, there are 
certain changes in the final value and/or the recipient of property as 
described in paragraph (e) or (f) of this section, the executor must 
file a supplemental Information Return with the IRS and furnish a 
supplemental Statement to the beneficiary. Subsequent transfers of all 
or a portion of property previously reported (or required to be 
reported) on the Information Return required by paragraph (a) of this 
section, in transactions in which the transferee acquires the property 
with the transferor's basis, require additional reporting as described 
in paragraph (f) of this section.
    (2) Exception. Paragraph (a)(1) of this section applies only to the 
executor of an estate required by section 6018 to file an estate tax 
return. Accordingly, notwithstanding Sec.  20.2010-2(a)(1), the 
executor does not have to file or furnish the Information Return or 
Statement(s) referred to in paragraph (a)(1) of this section if the 
executor is not required by section 6018 to file an estate tax return 
for the estate, even if the executor does file such a return for other 
purposes, e.g., to make a generation-skipping transfer tax exemption 
allocation or election, to make the portability election under section 
2010(c)(5), or to make a protective filing to avoid any penalty if an 
asset value is later determined to cause a return to be required or 
otherwise.
    (b) Property for which reporting is required--(1) In general. The 
property to which the reporting requirement under paragraph (a)(1) of 
this section applies is all property reported or required to be 
reported on a return under section 6018. This includes, for example, 
any other property whose basis is determined in whole or in part by 
reference to that property (for example as the result of a like-kind 
exchange or involuntary conversion). Of the property of a deceased 
nonresident non-citizen, this includes only the property that is 
subject to U.S. estate tax; similarly, this includes only the 
decedent's one-half of community property. Nevertheless, the following 
property is excepted from the reporting requirements--
    (i) Cash (other than a coin collection or other coins or bills with 
numismatic value);
    (ii) Income in respect of a decedent (as defined in section 691);
    (iii) Tangible personal property for which an appraisal is not 
required under Sec.  20.2031-6(b); and
    (iv) Property sold, exchanged, or otherwise disposed of (and 
therefore not distributed to a beneficiary) by the estate in a 
transaction in which capital gain or loss is recognized.
    (2) Examples. The following examples illustrate the provisions of 
paragraph (b)(1) of this section.

    Example 1.  Included in D's gross estate are the contents of his 
residence. Pursuant to Sec.  20.2031-6(a), the executor attaches to 
the return required by section 6018 filed for D's estate a room by 
room itemization of household and personal effects. All articles are 
named specifically. In each room a number of articles, none of which 
has a value in excess of $100, are grouped. A value is provided for 
each named article. Included in the household and personal effects 
are a painting, a rug, and a clock, each of which has a value in 
excess of $3,000. Pursuant to Sec.  20.2031-6(b), the executor 
obtains an appraisal from a disinterested, competent appraiser(s) of 
recognized standing and ability, or a disinterested dealer(s) in the 
class of personalty involved for the painting, rug, and clock. The 
executor attaches these appraisals to the estate tax return for D's 
estate. Pursuant to paragraph (b)(1)(iii) of this section, the 
reporting requirements of paragraph (a)(1) of this section apply 
only to the painting, rug, and clock.
    Example 2.  Included in D's estate are shares in C, a publicly 
traded company. Shortly after D's death but prior to the filing of 
the estate tax return for D's estate, C is acquired by T, also a 
publicly traded company. For the shares in C includible in D's 
estate, the estate receives new shares in T and cash in a fully 
taxable transaction. Pursuant to paragraph (b)(1)(iv) of this 
section, the reporting requirements of paragraph (a)(1) of this 
section do not apply to the new shares in T or the cash.

    (c) Beneficiaries--(1) In general. As provided in paragraph (a)(1) 
of this section, the executor must furnish to each beneficiary 
(including a beneficiary who is also an executor) receiving property 
that must be reported on the Information Return filed with the IRS, the 
Statement containing the required information regarding that

[[Page 11494]]

beneficiary's property. For purposes of this provision, the beneficiary 
of a life estate is the life tenant, the beneficiary of a remainder 
interest is the remainderman(men) identified as if the life tenant were 
to die immediately after the decedent, and the beneficiary of a 
contingent interest is a beneficiary, unless the contingency has 
occurred prior to the filing of the Form 8971. If the contingency 
subsequently negates the inheritance of the beneficiary, the executor 
must do supplemental reporting in accordance with paragraph (e) of this 
section to report the change of beneficiary.
    (2) Beneficiary not an individual. If the beneficiary is a trust or 
another estate, the executor must furnish the beneficiary's Statement 
to the trustee or executor of the trust or estate, rather than to the 
beneficiaries of that trust or estate. If the beneficiary is a business 
entity, the executor must furnish the Statement to the entity. However, 
see paragraph (f) of this section for additional reporting requirements 
in the event the trust, estate, or entity transfers all or a portion of 
the property in a transaction in which the transferee acquires the 
basis of the trust, estate, or entity.
    (3) Beneficiary not determined. If, by the due date provided in 
paragraph (d) of this section, the executor has not determined what 
property will be used to satisfy the interest of each beneficiary, the 
executor must report on the Statement for each such beneficiary all of 
the property that the executor could use to satisfy that beneficiary's 
interest. Once the exact distribution has been determined, the executor 
may, but is not required to, file and furnish a supplemental 
Information Return and Statement as provided in paragraph (e)(3) of 
this section.
    (4) Beneficiary not located. An executor must use reasonable due 
diligence to identify and locate all beneficiaries. If the executor is 
unable to locate a beneficiary by the due date of the Information 
Return provided in paragraph (d) of this section, the executor must so 
report on that Information Return and explain the efforts the executor 
has taken to locate the beneficiary and to satisfy the obligation of 
reasonable due diligence. If the executor subsequently locates the 
beneficiary, the executor must furnish the beneficiary with that 
beneficiary's Statement and file a supplemental Information Return with 
the IRS within 30 days of locating the beneficiary. A copy of the 
beneficiary's Statement must be attached to the supplemental 
Information Return. If the executor is unable to locate a beneficiary 
and distributes the property to a different beneficiary who was not 
identified in the Information Return as the recipient of that property, 
the executor must file a supplemental Information Return with the IRS 
and furnish the substitute beneficiary with that beneficiary's 
Statement within 30 days after the property is distributed. See 
paragraph (e)(1) of this section. A copy of the substitute 
beneficiary's Statement must be attached to the supplemental 
Information Return.
    (d) Due dates--(1) In general. Except as provided in Sec.  1.6035-
2T, the executor must file the Information Return with the IRS, and 
must furnish to each beneficiary the Statement with regard to the 
property to be received by that beneficiary, on or before the earlier 
of--
    (i) The date that is 30 days after the due date of the estate tax 
return required by section 6018 (including extensions, if any), or
    (ii) The date that is 30 days after the date on which that return 
is filed with the IRS.
    (2) Transition rule. If the due date of an estate tax return 
required to be filed by section 6018 is on or before July 31, 2015, but 
the executor does not file the return with the IRS until after July 31, 
2015, then the Information Return and Statement(s) are due on or before 
the date that is 30 days after the date on which the estate tax return 
is filed, except as provided in Sec.  1.6035-2T.
    (e) Duty to supplement.--(1) In general. In the event of any 
adjustment to the information required to be reported on the 
Information Return or any Statement as described in paragraph (e)(2) of 
this section, the executor must file a supplemental Information Return 
with the IRS including all supplemental Statements and furnish a 
corresponding supplemental Statement to each affected beneficiary by 
the due date described in paragraph (e)(4) of this section.
    (2) Adjustments requiring supplement. Except as provided in 
paragraph (e)(3) of this section, an adjustment to which the duty to 
supplement applies is any change to the information required to be 
reported on the Information Return or Statement that causes the 
information as reported to be incorrect or incomplete. Such changes 
include, for example, the discovery of property that should have been 
(but was not) reported on an estate tax return described in section 
6018, a change in the value of property pursuant to an examination or 
litigation, or a change in the identity of the beneficiary to whom the 
property is to be distributed (pursuant to a death, disclaimer, 
bankruptcy, or otherwise). Such changes also include the executor's 
disposition of property acquired from the decedent or as a result of 
the death of the decedent in a transaction in which the basis of new 
property received by the estate is determined in whole or in part by 
reference to the property acquired from the decedent or as a result of 
the death of the decedent (for example as the result of a like-kind 
exchange or involuntary conversion). Changes requiring supplement 
pursuant to this paragraph (e)(2) are not inconsequential errors or 
omissions within the meaning of Sec.  301.6722-1(b) of this chapter.
    (3) Adjustments not requiring supplement--(i) In general. A 
supplemental Information Return and Statement may but they are not 
required to be filed or furnished-
    (A) To correct an inconsequential error or omission within the 
meaning of Sec.  301.6722-1(b) of this chapter, or
    (B) To specify the actual distribution of property previously 
reported as being available to satisfy the interests of multiple 
beneficiaries in the situation described in paragraph (c)(3) of this 
section.
    (ii) Example. Paragraph (e)(3)(i)(B) of this section is illustrated 
by the following example.

    Example 1.  D's Will provided for D's residuary estate to be 
distributed to D's three children (E, F, and G). D's residuary 
estate included stock in a publicly traded company (X), a personal 
residence, and three paintings. On the due date of the Information 
Return and Statement required by paragraph (a)(1) of this section, 
D's executor had not yet determined which property each child would 
receive from D's residuary estate in satisfaction of that child's 
bequest. In accordance with paragraph (c)(3) of this section, D's 
executor reported on the Information Return filed with the IRS and 
on each child's own Statement that E, F, and G each might receive an 
interest in the stock in X, the personal residence, and the three 
paintings. Several months later, the executor determined that E 
would receive the stock in X, F would receive the residence, and G 
would receive the paintings. Paragraph (e)(3)(i)(B) of this section 
provides that the executor may but is not required to file a 
supplemental Information Return with the IRS and furnish 
supplemental Statements to E, F, and G to accurately report which 
beneficiary received what property.
    Example 2. D's Will provided that D's jewelry and household 
effects (personalty) are to be distributed among D's three children 
(E, F, and G) as determined by E, F, and G. In accordance with 
paragraph (c)(3) of this section, D's executor reports on the 
Information Return filed with the IRS and on each child's own 
Statement each item of personalty other than items described in 
paragraph (b)(1)(iii) of this section. Several months later, E, F, 
and G determine who is to receive each item of personalty. Paragraph 
(e)(3)(i)(B) of this section provides that the

[[Page 11495]]

executor may but is not required to file a supplemental Information 
Return with the IRS and furnish supplemental Statements to E, F, and 
G to accurately report which beneficiary received which item(s) of 
personalty.

    (4) Due date of supplemental reporting--(i) In general. Except as 
provided in paragraph (e)(4)(ii) of this section, the supplemental 
Information Return must be filed and each supplemental Statement must 
be furnished on or before 30 days after--
    (A) The final value within the meaning of Sec.  1.1014-10(c)(1) is 
determined;
    (B) The executor discovers that the information reported on the 
Information Return or Statement is otherwise incorrect or incomplete, 
except to the extent described in paragraph (e)(3)(i) of this section; 
or
    (C) A supplemental estate tax return under section 6018 is filed 
reporting property not reported on a previously filed estate tax return 
pursuant to Sec.  1.1014-10(c)(3)(i). In this case, a copy of the 
supplemental Statement provided to each beneficiary of an interest in 
this property must be attached to the supplemental Information Return.
    (ii) Probate property or property from decedent's revocable trust. 
With respect to property in the probate estate or held by a revocable 
trust at the decedent's death, if an event described in paragraph 
(e)(4)(i)(A), (B), or (C) of this section occurs after the decedent's 
date of death but before or on the date the property is distributed to 
the beneficiary, the due date for the supplemental Information Return 
and corresponding supplemental Statement is the date that is 30 days 
after the date the property is distributed to the beneficiary. If the 
executor chooses to furnish to the beneficiary on the Statement 
information regarding any changes to the basis of the reported property 
as described in Sec.  1.1014-10(a)(2) that occurred after the date of 
death but before or on the date of distribution, that basis adjustment 
information (which is not part of the requirement under section 6035) 
must be shown separately from the final value required to be reported 
on that Statement.
    (f) Subsequent transfers. If all or any portion of property that 
previously was reported or is required to be reported on an Information 
Return (and thus on the recipient's Statement or supplemental 
Statement) is distributed or transferred (by gift or otherwise) by the 
recipient in a transaction in which a related transferee determines its 
basis, in whole or in part, by reference to the recipient/transferor's 
basis, the recipient/transferor must, no later than 30 days after the 
date of the distribution or other transfer, file with the IRS a 
supplemental Statement and furnish a copy of the same supplemental 
Statement to the transferee. The requirement to file a supplemental 
Statement and furnish a copy to the transferee similarly applies to the 
distribution or transfer of any other property the basis of which is 
determined in whole or in part by reference to that property (for 
example as the result of a like-kind exchange or involuntary 
conversion). In the case of a supplemental Statement filed by the 
recipient/transferor before the recipient/transferor's receipt of the 
Statement described in paragraph (a) of this section, the supplemental 
Statement will report the change in the ownership of the property and 
need not provide the value information that would otherwise be required 
on the supplemental Statement. In the event the transfer occurs before 
the final value is determined within the meaning of proposed Sec.  
1.1014-10(c), the transferor must provide the executor with a copy of 
the supplemental Statement filed with the IRS and furnished to the 
transferee in order to notify the executor of the change in ownership 
of the property. When the executor subsequently files any Return and 
issues any Statement required by paragraphs (a) or (e) of this section, 
the executor must provide the Statement (or supplemental Statement) to 
the new transferee instead of to the transferor. For purposes of this 
provision, a related transferee means any member of the transferor's 
family as defined in section 2704(c)(2), any controlled entity (a 
corporation or any other entity in which the transferor and members of 
the transferor's family (as defined in section 2704(c)(2)), whether 
directly or indirectly, have control within the meaning of section 
2701(b)(2)(A) or (B)), and any trust of which the transferor is a 
deemed owner for income tax purposes. If the transferor chooses to 
include on the supplemental Statement provided to the transferee 
information regarding any changes to the basis of the reported property 
as described in Sec.  1.1014-10(a)(2) that occurred during the 
transferor's ownership of the property, that basis adjustment 
information (which is not part of the requirement under section 6035) 
must be shown separately from the final value required to be reported 
on that Statement.
    (g) Definitions. For purposes of this section, the following terms 
are defined as follows--
    (1) Executor has the same meaning as in section 2203 and includes 
any other person required under section 6018(b) to file a return.
    (2) Information Return means the Form 8971, including each 
beneficiary's Statement as defined in paragraph (g)(3) of this section 
required to be furnished, or any successor form issued by the IRS for 
this purpose.
    (3) Statement means the payee statement described as Schedule A of 
the Information Return furnished to a beneficiary or any successor form 
or schedule issued by the IRS for this purpose.
    (h) Penalties--(1) Failure to timely file complete and correct 
Information Return. For provisions relating to the penalty provided for 
failure to file an Information Return required by section 6035(a)(1) on 
or before the required filing date, failure to include all of the 
required information on an Information Return, or the filing of an 
Information Return that includes incorrect information, see section 
6721 and the regulations thereunder. See section 6724 and the 
regulations thereunder for rules relating to waivers of penalties for 
certain failures due to reasonable cause.
    (2) Failure to timely furnish correct Statements. For provisions 
relating to the penalty provided for failure to furnish a Statement 
required by section 6035(a)(2) on or before the prescribed date, 
failure to include all of the required information on a Statement, or 
the filing of a Statement that includes incorrect information, see 
section 6722 and the regulations thereunder. See section 6724 and the 
regulations thereunder for rules relating to waivers of penalties for 
certain failures due to reasonable cause.
    (i) Effective/applicability date. Upon the publication of the 
Treasury Decision adopting these rules as final in the Federal 
Register, this section will apply to property acquired from a decedent 
or by reason of the death of a decedent whose return required by 
section 6018 is filed after July 31, 2015. Persons may rely upon these 
rules before the date of publication of the Treasury Decision adopting 
these rules as final in the Federal Register.

0
Par. 4. Section 1.6035-2 is added to read as follows:


Sec.  1.6035-2  Transition relief.

    [The text of proposed Sec.  1.6035-2 is the same as the text of 
Sec.  1.6035-2T published elsewhere in this issue of the Federal 
Register].


Sec.  1.6035-3  [Removed]

0
Par. 5. Section 1.6035-3 is removed.

[[Page 11496]]

0
Par. 6. Section 1.6662-8 is added to read as follows:


Sec.  1.6662-8  Inconsistent estate basis reporting.

    (a) In general. Section 6662(a) and (b)(8) impose an accuracy-
related penalty on the portion of any underpayment of tax required to 
be shown on a return that is attributable to an inconsistent estate 
basis.
    (b) Inconsistent estate basis. In accordance with section 6662(k), 
there is an inconsistent estate basis to the extent that a taxpayer 
claims a basis, without regard to the adjustments described in Sec.  
1.1014-10(a)(2), in property described in paragraph (c) of this section 
that exceeds that property's final value as determined under Sec.  
1.1014-10(c).
    (c) Applicable property. The property to which this section applies 
is property described in Sec.  1.1014-10(b) that is reported or 
required to be reported on a return required by section 6018 filed 
after July 31, 2015.
    (d) Effective/applicability date. Upon the publication of the 
Treasury Decision adopting these rules as final in the Federal 
Register, this section will apply to property described in Sec.  
1.1014-10(b) acquired from a decedent or by reason of the death of a 
decedent whose return required by section 6018 is filed after July 31, 
2015. Persons may rely upon these rules before the date of publication 
of the Treasury Decision adopting these rules as final in the Federal 
Register.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 7. The authority citation for part 301 continues to read in part 
as follows:

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

0
Par. 8. Section 301.6721-1 is amended by removing the word ``or'' at 
the end of paragraph (g)(2)(x), removing the period and adding ``; or'' 
at the end of paragraph (g)(2)(xi), and adding paragraph (g)(2)(xii).
    The addition reads as follows:


Sec.  301.6721-1  Failure to file correct information returns.

* * * * *
    (g) * * *
    (2) * * *
    (xii) Section 6035 (relating to basis of property acquired from 
decedents).
* * * * *
0
Par. 9. Section 301.6722-1 is amended by removing the word ``or'' at 
the end of paragraph (d)(2)(xxxiii), removing the period and adding a 
semi-colon in its place followed by the word ``or'' at the end of 
paragraph (d)(2)(xxxiv), and adding paragraph (d)(2)(xxxv).
    The addition reads as follows:


Sec.  301.6722-1  Failure to furnish correct payee statements.

* * * * *
    (d) * * *
    (2) * * *
    (xxxv) Section 6035 (relating to basis of property acquired from 
decedents).
* * * * *

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-04718 Filed 3-2-16; 4:15 pm]
 BILLING CODE 4830-01-P