Consistent Basis Reporting Between Estate and Person Acquiring Property From Decedent, 76356-76387 [2024-20429]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 180 (Tuesday, September 17, 2024)]
[Rules and Regulations]
[Pages 76356-76387]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-20429]



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Vol. 89

Tuesday,

No. 180

September 17, 2024

Part VI





Department of the Treasury





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 Internal Revenue Service





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26 CFR Parts 1 and 301





Consistent Basis Reporting Between Estate and Person Acquiring Property 
From Decedent; Final Rule

Federal Register / Vol. 89, No. 180 / Tuesday, September 17, 2024 / 
Rules and Regulations

[[Page 76356]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9991]
RIN 1545-BM97


Consistent Basis Reporting Between Estate and Person Acquiring 
Property From Decedent

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: This document contains final regulations that provide guidance 
on the statutory 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, the final regulations provide guidance on the statutory 
requirements that executors and other persons provide basis information 
to the IRS and to the recipients of certain property. The final 
regulations regarding the statutory consistent basis requirement affect 
recipients of property acquired from a decedent if the inclusion of the 
value of the property in the decedent's gross estate increases the 
Federal estate tax liability. The final regulations regarding the 
statutory basis reporting requirements affect executors and other 
persons required to file an estate tax return based on the value of the 
decedent's gross estate and the amount of decedent's lifetime adjusted 
taxable gifts, as well as trustees making in-kind distributions of 
property initially acquired from a decedent that was subject to the 
statutory basis reporting requirements.

DATES: Effective date: These regulations are effective on September 17, 
2024.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.1014-1(d), 1.1014-10(f), 1.6035-1(j), and 1.6662-9(c).

FOR FURTHER INFORMATION CONTACT: Concerning section 1014(f), Donna 
Douglas at 202-317-6859; concerning section 6035, Karen Wozniak at 202-
317-6844 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under sections 1014(f) and 6035 of the Internal Revenue 
Code (Code) relating to the statutory consistent basis requirement and 
basis reporting requirements, and amendments to the Procedure and 
Administration Regulations (26 CFR part 301) under sections 6721 and 
6722 of the Code relating to the applicable penalties for failure to 
comply with the statutory basis reporting requirements.

1. General Statutory Background and Enactment of the 2015 Act

    Section 2004 of the Surface Transportation and Veterans Health Care 
Choice Improvement Act of 2015 (2015 Act), Public Law 114-41, 129 Stat. 
443, 454 (July 31, 2015), enacted sections 1014(f), 6035, 6662(b)(8), 
6662(k), 6724(d)(1)(D), and 6724(d)(2)(II) of the Code to require 
consistency between a recipient's basis in certain property acquired 
from a decedent and the value of the property as finally determined for 
Federal estate tax purposes. Section 1014(f) sets forth the consistent 
basis requirement, while the procedural rules in sections 6035, 6662, 
and 6724 set forth the applicable reporting requirements, penalties, 
and definitions. On March 23, 2018, section 104 of Division U of the 
Consolidated Appropriations Act, 2018, Public Law 115-141, 132 Stat. 
348, 1170, made a technical correction to the definition of the term 
inconsistent estate basis under section 6662(k) of the Code, 
retroactive to the original date of enactment of the 2015 Act. The 
technical correction modified the definition to take into account, for 
purposes of the accuracy-related penalty imposed under section 6662 of 
the Code, that the basis of property determined under section 1014(f) 
is only the initial basis of such property. Thus, nothing in section 
1014(f) prevents post-death basis adjustments pursuant to other 
sections of the Code.

2. Existing Regulatory and Administrative Guidance Under Sections 
1014(f) & 6035

    On March 4, 2016, the Department of the Treasury (Treasury 
Department) and the IRS published in the Federal Register (81 FR 11486) 
a notice of proposed rulemaking and notice of proposed rulemaking by 
cross-reference to temporary regulations (REG-127923-15). The proposed 
regulations would provide guidance on the consistent basis requirement 
under section 1014(f) applicable to recipients of certain property from 
a decedent and the reporting requirements under section 6035 applicable 
to executors and other persons required to file an estate tax return. 
Section 1.6035-2 of the proposed regulations (proposed Sec.  1.6035-2) 
cross-references temporary regulations under Sec.  1.6035-2T (TD 9757), 
published in the Federal Register (81 FR 11431) on the same day, which 
provide transitional relief on the due date for filing the information 
return required by section 6035 (Information Return) and furnishing the 
statement(s) required by section 6035 (Statement(s)). Specifically, the 
temporary regulations extended the due date for filing and furnishing 
the required Information Return and Statement(s) to March 31, 2016.\1\
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    \1\ Prior extensions of the due dates to file and furnish the 
required Information Return and Statement(s) were set forth in 
Notice 2015-57, 2015-36 IRB 24, and Notice 2016-19, 2016-09 IRB 362.
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    On March 23, 2016, in response to requests from the public for an 
additional extension of time for filing and furnishing the required 
Information Return and Statement(s), the Treasury Department and the 
IRS issued Notice 2016-27, 2016-15 IRB 576, extending the due date for 
both to June 30, 2016. On December 2, 2016, the Treasury Department and 
the IRS published in the Federal Register (81 FR 86953) final 
regulations (TD 9797) confirming the extension until June 30, 2016, to 
file and furnish the required Information Return and Statement(s).

3. Public Hearing and Comments

    On June 27, 2016, the Treasury Department and the IRS held a public 
hearing on the proposed regulations. In addition to the comments 
received at the hearing, the Treasury Department and the IRS received 
approximately thirty written comments on the proposed regulations. The 
written comments are available for public inspection at https://www.regulations.gov or upon request.
    After consideration of all of the comments, the Treasury Department 
and the IRS are adopting the proposed regulations with certain 
revisions. These revisions substantially reduce the burden on both the 
IRS and taxpayers and increase administrability of the proposed rules. 
The revisions include (1) removing the zero basis rule for unreported 
property; (2) adopting a suggested interpretation of the term acquiring 
for purposes of section 6035(a)(1) and thereby modifying the reporting 
requirements applicable in the case of property not acquired by a 
beneficiary before the estate tax return due date; (3) eliminating the 
subsequent transfer reporting requirement for all beneficiaries other 
than trustees; and (4) excepting additional types of property interests 
from the consistent basis requirements and the reporting requirements 
under section 6035. In addition, a number of requested technical 
changes have been made to

[[Page 76357]]

the proposed regulations. Besides the changes made in response to 
comments, non-substantive revisions have been made to clarify the 
language and improve the organization of the proposed regulations. The 
public comments and revisions are discussed in the Summary of Comments 
and Explanation of Revisions section of this preamble.

Summary of Comments and Explanation of Revisions

1. Section 1014(f)--Consistent Basis Requirement
A. Proposed Sec.  1.1014-10(a)(1): Consistent Basis Requirement--In 
General
    Section 1014(f)(1) provides that the basis of certain 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 required Statement. This statutory rule is referred to as 
the consistent basis requirement. Section 1.1014-10 of the proposed 
regulations (proposed Sec.  1.1014-10) includes proposed rules that 
would implement the consistent basis requirement.
    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 
property's final value for estate tax purposes within the meaning of 
proposed Sec.  1.1014-10(c). Proposed Sec.  1.1014-10(a)(1) 
additionally provides that the consistent basis requirement applies 
whenever the taxpayer reports a taxable event to the IRS with respect 
to the property and continues to apply until the entire 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.
    The final regulations retain the rule in proposed Sec.  1.1014-
10(a)(1) incorporating the consistent basis requirement as it applies 
if a final value has been determined. However, proposed Sec.  1.1014-
10(a)(1) is revised in the final regulations to incorporate the 
consistent basis requirement as it applies if no final value has been 
determined (previously addressed in proposed Sec.  1.1014-10(c)(2)). 
Proposed Sec.  1.1014-10(a)(1) additionally is revised in the final 
regulations to explain that the property subject to the consistent 
basis requirement is referred to as consistent basis property, which 
now is described in Sec.  1.1014-10(c)(1) of the final regulations.
    A commenter inquired whether the judicial doctrine of the duty of 
consistency continues to apply if the consistent basis requirement 
applies to property. For a discussion of the judicial doctrine of the 
duty of consistency, see Van Alen v. Commissioner, T.C. Memo, 2013-235 
(Oct. 2013) and Janis v. Commissioner, 461 F.3d 1080 (9th Cir. 2006). 
The final regulations do not limit the arguments that may be applicable 
under case law, including the judicial doctrine of the duty of 
consistency in appropriate cases.
    With regard to the rule describing the duration of the consistent 
basis requirement in proposed Sec.  1.1014-10(a)(1), several comments 
were received. Commenters asserted, and the Treasury Department and the 
IRS agree, that the consistent basis requirement should not continue to 
apply to property that is sold at a price that is equal to its basis 
because this sale is a recognition event even though no gain or loss is 
recognized. Other commenters asserted, and the Treasury Department and 
the IRS agree, that the consistent basis requirement should not 
continue to apply to property once that property is included in the 
gross estate of another decedent. Finally, commenters questioned 
whether substituted property obtained in an exchange under section 1031 
of the Code (that is, a like-kind exchange) is subject to the 
consistent basis requirement.
    Accordingly, the rule in proposed Sec.  1.1014-10(a)(1) describing 
the duration of the consistent basis requirement, which is moved to 
Sec.  1.1014-10(a)(3) of the final regulations, is revised to clarify 
that the consistent basis requirement applies until the entire property 
is sold, exchanged, or otherwise disposed of in a recognition 
transaction for income tax purposes (whether or not any amount of gain 
or loss is actually recognized) or the property becomes includible in 
another decedent's gross estate. Under this rule, because a like-kind 
exchange is not a recognition event for income tax purposes, 
substituted property obtained in such a transaction is subject to the 
consistent basis requirement until the owner's basis in every portion 
of the substituted property no longer is related, in whole or in part, 
to the final value of the property that was acquired from the decedent.
B. Proposed Sec.  1.1014-10(a)(2): Subsequent Basis Adjustments
    Proposed Sec.  1.1014-10(a)(2) provides that the final value of 
consistent basis property is the taxpayer's initial basis in the 
property. Proposed Sec.  1.1014-10(a)(2) further confirms that, in 
computing 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 Code 
provisions that govern basis without violating the consistent basis 
requirement. Proposed Sec.  1.1014-10(a)(2) also gives examples of such 
adjustments, such as 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 an S corporation (as defined in section 1361(a)(1) of 
the Code). Proposed Sec.  1.1014-10(a)(2) states that 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, the proposed regulations state that post-death 
payments on recourse or non-recourse debt secured by property do not 
result in an adjustment to the property's basis.
    Section 1.1014-10(a)(2) of the final regulations maintains the rule 
identifying the initial basis of consistent basis property if a final 
value has been determined, as well as the rule and examples regarding 
acceptable adjustments to initial basis. However, proposed Sec.  
1.1014-10(a)(2) is revised in the final regulations by identifying the 
initial basis of consistent basis property during the period before the 
final value of such property is determined and by moving the rule 
regarding recourse and non-recourse debt secured by property to Sec.  
1.1014-10(b)(3)(i) of the final regulations.
    The rule regarding recourse and non-recourse debt secured by 
property is addressed separately in the final regulations in order to 
address more specifically, in response to comments, the effect of 
recourse and non-recourse debt on the initial basis of consistent basis 
property. A commenter requested that the final regulations clarify 
that, if the decedent's estate includes property subject to non-
recourse debt and the executor reports the value of the property on the 
decedent's estate tax return as the value of the property less the debt 
(the net value or equity of redemption value), then the final value of 
the property is nevertheless the gross value of the property 
undiminished by the debt. The Treasury Department and the IRS adopt 
this suggestion in

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Sec.  1.1014-10(b)(3)(i) of the final regulations, which provides that 
the final value or, if applicable, the reported value, of property 
subject to recourse or non-recourse debt is determined based on the 
gross value of that property undiminished by debt, regardless of 
whether the estate tax return reports the net value (equity of 
redemption value) of the property or separately reports the gross value 
of the property and claims an estate tax deduction for the outstanding 
debt.
    Another commenter requested that the final regulations clarify 
whether the existence of recourse or non-recourse debt on partnership 
property reduces the final value of a partnership interest includible 
in the decedent's gross estate. The existence of recourse or non-
recourse debt on partnership property relates to the value of the 
partnership and the gross value of a decedent's partnership interest, 
determinations of which are outside the scope of these final 
regulations. Accordingly, this request is not adopted. However, the 
Treasury Department and the IRS note that, with respect to a deceased 
partner having a loan secured by a partnership interest, the same rule 
in Sec.  1.1014-10(b)(3)(i) of the final regulations will apply so that 
the final value of the partnership interest is the gross value of the 
partnership interest undiminished by the debt, regardless of whether 
the estate tax return reports the net value (equity of redemption 
value) of the partnership interest or separately reports the gross 
value of the partnership interest and claims an estate tax deduction 
for the outstanding debt.
C. Proposed Sec.  1.1014-10(b)(1): Property Subject to Consistency 
Requirement--In General
    Section 1014(f)(2) provides that the consistent basis requirement 
applies only to property whose inclusion in the decedent's gross estate 
increased the estate tax liability. Based on this rule, proposed Sec.  
1.1014-10(b)(1) provides that the property subject to the consistent 
basis requirement is any property includible in the decedent's gross 
estate under section 2031 of the Code, any property subject to tax 
under section 2106 of the Code, 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 an 
involuntary conversion) that generates an estate tax liability in 
excess of allowable credits, except for the credit for prepayment of 
estate tax.
    This rule is maintained in Sec.  1.1014-10(c)(1)(i) of the final 
regulations with certain modifications in response to comments. First, 
the final regulations, in Sec.  1.1014-10(c)(1)(i)(A), include the 
preliminary criterion for the applicability of the consistent basis 
requirement in section 1014(f)(1) that only property to which section 
1014(a) applies is consistent basis property. Second, the Treasury 
Department and the IRS have corrected the final regulations to reflect 
that section 2103 of the Code, not section 2106, defines the gross 
estate for purposes of the estate tax on the estate of a nonresident 
non-citizen. The correction is found in the definition of the term 
included property in Sec.  1.1014-10(d)(4) of the final regulations, 
which term is referenced in Sec.  1.1014-10(c)(1)(i)(B) of the final 
regulations. Finally, the Treasury Department and the IRS have 
corrected the final regulations in Sec. Sec.  1.1014-10(c)(1)(i)(C) and 
1.1014-10(d)(5) to remove the reference to the prepayment of estate tax 
as a credit, because an estate tax prepayment is not an identified 
credit but instead is a payment of estate tax.
    Commenters inquired whether the allowable credits referenced in 
proposed Sec.  1.1014-10(b)(1) include credits provided under treaties. 
One commenter inquired whether, in order to treat the prorated unified 
credit under section 2102(b)(3) of the Code as an allowable credit, the 
executor is required to attach a Form 8833, Treaty-Based Return 
Position Disclosure Under Section 6114 or 7701(b), to the nonresident 
non-citizen decedent's Form 706-NA, United States Estate (and 
Generation-Skipping Transfer) Tax Return, Estate of nonresident not a 
citizen of the United States. In response to these comments, Sec.  
1.1014-10(d)(5) of the final regulations defines the term allowable 
credits to include both credits against the estate tax allowable by any 
section of the Code and credits against the estate tax allowable by any 
treaty obligation of the United States, provided that the estate 
qualifies for the credit and complies with all applicable rules for 
claiming the credit, including filing all necessary forms or 
statements.
    With regard to the applicability date of the consistent basis 
requirement to property, commenters requested clarification on whether 
the filing after July 31, 2015, of an estate tax return supplementing 
an estate tax return filed on or before that date would subject any of 
the assets in the decedent's gross estate to the consistent basis 
requirement. Other commenters requested clarification on whether the 
filing on or before July 31, 2015, of an estate tax return that was due 
after July 31, 2015, would subject any of the assets in the decedent's 
gross estate to the consistent basis requirement. In response to these 
comments, Sec.  1.1014-10(c)(1)(ii) of the final regulations clarifies 
that neither the supplementing of an estate tax return after July 31, 
2015, nor a due date of an estate tax return after July 31, 2015, 
causes property to be subject to the consistent basis requirement if an 
estate tax return was filed on or before July 31, 2015.
D. Proposed Sec.  1.1014-10(b)(2): Exclusions
    Proposed Sec.  1.1014-10(b)(2) provides that property that 
qualifies for an estate tax charitable or marital deduction under 
section 2055, 2056, or 2056A of the Code does not generate a tax 
liability under chapter 11 of the Code (chapter 11) and therefore is 
excluded from the property subject to the consistent basis requirement. 
Proposed Sec.  1.1014-10(b)(2) further provides that tangible personal 
property for which an appraisal is not required under Sec.  20.2031-
6(b) of the Estate Tax Regulations (26 CFR part 20) is deemed not to 
generate a tax liability under chapter 11 and therefore also is 
excluded from the property subject to the consistent basis requirement.
    With regard to the exclusion for property qualifying for an estate 
tax charitable or marital deduction under section 2055, 2056, or 2056A, 
multiple commenters sought clarification on whether property qualifying 
for only a partial marital or charitable deduction is subject to the 
consistent basis requirement. In the case of property qualifying for 
only a partial marital or charitable deduction, the property increases 
the estate tax liability to the extent that it does not qualify for a 
marital or charitable deduction and, therefore, the property is subject 
to the consistent basis requirement. In such a case, applying the 
consistent basis requirement only to the partial interest not 
qualifying for a deduction is impractical and incompatible with the 
uniform basis rules under Sec.  1.1014-4 of the Income Tax Regulations. 
Accordingly, Sec.  1.1014-10(c)(2)(xi) of the final regulations 
identifies only wholly deductible property, under any of sections 2055, 
2056, 2056A, 2106(a)(2) and (3), as property not subject to the 
consistent basis requirement. Partially deductible property (property 
that qualifies for only a partial marital or charitable deduction) is 
outside the scope of this rule and, therefore, is consistent basis 
property subject to the consistent basis requirement. Some examples of 
property qualifying for only a partial marital or charitable deduction, 
and, therefore, not excepted from the consistent basis requirement, 
are: (1) a charitable remainder trust, a charitable

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lead trust, or a pooled income fund; (2) a trust subject only to a 
partial QTIP election under section 2056(b)(7); and (3) property 
divided between the decedent's surviving spouse and a charity if the 
sum of the deductions for the two interests given to those recipients 
is less than the value of the property included in the value of the 
gross estate.
    With regard to the exclusion for tangible personal property, Sec.  
1.1014-10(c)(2)(ix) of the final regulations retains as an exception to 
the consistent basis requirement tangible personal property for which 
an appraisal is not required under Sec.  20.2031-6(b). However, in 
response to a comment, these items are described in the final 
regulations as household and personal effects, rather than as tangible 
personal property, to conform more closely with Sec.  20.2031-6(b).
    Multiple commenters advocated for additional exclusions from the 
consistent basis requirement either because certain property is not 
subject to the consistent basis requirement under the plain language of 
the statute or because certain property, in the commenters' views, 
should be excepted from the consistent basis requirement by the 
exercise of regulatory authority. In response, Sec.  1.1014-10(c)(2) of 
the final regulations provides a list of property that is identified as 
property excepted from or not subject to the consistent basis 
requirement. A particular property may be described in more than one 
item on that list.
    One commenter suggested that the final regulations confirm that the 
consistent basis requirement applies only to property to which section 
1014(a)(1) through (3) applies, as only such property has a basis that 
is adjusted to the property's Federal estate tax value as a result of 
the decedent's death. Specifically, the commenter requested that the 
final regulations provide that, if the basis of property is not 
determined under section 1014(a)(1) through (3), then the property is 
not subject to the consistent basis requirement. Under such a 
provision, the commenter concluded that the following property would be 
excluded from the consistent basis requirement: (1) property subject to 
a conservation easement resulting from the section 2031(c) election 
(the subject of section 1014(a)(4)); (2) income in respect of a 
decedent (IRD) (the subject of section 1014(c)); (3) DISC stock (the 
subject of section 1014(d)); (4) pre-death gifts of appreciated 
property (the subject of section 1014(e)); (5) stock in a passive 
foreign investment company (PFIC) by reason of section 1291(e)(1); and 
(6) annuities subject to section 72 (the subject of section 
1014(b)(9)(A)). Section 1014(f)(1) applies the consistent basis 
requirement to all property to which section 1014(a) applies. The 
Treasury Department and the IRS agree that section 1014(b)(9)(A), (c), 
and (e) describes property not subject to section 1014(a), and 
therefore property that does not acquire a new basis based in any way 
on the Federal estate tax value of that property. Stock of a PFIC 
subject to section 1296(i) also is property not subject to section 
1014(a), but only if the basis of such stock is its adjusted basis in 
the hands of the decedent immediately before the decedent's death. 
Accordingly, Sec.  1.1014-10(c)(2)(x) of the final regulations 
clarifies that such interests are not subject to the consistent basis 
requirement.
    However, the adjustments to the basis of property to be made 
pursuant to section 1014(a)(4) and (d) and otherwise under section 
1291(e)(1), do not make section 1014(a), and therefore section 1014(f), 
inapplicable to the property described in those sections. In each of 
these cases, the property's Federal estate tax value is a factor used 
in determining the property's basis under these sections. Thus, the 
consistent basis requirement applies to the property described in these 
sections, even though the basis of the property may differ from the 
Federal estate tax value of the property.
    Several commenters requested confirmation that certain property is 
not subject to the consistent basis requirement because the value of 
that property is not included in the decedent's gross estate for 
Federal estate tax purposes. For instance, a commenter requested 
confirmation that the consistent basis requirement does not apply to 
property the basis of which is adjusted in a manner similar to section 
1014(a) on the occurrence of a taxable termination that occurs on a 
person's death pursuant to section 2654(a)(2). Such property generally 
becomes subject to the generation-skipping transfer tax on the death of 
a trust beneficiary and, as long as the property is not includible in a 
person's gross estate for Federal estate tax purposes, it is not 
property to which section 1014(a) applies. Other commenters requested 
confirmation that the consistent basis requirement does not apply to a 
surviving spouse's interest in community property to which section 
1014(b)(6) applies because, although this property is deemed to have 
been acquired from the decedent and thus is subject to section 1014(a), 
such property is not includible in the decedent's gross estate for 
estate tax purposes. The Treasury Department and the IRS agree with the 
commenters that, in both cases, the property is not subject to the 
consistent basis requirement because it is not property includible in 
the gross estate. Accordingly, Sec.  1.1014-10(c)(2)(xii) and (xiii) of 
the final regulations clarify that such interests are not subject to 
the consistent basis requirement.
    Finally, in addition, Sec.  1.1014-10(c)(2) of the final 
regulations excepts certain types of property whose basis generally 
does not differ from the property's face value, such as United States 
dollars and certain equivalents.
E. Proposed Sec.  1.1014-10(b)(3): Application
    Proposed Sec.  1.1014-10(b)(3) provides that, if an estate tax 
liability is payable after the application of all available credits 
(other than a credit for a prepayment of estate tax), the consistent 
basis requirement applies to the entire gross estate (other than 
property excluded by proposed Sec.  1.1014-10(b)(2)) because all such 
property contributes to the estate tax liability and therefore is 
treated as generating an estate tax liability. Proposed Sec.  1.1014-
10(b)(3) clarifies that if, 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. The final 
regulations in Sec.  1.1014-10(c)(1)(ii) adopt the substance of this 
proposed rule with minor language changes.
F. Proposed Sec.  1.1014-10(c)(1): Final Value--Finality of Estate Tax 
Value
    Proposed Sec.  1.1014-10(c)(1) provides that the final value of 
property reported on an estate tax return is its value as finally 
determined for purposes of the estate tax. Proposed Sec.  1.1014-
10(c)(1) further provides that the finally determined value is (i) the 
value reported on a return filed with the IRS pursuant to section 6018 
of the Code once the period of limitations for assessment of the estate 
tax has expired without that value having been timely adjusted or 
contested by the IRS, (ii) if the preceding rule in (i) 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 
estate tax have expired without that value having been timely 
contested, (iii) if the preceding rules in (i) and (ii) do not apply, 
the value determined in an agreement, once that agreement is final and 
binding on all parties, or (iv) if the preceding rules in (i), (ii), or 
(iii) do not apply, the value determined by a court, once the court's 
determination is final.

[[Page 76360]]

    The rules in proposed Sec.  1.1014-10(c)(1) are adopted in 
redesignated Sec.  1.1014-10(b)(1) of the final regulations, with 
certain clarifications and other changes. First, Sec.  1.1014-
10(b)(1)(ii) of the final regulations omits the reference to the period 
of limitations on credit or refund, which makes the rules defining the 
``final value'' of consistent basis property in the final regulations 
more consistent with the rules defining a final determination for gift 
tax purposes. This is appropriate because both regulatory definitions 
are based on similar statutory language. Second, the final regulations 
in Sec.  1.1014-10(d)(1) add a definition of the term contested to 
clarify that an executor cannot contest the IRS's determination of 
value with only a ``protective'' statement generally contesting the 
IRS's determination of value. The challenge must be specific to a 
particular item of property, rather than a general objection that would 
provide no meaningful information respecting the value of the property 
at issue. Thus, the challenge must put at issue the value of property 
by providing to the IRS a written statement that identifies the 
specific property, states that the executor does not accept as correct 
the value determined or specified by the IRS, and provides the 
executor's claimed value for the property as determined in accordance 
with the requirements of section 2031, the regulations thereunder, and 
other applicable guidance. In cases in which the value of property is 
contested, the final value will be determined either by agreement 
between the executor and the IRS, as described in Sec.  1.1014-
10(b)(1)(iii) of the final regulations, or by litigation, as described 
in Sec.  1.1014-10(b)(1)(iv) of the final regulations.
G. Proposed Sec.  1.1014-10(c)(2): No Finality of Estate Tax Value
    Proposed Sec.  1.1014-10(c)(2) of the proposed regulations provides 
that, prior to the determination of the final value of property subject 
to the consistent basis requirement, the recipient of that property may 
not claim an initial basis in excess of the value reported on the 
required Statement. Proposed Sec.  1.1014-10(c)(2) further provides 
that, if the final value of the property subsequently is determined 
(under proposed Sec.  1.1014-10(c)(1)) and that value differs from the 
value reported on the required Statement, then the taxpayer may not 
rely on the required Statement initially furnished for the value of the 
property and the taxpayer may have a deficiency and underpayment 
resulting from this difference. The Treasury Department and the IRS 
received several comments on these proposed rules.
    One commenter opined that the proposed regulations unfairly hold a 
beneficiary responsible for not using the final value to determine 
initial basis if the beneficiary sells property before its final value 
is determined. The commenter asserted that, in any event, if the final 
value of property is determined after its sale, any accuracy-related 
penalty imposed under section 6662 should be waived if the beneficiary 
acted in good faith. Similarly, commenters requested confirmation that 
no income tax deficiency would result if the final value of the 
property is determined after the expiration of the period of 
limitations on assessment applicable to the beneficiary's income tax 
return.
    If a beneficiary uses the value reported on the required Statement 
to calculate gain or loss on the sale of property, the beneficiary is 
using the value reported on the estate tax return. This may or may not 
be the final value of the consistent basis property as determined under 
section 1014(f)(3). Nevertheless, section 1014(f)(1)(A) provides 
specifically that, in the case of property the final value of which has 
been determined, the beneficiary's initial basis is limited to that 
final value. It would be inconsistent with the language of the statute 
to fail to provide that an income tax deficiency and underpayment may 
result if a value exceeding the final value is used to determine 
initial basis.
    Accordingly, the final regulations, in redesignated Sec.  1.1014-
10(b)(2), maintain the rules in proposed Sec.  1.1014-10(c)(2), and add 
several clarifying provisions. Section 1.1014-10(b)(2)(i) of the final 
regulations clarifies that the reported value is the value reported on 
the Statement required under Sec.  1.6035-1 or, if supplemented, on the 
most recent supplement to that Statement. That section further 
clarifies that the value from any Statement that reports either a value 
from an estate tax return filed after the expiration of the period of 
limitations on assessment applicable to that return, or a value for 
property not reported on the estate tax return, is not a reported 
value. In effect, before a final value is determined, the value 
reported on the estate tax return controls. This rule recognizes that 
section 1014(f)(3) requires an assessment process to determine the 
final value of property. The IRS cannot assess tax on property reported 
only on the required Information Return or required Statement(s) 
because these constitute only information returns and payee statements 
as defined in section 6724(d)(1)(D) and (d)(2)(II), respectively. 
Section 1.1014-10(b)(2)(ii) of the final regulations clarifies that an 
income tax deficiency can result if the final value of property is 
determined before the expiration of the period of limitations on 
assessment for an income tax return that reports a taxable event with 
regard to the property. Section 1.1014-10(b)(2)(ii) of the final 
regulations also includes a reference to section 6664 and the 
regulations thereunder for rules relating to waivers of penalties for 
certain failures due to reasonable cause.
H. Proposed Sec.  1.1014-10(c)(3): After-Discovered or Omitted Property
    Proposed Sec.  1.1014-10(c)(3) provides basis rules for property 
that is discovered after the filing of the estate tax return or 
otherwise is omitted from the estate tax return. Proposed Sec.  1.1014-
10(c)(3)(i)(A) provides that, if the executor reports the after-
discovered or omitted (unreported) property on an estate tax return 
filed before the expiration of the period of limitations 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 unreported property is not 
reported before the period of limitations on assessment expires, the 
final value of that property is zero. Finally, to address situations in 
which no 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). Because the application of proposed Sec.  1.1014-
10(c)(3)(i)(B) or Sec.  1.1014-10(c)(3)(ii) results in the beneficiary 
having an initial basis of zero in unreported property, these proposed 
provisions are collectively referred to as the zero basis rule.
    Comments received on the zero basis rule generally fall into two 
categories: those relating to the statutory interpretation of section 
1014(f) and the authority to impose the zero basis rule; and those 
relating to the practical effects of the zero basis rule. With respect 
to the former, many commenters contended that section 1014(f), by its 
terms, applies only to property that is reported on an estate tax 
return. Therefore, the commenters concluded that the basis of 
unreported property, as determined under section 1014(a), is not 
limited by the consistent basis requirement in section 1014(f). 
Commenters further contended that section 1014(f)(4) limits the 
regulatory authority of the Treasury Department

[[Page 76361]]

and the IRS to providing exceptions to the application of the 
consistent basis requirement, and that expanding the consistent basis 
requirement to address unreported property is beyond the scope of this 
regulatory authority. Some commenters contended that the Code does not 
support a regulatory interpretation that denies at least a carryover 
basis for an inherited asset.
    Commenters commenting on the practical effects of the zero basis 
rule contended that the rule is onerous, unduly harsh, and unfair. 
Commenters noted that a beneficiary receiving unreported property in 
many cases will not be the executor or other person having the 
responsibility to report the property and the beneficiary may have no 
ability to compel the executor to report the property on the return. 
Yet, under the zero basis rule, the beneficiary receiving unreported 
property will have an increased tax burden due to the denial of basis, 
whether determined under section 1014(a) (fair market value on the 
decedent's date of death) or, in the alternative, a carry-over basis of 
the decedent's adjusted basis in the property. Commenters noted that 
unreported property is more likely to arise by inadvertent omission 
from the estate tax return or as a result of being undiscovered, rather 
than willful omission. Therefore, except in the case of willful 
omission by a beneficiary who is the executor or other person 
responsible to report the property, commenters contended that the zero 
basis rule is unduly harsh and unfair because it creates a 100 percent 
taxable gain on the sale of the property by the beneficiary.
    The Treasury Department and the IRS do not agree that providing a 
zero basis rule for unreported property is beyond its regulatory 
authority for implementing the congressional mandate of section 
1014(f). See section 7805(a) and, more specifically, section 
1014(f)(3)(B) (referencing the ability of the IRS to specify the value 
of property not reported on a return required by section 6018). 
However, the Treasury Department and the IRS recognize that such a rule 
primarily impacts the recipients of unreported property, who may have 
had no knowledge of or involvement in the failure to report the 
property for Federal estate tax purposes, but, nevertheless, have an 
increased tax burden under the rule.
    The Treasury Department and the IRS additionally recognize that, 
under applicable State law, an executor is personally accountable to 
discharge its fiduciary duty to seek out and collect every asset and to 
acquire possession of the property of the decedent. See 31 a.m. Jur. 2d 
Executors and Administrators Sec.  369 (2018); Eger v. Eger, 314 NE2d 
394 (Ohio App. 1974); Matter of Deutsch, 114 A.D.2d 413, 493 N.Y.S 884 
(2d Dep't 1985). Further, the Treasury Department and the IRS recognize 
that, in the absence of a zero basis rule for unreported property, 
existing Federal tax enforcement mechanisms under subtitle F of the 
Code, including criminal liability, serve to deter willful nonreporting 
of property on the estate tax return. See, e.g., section 6651(a)(3) of 
the Code for a potential addition to tax; sections 6662(a), (g), and 
(h), 6663, 6721, and 6722 of the Code for potential accuracy-related, 
fraud, and other penalties; section 6501(c)(1) and (2), and (e)(2) of 
the Code for potential exceptions to the general three-year period of 
limitations on assessment; and sections 7203, 7206, and 7207 of the 
Code for potential criminal liability and penalties.
    In view of these considerations, the final regulations do not 
include the zero basis rule. Instead, Sec.  1.1014-10(c)(1)(i) of the 
final regulations clarifies that the consistent basis requirement 
applies only to included property, a term that is defined in Sec.  
1.1014-10(d)(4) of the final regulations to refer to property, the 
value of which is included in the value of the decedent's gross estate, 
as defined in section 2031 or 2103. Section 1.1014-10(d)(4) of the 
final regulations explains that this refers to property whose value is 
reported on an estate tax return or otherwise is included in the total 
value of the gross estate so that a final value is or will be 
determined for that property under chapter 11. Consequently, the basis 
of property acquired or passed from a decedent that is not reported on 
an estate tax return and not otherwise included in the gross estate 
generally is determined under section 1014(a), without regard to the 
rules of section 1014(f). The rule identifying property subject to the 
consistent basis requirement in Sec.  1.1014-10(c)(1)(i) of the final 
regulations, together with the definition of the term included property 
in Sec.  1.1014-10(d)(4) of the final regulations, is sufficient to 
clarify the scope of the consistent basis requirement, and therefore 
these final regulations do not include a specific rule on the basis of 
unreported property.
I. Proposed Sec.  1.1014-10(d): Executor
    Proposed Sec.  1.1014-10(d) provides that, for purposes of proposed 
Sec.  1.1014-10, the term executor has the same meaning as in section 
2203 of the Code and includes any other person required under section 
6018(b) to file a return. In response to comments or as needed for 
clarity, proposed Sec.  1.1014-10(d) is expanded in the final 
regulations to define several additional terms for purposes of Sec.  
1.1014-10, including the terms contested, estate tax liability, 
included property, allowable credits, and United States dollars.
J. Proposed Sec.  1.1014-10(e): Examples
    Proposed Sec.  1.1014-10(e) provides four examples to illustrate 
the application of proposed Sec.  1.1014-10. In general, the examples 
illustrate rules applicable to the final value of property, subsequent 
basis adjustments, and reliance on a required Statement. In particular, 
one example illustrates the application of the zero basis rule on the 
final value of unreported property.
    Section 1.1014-10(e) is revised in the final regulations by 
reordering the examples and adding headings to provide clarity. Because 
the zero basis rule from proposed Sec.  1.1014-10(c)(3) is not included 
in the final regulations, Sec.  1.1014-10(e) is further revised in the 
final regulations by removing the example illustrating the zero basis 
rule. Finally, Sec.  1.1014-10(e) is revised in the final regulations 
by adding examples to illustrate rules regarding the duration of the 
consistent basis requirement, the meaning of included property that is 
subject to the consistent basis requirement, and the treatment of 
partially deductible property that is subject to the consistent basis 
requirement.
K. Applicability Date
    Proposed Sec.  1.1014-10(f) provides that, upon publication of the 
Treasury Decision adopting these rules as final in the Federal 
Register, Sec.  1.1014-10(f) of the final regulations will apply to 
property acquired from a decedent or by reason of the death of a 
decedent whose estate tax return is filed after July 31, 2015. The 
final regulations revise the applicability date of Sec.  1.1014-10(f) 
of the proposed regulation consistent with section 7805(b)(1). 
Accordingly, Sec.  1.1014-10(f) of the final regulations does not 
reference the July 31, 2015, effective date of section 1014(f), and 
provides instead that Sec.  1.1014-10 of the final regulations applies 
to property described in Sec.  1.1014-10(c)(1) of the final regulations 
that is acquired from a decedent or by reason of the death of a 
decedent if the decedent's estate tax return is filed after the date of 
publication of these final regulations in the Federal Register.

[[Page 76362]]

L. Comments Requesting New Process for Beneficiary To Challenge Value
    Several commenters expressed concern that beneficiaries have no 
input in the determination of final value even if they believe the 
estate tax return reports an incorrect or understated value. These 
commenters posited that binding a beneficiary's initial basis to the 
final value may deprive the beneficiary of due process. Consequently, 
they requested a procedure through which a beneficiary may challenge 
the determination of final value. Some commenters suggested that the 
procedure allow the beneficiary an opportunity to provide evidence of a 
different date-of-death value at the time of examination by the IRS of 
the beneficiary's income tax return (on which a taxable event with 
respect to the property is reported).
    The Treasury Department and the IRS considered and briefly 
responded to a request to create a new process for challenging the 
value reported by the executor in part 16 of the Summary of Comments on 
Notice 2015-57 and Explanation of Provisions section of the preamble of 
the proposed regulations. In the proposed regulations, the Treasury 
Department and the IRS declined to create a new Federal process for 
challenging the value reported by the executor. Administrability and 
other concerns weigh against creating a new Federal process for 
challenging the value reported by the executor. Specifically, this 
would leave the IRS in the same position it held prior to the enactment 
of section 1014(f). During that time, the IRS was forced to litigate 
valuation issues with a beneficiary, often years after relevant market 
information had ceased to be available, and/or after having previously 
litigated the same valuation issue with the estate. In addition, 
regarding the suggestion to create a procedure to allow the beneficiary 
to provide evidence of value at the time of examination by the IRS of 
the beneficiary's income tax return, such a procedure would be contrary 
to the statutory rule in section 1014(f)(1) limiting the basis of 
property within its scope to the property's final value for Federal 
estate tax purposes or, otherwise, to the value reported on a required 
Statement.
    In response to the commenters' concerns, however, the Treasury 
Department and the IRS are considering issuing guidance in the future 
that grants a beneficiary of property subject to the consistent basis 
requirement the opportunity to provide certain credible evidence of 
value. Out of administrability concerns, the Treasury Department and 
the IRS further anticipate such an opportunity might be available only 
during some limited period of time and only if the credible evidence of 
value indicates that the reported value represents a substantial 
understatement of value.

2. Section 6035--Required Information Return(s) and Statement(s)

    Section 1.6035-1 of the proposed regulations (proposed Sec.  
1.6035-1) includes proposed rules that would address the statutory 
basis reporting requirements under section 6035 applicable to executors 
and other persons required to file an estate tax return. As noted in 
part 3 of the Background section of this preamble, the Treasury 
Department and the IRS made amendments to the proposed rules that 
substantially reduce burden and increase administrability for both 
taxpayers and the IRS. In particular, the final regulations (1) adopt a 
suggested interpretation of the term acquiring in section 6035(a)(1), 
thereby modifying the reporting requirements applicable in the case of 
property not acquired by a beneficiary before the estate tax return due 
date, (2) eliminate the subsequent transfer reporting requirement for 
all beneficiaries other than trustees, and (3) except additional types 
of property interests from the reporting requirements under section 
6035. These and other amendments to proposed Sec.  1.6035-1 are laid 
out in a reorganized final regulation.
A. Overview of Reporting Requirements
    The final regulations under section 6035 add an overview paragraph 
in Sec.  1.6035-1(a) to clarify the relationship between the reporting 
requirements under section 6035 and the consistent basis requirement 
applicable to certain beneficiaries under section 1014(f).
B. Applicability of Section 6035 Reporting Requirements
    In order to provide greater clarity, the final regulations set 
forth in separate paragraphs the provisions governing the applicability 
of the section 6035 reporting requirements and the rule for the 
identification of the persons included as executors who are subject to 
them.
i. General Rules Regarding Applicability of Section 6035 Reporting 
Requirements
    Section 1.6035-1(b)(1) sets forth the rule in section 6035(a)(1) 
and proposed Sec.  1.6035-1(a)(2) that only executors of an estate who 
are required to file an estate tax return (referred to as a required 
estate tax return) under section 6018 are subject to the reporting 
requirements under section 6035. In addition, Sec.  1.6035-1(b)(1) sets 
forth the rule that the reporting requirements apply only in the case 
of a required estate tax return that is filed after July 31, 2015, and 
sets forth the rule in proposed Sec.  1.6035-1(a)(2) that the reporting 
requirements do not apply if no estate tax return is required to be 
filed under section 6018 even if the executor files an estate tax 
return for other purposes, including without limitation to make a 
generation-skipping transfer tax exemption allocation or election, a 
portability election, or a protective filing to avoid a penalty if an 
asset value is later determined to cause a return to be required or 
otherwise.
    Section 1.6035-1(b)(1) of the final regulations also clarifies that 
whether an estate tax return is a required estate tax return depends on 
the date of death value of property includible in the decedent's gross 
estate, the amount of adjusted taxable gifts, and the applicable filing 
threshold under section 6018(a), so that an election made under section 
2032 or 2032A of the Code to determine the value of property includible 
in the gross estate in accordance with either of those respective 
provisions is not relevant to the determination of whether a return is 
a required estate tax return. See section 6018(a) and Sec.  20.6018-
1(a).
    Some commenters inquired whether the reporting requirements apply 
in the event estate tax returns are filed before August 1, 2015, if 
either the due date for the return is after July 31, 2015, or the 
executor files a supplement to the return after July 31, 2015. Section 
1.6035-1(b)(1) of the final regulations provides that the reporting 
requirements do not apply if a required estate tax return is filed on 
or before July 31, 2015, even if the due date of the return is after 
July 31, 2015, or if one or more supplements to that return are filed 
with the IRS after July 31, 2015.
ii. Executors Subject to the Section 6035 Reporting Requirements
    Section 1.6035-1(b)(2) of the final regulations defines the term 
executor consistent with the definition of that term in proposed Sec.  
1.6035-1(g)(1), but includes further explanation in response to 
comments. One commenter noted the possibility that more than one person 
may be considered an executor for purposes of section 2203(a) and Sec.  
20.2203-1 and asked for clarification of the filing requirements in 
that situation. The commenter posited a scenario in which an executor 
who is appointed, qualified, and acting on behalf of the estate (an 
appointed executor) files an estate tax return, but

[[Page 76363]]

is unable to make a complete return as to a trust the value of which is 
includible in the gross estate of the decedent. In that case, the 
trustee of that trust, upon notice from the IRS, is required to file a 
return reporting the trust property and the value thereof. See section 
6018(b) and Sec.  20.6018-2. In response, the final regulations provide 
that each person required to file a return is subject to the section 
6035 reporting requirements, but only with regard to the property 
reported or required to be reported on the estate tax return required 
to be filed by that person. The commenter also suggested clarifying the 
application of the section 6035 reporting requirements if no executor 
is appointed but multiple persons are in actual or constructive 
possession of property of the decedent. Under the final regulations, 
each person in actual or constructive possession of property of the 
decedent is an executor and is subject to the section 6035 reporting 
requirements, but only with regard to the property reported or required 
to be reported on the estate tax return required to be filed by that 
executor. Finally, the commenter suggested clarifying the application 
of the reporting requirements in the case of successor or co-executors. 
While all co-executors are responsible for the reporting, it is 
sufficient for only one of the co-executors to file the Information 
Return and to furnish the Statement(s).
    Commenters questioned who is required to comply with the reporting 
requirements if a qualified revocable trust makes a section 645 
election and there is a probate estate. Under section 645, the trustee 
of a qualified revocable trust and an appointed executor (if any) may 
elect to treat the trust as part of the estate for income tax purposes. 
The section 645 election relates only to the income tax liability of a 
qualified revocable trust. Therefore, the section 645 election, by 
itself, does not affect whether the trustee of a qualified revocable 
trust is an executor within the meaning of Sec.  1.6035-1(b)(2). The 
expanded definition of the term executor in Sec.  1.6035-1(b)(2) of the 
final regulations adequately clarifies who is subject to the reporting 
requirements.
C. Required Information Return and Statements
    Section 1.6035-1(c) of the final regulations incorporates 
modifications to the rules applicable to an executor's duty to file the 
required Information Return (defined in Sec.  1.6035-1(c)(1) of the 
final regulations) and furnish each required Statement (defined in 
Sec.  1.6035-1(c)(2) of the final regulations) and the due dates for 
the satisfaction of those duties. The modifications reflect the 
adoption of comments relating to an executor's duty to furnish 
Statements to beneficiaries who have not acquired property before the 
due date (or earlier filing date) of the estate tax return.
i. Furnishing Statements to Beneficiaries Reporting Property the 
Beneficiaries Have Not Yet Acquired
    Section 6035(a)(1) requires the executor to furnish Statements to 
each person acquiring any interest in property included in the 
decedent's gross estate for Federal estate tax purposes. Section 
1.6035-1(c)(2) of the final regulations defines Statement consistent 
with proposed Sec.  1.6035-1(g)(3) and requires an executor to furnish 
a Statement to each beneficiary who acquires certain property. Section 
1.6035-1(c)(2) of the final regulations clarifies that the value the 
executor reports on that Statement is the value of the property as 
reported on the estate tax return required to be filed with the IRS.
    Proposed Sec.  1.6035-1(d)(1), relying on the language of section 
6035(a)(3)(A), requires that Statements be provided to all 
beneficiaries on or before the earlier of the date that is 30 days 
after the due date of the estate tax return or the date that is 30 days 
after the date the estate tax return is filed with the IRS. If, by this 
due date, the executor has not determined what property will be used to 
satisfy the interest of each beneficiary, proposed Sec.  1.6035-1(c)(3) 
requires executors to report on the Statement for each beneficiary all 
of the property that the executor could use to satisfy that 
beneficiary's interest. Proposed Sec.  1.6035-1(c)(3) further provides 
that, once the exact distribution has been determined, the executor 
may, but is not required to, file and furnish a supplemental 
Information Return and Statement.
    The Treasury Department and the IRS received numerous comments 
objecting to this proposed rule. Commenters noted, and the Treasury 
Department and the IRS agree, that proposed Sec.  1.6035-1(c)(3) would 
result in duplicate reporting because a single item of property (or 
interest in the property) would be reported on the Statement of several 
beneficiaries, even though some of these beneficiaries will never 
receive an interest or a partial interest in that property. According 
to commenters, this duplicate reporting may confuse beneficiaries by 
leading them to expect to receive all of the property reported on the 
Statements furnished to them. In addition, commenters have contended 
that this duplicate reporting is burdensome and may violate a 
decedent's or beneficiary's right to privacy, possibly resulting in 
conflicts and litigation among beneficiaries with competing interests 
in the estate.
    Commenters offered various suggestions for revising the rule for 
property not acquired before the due date of the required reporting 
under section 6035. One commenter suggested that, in lieu of the rule 
requiring an executor to identify specific property the beneficiary may 
receive from the estate, the final regulations should permit executors 
to furnish Statements indicating that a beneficiary is to receive 
either (1) a certain percentage of the estate's property or (2) 
property valued at a certain dollar amount. Under this suggested 
alternative, the executor then would be required to file a supplemental 
Information Return and furnish a supplemental Statement within 30 days 
after the executor distributes the property to the beneficiary.
    Most commenters requested that the IRS extend the time for 
furnishing Statements to beneficiaries to allow executors more time to 
distribute property or to determine which property will go to which 
beneficiary. One commenter suggested that the proper interpretation of 
the language in section 6035(a)(1) requiring an executor to furnish a 
Statement ``to each person acquiring any interest in property included 
in the decedent's gross estate for Federal estate tax purposes'' is 
that it does not include beneficiaries until they have received an 
interest in particular property. The commenter supported this 
recommendation by pointing out that the meaning of the word 
``acquiring'' in the Code generally means already received. The 
commenter identified sixty-four other sections of the Code in which the 
word ``acquiring'' appears and noted that, in only two of those 
sections, does ``acquiring'' refer to an event that has not yet 
occurred. The commenter also pointed to the description of earlier 
legislative proposals using identical language in which the 
descriptions refer to the beneficiary ``receiving'' the property or the 
``recipients'' of an interest. The commenter reasoned that section 
6035(a) requires the reporting of the value (as reported on the estate 
tax return) to the beneficiary acquiring that property, which assumes 
that the property has already been identified by having been received 
by the beneficiary. In addition, the commenter suggested, in effect, 
that this interpretation of the statutory language would not violate 
the statute's prohibition of any delay in reporting to a recipient 
beyond the determination of that value because

[[Page 76364]]

reporting triggered by the beneficiary's receipt of the property would 
still provide the required valuation notice to the recipient as soon as 
the recipient would have reason to use that information. The commenter 
also noted that section 6035(b) authorizes the Secretary to prescribe 
regulations as necessary to carry out section 6035, and stated the 
commenter's belief that this authority is sufficient to allow the 
creation of a due date for Statements based on the date property is 
acquired by a beneficiary.
    The commenter suggested two alternatives for the due date for 
furnishing Statements reporting the value of property that has not been 
acquired or received by the beneficiary by the due date of the 
Information Return: 30 days after distribution of the property to the 
beneficiary or January 31 of the year following the year of 
distribution of the property to the beneficiary. The commenter 
acknowledged that the first alternative appears to be consistent with 
the 30-day concepts found in section 6035(a)(3) (due on or before 30 
days after the estate tax return due date or 30 days after the estate 
tax return is filed, if filed before the due date, and, in the case of 
an adjustment, 30 days after the adjustment is made), but the potential 
of multiple due dates during a single year would be burdensome on both 
taxpayers and the IRS. The commenter suggested that a due date of 
January 31 of the year following distribution would minimize those 
burdens while nevertheless ensuring that every beneficiary acquiring 
property from the decedent would have the information necessary for 
filing a timely income tax return reporting a sale or other relevant 
event regarding this property.
    One commenter requested that, if the final regulations create a due 
date for furnishing Statements that is based on the date property is 
acquired by a beneficiary, then executors nevertheless have the option 
of furnishing all required Statements with the Information Return. 
Under this suggestion, if an executor determines that it would be less 
burdensome, an executor would have the option to furnish a Statement to 
a beneficiary even if the beneficiary has not yet acquired the 
property.
    The Treasury Department and the IRS are sympathetic to the various 
concerns raised by the commenters. Many estates subject to the section 
6035 reporting requirements are complex and will require a period of 
time well beyond the estate tax return filing due date to determine the 
appropriate distributions of property to beneficiaries. In light of 
these concerns, the final regulations adopt a suggested interpretation 
of the term acquiring in section 6035(a)(1) that modifies, and reduces 
the burden of, the reporting requirements applicable in the case of 
property not acquired by a beneficiary before the estate tax return due 
date (or earlier filing date). With regard to property the 
beneficiaries acquire after the estate tax return due date, the 
Treasury Department and the IRS agree with the commenters that a due 
date for furnishing Statements to such beneficiaries that is after the 
acquisition of property would have several benefits. It would eliminate 
the potential confusion and lack of privacy that could result from 
giving each beneficiary a Statement showing all of the property that 
could be used to satisfy their respective bequests. It also would be 
consistent with the understanding of the Treasury Department and the 
IRS of the intent of section 6035 to provide accurate, timely, and 
useful information to beneficiaries and the IRS. After consideration of 
the comments, the Treasury Department and the IRS conclude that it is 
appropriate to interpret the term acquiring consistent with its most 
common meaning and consistent with the discretionary authority granted 
in section 6035(b) to provide a due date, which is after the 
acquisition of property, for furnishing Statements to beneficiaries who 
acquire property after the due date (or earlier filing date) of the 
decedent's estate tax return.
    With regard to what the due date for Statements with regard to this 
property should be, the Treasury Department and the IRS conclude that a 
due date of January 31 of the year following acquisition by the 
beneficiary of this property is the most administrable and least 
burdensome alternative. This alternative is the most administrable and 
least burdensome because a January 31 due date would allow an executor 
to file the supplemental Information Return on an annual basis with 
copies of all Statements furnished to beneficiaries acquiring property 
in any given year, rather than having to file multiple supplemental 
Information Returns each year on a Statement-by-Statement basis as each 
Statement is furnished to a beneficiary within 30 days of acquisition.
    Accordingly, Sec.  1.6035-1(c)(3) of the final regulations provides 
that the due date for furnishing a Statement to a beneficiary who 
acquired property on or before the due date or earlier filing of the 
estate tax return is 30 days after the due date or earlier filing of 
the estate tax return. The due date for furnishing a Statement to a 
beneficiary who acquires property at a later date is January 31 of the 
calendar year following the year of acquisition. Section 1.6035-1(c)(4) 
of the final regulations provides that a beneficiary acquires property 
when title vests in the beneficiary or when the beneficiary otherwise 
has sufficient control over or connection with the property that the 
beneficiary is able to take action related to the property for which 
basis is relevant for Federal income tax purposes. Depending upon the 
particular property and how it was titled at the decedent's death, this 
could occur at the moment of death, or upon distribution by the 
executor or a trustee.
    The Treasury Department and the IRS further agree that providing 
executors the option of furnishing all Statements within 30 days of 
filing the estate tax return, regardless of whether all assets by then 
have been acquired by the beneficiaries, may reduce the burden 
associated with these reporting requirements and is reasonable if an 
executor has cause to believe that a beneficiary will acquire certain 
property. However, in the event that a different beneficiary acquires 
that property, requiring supplemental reporting ensures that 
beneficiaries receive the information they need to satisfy the 
consistent basis requirement of section 1014(f) and otherwise. 
Accordingly, Sec.  1.6035-1(c)(5) of the final regulations provides an 
option to furnish Statement(s) prior to the acquisition of property by 
a beneficiary. Under this rule, an executor may satisfy the requirement 
to furnish a Statement to a beneficiary acquiring property from the 
decedent or by reason of the death of the decedent by furnishing the 
Statement prior to the beneficiary's acquisition of the property, but 
only if the executor has reason to believe that the beneficiary in fact 
will acquire the property. The Statement must identify the property the 
beneficiary is expected to acquire as well as the value of that 
property and other information prescribed by the Statement and the 
instructions. A Statement described in this paragraph also must include 
information with respect to property that has been acquired by that 
beneficiary as required under Sec.  1.6035-1(c)(2) of the final 
regulations. Also, under the rule in Sec.  1.6035-1(c)(5) executors are 
required to update the beneficiary information on a supplemental 
Information Return and Statement if, after satisfying the requirements 
for this optional reporting, the property is acquired by a different 
beneficiary.

[[Page 76365]]

ii. Explanation of Provisions Regarding the Required Information Return 
and Statement(s)
    In light of the due date set forth in the final regulations for the 
furnishing of Statements with regard to property acquired by a 
beneficiary after the due date or earlier filing of the estate tax 
return, Sec.  1.6035-1(c) of the final regulations makes coordinating 
changes in the description of the Information Return and the due dates 
of that return and of any required supplements to the Information 
Return.
    In particular, Sec.  1.6035-1(c)(1) of the final regulations 
defines Information Return consistent with proposed Sec.  1.6035-
1(g)(2), with one exception, and requires an executor to file the 
Information Return by the due date set forth in Sec.  1.6035-1(c)(3) of 
the final regulations. The one change is that the required attachments 
to the Information Return include only a copy of each Statement 
reporting the value of property acquired by a beneficiary on or before 
the due date or earlier filing of the Federal estate tax return, and a 
copy of each Statement (if any) reporting the value of property that 
has not by then been acquired by a beneficiary as described in Sec.  
1.6035-1(c)(5) of the final regulations (the option to furnish 
Statement(s) prior to the acquisition of property by a beneficiary). 
The Information Return must be timely filed even if there are no 
Statements (as described in the preceding sentence) required to be 
attached to that return.
    As discussed in part 2.C.i. of this Summary of Comments and 
Explanation of Revisions, a Statement reporting the value of property 
acquired by a beneficiary subsequent to the due date or earlier filing 
date of the estate tax return must be furnished to the beneficiary on 
or before January 31 of the calendar year following the date of that 
acquisition. Under Sec.  1.6035-1(c)(3)(ii) of the final regulations, a 
copy of each Statement due by that January 31, along with a copy of 
each Statement (if any) provided to beneficiaries in advance of their 
receipt of property as permitted under Sec.  1.6035-1(c)(5) of the 
final regulations, must be attached to a supplemental Information 
Return filed with the IRS on or before that same January 31. Section 
1.6035-1(c)(3)(iii) of the final regulations confirms the transition 
rule in proposed Sec.  1.6035-1(d)(2), with an updated reference to 
Sec.  1.6035-2 of the final regulations. Finally, Sec.  1.6035-1(c)(6) 
of the final regulations includes an example illustrating the 
application of Sec.  1.6035-1(c) of the final regulations.
    Several commenters requested that a six-month extension of time 
(distinct from the automatic six-month extension of time for filing the 
estate tax return) be permitted for filing and furnishing the 
Information Return and Statements in order to allow the executor 
sufficient time to accurately determine which assets will be used to 
satisfy the interests of the various beneficiaries. The due date set 
forth in the final regulations for furnishing Statements to 
beneficiaries with regard to property they acquire after the estate tax 
return due date adequately addresses the concern identified by the 
commenters. Therefore, this suggestion is not adopted.
D. Duty To Supplement
i. Duty To Supplement and Changes Requiring Supplemental Reporting
    Section 1.6035-1(d)(1) of the final regulations sets forth the 
rules in proposed Sec.  1.6035-1(e)(1) that impose a supplemental 
reporting obligation (both to the IRS and to the beneficiary) on an 
executor if a change to the information required to be reported on the 
Information Return or Statement (or supplement to either) causes the 
information as reported to be incorrect or incomplete. Several examples 
of adjustments requiring supplemental reporting are identified in 
proposed Sec.  1.6035-1(e)(2), and several comments were received with 
regard to these examples. In response to these comments, some of the 
examples listed in Sec.  1.6035-1(d)(2) of the final regulations differ 
from those proposed, and the final regulations clarify some of the 
other examples of adjustments.
    Section 1.6035-1(d)(2)(i) of the final regulations sets forth the 
rule in proposed Sec.  1.6035-1(e)(2) imposing a duty to supplement 
upon the executor's receipt, discovery, or acquisition of information 
that changes the beneficiary to whom the property is to be distributed 
(pursuant to a death, disclaimer, bankruptcy, or otherwise). However, 
the rule is clarified in the final regulations to provide more detail 
in response to comments. Commenters asked how an executor is to comply 
with the reporting requirements under section 6035 if all of the 
required beneficiary information is not available to the executor, for 
instance, if the beneficiary cannot be located or the beneficiary is a 
trust not as yet established. The final regulations describe the 
requirements in these circumstances and include the requirement to 
supplement the required reporting to update the beneficiary information 
when it becomes available to an executor. See Sec.  1.6035-1(d) and (g) 
of the final regulations. Accordingly, Sec.  1.6035-1(d)(2)(i) of the 
final regulations includes, as a change requiring supplemental 
reporting, the discovery of any information that corrects or completes 
other beneficiary information originally reported.
    In response to comments, Sec.  1.6035-1(d)(2)(ii) of the final 
regulations clarifies the rule in proposed Sec.  1.6035-1(e)(2) 
providing that a change in the value of property pursuant to an 
examination or litigation is a change requiring supplemental reporting. 
One commenter asked for clarification as to whether supplemental 
reporting is required if, during examination or litigation, a 
settlement with the IRS increases the estate tax liability but the 
increase is not related to a particular property. Another commenter 
requested confirmation that only an adjustment in value that represents 
the final value for Federal estate tax purposes gives rise to a duty to 
supplement. With respect to the first comment, the Treasury Department 
and the IRS observe that a settlement of estate tax liability typically 
is related to an adjustment to the value of particular, identified 
property includible in the gross estate, a claimed deduction or credit, 
gift tax paid within three years before death, adjusted taxable gifts, 
or gift tax paid and/or payable. If a settlement does not change the 
value of particular, identified property, the settlement does not 
impact the final value of the estate's property and is not a change 
requiring supplemental reporting with respect to that specific 
property. With respect to the second comment, an adjustment 
representing the final value for estate tax purposes undoubtedly gives 
rise to the statutory duty to supplement. In addition, an adjustment to 
value on a supplemental estate tax return becomes the reported value 
for purposes of section 6035(a)(1) and Sec.  1.1014-10(b)(2) of the 
final regulations. Therefore, reporting a different value on a 
supplemental estate tax return also comes within the scope of an 
executor's duty to supplement. In response to these comments, Sec.  
1.6035-1(d)(2)(ii) of the final regulations clarifies that both a final 
determination of value of property for Federal estate tax purposes that 
differs from the value identified on a Statement or supplement to a 
Statement and an executor's reporting of a change in value on a 
supplemental estate tax return give rise to a duty to supplement.
    Commenters objected to the rule in proposed Sec.  1.6035-1(e)(2) 
providing that the discovery of unreported property is a change 
requiring supplemental reporting; they suggested that this is an

[[Page 76366]]

impermissible broadening of the estate tax filing requirement. In 
response, the final regulations instead provide that it is only the 
supplementing of an estate tax return, to report the value of 
previously unreported property, that triggers a duty to supplement the 
reporting under section 6035, and not the mere discovery of unreported 
property. Consistent with the definition of included property in 
Sec. Sec.  1.1014-10(d)(4) and 1.6035-1(e)(1) of the final regulations, 
Sec.  1.6035-1(d)(2)(iii) of the final regulations sets forth the rule 
that property that is included in a decedent's gross estate, either by 
the filing of an estate tax return, a supplemental estate tax return, 
or pursuant to an examination by the IRS or otherwise, will give rise 
to a duty to supplement if the fair market value of that property was 
not previously reported on the estate tax return or is changed.
    The rule in proposed Sec.  1.6035-1(e)(2) relating to a change in 
the property to be acquired by a beneficiary is updated in the final 
regulations to conform with the reporting requirements in the final 
regulations for property not acquired by a beneficiary before the due 
date or earlier filing date of the estate tax return. Section 1.6035-
1(d)(2)(iv) of the final regulations provides that a change requiring 
supplemental reporting includes an executor's disposition of property 
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 final 
value of 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). However, Sec.  1.6035-1(d)(2)(iv) 
of the final regulations also imposes a duty to supplement if an 
executor furnishes a Statement to a beneficiary prior to the 
beneficiary's acquisition of property pursuant to the optional 
reporting afforded under Sec.  1.6035-1(c)(5) of the final regulations 
and the beneficiary ultimately acquires property different than that 
identified on that Statement.
ii. Changes Not Requiring Supplemental Reporting
    Section 1.6035-1(d)(3)(i) of the final regulations adopts the rule 
in proposed Sec.  1.6035-1(e)(3)(i)(A) excluding from the duty to 
supplement changes to correct an inconsequential error or omission. 
However, the rule in proposed Sec.  1.6035-1(e)(3)(i)(B) excluding from 
the duty to supplement a change in the distribution of property from 
that previously reported is omitted from the final regulations because 
it relates only to the proposed reporting requirements for property not 
acquired by a beneficiary before the estate tax return due date. The 
reporting requirements for such property have been modified in the 
final regulations.
    Section Sec.  1.6035-1(d)(3)(ii) of the final regulations provides 
an exception to the duty to supplement for a change in value as the 
result of an event described in section 2032A(c)(1) that triggers an 
additional estate tax liability with regard to property for which a 
special use election was made, including a beneficiary's election to 
increase the beneficiary's basis in that property under section 1016(c) 
in response to that event. Although such an election by a beneficiary 
does result in a change in value under the rule in Sec.  1.1014-
10(b)(3)(ii), the qualified heir is in a better position than the 
executor to know this information, so no supplemental reporting is 
required of the executor. A commenter requested an example illustrating 
the adjustment to basis if there is a disposition of property subject 
to section 2032A under section 2032A(c)(1). Because an example would 
serve the purpose of illustrating the workings of section 1016(c), 
rather than the reporting requirements under section 6035, the Treasury 
Department and the IRS decline to include such an example in these 
regulations under section 6035.
    Section 1.6035-1(d)(3)(iii) of the final regulations adopts the 
suggestion of a commenter by excepting from the duty to supplement any 
post-death or other adjustment to the basis of property made pursuant 
to sections of the Code other than section 1014(f). The executor 
generally is required to provide only supplemental Statements that show 
a change in the identification, value, or recipient of property as 
reported on the estate tax return. Therefore, section 6035 does not 
require the reporting of adjustments in basis attributable to the 
operation of Code sections other than section 1014(f). That commenter 
also suggested that the final regulations provide a uniform method for 
reporting post-death adjustments to the beneficiary if the executor 
chooses to do so. The Treasury Department and the IRS understand that 
an executor may choose to furnish a beneficiary information regarding 
changes to basis that occur pursuant to Code sections other than 
section 1014(f). If the executor does so, and if the executor chooses 
to use the Statement to provide that information, that information must 
be shown separately from the information required to be reported on the 
beneficiary's Statement.
    Finally, Sec.  1.6035-1(d)(3)(iv) of the final regulations provides 
an exception to the duty to supplement for any other change that is 
identified as requiring no supplemental reporting under this section in 
guidance published in the future in the Federal Register or in the 
Internal Revenue Bulletin.
iii. Due Date of Supplemental Reporting
    The rules in proposed Sec.  1.6035-1(e)(4)(i) relating to the due 
date for supplemental reporting are updated in the final regulations to 
align with the modified reporting requirements in the final 
regulations. Section 1.6035-1(d)(4) of the final regulations provides 
that supplemental reporting is due on or before 30 days after the date 
on which information becomes available to the executor from which the 
executor can conclude that a change to the earlier reporting is 
required to be supplemented in accordance with these final regulations. 
Section 1.6035-1(d)(4) of the final regulations clarifies that, for 
changes occurring as a result of supplementing the estate tax return, 
the date on which that information becomes available to the executor is 
the filing date of the supplement to that return and, for changes 
occurring as a result of a determination of final value, that date is 
the date a value becomes the final value under Sec.  1.1014-10(b)(1) of 
the final regulations. In the case of property not acquired by a 
beneficiary before the due date or earlier filing date of the estate 
tax return, Sec.  1.6035-1(d)(4) of the final regulations provides 
that, for property for which a Statement has not been provided to the 
beneficiary pursuant to the option to furnish Statements prior to the 
acquisition of property by a beneficiary in Sec.  1.6035-1(c)(5) of the 
final regulations, the due date of any required supplemental reporting 
may be delayed until the due date for supplemental reporting for 
subsequently-acquired property in Sec.  1.6035-1(c)(3)(ii) of the final 
regulations.
iv. Duration of Duty To Supplement
    Commenters inquired whether the executor's duty to file 
supplemental Information Returns and furnish supplemental Statements is 
limited in time. In response, Sec.  1.6035-1(d)(5) of the final 
regulations is added to provide, in effect, that the duty to supplement 
is limited to changes that occur on or before the later of a 
beneficiary's acquisition of the property or the determination of the 
final value of the property under Sec.  1.1014-10(b)(1) of the final 
regulations.
v. Illustration of Duty To Supplement
    Section 1.6035-1(d)(6) was added to the final regulations to 
provide examples to illustrate the application of

[[Page 76367]]

the rules regarding the duty to supplement as provided in Sec.  1.6035-
1(d) of the final regulations.
E. Property for Which Reporting Is Required
    Proposed Sec.  1.6035-1(b)(1) provides in part that the property to 
which the section 6035 reporting requirements apply is all property 
reported or required to be reported on an estate tax return required 
under section 6018. The reporting requirements also apply to any other 
property the basis of which is determined in whole or in part by 
reference to the property described in the preceding sentence (for 
example, as the result of a like-kind exchange or an involuntary 
conversion).
    As discussed in part 1.H of this Summary of Comments and 
Explanation of Revisions, the final regulations do not include the 
proposed zero basis rule for unreported property to which numerous 
commenters objected. Therefore, the final regulations narrow the scope 
of property for which reporting is required as compared to the rule in 
proposed Sec.  1.6035-1(b)(1) that would have subjected all property 
reported or required to be reported on an estate tax return under 
section 6018. Section 1.6035-1(e)(1) of the final regulations provides 
that only property whose value is included in the value of a decedent's 
gross estate for Federal estate tax purposes (and any other property 
the basis of which is determined, in whole or in part, by reference to 
the basis of such included property) is subject to the section 6035 
reporting requirements. Section 1.6035-1(e)(1) of the final regulations 
defines the term included property consistently with the definition of 
that term in Sec.  1.1014-10(d)(4) of the final regulations to mean 
property the value of which is included in the value of the decedent's 
gross estate as defined in section 2031 or 2103. Section 1.6035-1(e)(1) 
of the final regulations further clarifies that included property does 
not include property whose value is not reported on an estate tax 
return and whose value is not otherwise included in the value of the 
decedent's gross estate as finally determined for Federal estate tax 
purposes.
    Some commenters suggested that property subject to reporting should 
be limited to property to which the consistent basis requirement of 
section 1014(f) applies. While both sections 6035 and 1014(f) apply 
with respect to property includible in a decedent's gross estate only 
if an executor is required to file an estate tax return under section 
6018, section 1014(f)(2) limits the application of the consistent basis 
requirement to property whose inclusion in the gross estate increases 
the estate tax liability for the estate. Section 6035 includes no 
similar limitation and, therefore, applies to a broader universe of 
property than section 1014(f), and it applies whether or not any estate 
tax must be paid. Therefore, this comment is not adopted.
    Another commenter sought clarification as to whether property for 
which a marital or charitable deduction is claimed is property for 
which reporting is required. Property that qualifies, in whole or in 
part, for a marital or charitable deduction for which a deduction is 
claimed is included property as that term is defined in Sec.  1.6035-
1(e)(1) of the final regulations. Accordingly, as Sec.  1.6035-1(e)(1) 
of the final regulations also clarifies, such property is subject to 
reporting. Consequently, the executor is required to file an 
Information Return and to furnish Statements if the value of the estate 
is sufficient to require the filing of an estate tax return, even if no 
estate tax is due as a result of a charitable and/or marital deduction.
    Some commenters had questions about the application of the 
reporting requirements to community property. Proposed Sec.  1.6035-
1(b)(1) provides that the reporting requirements are limited to only 
the decedent's one-half interest in community property. Commenters 
asked for confirmation that the reporting requirements do not apply to 
the surviving spouse's one-half interest in community property that is 
subject to section 1014(b)(6). Under section 1014(b)(6), the spouse's 
interest also is deemed to have been acquired from the decedent and 
thus is subject to the basis adjustment under section 1014(a). However, 
section 1014(a) and section 6035 are different. The spouse's interest 
is not includible in the decedent's gross estate and thus is not 
required to be reported on the estate tax return. Accordingly, Sec.  
1.6035-1(e)(1) of the final regulations sets forth the rule that the 
reporting requirements do not apply to the surviving spouse's interest 
in community property.
    Some commenters asked whether there is a reporting requirement if 
the executor makes a non pro rata division and distribution of 
community property authorized by applicable State law. See, for 
example, West's Ann. Cal. Prob. Code sections 100(b) and 101(b). Under 
applicable State law, an executor may distribute the surviving spouse's 
interest in community property (property belonging to the surviving 
spouse, in which the decedent has no interest includible under section 
2033) to a beneficiary other than the surviving spouse to satisfy a 
bequest. In lieu of the surviving spouse's interest in the community 
property, the executor may distribute to the surviving spouse all or 
any part of decedent's interest in other property includible in the 
gross estate. The executor's distribution does not convert property 
included in the gross estate into property not included in the estate 
and, therefore, does not eliminate the applicability of the reporting 
requirements with regard to the property distributed to the surviving 
spouse. Accordingly, Sec.  1.6035-1(e)(1) of the final regulations 
identifies, as property subject to reporting, property included in the 
decedent's gross estate that is distributed to a decedent's surviving 
spouse in lieu of the surviving spouse's interest in community property 
pursuant to State law.
    Section 1.6035-1(e)(2) of the final regulations adds two examples 
to illustrate property subject to reporting under section 6035.
F. Excepted Property Requiring Only Limited Reporting
    The proposed regulations under Sec.  1.6035-1(b)(1) list four types 
of property proposed to be excepted from the reporting requirements: 
(i) cash (other than a coin collection or other bills or coins 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.
    Many commenters suggested additions or modifications to this list 
of exceptions. In response, the list in proposed Sec.  1.6035-1(b)(1) 
is expanded in redesignated Sec.  1.6035-1(f)(2) of the final 
regulations. A particular property included in the decedent's gross 
estate may qualify under more than one of these exceptions. In 
addition, Sec.  1.6035-1(f)(1) of the final regulations explains the 
reporting requirements applicable to property described in Sec.  
1.6035-1(f)(2) of the final regulations, referred to as excepted 
property, and Sec.  1.6035-1(f)(4) of the final regulations provides 
examples of excepted property and illustrates the reporting 
requirements applicable to this property. A discussion of the comments 
and responses to the comments follows.
i. Limited Reporting of Excepted Property
    Some commenters noted that it is unclear whether an executor is 
subject to any reporting requirements under

[[Page 76368]]

section 6035 if all distributions from the estate are of property 
excepted from the reporting requirements by proposed Sec.  1.6035-
1(b)(1). For example, commenters questioned whether an executor is 
subject to any reporting requirements under section 6035 if the 
executor has liquidated (or will liquidate) the estate so that all 
distributions will be made in cash. In response, Sec.  1.6035-1(f)(1) 
of the final regulations clarifies that included property is subject to 
more limited reporting if the property is excepted property (as 
identified in Sec.  1.6035-1(f)(2)(i) through (xiv) of the final 
regulations). Specifically, the requirement to file an Information 
Return with the IRS pursuant to Sec.  1.6035-1(c)(1) of the final 
regulations remains the same even if all property is excepted property. 
However, in the case of excepted property, an executor is required only 
to disclose on the Information Return that some or all of the property 
included in the decedent's gross estate is excepted from the full 
reporting requirements pursuant to Sec.  1.6035-1(f)(2) of the final 
regulations; an executor is not required to identify the excepted 
property or to provide a Statement to a beneficiary with regard to 
excepted property.
ii. Exceptions for Cash and Other Property
    Proposed 1.6035-1(b)(1)(i) excepts cash (other than a coin 
collection or other bills or coins with numismatic value) from the 
reporting requirements under section 6035. To provide more precision 
and clarity, Sec.  1.6035-1(f)(2)(i) of the final regulations replaces 
the exclusion for cash with an exclusion for United States dollars. 
United States dollars are defined in Sec.  1.6035-1(f)(3) of the final 
regulations as the official currency of the United States. For purposes 
of section 6035, the term United States dollars includes physical bills 
and coins if the value of each bill or coin is equivalent to the face 
amount of that bill or coin. This definition does not include other 
physical United States bills or coins with numismatic value because 
these bills or coins typically do not have a value equal to their face 
value.
    Many commenters requested that the exception for cash in the 
proposed regulations be expanded to include cash equivalents. In 
response to these comments, Sec.  1.6035-1(f)(2) of the final 
regulations expands the list of excepted property to include property 
the value of which is equal to its face value and that either is 
expressed in United States dollars or will be paid in United States 
dollars. This excepted property includes: (1) United States dollar-
denominated demand deposits; (2) Cash collateral denominated in United 
States dollars held by a third party to secure a liability (such as a 
deposit of purchase money or a security deposit); (3) Life insurance 
proceeds on the life of the decedent payable in a lump sum in United 
States dollars; and (4) Federal, State, and local tax refunds and other 
refunds payable in United States dollars. Certificates of deposit are 
excepted property because their Federal estate tax value generally 
equals their face value plus interest accrued to the date of death. 
Similarly, shares in money market funds are excepted property under the 
final regulations.
    A commenter suggested that notes having a Federal estate tax value 
equal to the outstanding principal balance of the note should be 
considered a cash equivalent. Another commenter suggested that such 
notes should be excepted because the disposition of such property will 
never be a recognition event. The Treasury Department and the IRS 
decline to adopt these suggestions because notes have basis and the 
face value of the note may not always equal the final value of the note 
for Federal estate tax purposes. See Sec.  20.2031-4. However, if a 
note is forgiven in full by the decedent at death, the underlying 
indebtedness is discharged and no property having basis remains for 
distribution to a beneficiary. Accordingly, excepted property also 
includes notes that are forgiven in full by the decedent at death, 
whether or not denominated in United States dollars.
    In further response to the aforementioned comments as well as 
additional comments received regarding property qualifying for limited 
reporting under the cash exception, the Treasury Department and the IRS 
note that the following items do not fall within the list of excepted 
property in Sec.  1.6035-1(f)(2) of the final regulations: (1) currency 
other than in United States dollars; (2) any payments not made in 
United States dollars; (3) life insurance policies not paid in United 
States dollars, and life insurance policies payable to a beneficiary in 
United States dollars annually or at some other interval for a period 
of time after the decedent's death; (4) notes (other than an 
installment obligation subject to section 453) that the decedent did 
not forgive in full upon the decedent's death, whether or not expressed 
in United States dollars; (5) U.S. Savings bonds; and (6) accounts 
receivable (unless such property consists entirely of the right to 
receive an item of income in respect of a decedent as defined in 
section 691 (IRD)). This property generally has basis, its value 
generally may not equal its face value and, accordingly, this property 
is not excepted from the reporting requirements in the final 
regulations. For the same reasons, digital assets as defined in section 
6045(g)(3)(D), including virtual currency \2\ or cryptocurrency, do not 
fall within the list of excepted property set forth in Sec.  1.6035-
1(f)(2) of the final regulations. Consistent with all of the above, the 
list of excepted property is expanded and clarified in Sec.  1.6035-
1(f)(2) of the final regulations. With respect to future modifications 
to property qualifying as excepted property, Sec.  1.6035-1(f)(2)(xiv) 
of the final regulations provides that excepted property will include 
any other property that is identified as excepted property in published 
guidance in the Federal Register or in the Internal Revenue Bulletin.
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    \2\ Virtual currency is defined for Federal income tax purposes 
as a digital representation of value that functions as a medium of 
exchange, a unit of account, or a store of value other than the 
United States dollar or a foreign currency. See Notice 2014-21, 
2014-16 I.R.B. 938; Rev. Rul. 2019-24, 2019-44 I.R.B. 1004. Some 
digital assets are referred to as virtual currency or 
cryptocurrency.
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    The Treasury Department and the IRS note that certain beneficiaries 
in receipt of included property may have a basis in that property 
different from the value of that property as expressed in United States 
dollars, and therefore may have to convert the final value of that 
property into a currency other than United States dollars in order to 
determine their initial basis in that property. Such a beneficiary 
includes a qualified business unit (within the meaning of section 989) 
of a person that has a functional currency other than the United States 
dollar. See sections 985 through 989 for rules regarding the functional 
currency of a qualified business unit.
iii. Exception for Household and Personal Effects
    Proposed 1.6035-1(b)(1)(iii) excepts from the reporting 
requirements tangible personal property for which an appraisal is not 
required under Sec.  20.2031-6(b). Section 20.2031-6(b) requires an 
appraisal if the decedent's household and personal effects include 
articles having marked artistic or intrinsic value with a total value 
in excess of $3,000. In response to a comment, these items are 
described in the final regulations as household and personal effects, 
rather than as tangible personal property, to conform more closely with 
Sec.  20.2031-6(b).
    Commenters asked whether the $3,000 threshold applies to each 
article

[[Page 76369]]

or to the collective value of all the tangible personal property 
includible in the gross estate. In addition, one commenter asked how to 
allocate the final value of articles of household and personal effects 
appraised as a single set or group if the estate distributes parts of 
that set or group among different beneficiaries (for example, the gross 
estate includes a 24-piece silver flatware set with a final value of 
$4,000, and the set is divided between two beneficiaries). The 
commenter suggested that the executor be given the authority to use any 
reasonable method to allocate the final value (and thus the basis) of 
the parts of the set or group among the beneficiaries. Finally, 
commenters noted that the $3,000 threshold amount found in Sec.  
20.2031-6(b) has remained static since 1958 and asked that it be 
increased.
    The Treasury Department and the IRS understand the need for clarity 
on how to apply the exception in the proposed regulations for tangible 
personal property. However, addressing this issue in the final 
regulations necessarily would impact determinations of whether an 
appraisal is required under Sec.  20.2031-6(b) and how to allocate the 
value of estate property among beneficiaries. These issues, including 
any change to the threshold amount under Sec.  20.2031-6(b), are more 
appropriately addressed in guidance under section 2031 related to the 
valuation of household and personal effects. Accordingly, Sec.  1.6035-
1(f)(2)(ix) of the final regulations preserves the exception and does 
not address the commenters' questions.
iv. Exceptions for Property Whose Basis Is Unrelated to the Federal 
Estate Tax Value of the Property
    Because section 1014(a) does not apply to the right to income in 
respect of a decedent as defined in section 691 (IRD), the Federal 
estate tax value of IRD does not affect its basis in the hands of the 
beneficiary acquiring that property. Accordingly, proposed Sec.  
1.6035-1(b)(1)(ii) excepts IRD from the reporting requirements. The 
Treasury Department and the IRS deem it appropriate in the final 
regulations to more generally except from full section 6035 reporting 
requirements property having a basis that is determined without 
reference to the property's Federal estate tax value, including IRD. A 
beneficiary receiving such property has no need to receive a Statement 
providing the Federal estate tax value of such property. Several types 
of IRD are listed separately in the regulations. These assets, such as 
individual retirement accounts (IRAs), may have an IRD component and a 
non-IRD component of basis. The following paragraphs discuss comments 
relating to reporting exceptions or suggested exceptions for property 
having a basis that is determined without reference to the property's 
Federal estate tax value.
    Multiple commenters sought clarification on whether certain IRD 
property having a basis component is excepted from the full section 
6035 reporting requirements, particularly in the case of certain 
retirement plans, annuities, installment obligations, and interests in 
passthrough entities holding an item of IRD.
    With regard to annuity contracts subject to section 72 and 
installment obligations subject to section 453, commenters suggested 
that the final regulations clarify that, despite having a basis 
component, such property be excepted because no basis adjustment occurs 
with respect to such property at the decedent's death. The Treasury 
Department and the IRS agree and, accordingly, such property is 
identified in Sec.  1.6035-1(f)(2)(xi) of the final regulations as 
examples of property having a basis that is determined without 
reference to the property's Federal estate tax value. For the same 
reason, Sec.  1.6035-1(f)(2)(xi) of the final regulations also 
includes, as an example of such excepted property, any amounts received 
under an annuity contract, such as a lump sum payment paid to terminate 
an annuity contract or a death benefit paid under an annuity contract.
    Multiple commenters sought clarification as to whether IRAs and 
other retirement plans and deferred compensation plans come within the 
IRD exception in the proposed regulations. Commenters noted that, in 
certain scenarios, a decedent will have basis in such an account or 
plan, in addition to IRD. One commenter asserted that the reporting 
typically required for these accounts or plans outside of the section 
6035 reporting requirements is sufficient and suggested adding an 
exception to the final regulations so that the section 6035 reporting 
requirements will not apply to property in or distributions from 
retirement plans (whether or not tax-deferred). Such property, when 
acquired from a decedent, generally has a basis that is determined 
without reference to the property's Federal estate tax value. 
Therefore, distributions from retirement plans and deferred 
compensation plans, including individual retirement arrangements as 
defined in sections 408 and 408A, are included as examples of property 
coming within the exception from full reporting in Sec.  1.6035-
1(f)(2)(xi) of the final regulations.
    In other instances in which property consists only in part of a 
right to receive IRD, such as an interest in a passthrough entity that 
holds an interest constituting IRD, commenters sought clarification on 
the scope of the IRD exception to section 6035 reporting. In most 
cases, the basis of such property is determined under section 1014(a), 
even though the basis under section 1014(a) may be adjusted to account 
for the items of IRD. Because the Federal estate tax value of such 
property is relevant to the determination of the recipient's basis in 
the property, such property does not come within the exception for 
property having a basis determined without reference to the property's 
Federal estate tax value in Sec.  1.6035-1(f)(2)(xi) of the final 
regulations. That exception is limited to property that consists 
entirely of IRD.
    Finally, in response to other requests for clarification, 
appreciated property described in section 1014(e) that is acquired by a 
decedent within 1 year of death, for which basis is not adjusted under 
section 1014(a), also is included as an example of property coming 
within the exception from full reporting in Sec.  1.6035-1(f)(2)(xi) of 
the final regulations.
v. Exceptions for Property Sold, Exchanged, or Disposed of Prior to 
Distribution
    Proposed Sec.  1.6035-1(b)(1)(iv) excepts 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. Commenters asserted that this exception as proposed 
suggests that the reporting requirements would continue to apply to 
property sold, exchanged, or otherwise disposed of by the estate if no 
gain or loss is recognized because the sales price equals the estate's 
basis in the property. Commenters suggested, and the Treasury 
Department and the IRS agree, that the reporting requirements should 
not apply to property disposed of in a recognition transaction for the 
estate for income tax purposes, whether or not gain or loss is 
recognized, because the basis of this property is no longer related to 
the property's Federal estate tax value. The Treasury Department and 
the IRS also agree with commenters that, for purposes of the reporting 
required under section 6035, it is irrelevant whether any gain or loss 
the estate recognizes is capital or ordinary. The final regulations 
under Sec.  1.6035-1(f)(2)(x) include these clarifying changes. In 
addition, in response to requests for additional clarification, Sec.  
1.6035-1(f)(2)(x)(A) through (E) of the

[[Page 76370]]

final regulations include examples of excepted property pursuant to 
this rule as follows: (1) property distributed in satisfaction of a 
pecuniary bequest on which the estate recognizes any gain or loss 
pursuant to Sec.  1.661(a)-2(f); (2) property for which an election 
under section 643(e)(3) has been made for the estate to recognize any 
gain or loss; (3) interests in business entities that are redeemed for 
United States dollars prior to distribution to a beneficiary; (4) 
property disposed of in a transaction described in section 267(a) and 
(b)(13), which disallows a loss from the sale or exchange of property, 
directly or indirectly, between the executor and the beneficiary of the 
estate, except in a sale or exchange in satisfaction of a pecuniary 
bequest; and (5) property subject to the mark to market accounting 
method at the time of distribution from the estate or from the 
decedent's revocable trust.
    Similarly, Sec.  1.6035-1(f)(2)(xii) of the final regulations 
excepts bonds to the extent that they are redeemed by the issuer for 
United States dollars prior to being distributed to a beneficiary so 
that any gain or loss is recognized by the estate.
vi. Exception for Property Included in the Gross Estate of a 
Beneficiary
    A commenter suggested that an exception to the reporting 
requirements should apply if the beneficiary of property acquired from 
a decedent dies shortly after that decedent and that property then is 
included in the deceased beneficiary's gross estate. In this case, the 
deceased beneficiary does not need a Statement identifying the value of 
that property because the basis of that property will be determined as 
of the beneficiary's date of death, thus independently of the 
determination of the final value of that property in the decedent's 
estate. Accordingly, Sec.  1.6035-1(f)(2)(xiii) of the final 
regulations identifies property included in the gross estate of a 
beneficiary who died before the due date of the Information Return as 
excepted property subject to only limited reporting.
vii. Publicly Traded Securities
    Two commenters suggested that publicly traded securities should be 
excepted from the reporting requirements, both to reduce burden and 
because Sec.  1.6045A-1(b)(8) already requires basis reporting for 
certain publicly traded securities. This suggestion is not adopted in 
the final regulations because, while Sec.  1.6045A-1(b)(8) requires 
basis reporting between brokers if certain securities are transferred, 
it does not always require reporting to the IRS and the beneficiary. It 
would be burdensome for both taxpayers and the IRS to distinguish 
between those covered securities and others, including shares held in 
certificate form, for purposes of complying with these reporting 
requirements. Further, the information to be transferred between 
brokers might not always be the final value of the security for Federal 
estate tax purposes. Additional detailed information regarding the 
reporting of securities requested by commenters may be provided in 
forms and instructions.
viii. Other
    One commenter requested a reporting exception for property 
transferred to a charity or nonresident who is not a citizen of the 
U.S. (nonresident noncitizen) based on the assumption that charities 
and nonresident noncitizens have no need for basis information. Basis 
information for such property is relevant in certain circumstances, 
such as for the computation of the excise tax on a private foundation, 
and, therefore, this suggestion is not adopted.
G. Identification of Beneficiaries
    The proposed regulations under Sec.  1.6035-1(c)(1) describe the 
reporting requirements as they apply to different beneficiaries, 
including a beneficiary who is also an executor, a beneficiary of a 
life estate, a beneficiary of a remainder interest and a beneficiary of 
a contingent interest. Proposed Sec.  1.6035-1(c)(2) describes the 
reporting requirements as they apply to a beneficiary that is a trust, 
estate, or other entity. Proposed Sec.  1.6035-1(c)(3) describes the 
reporting requirements applicable if the beneficiary of particular 
included property has not been identified by the due date of the 
required reporting. Finally, proposed Sec.  1.6035-1(c)(4) describes 
the reporting requirements applicable if a beneficiary cannot be 
located by the executor.
    As discussed in part 2.C.i. of this Summary of Comments and 
Explanation of Revisions, many commenters objected to the proposed 
reporting requirements under Sec.  1.6035-1(c)(3) that would have 
applied in the case of an executor who has not determined what property 
will be used to satisfy the interest of each beneficiary by the due 
date of the Information Return. The section 6035 reporting requirements 
have been modified in Sec.  1.6035-1(c) of the final regulations to 
address the concerns of the commenters. However, additional comments 
were received on the other beneficiary provisions in proposed Sec.  
1.6035-1(c). A discussion of these comments and responses to these 
comments, as well as a discussion of certain clarifying changes made in 
Sec.  1.6035-1(g) of the final regulations, follows.
i. Definition of Beneficiaries
    Section 1.6035-1(g)(1) of the final regulations defines the term 
beneficiary to refer to a person who acquires (or will acquire) 
property subject to reporting described in Sec.  1.6035-1(e) of the 
final regulations. A beneficiary may be an individual (including one 
who is the executor as well as a beneficiary), the estate of a deceased 
individual who survived the decedent, a trust (referred to as a 
beneficiary trust), or an entity other than a trust, including without 
limitation a business entity or an organization described in section 
501(c).
ii. Beneficiary Trust
    Proposed Sec.  1.6035-1(c)(2) directs that, if the beneficiary is a 
trust, estate, or other entity, the executor is to furnish the 
beneficiary's Statement to the trustee of the trust or similar 
representative of the estate or other entity, rather than to the 
beneficiaries or other owners of that trust or other entity. This 
provision generated several comments. Some commenters questioned 
whether the Statement should be given to the trustee or to the trust's 
beneficiary. They noted that, because there are many different types of 
trusts and varying circumstances, an inflexible rule is not necessarily 
appropriate in this context. For instance, some trusts terminate at 
death or shortly thereafter and the trustee distributes the trust 
property in kind, while other trusts continue in existence for many 
generations. In some cases, it may be unclear when a trust terminates 
because an existing trust may be decanted or divided into several trust 
shares or different trusts. Some trusts are for the benefit of only one 
beneficiary, such as a marital trust, but other trusts may be for a 
class of different beneficiaries. In addition, sometimes, the executor 
may not be able to get information about the provisions or 
beneficiaries of an inter vivos trust, although the trust property is 
includible in the decedent's gross estate for Federal estate tax 
purposes.
    After consideration of the comments, the Treasury Department and 
the IRS agree that there are circumstances under which it would be 
appropriate for an executor to furnish the Statement to the trustee of 
a beneficiary trust and different circumstances warranting the 
furnishing of the Statement directly to the trust beneficiary(s). 
Section 6035 contemplates that the Statement will be

[[Page 76371]]

received by a person or entity that is likely to engage in an income 
tax recognition event with respect to the property. A trust that 
terminates at the death of the decedent or shortly thereafter is 
unlikely to have such an event, unlike a trust that continues for many 
years. Any rule attempting to distinguish between these different 
circumstances would be both complex and likely to fail to address the 
entire universe of possibilities.
    Accordingly, in order to respond to the comments, and to avoid 
undue complexity in regulations, the Treasury Department and the IRS 
conclude that it is appropriate to adopt a flexible rule for 
identifying the beneficiary to whom the executor must furnish the 
Statement in the case of a beneficiary trust. Section 1.6035-1(g)(2)(i) 
of the final regulations provides that the executor must furnish the 
Statement to the trustee, rather than to the beneficiaries of the 
trust, but allows the executor instead to furnish the Statement 
directly to the beneficiaries of the trust, with a copy to the trustee, 
if the executor reasonably believes that it is unlikely that the trust 
will depreciate, sell, or otherwise dispose of the property in a 
recognition event for income tax purposes. For this purpose, a trust's 
beneficiaries include all potential current income beneficiaries and 
each remainderman who would have had a current interest in the trust if 
one or more of the income beneficiaries had died immediately before the 
decedent.
    Commenters also requested clarification of the executor's 
obligation to furnish a Statement regarding the property of an inter 
vivos trust included in the decedent's gross estate for Federal estate 
tax purposes. In this situation, the executor is not distributing the 
trust property to the trustee and, assuming the executor reported the 
trust on the estate tax return, the trustee is not the executor 
required to file that estate tax return. If the trust property is 
reported on the estate tax return filed by the executor of the estate, 
that executor is subject to the reporting requirements as described in 
this section with regard to the trust property. Except for the 
reporting required under Sec.  1.6035-1(h) of the final regulations, it 
is only in the situations described in Sec.  1.6035-1(b)(2) of the 
final regulations, in which a trustee of a trust might be an executor 
required to file an estate tax return with regard to trust property, 
that the trustee would be required to file the Information Return and 
Statement(s) with regard to the trust property reported on the estate 
tax return filed by that trustee.
    Commenters requested guidance on how to comply with the reporting 
requirements to a beneficiary trust if that trust is not yet 
established by the due date of the Information Return. In response, 
Sec.  1.6035-1(g)(2)(ii) of the final regulations provides that, if by 
the due date of the Information Return, a beneficiary trust does not 
have at least one trustee and a tax identification number from the IRS, 
an executor must report on the Information Return that the beneficiary 
trust is not yet established in accordance with the instructions. 
Supplemental reporting is required once the beneficiary trust is 
established.
iii. Furnishing Statement to Beneficiary of Split Interest in Property, 
Not in Trust
    Section 1.6035-1(g)(3) of the final regulations retains and 
clarifies certain aspects of the rules in proposed Sec.  1.6035-1(c)(1) 
applicable to beneficiaries of split interests in property not in 
trust. Under Sec.  1.6035-1(g)(3) of the final regulations, the 
beneficiary of a life estate not in trust is the life tenant, and the 
beneficiary of a remainder interest not in trust is each remainderman, 
identified as if the life tenant were to die immediately after the 
decedent. For purposes of determining the due date for furnishing 
Statements to such beneficiaries under Sec.  1.6035-1(c)(3) of the 
final regulations, each beneficiary will be deemed to have acquired the 
property subject to reporting on the date of the decedent's death. 
Section 1.6035-1(g)(3) of the final regulations further provides that 
the beneficiary of a contingent interest not in trust is a beneficiary 
only if the contingency occurs before the end of the period during 
which the executor has an obligation to supplement the reporting as 
provided in Sec.  1.6035-1(d)(5) of the final regulations. If the 
contingency occurs during this period, Sec.  1.6035-1(g)(3) of the 
final regulations provides that the executor must update the 
beneficiary information on the Information Return and furnish a 
Statement to that beneficiary pursuant to the executor's duty to 
supplement to report a change in beneficiary information as described 
in Sec.  1.6035-1(d) of the final regulations. Section 1.6035-1(g)(3) 
of the final regulations clarifies that usufruct interests are treated 
in the same manner.
    Several commenters requested confirmation that, for purposes of 
complying with the reporting requirements of section 6035(a), the 
executor is not required to determine the allocation of uniform basis 
among the beneficiaries with interests in an asset for different 
periods of time. The Treasury Department and the IRS agree that nothing 
in section 6035(a) requires the executor to report to a beneficiary of 
such an interest that beneficiary's share of uniform basis as of the 
decedent's date of death. It is only the value of the entire property 
that is the subject of the required reporting. Therefore, Sec.  1.6035-
1(c)(2) of the final regulations provides that an executor is required 
to identify the property acquired by the beneficiaries, the value of 
the property as reported on the estate tax return filed with the IRS, 
and such other information prescribed by the Statement and the 
instructions.
iv. Reporting for a Missing Beneficiary
    In response to comments, Sec.  1.6035-1(g)(4) of the final 
regulations modifies the rule in proposed Sec.  1.6035-1(c)(4) with 
regard to the applicable reporting requirements if the executor cannot 
locate a beneficiary. The proposed rule provides that an executor must 
use reasonable due diligence to identify and locate all beneficiaries 
and, if the executor is unable to locate a beneficiary by the due date 
of the Information Return, the executor must so report on the 
Information Return and explain the efforts the executor has taken to 
locate the beneficiary and to satisfy the obligation of reasonable due 
diligence. Commenters requested an explanation or definition of 
``reasonable due diligence'' for this purpose. In referencing 
``reasonable due diligence'' in the proposed regulations, the Treasury 
Department and the IRS intended only to reference an executor's 
responsibility as a fiduciary under local law to identify and locate 
all beneficiaries and did not intend to create a new standard. 
Therefore, the requirement of due diligence is removed in the final 
regulations. Instead, Sec.  1.6035-1(g)(4) of the final regulations 
provides that, if the executor is unable to locate a beneficiary by the 
date required for filing the Information Return with the IRS, then the 
executor must report on the Information Return the failure to locate 
the beneficiary and the efforts the executor has made to locate the 
beneficiary. The final regulations retain the requirement to supplement 
the Information Return and to furnish the required Statement to the 
beneficiary once the beneficiary has been located or, if the 
beneficiary is not located, to report the distribution of the property 
to a different beneficiary.
H. Subsequent Transfers of Property Subject to Reporting
    Proposed Sec.  1.6035-1(f) would impose a reporting requirement 
with regard to

[[Page 76372]]

certain subsequent transfers of property previously reported (or 
required to be reported) on a Statement. Specifically, it would require 
the recipient of property to which section 6035 applies to file with 
the IRS a supplemental Information Return, and to furnish to a 
transferee of the property a Statement, if the recipient (who becomes 
the transferor) distributes or transfers all or any portion of that 
property in a transaction in which the transferee determines its basis, 
in whole or in part, by reference to the transferor's basis.
    Commenters asserted that section 6035 imposes reporting 
requirements on executors, but not on subsequent transferees and, 
therefore, the Treasury Department and the IRS lack authority to 
require reporting under section 6035 by beneficiaries who subsequently 
transfer property acquired from a decedent. Commenters also noted that 
this reporting requirement could continue for generations, and thus be 
impossible for the IRS to monitor and enforce, especially with respect 
to nonresident non-citizen beneficiaries if the property is no longer 
in the United States. Commenters also noted that this subsequent 
reporting requirement creates uncertainty for executors, estate tax 
return preparers, and beneficiaries as to whether supplemental 
reporting is required, and that the failure to comply with the 
reporting requirement is subject to penalties. They contended this 
requirement is particularly unfair with respect to unsophisticated 
individual recipients who are likely to be unaware of the reporting 
requirements and, as a result, are more likely to become subject to 
noncompliance penalties. Finally, commenters noted that, in many cases, 
the obligation to report the basis of property transferred is 
duplicative of other required filings.
    The Treasury Department and the IRS carefully have reconsidered the 
benefits and burdens of the proposed subsequent reporting requirement 
in light of these comments. The enactment of section 1014(f) created 
the consistent basis requirement, and the enactment of section 6035 
gave the IRS the ability to enforce the provisions of section 1014(f) 
and the related penalty under section 6662(k) for use of an 
inconsistent estate basis for income tax purposes. Without this 
proposed reporting requirement, subsequent ownership changes made 
through nonrealization events would erode the ability of the IRS to 
enforce the consistent basis requirement under section 1014(f) and the 
penalty under section 6662(k) for violations of that requirement.
    Nevertheless, the Treasury Department and the IRS conclude that the 
burden of the proposed subsequent reporting requirement, including the 
potential penalties for noncompliance, is too heavy a burden to impose 
on individual beneficiaries who, as a practical matter, may have no way 
of knowing of the existence of, or of how to comply with, this 
subsequent reporting requirement. The Treasury Department and the IRS, 
however, also conclude that trustees of trusts are one class of 
beneficiaries for whom the subsequent reporting requirement would not 
be sufficiently burdensome to outweigh the needs of, and benefits to, 
the IRS and trust beneficiaries. Generally, the trustee of a trust is 
likely to be aware of applicable tax requirements and to be both able 
and motivated to comply with these requirements. In addition, in 
discharging the trustee's fiduciary obligations to the trust 
beneficiaries, a trustee is likely (even without a supplemental 
reporting requirement) to provide certain relevant information (such as 
basis) to the beneficiary to whom the trustee is distributing a trust 
asset.
    Accordingly, the final regulations retain a reporting requirement 
for subsequent transfers, but this requirement is narrowed 
significantly. Under Sec.  1.6035-1(h)(1) of the final regulations, 
reporting requirements are imposed on trustees of beneficiary trusts 
making a distribution of property that was reported on a Statement 
furnished to those trustees, or of any other property the basis of 
which is determined, in whole or in part, by reference to the basis of 
this property. Such a trust distribution includes, for example, a 
transfer of trust property pursuant to the exercise or lapse of a 
person's power of appointment (whether general or limited). That 
section further provides that trustees of trusts that receive a 
distribution of such property, whether from a beneficiary trust or from 
any other trust that has received such property, either directly or 
indirectly, also are subject to these reporting requirements when 
making a distribution of that property. This reporting obligation 
imposed on trustees continues to apply for each subsequent transfer or 
distribution until the property is distributed to a beneficiary not in 
trust. However, these reporting requirements do not apply if property 
is disposed of by the trustee in a transaction that is a recognition 
event for income tax purposes (whether or not resulting in a gain or 
loss) that results in the entire property having a basis that no longer 
is related, in whole or in part, to the property's final value or, if 
applicable, reported value (within the meaning of Sec.  1.1014-10(b)(1) 
or (2) of the final regulations, respectively).
    By imposing a reporting obligation on trustees of beneficiary 
trusts and certain other recipient trusts, the final regulations ensure 
that an individual or entity likely to incur an income tax realization 
event with respect to the trust property has the necessary information 
to determine the correct initial basis. This facilitates the proper 
reporting of basis and compliance with the consistent basis requirement 
if it is applicable.
    Finally, to reduce burden and improve administrability, Sec.  
1.6035-1(h)(2) of the final regulations adopts the same due date for 
the filing of the Information Return and the furnishing of the 
Statement with regard to distributions of property by trustees as is 
required under Sec.  1.6035-1(c)(3)(ii) of the final regulations, which 
is January 31 of the year following the distribution. Section 1.6035-
1(h)(3) of the final regulations adds an example illustrating the 
application of the reporting requirements applicable to trustees making 
subsequent transfers of property if the property is subject to 
reporting under Sec.  1.6035-1(e) of the final regulations.
I. Penalties
    Section 1.6035-1(i) of the final regulations provides a cross-
reference to sections 6721 through 6724 and the regulations in part 301 
under sections 6721 through 6724 that impose penalties on the failure 
to timely file a correct Information Return and the failure to timely 
furnish a correct Statement as required by section 6035. Sections 
301.6721-1(h)(2)(xii) and 301.6722-1(e)(2)(xxxv) of these final 
regulations clarify that the penalties under those sections also apply 
to the failure to report as required by section 6035. A penalty applies 
separately to each initial or supplemental Information Return that the 
executor is required to file with the IRS, and to each initial or 
supplemental Statement that the executor is required to furnish to a 
beneficiary. Accordingly, only one penalty under section 6721 may be 
imposed for filing an incorrect Information Return, even if copies of 
multiple required Statements are not attached to the Information 
Return, but multiple penalties under section 6722 may be imposed for 
furnishing multiple incorrect Statements, even if the Statements were 
filed with the IRS as attachments to a single Information Return. 
Section 1.6035-1(i) of the final

[[Page 76373]]

regulations also refers to section 6724 and the regulations in part 301 
under section 6724 for rules relating to waivers of these penalties if 
it is shown that the failure was due to reasonable cause and not to 
willful neglect.
    For purposes of applying these penalties, commenters inquired 
whether an appointed executor is relieved of the reporting requirements 
if a successor executor is appointed. The issue of an executor's 
continuing liability under the Code if a successor executor is 
appointed is not limited to the section 6035 reporting requirements and 
may depend on varying factors, including local law. Accordingly, this 
issue is outside the scope of these regulations and is not addressed in 
these final regulations.
    Multiple commenters inquired about how to complete the Information 
Return and Statements in various scenarios, such as cases in which a 
nonresident noncitizen is a beneficiary and has no tax identification 
number, a partnership is a beneficiary, an executor reports bulk assets 
and brokerage accounts on an estate tax return, and others. To the 
extent not otherwise addressed in the final regulations or this 
preamble, these comments are best considered in contemplation of 
necessary or appropriate revisions to the Information Return and its 
instructions.
J. Applicability Date
    Proposed Sec.  1.6035-1(i) provides that, upon publication of the 
Treasury Decision adopting these rules as final in the Federal 
Register, Sec.  1.6035-1 of the final regulations will apply to 
property acquired from a decedent or by reason of the death of a 
decedent whose estate tax return is filed after July 31, 2015. The 
final regulations revise the applicability date of Sec.  1.6035-1(i) of 
the proposed regulation consistent with section 7805(b)(1). 
Accordingly, Sec.  1.6035-1(j) of the final regulations does not 
reference the July 31, 2015, effective date of section 6035, and 
provides instead that Sec.  1.6035-1 of the final regulations applies 
to executors of a decedent's estate who are required to file an estate 
tax return under section 6018 if that return is filed after the date of 
publication of these final regulations in the Federal Register, and to 
trustees receiving certain property included in the gross estate of 
such a decedent.

3. Section 6662--Inconsistent Estate Basis Reporting

    Section 6662(a) and (b)(8) impose an accuracy-related penalty on 
the portion of any underpayment of tax relating to property subject to 
the consistent basis requirement that is attributable to an 
inconsistent estate basis. Proposed Sec.  1.6662-8(b) provides that 
there is an inconsistent estate basis to the extent that a taxpayer 
claims a basis, without regard to the adjustments described in proposed 
Sec.  1.1014-10(a)(2), in property described in proposed Sec.  1.6662-
8(c) that exceeds that property's final value as determined under 
proposed Sec.  1.1014-10(c). Proposed Sec.  1.6662-8(c) provides that 
proposed Sec.  1.6662-8(b) applies to property described in proposed 
Sec.  1.1014-10(b) that is reported or required to be reported on an 
estate tax return filed after July 31, 2015.
    One commenter noted that the phrase ``without regard to the 
adjustments described in Sec.  1.1014-10(a),'' as used in proposed 
Sec.  1.6662-8(b), eliminates adjustments that correctly may be made by 
other sections of the Code on or after the decedent's date of death. 
The commenter's concern was that this language would void the effects 
of, or disallow the adjustments available under, other sections of the 
Code.
    Section 1.6662-9(b) of the final regulations clarifies that there 
is an inconsistent estate basis to the extent that a taxpayer claims a 
basis that was determined by using an initial basis as defined in Sec.  
1.1014-10(a)(2) of the final regulations that exceeds the property's 
final value as determined under Sec.  1.1014-10(b)(1) of the final 
regulations. The property to which this section applies is property 
described in Sec.  1.1014-10(c)(1) of the final regulations. In 
addition, Sec.  1.1014-10(a)(2) of the final regulations confirms that 
the taxpayer may compute basis at any time by adjusting the property's 
initial basis due to the operation of other provisions of the Code 
without violating the consistent basis requirement. Section 1.6662-
9(b)(2) of the final regulations provides an example illustrating the 
provisions of Sec.  1.6662-9(b) of the final regulations. The 
provisions regarding the reasonable cause exception to the penalty are 
contained in section 6664 and the regulations in part 1 under section 
6664.
    In the final regulations, proposed Sec.  1.6662-8 has been 
redesignated as Sec.  1.6662-9. Section 1.6662-8 is being reserved for 
future regulations to address other provisions under section 6662.

Special Analyses

1. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

2. Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been approved by the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under control number 1545-2264. On March 4, 2016, proposed regulations 
(REG-127923-15) were published in the Federal Register (81 FR 11486). 
The proposed regulations proposed amendments to the Income Tax 
Regulations (26 CFR part 1) and the Procedure and Administration 
Regulations (26 CFR part 301). Comments were specifically requested 
concerning (1) whether the proposed collection of information is 
necessary for the proper performance of the functions of the IRS, 
including whether the information will have practical utility; (2) the 
accuracy of the estimated burden associated with the proposed 
collection of information; (3) how the quality, utility, and clarity of 
the information to be collected may be enhanced; (4) 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 (5) estimates of capital or 
start-up costs and costs of operation, maintenance, and purchase of 
service to provide information.
    During the comment period, the IRS received 5 comments on the 
collection of information. With respect to the necessity and utility of 
the proposed collection of information, a commenter contended that the 
reporting requirements in section 6035 are intended solely to implement 
and enforce the basis consistency requirement under section 1014(f) 
and, therefore, reporting should be limited to property subject to 
section 1014(f). The Treasury Department and the IRS did not accept 
this recommendation because this comment appears to be based on a 
budget proposal rather than on section 6035 as enacted and its history. 
See U.S. Dept. of the Treasury, General Explanations of the 
Administration's Fiscal Year 2015 Revenue Proposals, 160-161 (2014). 
Based on the language of section 6035(a)(1) and (2), Congress mandated 
that reporting apply to a larger universe of property than the universe 
of property subject to the consistent basis requirement under section 
1014.

[[Page 76374]]

    Regarding the accuracy of the estimated burden associated with the 
collection of information, commenters indicated that the IRS estimate 
of the total annual reporting burden per respondent of 5.31 hours was 
too low. Commenters estimated that the total annual reporting burden 
per respondent should be 20 to 50 hours. Taking into account the input 
from the commenters regarding the number of hours needed to comply, as 
well as new rules in the final regulations that reduce certain 
reporting burdens, the Treasury Department and the IRS increased the 
estimated total annual reporting burden per respondent from 5.31 hours 
to 20 hours.
    With respect to how the burden of complying with the proposed 
collection of information may be minimized, a commenter suggested that 
the IRS could minimize the burden of complying with the proposed 
collection of information by accepting Form 706, United States Estate 
(and Generation-Skipping Transfer) Tax Return, and Form 709, United 
States Gift (and Generation-Skipping Transfer) Tax Return, along with a 
statement identifying the beneficiaries, rather than requiring 
duplicative reporting on the 6035 Information Return (currently, Form 
8971, Information Regarding Beneficiaries Acquiring Property From a 
Decedent). Another commenter suggested that, if the executor is the 
only beneficiary required to receive the Statement, the IRS could 
reduce the cost of compliance by allowing the executor to check a box 
on Form 706 certifying that fact. This commenter also suggested that 
the reporting requirements could be satisfied by giving beneficiaries 
an appropriately redacted copy of the filed Form 706.
    The Treasury Department and the IRS did not accept this 
recommendation because the filing of Form 709 does not trigger a 
section 6035 filing requirement of Form 8971 and Schedule A. Further, 
through its amendment of section 6724(d)(1) and (2) and the enactment 
of section 6035, both pursuant to section 2004 of the 2015 Act, 
Congress identified the statement required by section 6035(a)(1) and 
(2) to be filed with the IRS as an information return, and the 
statement required by section 6035(a)(2) to be furnished to a 
beneficiary as a payee statement. The Treasury Department and the IRS 
conclude that replacing the information return and payee statement 
identified in section 6724 with a beneficiary statement attached to the 
Form 706, a redacted Form 706, or the checking of a box on the Form 706 
would be contrary to legislative intent and the statutory language of 
section 6724(d)(1)(D) and (d)(2)(II).
    A commenter suggested that the optional ability to electronically 
file returns, including Forms 706 and 709, would facilitate compliance 
with the section 6035 reporting requirements and enhance efficiency. 
The Treasury Department and the IRS concur that the ability to 
electronically file not only Forms 706 and 709, but also Form 8971 and 
Schedule A, would facilitate compliance with the section 6035 reporting 
requirements and enhance efficiency. At this time, however, taxpayers 
are unable to electronically file Forms 706 and 709.
    Several comments were received with substantive recommendations 
that relate to whether the collection of information will have 
practical utility and how the burden of compliance could be minimized 
(including specific recommendations to expand the exceptions to the 
section 6035 reporting requirements, modify the reporting requirements 
in certain circumstances, and limit or eliminate the subsequent 
transfer reporting requirement). These comments are addressed in the 
Summary of Comments and Explanation of Revisions section of this 
preamble.
    The collection of information in these final regulations is in 
Sec.  1.6035-1(c)(1) and (2), (d)(1) and (2), and (h)(1) and (2). The 
collection of information is necessary to comply with the reporting 
requirements under section 6035(a). The likely respondents are 
executors and other persons required to file an estate tax return under 
section 6018 and trustees making in-kind distributions of property that 
was subject to reporting under section 6035 when initially acquired by 
the trustee.
    Estimated number of respondents: 10,000.
    Estimated average annual burden per respondent: 20 hours.
    Estimated total annual reporting burden: 200,000 hours.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the OMB.

3. Regulatory Flexibility Act

    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 preceding this regulation was submitted to the Chief Counsel 
for the Office of Advocacy of the Small Business Administration for 
comment on its impact on small business. No comments were received from 
the Chief Counsel for the Office of Advocacy of the Small Business 
Administration.

4. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The final regulations do not include any Federal mandate 
that may result in expenditures by State, local, or Tribal governments, 
or by the private sector in excess of that threshold.

5. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, 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 Publishing Office,

[[Page 76375]]

Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

    The principal authors of these final regulations are Donna Douglas, 
Melissa Liquerman, and Karlene Lesho of the Office of Associate Chief 
Counsel (Passthroughs and Special Industries). However, 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.
    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS are amending 26 
CFR parts 1 and 301 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by revising 
entries for Sec. Sec.  1.1014-1 and 1.1014-2, and adding entries for 
Sec. Sec.  1.1014-10, and 1.6035-1 in numerical order to read as 
follows:

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

    Section 1.1014-1 also issued under 26 U.S.C. 1014(f).
    Section 1.1014-2 also issued under 26 U.S.C. 1014(f).
    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.
* * * * *

0
Par 2. Add Sec.  1.1014-0 to read as follows:


Sec.  1.1014-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.1014-1 
through 1.1014-10.

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

    (a) General rule.
    (b) Scope and application.
    (c) Property to which section 1014 does not apply.
    (d) Applicability date.

Sec.  1.1014-2 Property acquired from a decedent.

    (a) In general.
    (b) Property acquired from a decedent dying after December 31, 
1953.
    (1) In general.
    (2) Rules for the application of paragraph (b)(1) of this 
section.
    (3) Exceptions to application of this paragraph.
    (c) Special basis rules with respect to certain property 
acquired from a decedent.
    (1) Stock or securities of a foreign personal holding company.
    (2) Spouse's interest in community property of decedent dying 
after October 21, 1942, and on or before December 31, 1947.

Sec.  1.1014-3 Other basis rules.

    (a) Fair market value.
    (b) Property acquired from a decedent dying before March 1, 
1913.
    (c) Reinvestments by a fiduciary.
    (d) Reinvestments of property transferred during life.
    (e) Alternate valuation dates.

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

    (a) In general.
    (b) Multiple interests.
    (c) Records.
    (d) Effective/applicability date.

Sec.  1.1014-5 Gain or loss.

    (a) Sale or other disposition of a life interest, remainder 
interest, or other interest in property acquired from a decedent.
    (b) Sale or other disposition of certain term interests.
    (1) In general.
    (2) Effective/applicability date.
    (c) Sale or other disposition of a term interest in a tax-exempt 
trust.
    (1) In general.
    (2) Tax-exempt trust defined.
    (3) Taxable beneficiary defined.
    (4) Effective/applicability date.
    (d) Illustrations.

Sec.  1.1014-6 Special rule for adjustments to basis where property 
is acquired from a decedent prior to his death.

    (a) In general.
    (b) Multiple interests in property described in section 
1014(b)(9) and acquired from a decedent prior to his death.
    (c) Adjustments for deductions allowed prior to the decedent's 
death.
Sec.  1.1014-7 Example applying rules Sec. Sec.  1.1014-4 through 
1.1014-6 to case involving multiple interests.
Sec.  1.1014-8 Bequest, devise, or inheritance of a remainder 
interest.
Sec.  1.1014-9 Special rule with respect to DISC stock.

    (a) In general.
    (b) Portion of property acquired from decedent before his death 
included in decedent's gross estate.
    (1) In general.
    (2) Example.
    (c) Estate tax valuation date.
    (d) Examples.

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

    (a) Consistent basis requirement.
    (1) General rule.
    (2) Initial basis in consistent basis property and effect of 
basis adjustments.
    (3) Duration of consistent basis requirement.
    (b) Final value and reported value.
    (1) Final value.
    (2) Reported value if no final value yet determined.
    (3) Special rules.
    (c) Consistent basis property.
    (1) Property subject to the consistent basis requirement.
    (2) Property excepted from or not subject to the consistent 
basis requirement.
    (d) Definitions.
    (e) Examples.
    (f) Applicability date.


0
Par. 3. Section 1.1014-1 is amended by:
0
1. Adding two sentences after the fourth sentence of paragraph (a).
0
2. Revising the last sentence and adding two sentences after the last 
sentence of paragraph (b).
0
3. Revising paragraphs (c) and (d).

    The addition and revisions read as follows:


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

    (a) * * *For certain property acquired from a decedent, the initial 
basis of the property must not exceed the property's final value for 
Federal estate tax purposes. See section 1014(f) and Sec.  1.1014-10 
for rules relating to the consistent basis requirement. * * *
    (b) * * *In Sec. Sec.  1.1014-1 to 1.1014-6, inclusive, and Sec.  
1.1014-10, whenever the words property acquired from a decedent are 
used, they also mean property passed from a decedent, and the phrase 
person who acquired it from the decedent includes the person to whom it 
passed from the decedent. The consistent basis rules in Sec.  1.1014-10 
apply to property subject to the consistent basis requirement, as 
described in Sec.  1.1014-10(c)(1). For property subject to the 
consistent basis requirement, the rules in Sec.  1.1014-10 modify the 
rules set forth in paragraphs (a) and (c) of this section and in 
Sec. Sec.  1.1014-2 through 1.1014-9.
    (c) Property to which section 1014 does not apply. Section 1014 has 
no application to property that constitutes a right to receive an item 
of income in respect of a decedent under section 691.
    (d) Applicability date. This section applies after September 17, 
2024. For rules on and before September 17, 2024, see Sec.  1.1014-1 as 
contained in 26 CFR part 1 revised as of January 19, 2017.

0
Par. 4. Section 1.1014-2 is amended by revising the second sentence of 
paragraph (b)(2) as follows:


Sec.  1.1014-2  Property acquired from a decedent.

* * * * *
    (b) * * *
    (2) * * * Except as provided in Sec.  1.1014-10, it is not 
necessary for the application of this paragraph (b)(2) that an estate 
tax return be required to be

[[Page 76376]]

filed for the estate of the decedent or that an estate tax be payable. 
* * *
* * * * *

0
Par. 5. 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 property's Federal estate tax value.

    (a) Consistent basis requirement--(1) General rule. The consistent 
basis requirement is the requirement that the initial basis in certain 
property be equal to or less than the property's final value as 
determined under paragraph (b)(1) of this section or, if no final value 
has yet been determined, the property's reported value for Federal 
estate tax purposes as described in paragraph (b)(2) of this section. 
The property subject to the consistent basis requirement is referred to 
in this section as consistent basis property and is described in 
paragraph (c)(1) of this section.
    (2) Initial basis in consistent basis property and effect of basis 
adjustments. The initial basis in consistent basis property is the 
final value of the property, as determined under paragraph (b)(1) of 
this section, and, until the final value of this property is 
determined, the property's initial basis is the reported value, as 
described in paragraph (b)(2) of this section. The initial basis in 
consistent basis property may be adjusted pursuant to the operation of 
section 1014 or other provisions of the Internal Revenue Code (Code) 
governing basis, as applicable, and those adjustments will not violate 
the consistent basis requirement in paragraph (a)(1) of this section. 
For example, the initial basis in consistent basis property may be 
adjusted for gain recognized by the estate upon distribution of the 
property and for post-death capital improvements and depreciation. It 
also may be adjusted in the manner provided in section 1014(d) in the 
case of DISC stock and in the manner provided under subchapter K or S 
of chapter 1 of the Code, respectively, in the case of an interest in a 
partnership or S corporation.
    (3) Duration of consistent basis requirement. The consistent basis 
requirement applies as long as the initial basis in consistent basis 
property is related, in whole or in part, to the property's final 
value, as determined under paragraph (b)(1) of this section, or, if 
applicable, the property's reported value, as determined under 
paragraph (b)(2) of this section. Therefore, regardless of the number 
of successive owners, the consistent basis requirement continues to 
apply until the entire property is sold, exchanged, or otherwise 
disposed of in one or more transactions that result in a recognition 
event for income tax purposes (whether or not resulting in a gain or 
loss) or until the entire property becomes includible in another 
decedent's gross estate. The consistent basis requirement applies 
whenever there is a taxable event with respect to the property, such 
as, but not limited to, a sale or exchange, depreciation, or 
amortization of the property. The expiration of the period of 
limitations on assessment for an income tax return that uses an 
incorrect basis in reporting a taxable event with respect to consistent 
basis property has no effect on the duty to determine basis under the 
rules of this section for purposes of reporting any subsequent taxable 
event with respect to the property if the consistent basis requirement 
continues to apply under the rule of this paragraph (a)(3).
    (b) Final value and reported value--(1) Final value. The final 
value of consistent basis property is its fair market value as finally 
determined for Federal estate tax purposes. That value is--
    (i) The value reported on an estate tax return filed with the IRS, 
once the period of limitations on assessment (see section 6501) of 
estate tax has expired without that value having been timely adjusted 
by the IRS; or
    (ii) The value determined or specified by the IRS that differs from 
the value reported on an estate tax return filed with the IRS and the 
value specified by the IRS for other included property, as defined in 
paragraph (d)(4) of this section, once the period of limitations on 
assessment applicable to the estate tax has expired without that value 
having been timely contested by the executor, as defined in paragraphs 
(d)(1) and (2) of this section, respectively; or
    (iii) The value determined in a written agreement with the IRS, 
(whether entered into in the course of the administrative proceedings 
between the estate and the IRS or after the commencement of 
litigation), once that written agreement has been executed by both the 
executor and the IRS and is binding on all parties (including, but not 
limited to, the executor, the IRS, and the beneficiaries); or
    (iv) The value determined by a court for the purpose of determining 
the estate tax liability of the estate, as defined in paragraph (d)(3) 
of this section, once the court's determination no longer can be 
appealed to any court.
    (2) Reported value if no final value yet determined--(i) In 
general. Prior to the determination of the final value in accordance 
with paragraph (b)(1) of this section, a taxpayer may not claim an 
initial basis in consistent basis property in excess of the property's 
value as reported on the Statement described in Sec.  1.6035-1(c)(2) 
and required under Sec.  1.6035-1 (as supplemented). This value is 
referred to in this section as the reported value. A value reported on 
a Statement (or a supplement to the Statement) that either reports a 
value from an estate tax return filed after the expiration of the 
period of limitations on assessment applicable to that return, or a 
value reported for property not reported on the estate tax return, is 
not a reported value for purposes of this section. See Sec.  1.6035-
1(d) regarding an executor's duty to supplement the Statement.
    (ii) Limit on reliance on Statement not reporting final value. If 
the final value of consistent basis property is determined (as 
described in paragraph (b)(1) of this section) before the expiration of 
the period of limitations on assessment for a taxpayer's income tax 
return that reports a taxable event with regard to the property, the 
taxpayer's reliance on a Statement (or a supplement to the Statement) 
that does not report the final value of the property may result in an 
income tax deficiency and underpayment. See, however, section 6664 and 
the corresponding regulations for rules relating to waivers of 
penalties for certain failures due to reasonable cause.
    (3) Special rules--(i) Property subject to debt. The final value 
or, if applicable, the reported value of property subject to recourse 
or non-recourse debt is determined based on the gross value of that 
property undiminished by the debt, regardless of whether the estate tax 
return reports the net value (equity of redemption value) of the 
property or separately reports the gross value of the property and the 
outstanding debt.
    (ii) Special use property. The final value or, if applicable, the 
reported value of special use property with regard to which a recapture 
event (described in section 2032A(c)(1)) has occurred is increased as 
provided in section 1016(c) if the qualified heir makes the election 
under section 1016(c) and pays the amounts required under that section.
    (c) Consistent basis property--(1) Property subject to the 
consistent basis requirement--(i) In general. Except as provided in 
paragraph (c)(2) of this section, consistent basis property is any 
property--
    (A) To which section 1014(a) applies;
    (B) That is included property, as defined in paragraph (d)(4) of 
this section, if the decedent's Federal estate tax return is filed 
after July 31, 2015, and any other property the basis of

[[Page 76377]]

which is determined, in whole or in part, by reference to the basis of 
included property (for example, property acquired in a like-kind 
exchange or an involuntary conversion); and
    (C) Whose value increases the estate tax liability, as defined in 
paragraph (d)(3) of this section, that is payable after the application 
of allowable credits, as defined in paragraph (d)(5) of this section.
    (ii) Application. If the decedent's Federal estate tax return is 
filed on or before July 31, 2015, no included property and no other 
property described in paragraph (c)(1)(i) of this section is subject to 
the consistent basis requirement, even if the due date of that return 
is after July 31, 2015, or if one or more supplements to that return 
are filed with the IRS after July 31, 2015. If an estate tax liability 
is payable after the application of allowable credits, all property 
described in paragraphs (c)(1)(i)(A) and (B) of this section is 
considered property whose value increases the estate tax liability for 
purposes of paragraph (c)(1)(i)(C) of this section and, therefore, is 
subject to the consistent basis requirement, except as provided in 
paragraph (c)(2) of this section. If, after the application of 
allowable credits, no estate tax liability is payable, no such property 
is subject to the consistent basis requirement.
    (2) Property excepted from or not subject to the consistent basis 
requirement. Notwithstanding paragraph (c)(1) of this section, the 
following property either is excepted from or is not subject to the 
consistent basis requirement--
    (i) United States dollars (as defined in paragraph (d)(6) of this 
section).
    (ii) United States dollar-denominated demand deposits.
    (iii) Certificates of deposit denominated in United States dollars.
    (iv) Cash collateral denominated in United States dollars held by a 
third party to secure a liability (such as a deposit of purchase money 
or a security deposit).
    (v) Shares of a registered investment company priced in United 
States dollars that is a money market fund under Rule 2a-7 under the 
Investment Company Act of 1940 (17 CFR 270.2).
    (vi) Life insurance proceeds on the life of the decedent payable in 
a lump sum in United States dollars.
    (vii) Federal, State, and local tax refunds and other refunds 
payable entirely in United States dollars.
    (viii) Notes that are forgiven in full by the decedent upon death, 
whether or not denominated in United States dollars.
    (ix) Household and personal effects for which an appraisal is not 
required under Sec.  20.2031-6(b) of this chapter.
    (x) Property the initial basis of which is not in any way 
determined with regard to or derived from the property's final value as 
determined under paragraph (b)(1) of this section or its reported value 
as determined under paragraph (b)(2) of this section, if applicable. 
Such property includes but is not limited to--
    (A) Annuity contracts subject to section 72 and amounts received as 
an annuity subject to section 72;
    (B) An interest in property that consists entirely of the right to 
receive an item of income in respect of a decedent as defined in 
section 691;
    (C) Amounts received under installment obligations arising from a 
transaction for which the installment method for determining gain under 
section 453 applies;
    (D) Appreciated property described in section 1014(e) that is 
acquired by the decedent within 1 year of death;
    (E) Stock of a passive foreign investment company subject to 
section 1296(i), but only if the basis of such stock is the adjusted 
basis in the hands of the decedent immediately before the decedent's 
death; and
    (F) Interests in and distributions from retirement plans and 
deferred compensation plans, including individual retirement 
arrangements as defined in sections 408 and 408A, that are expressed 
entirely in United States dollars.
    (xi) Any interest in property that qualified for an estate tax 
marital deduction under section 2056, 2056A, or 2106(a)(3) for which 
such a deduction was properly claimed, and/or any interest in property 
that qualified for an estate tax charitable deduction under section 
2055 or 2106(a)(2) for which such a deduction was properly claimed, 
provided that the value of the decedent's entire interest in the 
included property is wholly deductible and equal to the total amount 
qualifying for those deductions.
    (xii) Property that represents the surviving spouse's one-half 
share of community property to which section 1014(b)(6) applies, 
regardless of whether this property is included property as defined in 
paragraph (d)(4) of this section.
    (xiii) Property the basis of which is adjusted in a manner similar 
to section 1014(a) on the occurrence of a taxable termination that 
occurs on the death of a trust beneficiary pursuant to section 
2654(a)(2) (to the extent the property is not then includible in the 
gross estate of any person).
    (xiv) Any other property that is not described in paragraph 
(c)(1)(i) of this section or that is identified as excepted property in 
published guidance in the Federal Register or in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (d) Definitions. The following definitions apply for purposes of 
this section--
    (1) Contested. The term contested means to put at issue the value 
of property in a written communication to the IRS that identifies the 
specific property, states that the executor does not accept as correct 
the value of that property as determined or specified by the IRS, and 
provides the executor's claimed value for that property as determined 
in accordance with the requirements of section 2031, the corresponding 
regulations, and other applicable guidance. An issue cannot be 
contested by a general statement or written communication that does not 
include each of these specified elements.
    (2) Executor. The term executor includes any person described in 
section 2203, as expanded to include all persons required under section 
6018(b) to file an estate tax return.
    (3) Estate tax liability. The term estate tax liability means the 
amount of tax imposed under chapter 11 of the Code (chapter 11).
    (4) Included property. The term included property means property 
the value of which is included in the value of the decedent's gross 
estate as defined in section 2031 or 2103. Generally, this refers to 
property whose value is reported on an estate tax return, but it also 
refers to property whose value otherwise is included in the total value 
of the gross estate (for example, during examination by the IRS) so 
that a final value is or will be determined for that property under 
chapter 11. However, solely for purposes of this section, included 
property does not refer to unreported property whose value is not 
reported on an estate tax return and whose value is not otherwise 
included in the value of the decedent's gross estate as finally 
determined for Federal estate tax purposes.
    (5) Allowable credits. The term allowable credits includes any 
credit against the estate tax liability allowable by any section of the 
Code or by reason of any treaty obligation of the United States, 
provided the estate qualifies for and properly claims the credit by 
complying with all applicable rules for claiming the credit. For 
instance, the prorated unified credit under section 2102(b)(3) is an 
allowable credit for qualifying estates if the estate files all

[[Page 76378]]

necessary forms or statements required by the IRS to claim that credit.
    (6) United States dollars. The term United States dollars means the 
official currency of the United States. The term United States dollars 
includes physical bills and coins for which the value of each bill or 
coin is equivalent to the face amount of that bill or coin. This 
definition does not include other physical United States bills or coins 
with numismatic value because these bills and coins typically do not 
have a value equal to their face value.
    (e) Examples. The following examples illustrate the application of 
this section. In each case, the decedent D was a citizen of the United 
States, the estate does not elect the alternate valuation method under 
section 2032, and an estate tax liability is payable after the 
application of all allowable credits.
    (1) Example 1--(i) Final value determined by value on estate tax 
return. At D's death, D owned (among other assets) a private residence 
not subject to any debt. D's sole beneficiary is D's child C. The value 
of the residence is reported on the estate tax return at $300,000. The 
IRS accepts the return as filed and the period of limitations on 
assessment of estate tax expires. For purposes of the consistent basis 
requirement applicable to C, the final value of D's residence is 
$300,000, and therefore, C's initial basis in the residence is 
$300,000. See paragraphs (a)(2) and (b)(1)(i) of this section.
    (ii) Adjustment of initial basis pursuant to other Code provisions. 
Several years later, C adds a master suite to the private residence at 
a cost of $45,000. Pursuant to section 1016(a), C's basis in the 
residence is increased by $45,000 to $345,000. Subsequently, C sells 
the residence to an unrelated third party for $450,000. C claims a 
basis in the residence of $345,000 and reports a gain of $105,000 
($450,000 less $345,000). C has complied with the consistent basis 
requirement, and C's adjustment to C's initial basis does not violate 
the consistent basis requirement. See paragraphs (a)(1) and (2) of this 
section.
    (2) Example 2--(i) Final value determined on examination. The facts 
are the same as in paragraph (e)(1)(i) of this section (Example 1) 
except that, on examination, the IRS adjusts the value of the residence 
to $290,000 and that value is not contested before the period of 
limitations on assessment of estate tax expires. For purposes of the 
consistent basis requirement applicable to C, the final value of the 
residence is $290,000, and therefore, C's initial basis in the 
residence, before taking into account C's subsequent renovations, is 
$290,000. See paragraphs (a)(2) and (b)(1)(ii) of this section.
    (ii) Reported value if no final value yet determined and reliance 
on Statement required under Sec.  1.6035-1. Prior to the determination 
of final value, C sells the residence for $375,000. C reports a gain of 
$75,000 on C's income tax return, relying on the reported value in a 
Statement required under Sec.  1.6035-1 and claiming an initial basis 
of $300,000. C has complied with the consistent basis requirement 
because C did not claim an initial basis in the residence in excess of 
its reported value before the final value was determined. However, 
because C claimed an initial basis in the residence that exceeds the 
final value, C may have an income tax deficiency and underpayment for 
the year of the sale if the applicable period of limitations on 
assessment for C's income tax return has not expired when the final 
value is determined. See paragraphs (b)(2)(i) and (ii) of this section.
    (3) Example 3--(i) Final value determined by agreement. At D's 
death, D owned 50% of Partnership P, whose sole asset was a rental 
building with a fair market value of $10 million subject to non-
recourse debt of $2 million. D's sole beneficiary is D's child C. The 
value of D's interest in Partnership P is reported on the estate tax 
return at $4 million (50% of ($10 million less $2 million)). On 
examination, the IRS timely adjusts the value of the partnership 
interest to $5.25 million and the executor of D's estate timely 
contests that value before the period of limitations on assessment of 
estate tax expires. Subsequently, the IRS and the executor of D's 
estate enter into a settlement agreement that provides that the value 
of D's interest in Partnership P for purposes of the estate tax is $4.5 
million. For purposes of the consistent basis requirement applicable to 
C, the final value of the partnership interest is $4.5 million, and 
therefore, C's initial basis in the partnership interest is $4.5 
million. See paragraphs (a)(2) and (b)(1)(iii) of this section.
    (ii) Adjustment of initial basis pursuant to other Code provisions. 
C's share of Partnership P's liabilities at the date of D's death is $1 
million. Under section 742 of the Internal Revenue Code and Sec.  
1.742-1 of this part, C's basis in the partnership interest is $5.5 
million ($4.5 million initial basis plus C's $1 million share of 
Partnership P's debt). C later sells the partnership interest for $5 
million at a time when C's basis has not changed and C's share of the 
debt remains $1 million. Under section 752(d), C's amount realized on 
the sale includes $1 million for the reduction in C's share of 
partnership liabilities. Therefore, C's total amount realized is $6 
million. C reports taxable gain of $0.5 million ($6 million amount 
realized less $5.5 million basis). C has complied with the consistent 
basis requirement because C did not claim an initial basis in the 
partnership interest that exceeds the final value of the interest, as 
determined under paragraph (b)(1) of this section, and C's adjustment 
of the initial basis in the partnership interest as reported does not 
violate the consistent basis requirement. See paragraphs (a)(1) and (2) 
of this section.
    (4) Example 4--(i) Final value determined by court decision. At D's 
death, D owned (among other assets) a rental property. D's sole 
beneficiary is D's child C. The value of the rental property is 
reported on the estate tax return at $1 million. On examination, the 
IRS determines the value of the rental property to be $1.5 million. A 
court subsequently determines that the fair market value of the rental 
property for purposes of the estate tax is $1.3 million and the court's 
decision becomes final. For purposes of the consistent basis 
requirement, the final value of the rental property is $1.3 million, 
and therefore, C's initial basis is $1.3 million. See paragraphs (a)(2) 
and (b)(1)(iv) of this section.
    (ii) Reliance on Statement required under Sec.  1.6035-1 and 
duration of consistent basis requirement. After the estate tax return 
is filed and before the final value is determined, C receives a 
Statement required under Sec.  1.6035-1 showing a reported value of $1 
million for the rental property. C claims a depreciation deduction on 
the first income tax return C files after acquiring the property, 
relying on the reported value in the Statement required under Sec.  
1.6035-1. C has complied with the consistent basis requirement on that 
return because C did not claim an initial basis in the rental property 
in excess of its reported value before the final value was determined. 
C may claim a credit or refund of income tax that may result from the 
increased depreciation deduction based on the final value of the rental 
property, but only if the period of limitations for a claim for a 
credit or refund of income tax for that year has not expired. C must 
use the final value of $1.3 million to determine C's unadjusted basis 
in the rental property for all open taxable years. In this case and 
pursuant to section 1016(a)(2), C's adjusted basis is determined by 
reducing the rental property's final value of $1.3 million by the 
greater of the depreciation deductions allowed or allowable based on 
the final value of $1.3 million for all

[[Page 76379]]

prior tax years (open and closed). See paragraphs (a)(3), (b)(2)(i) and 
(ii) of this section.
    (5) Example 5--Final value for property subject to debt. At D's 
death, D's gross estate includes a yacht valued at $750,000, subject to 
$150,000 non-recourse debt. D's sole beneficiary is D's child C. 
Pursuant to the rule in Sec.  20.2053-7 of this chapter, the executor 
of D's estate reports the $600,000 net value of the yacht on the estate 
tax return ($750,000 less $150,000 debt) and claims no other deduction 
for the debt. The IRS accepts the return as filed and the period of 
limitations on assessment of estate tax expires. For purposes of the 
consistent basis requirement applicable to C, the final value of the 
yacht is $750,000, and therefore, C's initial basis in the yacht is 
$750,000. See paragraph (b)(3) of this section.
    (6) Example 6--Included property subject to the consistent basis 
requirement. After exercising due diligence to discover estate assets, 
the executor of D's estate reports the value of all known property 
includible in D's gross estate on a timely filed estate tax return and 
pays the estate tax liability. During examination of the return, the 
IRS becomes aware of a piece of artwork in the possession of D's child 
C, the value of which is includible in D's gross estate but is not 
reported on the estate tax return. The value of the artwork for Federal 
estate tax purposes is $500,000. Pursuant to the examination, the IRS 
includes the value of the artwork in the value of D's gross estate, 
which causes an increase in D's estate tax liability. Neither the 
inclusion of the artwork in D's gross estate nor the value at which the 
artwork is included in D's estate is contested by the executor of D's 
estate before the period of limitation on assessment of estate tax 
expires. The artwork is subject to the consistent basis requirement and 
the final value of the artwork is $500,000. Therefore, C's initial 
basis in the artwork is $500,000. See paragraphs (a)(2) and (c)(1)(i) 
of this section.
    (7) Example 7--(i) Partially deductible property subject to the 
consistent basis requirement. Pursuant to a bequest in D's will, Trust 
is established and funded with certain property, the value of which is 
includible in the gross estate under section 2031. Trust is a 
charitable remainder annuity trust described in section 664(d)(1). 
Trust provides that, in each taxable year during the lifetime of D's 
surviving child C, the trustee must pay to C an annuity of 5% of the 
initial net fair market value of all property passing to Trust as 
finally determined for Federal estate tax purposes. Upon the death of 
C, the trustee must distribute all of the then principal and income of 
Trust to organizations described in sections 170(c), 2055(a), and 
2522(a) of the Code as the trustee selects, in the trustee's sole 
discretion. Although the executor of D's estate properly claims an 
estate tax charitable deduction under section 2055(e)(2)(A) for the 
value of the remainder interest in Trust, D's estate has an estate tax 
liability after application of all allowable credits. The property 
passing to Trust is subject to the consistent basis requirement because 
the value of the property is included in D's gross estate, an estate 
tax liability is payable after the application of all allowable 
credits, and the property is not described in paragraph (c)(2) of this 
section (in particular, the property is not wholly deductible property 
within the meaning of paragraph (c)(2)(xi) of this section).
    (ii) Wholly deductible property not subject to the consistent basis 
requirement. The facts are the same as in paragraph (e)(7)(i) of this 
section (Example 7), except that the sole annuity beneficiary of Trust 
is D's surviving spouse S, and the executor of D's estate properly 
claims a deduction under section 2056(b)(8) for the value of S's 
annuity interest. Because the value of D's entire interest in the 
property passing to Trust qualified for either a charitable deduction 
under section 2055(e)(2) or a marital deduction under section 
2056(b)(8), none of the property passing to Trust will be subject to 
the consistent basis requirement. See paragraph (c)(2)(xi) of this 
section.
    (iii) Property not wholly deductible property if the sum of marital 
and charitable deductions allowed for that property is less than the 
value of the decedent's entire interest in the property. At the time of 
D's death, D owned 80 shares of voting stock in a closely-held 
corporation that has 100 shares of voting stock outstanding. D's will 
directed the executor of D's estate to distribute 40 shares of D's 
stock to a marital trust and 40 shares of D's stock to a charitable 
trust. D's executor included the value of D's 80 shares of stock in D's 
gross estate at $8,000,000 for purposes of the estate tax. Because of 
discounts applicable in valuing each of the two blocks of only 40 
shares of the stock, D's executor correctly claimed a charitable 
deduction under section 2055(e)(2) of only $3,000,000, and correctly 
claimed a marital deduction under section 2056(b)(7) of only 
$3,000,000. D's executor determined that an estate tax was due on D's 
estate after the application of all allowable credits. The IRS accepted 
the return as filed and the period of limitations on assessment of 
estate tax expired. The 40 shares of stock owned by charitable trust 
and the 40 shares of stock owned by marital trust are not wholly 
deductible property within the meaning of paragraph (c)(2)(xi) of this 
section and are subject to the consistent basis requirement.
    (f) Applicability date. This section applies to property described 
in paragraph (c)(1) of this section that is acquired from a decedent or 
by reason of the death of a decedent if the decedent's Federal estate 
tax return is filed after September 17, 2024.

0
Par. 6. Add Sec.  1.6035-0 to read as follows:


Sec.  1.6035-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.6035-1 
and 1.6035-2.

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

    (a) Overview.
    (b) Applicability of section 6035 reporting requirements.
    (1) In general.
    (2) Executor(s) subject to section 6035 reporting requirements.
    (3) Examples.
    (c) Required Information Return and Statement(s).
    (1) Required Information Return.
    (2) Required Statement(s).
    (3) Due dates.
    (4) Acquiring an interest in property.
    (5) Option to furnish Statement(s) prior to the acquisition of 
property by a beneficiary.
    (6) Example.
    (d) Duty to supplement.
    (1) Duty to supplement to report changes to the information 
reported on the Information Return or Statement(s).
    (2) Changes requiring supplemental reporting.
    (3) Exceptions; no duty to supplement despite certain changes.
    (4) Due date of supplemental reporting.
    (5) Duration of duty to supplement.
    (6) Examples.
    (e) Property for which reporting is required.
    (1) In general.
    (2) Examples.
    (f) Excepted property requiring only limited reporting.
    (1) Excepted property.
    (2) List of excepted property.
    (3) United States dollars defined.
    (4) Examples.
    (g) Beneficiaries.
    (1) In general.
    (2) Required Statement to beneficiary trust.
    (3) Required Statement to the holder of a split interest in 
property, not in trust.
    (4) Reporting for a missing beneficiary.
    (h) Reporting requirements applicable to trustees.
    (1) Circumstances under which trustees of beneficiary trusts and 
other trusts are subject to reporting.
    (2) Required reporting.
    (3) Example.
    (i) Penalties.

[[Page 76380]]

    (j) Applicability date.

Sec.  1.6035-2 Transitional relief.

    (a) Statements due before June 30, 2016.
    (b) Applicability date.


0
Par. 7. Revise Sec.  1.6305-1 to read as follows:


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

    (a) Overview. This section implements the reporting requirements 
under section 6035 of the Internal Revenue Code (Code) applicable to 
executors and certain trustees. In general, the reporting requirements 
of this section require providing information to the IRS on the 
identity of persons acquiring property from a decedent and providing 
basis information to persons acquiring that property from the decedent. 
Basis information is needed by certain persons acquiring property from 
a decedent in order to comply with the consistent basis requirement of 
section 1014(f) of the Code. See Sec.  1.1014-10 for rules applicable 
to the consistent basis requirement.
    (b) Applicability of section 6035 reporting requirements--(1) In 
general. The reporting requirements under section 6035 of the Code 
apply only in the case of an estate in which the executor is required 
to file an estate tax return under section 6018 of the Code (determined 
without regard to Sec.  20.2010-2(a)(1) of this chapter) (required 
estate tax return) and the executor files that return after July 31, 
2015. The requirements do not apply in the case of an estate whose 
required estate tax return is filed on or before July 31, 2015, even if 
the due date of the return is after July 31, 2015, or if one or more 
supplements to that return are filed with the IRS after July 31, 2015. 
Whether an estate tax return is a required estate tax return depends on 
the relevant factors identified in section 6018 and the corresponding 
regulations, including the date of death value of property includible 
in the decedent's gross estate, the amount of adjusted taxable gifts, 
and the applicable filing threshold. An election under section 2032 or 
2032A of the Code to determine the value of the gross estate in 
accordance with those respective provisions is not relevant to whether 
an executor is required to file an estate tax return under section 
6018. If an estate tax return is not required to be filed under section 
6018 based on the relevant factors identified in section 6018, then an 
estate tax return filed for another purpose (such as to make a 
portability election under section 2010(c)(5) of the Code, an 
allocation or election under section 2632 of the Code with regard to a 
decedent's generation-skipping transfer tax exemption, or a protective 
filing to avoid a penalty or satisfy a State law requirement) is not a 
required estate tax return for purposes of this section.
    (2) Executor(s) subject to section 6035 reporting requirements. For 
purposes of this section, the term executor has the same meaning as in 
section 2203 of the Code, as expanded to include all persons required 
under section 6018(b) to file an estate tax return. Thus, more than one 
person may be subject to the reporting requirements for the same 
decedent's estate. If one executor is unable to file a complete estate 
tax return (for example, if the executor has insufficient information 
about property in the decedent's gross estate that is not in the 
possession of that executor), each person required to file a return is 
subject to the reporting requirements of this section only with regard 
to the property reported (or required to be reported) on the estate tax 
return required to be filed by that person. Similarly, if no executor 
is appointed by a court, each person in actual or constructive 
possession of any property of the decedent is an executor for purposes 
of this section and is subject to the reporting requirements of this 
section, but only with regard to the property reported or required to 
be reported on the estate tax return required to be filed by that 
executor under section 6018(b).
    (3) Examples. The following examples, in which the decedent D was a 
United States citizen at the time of the decedent's death, illustrates 
the application of this paragraph (b).
    (i) Example 1--Executor required to file a return under section 
6018. The value at death of property includible in D's gross estate 
exceeds the basic exclusion amount in effect for the year of D's death 
under section 2010(c). On the timely-filed estate tax return, D's 
executor makes a valid alternate valuation election under section 2032 
to value the property of D's gross estate as of a date subsequent to 
the date of death. As a result, the value of property includible in D's 
gross estate is decreased to a value that is less than the basic 
exclusion amount in effect for the year of D's death. Because D's 
executor is required to file an estate tax return under section 6018, 
D's executor also is subject to the reporting requirements of section 
6035. This is true even though no estate tax liability was incurred, 
and the requirements of section 1014(f) do not apply to any property 
includible in D's gross estate. See Sec.  1.1014-10(c)(1).
    (ii) Example 2--Executor not required to file a return under 
section 6018. The value at death of property includible in D's gross 
estate does not exceed the basic exclusion amount in effect for the 
year of D's death under section 2010(c) of the Code. In accordance with 
the terms of D's will, D's executor distributes D's entire estate to 
D's only child. D's executor files an estate tax return solely for the 
purpose of making a portability election under section 2010(c)(5). 
Because D's executor is not required to file an estate tax return under 
section 6018, D's executor is not subject to the reporting requirements 
of section 6035.
    (iii) Example 3--No executor appointed. The value at death of 
property includible in D's gross estate exceeds the basic exclusion 
amount in effect for the year of D's death under section 2010(c) and 
consists entirely of D's interests in Property A and Property B that D 
owned with Nephew A and Nephew B, respectively, as joint tenants with 
rights of survivorship. Pursuant to local law, Nephew A becomes the 
sole owner of Property A and Nephew B becomes the sole owner of 
Property B upon D's death. No executor or administrator is appointed, 
qualified, or acting within the United States for D's estate on the due 
date of D's estate tax return. Because Nephew A has actual or 
constructive possession of Property A, Nephew A is an executor 
described in paragraph (b)(2) of this section with regard to D's 
interest in Property A. Because Nephew A is required to file an estate 
tax return under section 6018 with regard to D's interest in Property 
A, Nephew A also is subject to the reporting requirements of section 
6035 with respect to Property A. Similarly, because Nephew B has actual 
or constructive possession of Property B on the due date of D's estate 
tax return, Nephew B is an executor described in paragraph (b)(2) of 
this section with regard to D's interest in Property B. Because Nephew 
B is required to file an estate tax return under section 6018 with 
regard to D's interest in Property B, Nephew B also is subject to the 
reporting requirements of section 6035 with respect to Property B.
    (iv) Example 4--Executor unable to make a complete return. The 
value at death of property includible in D's gross estate exceeds the 
basic exclusion amount in effect for the year of D's death under 
section 2010(c). E is appointed the executor of D's estate. During the 
administration of D's estate, E discovers that D has made transfers 
each year for the past ten years to T as trustee of Trust. E contacts 
T, but T refuses to provide E with any information regarding Trust. E 
timely files D's estate tax return reporting the value of all of the 
property in D's gross estate except Trust. Pursuant to

[[Page 76381]]

Sec.  20.6018-2 of this chapter, E includes with the return a statement 
that gives T's name and contact information and the date and amount of 
each transfer from D to T as trustee of Trust, which is all the 
information E has about Trust. The IRS provides notice to T of T's 
obligation to make D's estate return as to Trust. Because E is required 
to file an estate tax return under section 6018, E is subject to the 
reporting requirements of section 6035 as to the property reported on 
the estate tax return filed by E. Because T is required to file an 
estate tax return under section 6018, T is subject to the reporting 
requirements of section 6035 as to Trust.
    (c) Required Information Return and Statement(s)--(1) Required 
Information Return. An executor required to file an estate tax return 
under section 6018 must file with the IRS an Information Return by the 
date required under paragraph (c)(3) of this section. The term 
Information Return refers to the Form 8971, Information Regarding 
Beneficiaries Acquiring Property from a Decedent, and all required 
attachments. Required attachments include a copy of each Statement 
described in paragraph (c)(2) of this section (if any) required to be 
furnished to a beneficiary who acquires property within the meaning of 
paragraph (c)(4) of this section on or before the due date of the 
estate tax return or, if earlier, the date on which the estate tax 
return is filed with the IRS. Required attachments also include a copy 
of each Statement (if any) furnished pursuant to paragraph (c)(5) of 
this section before the filing of the Information Return. The term 
Information Return also refers to any successor form or procedure 
designated by the IRS for this purpose. The Information Return must 
identify each beneficiary who has acquired or will acquire property 
subject to reporting (under paragraph (e) of this section), as well as 
other information prescribed by the Information Return and the 
instructions for that form. For the duty to supplement the Information 
Return in the event such property is acquired by a beneficiary after 
the filing of the estate tax return, see paragraph (c)(3)(ii) of this 
section. For the duty to supplement the Information Return in the event 
of a change to the information required to be reported, see paragraph 
(d) of this section.
    (2) Required Statement(s). An executor required to file an estate 
tax return under section 6018 also must furnish a Statement to each 
beneficiary who acquires property subject to reporting under paragraph 
(e) of this section. For purposes of this section, the term Statement 
refers to the payee statement described as Schedule A of the 
Information Return to be furnished to a beneficiary, or any successor 
form, schedule, or procedure designated by the IRS for this purpose. 
The Statement furnished to a beneficiary must identify that 
beneficiary's acquired property and its value and other information 
prescribed by the Statement and the instructions for that form. For 
each property reported on a Statement, the value the executor reports 
on that Statement is the value of the property as reported on the 
estate tax return filed with the IRS. Generally, this is the value of 
the property on the date of the decedent's death, except in the case of 
an election in which the value is determined under section 2032 or 
2032A, in which case it is the value determined under the applicable 
provision. If different interests in the same property pass from the 
decedent to one or more income beneficiaries or life tenants and 
remaindermen, the value to be reported is the value of the entire 
property and each recipient will be responsible for identifying his or 
her respective share of uniform basis. For the duty to supplement the 
Statement in the event of a change to the information required to be 
reported, including a change in the identified value of property 
reported on a Statement, see paragraph (d) of this section.
    (3) Due dates--(i) General rule. Except as provided in paragraphs 
(c)(3)(ii) and (iii) of this section and in Sec.  1.6035-2, the 
executor must file the Information Return with the IRS on or before the 
due date specified in this paragraph (c)(3)(i). In addition, each 
Statement, a copy of which is required to be attached to the 
Information Return, must be furnished to the named beneficiary on or 
before this same due date. The Information Return must be filed, and 
each such Statement (if any) must be furnished to its named 
beneficiary, on or before the earlier of--
    (A) The date that is 30 days after the due date of the estate tax 
return required under section 6018 (including extensions, if any); or
    (B) The date that is 30 days after the date on which that estate 
tax return is filed with the IRS.
    (ii) Due date and applicable rules if property is acquired 
subsequently by beneficiary. If a beneficiary acquires property subject 
to reporting after the due date of the estate tax return (or the 
earlier filing of the Information Return), the executor must furnish a 
Statement to that beneficiary with regard to that acquired property on 
or before January 31 of the year following the beneficiary's 
acquisition of that property. By that same January 31, the executor 
also must attach a copy of the Statement to a supplement to the 
Information Return (a supplemental Information Return) and must file 
the supplemental Information Return with the IRS. The supplemental 
Information Return must include a copy of each Statement required to be 
furnished for that year pursuant to this paragraph (c)(3)(ii), as well 
as a copy of each Statement (if any) furnished in accordance with 
paragraph (c)(5) of this section that has not already been filed with 
the IRS as an attachment to the Information Return or a supplement to 
the Information Return. The requirements of this paragraph (c)(3)(ii) 
do not apply if the property already has been reported on a Statement 
furnished pursuant to paragraph (c)(5) of this section. See this 
paragraph (c)(3) and paragraph (d)(4) of this section for the due date 
of other required supplements to this reporting.
    (iii) 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 estate tax return with the IRS until 
after July 31, 2015, then the Information Return and all required 
Statements 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.  
1.6035-2.
    (4) Acquiring an interest in property. For purposes of this 
section, the term acquired property refers to property subject to 
reporting under paragraph (e) of this section that a beneficiary 
acquires. A beneficiary acquires such property when, under local law, 
title vests in the beneficiary or when the beneficiary otherwise has 
sufficient control over or connection with the property that the 
beneficiary is able to take action related to the property for which 
basis is relevant for Federal income tax purposes (such as, for 
example, to sell or depreciate the property). In many cases, a 
beneficiary's acquisition of property occurs upon an executor's or 
trustee's distribution of the property. For property passing by 
contract or by operation of law, the beneficiary's acquisition of that 
property generally occurs automatically upon the death of the decedent.
    (5) Option to furnish Statement(s) prior to the acquisition of 
property by a beneficiary. An executor may satisfy the requirement in 
paragraph (c)(2) of this section to furnish a Statement to a 
beneficiary by furnishing the Statement to the beneficiary prior to the 
beneficiary's acquisition of the property subject to reporting under 
paragraph (e) of this section, provided that the executor has reason to 
believe that the

[[Page 76382]]

beneficiary will acquire that property. The Statement furnished to such 
a beneficiary must identify the property the beneficiary is expected to 
acquire as well as the value of that property and other information 
prescribed by the Statement and the instructions for that form (and 
must include information relating to other property actually acquired 
by such beneficiary as may be required under paragraph (c)(2) of this 
section). If, after satisfying the requirements of this paragraph 
(c)(5), the property is acquired by a different beneficiary, the 
executor must update the beneficiary information in the Information 
Return and furnish a Statement to that beneficiary pursuant to the duty 
to supplement to report a change in beneficiary information as 
described in paragraph (d)(2)(i) of this section. The executor 
additionally is subject to the duty to supplement to report other 
changes to the information required to be reported as identified in 
paragraph (d) of this section.
    (6) Example. The following example illustrates the application of 
this paragraph (c).
    (i) The decedent D was a United States citizen at the time of D's 
death and the executor of D's estate E is required to file an estate 
tax return under section 6018. The terms of D's will provide for D's 
entire estate to be distributed to a marital trust. Prior to timely 
filing the estate tax return for D's estate, E funded the marital trust 
with a portion of the property, the value of which is included in D's 
gross estate. Under paragraph (c)(4) of this section, the marital trust 
has acquired this property upon the funding of the trust by E. Under 
paragraphs (c)(1) and (c)(3)(i) of this section, within 30 days of 
filing the estate tax return, E must file with the IRS the Information 
Return identifying the marital trust as the beneficiary (as well as 
other information prescribed by the Information Return or instructions) 
and must include with the Information Return all required attachments. 
Under paragraphs (c)(2) and (c)(3)(i) of this section, by the same 
date, E must furnish to the marital trust the Statement identifying the 
portion of the property distributed to the marital trust and its estate 
tax value (as well as any other information prescribed by the Statement 
or instructions). A copy of the Statement is a required attachment to 
be included with the Information Return. Pursuant to paragraph (c)(5) 
of this section, E may choose to expand the property identified on the 
Statement to also include the property the marital trust is expected to 
acquire subsequently. If E so chooses, the Statement to be furnished to 
the marital trust will identify all such property and its value at the 
date of death and, except in the case of any changes to the information 
required to be reported, no further Statement will be required at the 
time of the completion of the funding of the trust.
    (ii) However, if E chooses not to expand the reporting to property 
not yet acquired by the marital trust, then, once the marital trust has 
acquired additional property, E is subject to further reporting. Under 
paragraph (c)(3)(ii) of this section, in each year that E distributes 
additional property to the marital trust, E must furnish, by January 31 
of the following year, a Statement to the marital trust identifying all 
of the property the marital trust has acquired from D's estate that 
year and the property's estate tax value (as well as any other 
information prescribed by the Statement or instructions). By the same 
date, E must file with the IRS a supplemental Information Return and 
attach a copy of that Statement as well as any other required 
attachments.
    (d) Duty to supplement--(1) Duty to supplement to report changes to 
the information reported on the Information Return or Statement(s). An 
executor to whom the reporting requirements of this section apply must 
file a supplemental Information Return with the IRS and furnish a 
Statement or supplemental Statement to each affected beneficiary if a 
change to the information required to be reported on the Information 
Return or Statement (or supplement to either) causes the information as 
reported to be incorrect or incomplete. The executor must file the 
supplemental Information Return with the IRS, including copies of each 
Statement or supplemental Statement furnished to affected 
beneficiaries, and must furnish a Statement or supplemental Statement 
to each affected beneficiary, by the due date described in paragraph 
(d)(4) of this section.
    (2) Changes requiring supplement. This paragraph (d)(2) provides a 
nonexhaustive list of changes that require supplemental reporting under 
paragraph (d)(1) of this section.
    (i) Change in beneficiary information. The receipt, discovery, or 
acquisition by the executor of information that changes the beneficiary 
to whom property is to be distributed (pursuant to a death, disclaimer, 
bankruptcy, or otherwise), or corrects or completes other beneficiary 
information originally reported, will give rise to a duty to 
supplement.
    (ii) Change in the identified value of property. The supplementing 
of an estate tax return to report a corrected estate tax value of 
property that was previously reported on an estate tax return and a 
Statement will give rise to a duty to supplement. In addition, a final 
determination of value of property for Federal estate tax purposes 
(within the meaning of Sec.  1.1014-10(b)(1)) that differs from the 
value provided on a Statement or supplement to a Statement will give 
rise to a duty to supplement.
    (iii) Change or addition of property subject to reporting. The 
supplementing of an estate tax return to report the estate tax value of 
property subject to reporting under paragraph (e) of this section, if 
that property and/or its value previously was not reported on an estate 
tax return or supplement to the estate tax return, will give rise to a 
duty to supplement. A duty to supplement also will arise if such 
property or its value that previously was not reported on an estate tax 
return or supplement to the estate tax return is included in the 
decedent's gross estate pursuant to an examination by the IRS or 
otherwise.
    (iv) Change in property to be acquired by beneficiary. A duty to 
supplement will arise if an executor furnishes a Statement to a 
beneficiary prior to the beneficiary's acquisition of property pursuant 
to paragraph (c)(5) of this section and the beneficiary ultimately 
acquires property different from the property identified on that 
Statement. A beneficiary's acquisition of different property may occur 
for any reason, including an executor's receipt of different property 
in a transaction in which the basis of the new property received by the 
executor is determined, in whole or in part, by reference to the final 
value of property acquired from or as a result of the death of the 
decedent (for example, as the result of a like-kind exchange under 
section 1031 or an involuntary conversion).
    (3) Exceptions; no duty to supplement despite certain changes. 
Notwithstanding paragraph (d)(2) of this section, no supplemental 
reporting under this section is required for:
    (i) Inconsequential errors or omissions within the meaning of Sec.  
301.6722-1(b) of this chapter;
    (ii) Changes resulting from an event that triggers an additional 
estate tax under section 2032A, including changes in value in the event 
of a beneficiary election under section 1016(c) of the Code;
    (iii) Adjustments to the basis of property pursuant to sections of 
the Code other than section 1014(f); and
    (iv) Any other change that is identified as requiring no 
supplemental reporting under this section in published guidance in the 
Federal Register or in the Internal Revenue

[[Page 76383]]

Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (4) Due date of supplemental reporting. The supplemental reporting 
required by this paragraph (d) must be filed with the IRS and furnished 
to each affected beneficiary on or before 30 days after the date on 
which information becomes available to the executor from which the 
executor can conclude that a change to the information provided on the 
Information Return or Statement (or supplement to either) requires 
supplemental reporting. For changes occurring as a result of 
supplementing the estate tax return, the date on which the information 
becomes available to the executor is deemed to be the filing date of 
the supplemental information. Therefore, for changes occurring as a 
result of supplementing the estate tax return, the due date of the 
supplemental reporting required by this paragraph (d) is 30 days after 
the filing date of the supplemental information. For changes occurring 
as a result of a determination of final value, the date on which the 
information becomes available to the executor is deemed to be the date 
a value becomes the final value under Sec.  1.1014-10(b)(1). Therefore, 
for changes occurring as a result of a determination of final value, 
the due date of the supplemental reporting required by this paragraph 
(d) is 30 days after the date a value becomes the final value under 
Sec.  1.1014-10(b)(1). However, with regard to property that has not 
been acquired by a beneficiary on or before the due date described in 
this paragraph (d)(4) and for which a Statement was not provided to the 
beneficiary pursuant to paragraph (c)(5) of this section, the due date 
may be delayed until the due date described in paragraph (c)(3)(ii) of 
this section.
    (5) Duration of duty to supplement. An executor's duty to 
supplement as described in this section continues to apply until a 
final determination of value for Federal estate tax purposes (a final 
value within the meaning of Sec.  1.1014-10(b)(1)) is determined for 
all property subject to reporting (under paragraph (e) of this section) 
or, if later, until such property has been acquired by a beneficiary. 
Therefore, the executor's final supplemental reporting is the reporting 
to the IRS and the furnishing of Statements to beneficiaries with 
regard to the last to occur of these two events, assuming that either 
event would create a change requiring supplemental reporting.
    (6) Examples. The following examples illustrate the application of 
this paragraph (d). In each case, the decedent D was a U.S. citizen and 
D's executor E was required under section 6018 to file an estate tax 
return.
    (i) Example 1--Change in identified value of property. D's estate 
includes stock in a closely-held corporation. E distributes the stock 
to a beneficiary B of the estate before the due date of the estate tax 
return. D's executor reports the value of the stock at $14 million on 
D's estate tax return and on the Statement furnished to B. On 
examination of D's estate tax return, the IRS adjusts the value of the 
closely-held stock to $18 million. A court subsequently determines that 
the fair market value of the closely-held stock for Federal estate tax 
purposes is $17 million and the court's decision becomes final on June 
15th. On or before July 15th of the same year, E must furnish a 
supplemental Statement to B showing the final value of $17 million for 
the closely-held stock, and must attach a copy of that supplemental 
Statement to a supplemental Information Return and file it with the 
IRS.
    (ii) Example 2--Duration of the duty to supplement. D's gross 
estate includes stock in closely-held corporation X, stock in closely-
held corporation Y, and cash. D's will directs E to distribute 50% of 
the value of D's estate to A and 50% to B in any manner to which A and 
B agree. A and B agree that A will take the stock in corporation X and 
B will take stock in corporation Y and they will divide the cash in 
such amounts as to cause each to take an equal share of the value D's 
estate. E timely files D's estate tax return and furnishes a Statement 
to A and to B pursuant to paragraph (c)(5) of this section. The IRS 
accepts the return as filed and the period of limitations on assessment 
of estate tax expires. Thereafter, A and B agree to revise their 
agreement. E distributes the stock in corporation X to B and the stock 
in corporation Y to A in accordance with a revised agreement between A 
and B. E's final supplemental reporting is the filing of a supplemental 
Information Return and furnishing of a supplemental Statement to A 
describing the shares and value of stock distributed to A and a 
supplemental Statement to B describing the shares and value of stock 
distributed to B.
    (e) Property for which reporting is required--(1) In general. 
Except for excepted property subject to only limited reporting as 
described in paragraph (f) of this section, the property subject to 
reporting under this section is included property and any other 
property the basis of which is determined, in whole or in part, by 
reference to the basis of the included property (for example, property 
acquired in a like-kind exchange or an involuntary conversion). For 
purposes of this section, included property is property the value of 
which is included in the value of the decedent's gross estate as 
defined in section 2031 or 2103. Generally, included property refers to 
property whose value is reported on an estate tax return, but it also 
refers to property whose value otherwise is included in the total value 
of the gross estate (for example, during examination by the IRS). Thus, 
included property includes property that qualified, in whole or in 
part, for an estate tax marital deduction under section 2056, 2056A, or 
2106(a)(3) or for an estate tax charitable deduction under section 2055 
or 2106(a)(2). It further includes property included in the decedent's 
gross estate that is distributed to a surviving spouse in satisfaction 
of that surviving spouse's interest in community property not included 
in the gross estate that the executor has distributed to a non-spouse 
pursuant to State law properly applied. However, included property does 
not include property whose value is not reported on an estate tax 
return and whose value is not otherwise included in the value of the 
decedent's gross estate, such as the property of a deceased nonresident 
noncitizen that is not subject to United States estate tax, and the 
surviving spouse's share of community property described in section 
1014(b)(6).
    (2) Examples. The following examples illustrate the application of 
this paragraph (e). In each case, the decedent D was a U.S. citizen and 
D's executor E was required under section 6018 to file an estate tax 
return.
    (i) Example 1--Included property. Pursuant to the terms of D's 
will, a trust is established and funded with property, the value of 
which is includible in D's gross estate under section 2031. The trust 
is a charitable remainder annuity trust described in section 664(d)(1). 
The terms of the trust provide that, in each taxable year during the 
lifetime of D's surviving spouse S, the trustee must pay to S an 
annuity of 5% of the initial net fair market value of all property 
passing to the trust as finally determined for Federal estate tax 
purposes. Upon the death of S, the trustee must distribute all of the 
then-principal and income of the trust to organizations described in 
sections 170(c), 2055(a) and 2522(a) as the trustee selects, in the 
trustee's sole discretion. The property used to fund the trust is 
included property and is subject to the reporting requirements of this 
section. This is true whether or not the requirements of section 
1014(f)

[[Page 76384]]

apply to the property transferred to the trust. See Sec.  1.1014-
10(d)(4).
    (ii) Example 2--Property the basis of which is determined by 
reference to the basis of included property. D's gross estate includes 
the value of Property A. Before the due date for filing the estate tax 
return, E exchanges Property A for Property B in a like-kind exchange 
pursuant to section 1031, for which D's estate recognizes no gain or 
loss. Property B is property subject to reporting as prescribed in this 
section. With respect to Property B, the value E reports on the 
Statement is the value reported for Property A on the estate tax return 
filed with the IRS.
    (f) Excepted property requiring only limited reporting--(1) 
Excepted property. Certain included property that is described in 
paragraph (f)(2) of this section (excepted property) is subject to more 
limited reporting than the reporting required under paragraph (c) of 
this section. The requirement to file an Information Return with the 
IRS as described in paragraph (c)(1) of this section remains the same 
even if all property subject to reporting under paragraph (e) of this 
section is excepted property. However, the executor is not required to 
identify or provide any other information for excepted property on the 
Information Return, and the executor is not required to furnish a 
Statement to the beneficiary with regard to that property. Instead, the 
executor is required only to report on the Information Return, in 
accordance with the instructions for that form, that some or all of the 
property subject to reporting is excepted property described in this 
paragraph (f). Further, the executor is not required to identify or 
provide any other information for excepted property on any Statement 
furnished to a beneficiary and, if this property is the only property 
that a beneficiary has acquired, an executor is not required to furnish 
a Statement to that beneficiary.
    (2) List of excepted property. Excepted property includes--
    (i) United States dollars (as defined in paragraph (f)(3) of this 
section).
    (ii) United States dollar-denominated demand deposits.
    (iii) Certificates of deposit denominated in United States dollars.
    (iv) Cash collateral denominated in United States dollars held by a 
third party to secure a liability (such as a deposit of purchase money 
or a security deposit).
    (v) Shares of a registered investment company priced in United 
States dollars that is a money market fund under Rule 2a-7 under the 
Investment Company Act of 1940 (17 CFR 270.2a).
    (vi) Life insurance proceeds on the life of the decedent payable in 
a lump sum in United States dollars.
    (vii) Federal, State, and local tax refunds and other refunds 
payable in United States dollars.
    (viii) Notes that are forgiven in full by the decedent upon the 
decedent's death, whether or not denominated in United States dollars.
    (ix) Household and personal effects for which an appraisal is not 
required under Sec.  20.2031-6(b) of this chapter.
    (x) Property that, prior to distribution from the estate or the 
decedent's revocable trust, is completely sold, exchanged, or otherwise 
disposed of in one or more transactions that are recognition events for 
Federal income tax purposes (whether or not resulting in a gain or 
loss, and whether or not any gain is capital or ordinary). Such 
property includes, but is not limited to--
    (A) Property distributed in satisfaction of a pecuniary bequest on 
which the estate recognizes any gain or loss pursuant to Sec.  
1.661(a)-2(f);
    (B) Property for which an election under section 643(e)(3) has been 
made for the estate to recognize any gain or loss;
    (C) Interests in a business entity that are redeemed for United 
States dollars prior to being distributed to the beneficiary;
    (D) Property disposed of in a transaction described in section 
267(a) and (b)(13); and
    (E) Property subject to the mark to market accounting method at the 
time of distribution from the estate or from the decedent's revocable 
trust.
    (xi) Other property having an initial basis that is not in any way 
determined with regard to or derived from the property's fair market 
value for Federal estate tax purposes. For purposes of this section, 
such property includes but is not limited to--
    (A) Annuity contracts subject to section 72 and amounts received as 
an annuity subject to section 72;
    (B) An interest in property that consists entirely of the right to 
receive an item of income in respect of a decedent as defined in 
section 691;
    (C) Amounts received under installment obligations arising from a 
transaction for which the installment method for determining gain under 
section 453 applies;
    (D) Appreciated property described in section 1014(e) that is 
acquired by the decedent within 1 year of death;
    (E) Stock of a passive foreign investment company subject to 
section 1296(i), but only if the basis of such stock is the adjusted 
basis in the hands of the decedent immediately before the decedent's 
death; and
    (F) Interests in and distributions from retirement plans and 
deferred compensation plans, including individual retirement 
arrangements as defined in sections 408 and 408A, that are expressed 
entirely in United States dollars.
    (xii) Bonds to the extent that they are redeemed by the issuer for 
United States dollars prior to being distributed to a beneficiary so 
that any resulting gain or loss is recognized by the estate.
    (xiii) Property included in the gross estate of a beneficiary who 
died before the due date of the Information Return.
    (xiv) Any other property that is identified as excepted property in 
published guidance in the Federal Register or in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (3) United States dollars defined. For purposes of this paragraph 
(f), the term United States dollars means the official currency of the 
United States. The term United States dollars includes physical bills 
and coins for which the value of each bill or coin is equivalent to the 
face amount of that bill or coin. This definition does not include 
other physical United States bills or coins with numismatic value 
because these bills or coins typically do not have a value equal to 
their face value.
    (4) Examples. The following examples illustrate the application of 
this paragraph (f). In each case, the decedent D was a U.S. citizen and 
D's executor E is required under section 6018 to file an estate tax 
return.
    (i) Example 1--Reporting household and personal effects. Included 
in D's gross estate are D's household and personal effects. The only 
item included in D's household and personal effects with a value in 
excess of $3,000 is a painting. E attaches to D's estate tax return an 
appraisal of the painting prepared in accordance with Sec.  20.2031-
6(b) of this chapter and a room-by-room itemization of D's other 
household and personal effects prepared in accordance with Sec.  
20.2031-6(a) of this chapter. E must furnish to the beneficiary of the 
painting the Statement required by paragraph (c)(2) of this section. E 
is not required to report on a Statement furnished to any beneficiary 
any information about D's other household and personal effects. If a 
beneficiary of D's household effects, other than the beneficiary of the 
painting, has acquired no other property, E is not required to furnish 
a Statement to that beneficiary. E is required to file the Information 
Return required by section (c)(1) of this section and attach to that 
Information

[[Page 76385]]

Return a copy of the Statement furnished to the beneficiary of the 
painting. E must disclose on the Information Return that some or all of 
the property included in D's gross estate is excepted property 
described in this paragraph (f).
    (ii) Example 2--Reporting if property is disposed of in taxable 
transaction. Included in D's estate are shares in X, a publicly traded 
company. Shortly after D's death but prior to the filing of the estate 
tax return for D's estate, X is acquired by T, also a publicly traded 
company. In exchange for the shares in X, the estate receives shares in 
T and cash in a fully taxable transaction. E is required to report on 
the Information Return required by paragraph (c)(1) of this section 
that some or all of the property included in D's gross estate is 
excepted property described in this paragraph (f). E is not required to 
furnish a Statement to any recipient with respect to the cash, X stock, 
or T stock.
    (iii) Example 3--Reporting if estate is liquidated prior to 
distribution. Property A is the only property in D's estate. Prior to 
filing the estate tax return for D's estate, E sells Property A for 
$15,000,000. D's estate recognizes gain on the sale of Property A for 
income tax purposes. E distributes the $15,000,000 among the 
beneficiaries of D's estate. E must file the Information Return 
required by paragraph (c)(1) of this section even though all of the 
property included in D's gross estate is excepted property within the 
meaning of this paragraph (f). E is not required to furnish to the 
beneficiaries of D's estate a Statement with regard to Property A, and 
therefore is not required to attach a copy of any Statement to the 
Information Return. E is required to file an Information Return with 
the IRS indicating that all of the property included in D's gross 
estate is excepted property described in this paragraph (f), and must 
provide other information as required by the Information Return and the 
instructions.
    (g) Beneficiaries--(1) In general. Each person who acquires (or 
will acquire) property from a decedent or by reason of the decedent's 
death that is subject to the reporting described in paragraph (e) of 
this section is a beneficiary for purposes of this section and thus is 
a person to be listed on the Information Return and, except with 
respect to excepted property (described in paragraph (f) of this 
section), is a person to whom the executor must furnish a required 
Statement. Thus, a beneficiary may be:
    (i) An individual, including one who is both the executor and a 
beneficiary, who acquires (or will acquire) property subject to 
reporting not in trust;
    (ii) The estate of a deceased individual who survived the decedent 
if such individual or estate acquires (or will acquire) property 
subject to reporting not in trust;
    (iii) A trust, whether foreign or domestic, including without 
limitation a grantor retained annuity trust, charitable remainder 
trust, and charitable lead trust (each referred to in this section as 
beneficiary trusts); or
    (iv) An entity other than a trust, including without limitation a 
business entity or an organization described in section 501(c).
    (2) Required Statement to beneficiary trust--(i) In general. If a 
beneficiary trust is the beneficiary to be identified on the 
Information Return pursuant to paragraph (g)(1) of this section, the 
executor must furnish the Statement described in paragraph (c)(2) of 
this section to the trustee rather than to the beneficiaries of the 
trust. However, if the executor reasonably believes that it is unlikely 
that the beneficiary trust will depreciate, sell, or otherwise dispose 
of the property subject to reporting in a recognition event for income 
tax purposes but instead will distribute the property in kind to the 
trust beneficiaries, the executor instead may furnish the Statement 
described in paragraph (c)(2) of this section to each of the trust 
beneficiaries, with copies of the Statements to the trustee. For this 
purpose, the trust beneficiaries include all potential current income 
beneficiaries and each remainderman who would have had a current 
interest in the trust if one or more of the income beneficiaries had 
died immediately after the decedent. For purposes of determining the 
due date of such Statements, each trust beneficiary will be deemed to 
have acquired the trust property when the trust acquired that property.
    (ii) Beneficiary trust not yet established. If, by the date 
required for filing the Information Return with the IRS, a beneficiary 
trust does not have at least one trustee and a tax identification 
number, an executor must report on the Information Return that the 
beneficiary trust has not yet been established in accordance with the 
instructions. Once the beneficiary trust has been established and the 
trust information becomes available to the executor, the executor must 
supplement the required reporting as described in paragraph (d) of this 
section to update the beneficiary information on the Information Return 
and Statement.
    (3) Required Statement to the holder of a split interest in 
property, not in trust. The beneficiary of a life estate not in trust, 
and thus the beneficiary to whom the executor is to furnish any 
required Statement, is the life tenant. Similarly, the beneficiary of a 
remainder interest not in trust is each remainderman identified as if 
the life tenant were to die immediately after the decedent. For 
purposes of determining the due date of the Statements reporting these 
interests under paragraph (c)(3) of this section, each beneficiary will 
be deemed to have acquired the property subject to reporting on the 
date of the decedent's death. The beneficiary of a contingent interest, 
not in trust, is a beneficiary only if the contingency occurs before 
the end of the period during which the executor has an obligation to 
supplement the reporting as provided in paragraph (d)(5) of this 
section. If the contingency occurs during this period, the executor 
must update the beneficiary information on the Information Return and 
furnish a Statement to that beneficiary pursuant to the executor's duty 
to supplement to report a change in beneficiary information as 
described in paragraph (d) of this section. Usufruct interests are 
treated in the same manner.
    (4) Reporting for a missing beneficiary. If the executor is unable 
to locate a beneficiary by the date required for filing the Information 
Return with the IRS, the executor must report on the Information Return 
the failure to locate the beneficiary and the efforts the executor has 
made to locate the beneficiary. The executor must supplement the 
Information Return and must furnish the required Statement, as provided 
in paragraph (d) of this section, to report the subsequent location of 
the beneficiary or, if the beneficiary is not located, to report the 
distribution of the property subject to reporting to a different 
beneficiary.
    (h) Reporting requirements applicable to trustees--(1) 
Circumstances under which trustees of beneficiary trusts and other 
trusts are subject to reporting. Trustees of beneficiary trusts making 
a distribution of property that was reported on a Statement furnished 
to those trustees, or of any other property the basis of which is 
determined, in whole or in part, by reference to the basis of property 
subject to reporting under paragraph (e) of this section, are subject 
to the reporting requirements described in paragraph (h)(2) of this 
section and the supplemental reporting requirements described in 
paragraph (d) of this section (to the extent applicable) with respect 
to such property. In addition, trustees of trusts that receive a 
distribution of such property, whether from a beneficiary trust or from 
any

[[Page 76386]]

other trust that has received such property, either directly or 
indirectly, also are subject to these reporting requirements when 
making a distribution of that property. This reporting obligation 
imposed on trustees continues to apply for each subsequent transfer or 
distribution until the property is distributed to a beneficiary not in 
trust. However, no trustee of a beneficiary trust or of a subsequent 
recipient trust is subject to the reporting requirements described in 
paragraph (h)(2) of this section for a disposition of property in a 
transaction that is a recognition event for income tax purposes 
(whether or not resulting in a gain or loss) that results in the entire 
property having a basis that no longer is related, in whole or in part, 
to the property's final value or, if applicable, reported value (within 
the meaning of Sec.  1.1014-10(b)(1) or (2), respectively).
    (2) Required reporting. On or before January 31 of the calendar 
year immediately following the year during which occurs a distribution 
of property subject to reporting under this paragraph (h), the trustee 
making the distribution must file an Information Return in accordance 
with the instructions for that form and must furnish a Statement to 
each recipient of the distribution. For purposes of this section, each 
recipient is a beneficiary.
    (3) Example. The following example illustrates the application of 
this paragraph (h). Decedent D was a U.S. citizen and D's executor E 
was required under section 6018 to file an estate tax return. Pursuant 
to the will of D, E distributed 100 shares of publicly traded stock in 
Company X to a trust (Children's Trust) for the benefit of D's two 
children A and B and their respective issue. E provided a Statement to 
the trustee of Children's Trust in accordance with the requirements of 
paragraph (c)(2) of this section. Shortly thereafter, pursuant to the 
terms of Children's Trust, Children's Trust terminates with the 100 
shares of Company X stock being distributed in equal shares between 
Trust A, for the benefit of A and A's issue, and Trust B, for the 
benefit of B and B's issue. Pursuant to paragraph (h)(2) of this 
section, the trustee of Children's Trust files an Information Return 
with the IRS and furnishes a Statement to the trustees of Trust A and 
Trust B. Several years later, the trustee of Trust A distributes its 50 
shares of Company X stock to C, the only child of A. Pursuant to this 
paragraph (h), the trustee of Trust A files an Information Return with 
the IRS and furnishes a Statement to C. Shortly thereafter, C gives the 
50 shares of Company X stock, outright, to C's nephew N. C has no 
obligation to file an Information Return with the IRS or furnish a 
Statement to N to report the distribution of the 50 shares of Company X 
stock to N.
    (i) Penalties. For the penalties applicable to the filing of 
Information Returns and the furnishing of Statements required by this 
section, including waivers for reasonable cause, see sections 6721 
through 6724 and the regulations in part 301 under sections 6721 
through 6724.
    (j) Applicability date. This section applies to executors of the 
estate of a decedent who are required to file a Federal estate tax 
return under section 6018 if that return is filed after September 17, 
2024, and to trustees receiving certain property included in the gross 
estate of such a decedent.

0
Par. 8. Section 1.6662-9 is added to read as follows:


Sec.  1.6662-9  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 an income tax return that is attributable to an 
inconsistent estate basis.
    (b) Inconsistent estate basis--(1) In general. There is an 
inconsistent estate basis in property under section 6662(k) to the 
extent that a taxpayer claims a basis that was determined by using an 
initial basis as defined in Sec.  1.1014-10(a)(2) that exceeds the 
property's final value as determined under Sec.  1.1014-10(b)(1). The 
property to which this section applies is the property described in 
Sec.  1.1014-10(c)(1).
    (2) Example. The following example illustrates the provisions of 
paragraph (b)(1) of this section. In year 1, taxpayer (T), a citizen of 
the United States, inherited a house, property described in Sec.  
1.1014-10(c)(1) and not described in Sec.  1.1014-10(c)(2). The final 
value and thus initial basis of the house as determined under Sec.  
1.1014-10(b) was $300,000. In year 5, T spent $85,000 on an addition to 
the house, which is added to T's initial basis in the house under 
section 1016(a). In year 11, T sold the house to an unrelated third 
party for $650,000. On T's return, T claims an initial basis of 
$400,000 and the $85,000 spent on the addition to the house, for a 
total claimed basis of $485,000. T's claimed initial basis exceeds the 
allowable basis by $100,000. Because this amount is due to T claiming 
an initial basis as defined in Sec.  1.1014-10(a)(2) that exceeds the 
property's final value as determined under Sec.  1.1014-10(b), T is 
liable for the 20% accuracy-related penalty for the portion of any 
underpayment that is attributable to the reporting of an inconsistent 
basis.
    (c) Applicability date. This section applies to property described 
in Sec.  1.1014-10(c)(1) that is reported on an estate tax return 
required under section 6018 that is filed after September 17, 2024.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 9. The authority citation for part 301 continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805.


0
Par. 10. Section 301.6721-1 is amended by revising paragraph 
(h)(2)(xii) and paragraph (j) to read as follows:


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

* * * * *
    (h) * * *
    (2) * * *
    (xii) Section 6035 (relating to basis information with respect to 
property acquired from a decedent, generally Form 8971, Information 
Regarding Beneficiaries Acquiring Property from a Decedent), whether an 
initial or supplemental information return.
* * * * *
    (j) Applicability dates--(1) In general. Except as provided in 
paragraph (j)(2) of this section, this section applies with respect to 
information returns required to be filed on or after January 1, 2024. 
See 26 CFR 301.6721-1, as revised April 1, 2023, for rules applicable 
prior to January 1, 2024.
    (2) Exception. Paragraph (h)(2)(xii) of this section applies with 
respect to information returns required to be filed after September 17, 
2024.

0
Par. 11. Section 301.6722-1 is amended by revising paragraph 
(e)(2)(xxxv) and paragraph (g) to read as follows:

[[Page 76387]]

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

* * * * *
    (e) * * *
    (2) * * *
    (xxxv) Section 6035 (relating to basis information with respect to 
property acquired from a decedent, generally Schedule A of Form 8971, 
Information Regarding Beneficiaries Acquiring Property from a 
Decedent), other than an information return described in section 
6724(d)(1)(D), whether an initial or supplemental payee statement;
* * * * *
    (g) Applicability dates--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies with respect to 
payee statements required to be furnished on or after January 1, 2024. 
See 26 CFR 301.6722-1, as revised April 1, 2023, for rules applicable 
prior to January 1, 2024.
    (2) Exception. Paragraph (e)(2)(xxxv) of this section applies with 
respect to payee statements required to be furnished after September 
17, 2024.

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: August 16, 2024.
Aviva R. Aron-Dine,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-20429 Filed 9-16-24; 8:45 am]
BILLING CODE 4830-01-P