Rev. Rul. 84-139

ISSUE

Will a United States citizen who inherits foreign real property from a nonresident alien receive a stepped-up basis in such property under section 1014 of the Internal Revenue Code even though the property is not includible in the value of the decedent's gross estate?

FACTS

D, who was a citizen and a resident of Z, a foreign country, died in 1982 owning real property located in Z. B, a United States citizen, inherited the real property in accordance with the laws of Z. At the time of D's death, the real property had a basis of 100 x dollars and a fair market value of 1000x dollars. Because the real property is located outside the United States and D was a nonresident alien, the value of such property is not includible in D's gross estate under section 2103 of the Code for purposes of the United States federal estate tax. B sold the real property in 1983 for 1050x dollars, claiming a basis of 1000x and a gain of 50x dollars.

LAW AND ANALYSIS

Section 1014(a)(1) of the Code states that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent's death by such person, be the fair market value of the property at the date of the decedent's death.

Section 1014(b)(1) of the Code provides that property acquired by bequest, devise, or inheritence, or by the decedent's estate from the decedent shall be considered to have been acquired from or to have passed from the decedent for purposes of section 1014(a).

Section 1014(b)(9)(C) of the Code further provides that section 1014(b)(9) shall not apply to property described in other paragraphs of section 1014(b).

Section 1014(b)(9) of the Code provides that, in the case of a decedent dying after December 31, 1953, property acquired from a decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of a decedent's gross estate shall be considered to have been acquired from or to have passed from the decedent for purposes of section 1014(a).

Section 1.1014-2(b)(2) of the Income Tax Regulations provides that section 1014(b)(9) property does not include property that is not includible in the value of a decedent's gross estate, such as property not situated in the United States acquired from a nonresident who is not a citizen of the United States.

In this case, B inherited the real property from D, and such property is within the description of property acquired from a decedent under section 1014(b)(1) of the Code. Therefore, B will be entitled to a stepped-up basis under section 1014(a). Under section 1014(b)(9)(c), section 1014(b)(9) does not apply to property described in section 1014(b)(1); hence, the requirement of section 1014(b)(9) that property be includible in the value of a decedent's gross estate does not apply here.

HOLDING

Foreign real property that is inherited by a United States citizen from a nonresident alien will receive a step-up in basis under sections 1014(a)(1) and 1014(b)(1) of the Code.

B's basis in the real property sold is 1000x, the fair market value of the property on the date of D's death, as determined under sections 1014(a)(1) and 1014(b)(1) of the Code