State Bar of Texas Offers Comments on Estate Basis Reporting Regs

On behalf of the Tax Section of the State Bar of Texas, I am pleased to submit the enclosed response to the request of the Department of the Treasury ("Treasury") and Internal Revenue Service ("IRS") in the Notice of Proposed Rulemaking (REG-127923-15) issued on March 4, 2016 (the "Proposed Regulations"). The Proposed Regulations provide guidance regarding the requirement that a recipient's basis in certain property acquired from a decedent be consistent with the value of the property as finally determined for Federal estate tax purposes.

THE COMMENTS ENCLOSED WITH THIS LETTER ARE BEING PRESENTED ONLY ON BEHALF OF THE TAX SECTION OF THE STATE BAR OF TEXAS. THE COMMENTS SHOULD NOT BE CONSTRUED AS REPRESENTING THE POSITION OF THE BOARD OF DIRECTORS, THE EXECUTIVE COMMITTEE OR THE GENERAL MEMBERSHIP OF THE STATE BAR OF TEXAS. THE TAX SECTION, WHICH HAS SUBMITTED THESE COMMENTS, IS A VOLUNTARY SECTION OF MEMBERS COMPOSED OF LAWYERS PRACTICING IN A SPECIFIED AREA OF LAW.

THE COMMENTS ARE SUBMITTED AS A RESULT OF THE APPROVAL OF THE COMMITTEE ON GOVERNMENT SUBMISSIONS OF THE TAX SECTION AND PURSUANT TO THE PROCEDURES ADOPTED BY THE COUNCIL OF THE TAX SECTION, WHICH IS THE GOVERNING BODY OF THAT SECTION. NO APPROVAL OR DISAPPROVAL OF THE GENERAL MEMBERSHIP OF THIS SECTION HAS BEEN OBTAINED AND THE COMMENTS REPRESENT THE VIEWS OF THE MEMBERS OF THE TAX SECTION WHO PREPARED THEM.

We appreciate being extended the opportunity to participate in this process.

Although members of the Tax Section who participated in preparing these Comments have clients who would be affected by the principles addressed by these Comments or have advised clients on the application of such principles, no such member (or the firm or organization to which such member belongs) has been engaged by a client to make a government submission with respect to, or otherwise to influence the development or outcome of, the specific subject matter of these Comments.

I. INTRODUCTION

These Comments are in response to the Proposed Regulations regarding the requirement that a recipient's basis in certain property acquired from a decedent be consistent with the value of the property as finally determined for Federal estate tax purposes, which were issued by Treasury and the IRS on March 2, 2016.

We recognize and appreciate the time and thoughtful work invested by Treasury and the IRS in preparing the Proposed Regulations and the accompanying explanatory preamble to the Proposed Regulations. These efforts are extremely useful to taxpayers and practitioners. It is our intent to present items for consideration that may help and support Treasury and the IRS in this endeavor.

II. COMMENTS REGARDING PROPOSED REGULATIONS UNDER SECTION 6035

The nature of assets in the larger estates that will be subject to this filing requirement are often complicated in nature and the distribution of assets, or even the decisions regarding the division of those assets among multiple beneficiaries of an estate, is not often accomplished prior to the deadline for Schedule A. A beneficiary cannot have a basis consistency reporting requirement with respect to assets he or she has not yet received from an estate. The IRS has acknowledged that determining which assets to report on Schedule A by the due date may be challenging. Accordingly, Proposed Regulation § 1.6035-1(c)(3) provides that if an executor has not determined which assets a beneficiary will receive by the due date, the executor must list on the beneficiary's Schedule A all items of property "that the executor could use to satisfy that beneficiary's interest."

We commend the IRS on their creative approach to finding a solution that will both meet the statutory requirements and accomplish the goal of providing information relating to the value of property of the estate to the beneficiaries of the estate. However, we do not believe this would be the most effective approach in many cases. Accordingly, we respectfully suggest that the IRS consider allowing an alternate method. Under this alternate method, to the extent that assets have not yet been distributed to a beneficiary by the filing due date, the executor would file Schedule A when due, reporting only a dollar amount equal to the value of the beneficiary's share of estate assets not yet distributed, but without identification of specific assets. When the distributions of assets from the estate are later made, the executor would then file a supplemental Schedule A to report any assets that were actually distributed to each beneficiary that are subject to the basis consistency rules. In complex estates, this approach would reduce the compliance burden on the executor, reduce potential fiduciary risk to the executor, and reduce or eliminate confusion for beneficiaries who would otherwise receive information that is not needed or relevant at the time. The supplemental Schedule A later filed by the executor will result in the accurate information being provided to both the IRS and the beneficiary at a time when it will be needed, without creating unnecessary confusion.

We understand that some executors may be able to easily comply with the rule in the Proposed Regulations. Under that rule, no supplemental Schedule A would need to be prepared, as long as the initial Schedule A included the value information on each asset the beneficiary later received. For those estates that can easily comply with this requirement, this alternative should reduce the compliance burden on the executor and the beneficiaries, while providing the necessary information to the IRS in an efficient manner. Accordingly, we respectfully request that the IRS offer both alternatives -- the reporting method in the Proposed Regulations and the alternate method suggested above -- as options for reporting on Schedule A.

III. CONCLUSION

We greatly appreciate the opportunity to work with your office on these significant tax issues and hope these comments provide relevant analysis for your review. Thank you for your consideration.