Unless Congress Acts, my view is that all estates should consider filing a Form 706 to elect to allocate basis under Section 1022 of the Internal Revenue Code (even for estates that are under the filing threshold (absent regulatory guidance to the contrary). This will allow you the opportunity to fix the basis forever. The other question is whether the repeal of Section 1014 and its replacement by Section 1022 repealed the Gallenstein rule for basis pre-2010. This could mean that the property of the first to die for a couple that owned property pre-1976 and in which one spouse died, were able to get the full step-up instead of a 50% step-up, but under Section 1022, for decedent’s dying in 2010, there is clearly no step-up in basis as to the husband’s half regardless of the Gallenstein rule without an allocation. There are ton’s of issues in Section 1022 and I am sure the Service is loathe to give much guidance because Congress could repeal the law any day now and try to make it retroactive. So, you will need to read the statute and follow its language to the letter.
“Because your mom died in 2010, she has no increase in basis to date of death value. We have established that the amount is $150,000. Section 1022 of the Internal Revenue Code permits us to allocate $1.3 Million to the value of assets. We will have to file a form 706 (which will be late, its due within 9 months of the date of death). This could present a problem because the Internal Revenue Service could elect to disallow the basis increase”, the Accountant droned to Suzie. “Your mom’s estate was $900,000, so we can apply the entire amount to the the estate and there should be no taxes due.” Suzie breathed a sigh of relief until she heard the accountant say, “of course if the IRS refuses to allow the step up in basis, your taxes will be $90,000 Federal and $30,000 state.” Suzie left in tears and cursed the family attorney for not filing the Federal Estate Tax return on time silently praying that the IRS would allow the retroactive election.
April. 2011
Jonas Romule called Suzie. The accountant asked Suzie. “Suzie, can you tell me what your parents paid for this stock that you sold and what did they pay for the house?” “Why are you asking?” Suzie asked. I have to compute the capital gains taxes. Its a rather complicated formula. You get to elect a partial step-up, but I have to determine what is the basis first. “How do you do that?” Suzie asked. “Well first, we have to determine what the property was worth when your father died. You see because of a old court ruling, the basis of the property for your mother was the value on the date that your father died. Once we get that, then we need to determine what other assets your mother had when she died in order to allocate the increase in basis permitted by the statute”, the accountant replied. “Wow, does that mean we might owe taxes on what we inherited?” Suzie inquired, nervously. “Its possible, we just have to run the numbers”, the accountant replied.
Sell off begins
The kids took their duties seriously and started liquidating assets mostly because Left had lots of ways to spend the money and his sister just wanted to be rid of him. They sold all the stocks for $150,000. The sold the house of $750,000 and netted about $730,000 after closing costs. They each took out $440,000 and shut down the estate. They were really proud of themselves for their care in carrying out their duties. Left couldn’t wait to spend his money. His new girlfriend, Hot Potato, had him wrapped around her little finger. He bought a fancy car for $75,000, some jewelry for her to the tune of $50,000, and some clothes for both of them to the tune of $100,000. They went to expensive restaurants. He was on a spending spree.
Capital Gains Quandry
Beulah Gladhand died on January 2, 2010. She was survived by two children, Suzie Marachino and her son, Left Gladhand. Suzie and Left qualified as Executors of her estate. She was not a rich woman when she died. Her estate included a house that she and late her husband Clem had purchased together in 1973 for a whopping $75,000. Now the house was worth $750,000. The rest of her estate was about $150,000 in stocks and bonds which she also had bought together with her husband over their marriage.