“It means that on the $50 Million of negative capital account you owe ordinary income taxes at your rate. Since this is 2011, you owe them at 39.5%. That translated into $19.75 Million. You also owe capital gains taxes, that translates into $20 Million dollars. You also owe state taxes that translates into $8 Million. So that’s $48 Million dollars. Subtract out the debt of $50 Million. That leaves untaxed $52 Million to be divided among your family members. The family trust gets the entire $52 Million. That means that you won’t see the money until your momma dies. And then you have to divide what’s left among your siblings.” “Oh, that’s pretty bleak” said Delicious.
Tag Archives: Section 1022
The Negative Capital Account
Meratroid Asteroid dies in 2010. His family is understandably relieved that he owes no estate taxes. He owns a bunch of real estate partnerships totalling $150 Million in value. They have been licking their chops for years to sell the real estate and retire to beaches and fruity rum drinks. So, after his death, they go into their attorney Mark Snotnose. Mr. Snotnose after looking over his half glasses at them with a sneer says, “don’t think you better sell those real estate partnership interest any time soon.” “What do you mean?”, asks daughter Delicious LaTour.
Update on Section 1022
At this point the IRS has not issued any guidance that we’ve seen concerning Section 1022 of the Code for allocating basis for decedent’s dying in calender year 2010, as we discussed in February. As you recall, survivors other than a spouse can elect to step-up basis on $1.3 Million of assets and a surviving spouse can elect to step-up basis on up to $3 Million of assets. So at this point, since it appears that Congress is not going to make any changes to the Estate Tax in 2010 or Section 1022. Thus, for families of persons dying in 2010, it would be advisable to talk to your attorney about filing a protective form 706 to elect the basis allocation.
Practice Note
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 The other question is whether the repeal of Section 1014 and its replacement by Section 1022 repealed the Gallenstein rule for basis pre-2010.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.