Form 8971 and Instructions Released but many ??? Remain

The following post is supplied through the courtesy of Bob Wolf (Tener, Van Kirk, Wolf & Moore, P.C., Pittsburgh, PA):

 The final form 8971 and the instructions to the form have now been released.

 This is a form that is required to be filed for all estates where a Federal Estate Tax return is required to be filed on or after August 1, 2015. The point of it is to inform both the beneficiaries and the IRS of the estate tax value of assets passing to beneficiaries where a Federal Estate Tax Return is required.

1. If a Federal Estate Tax Return is not “required to be filed”, this form and its accompanying schedule A which is to be sent to the individual beneficiaries is not required.

2. Where a Federal Estate Tax Return is required, even though there may be no Federal Estate Tax due because of the marital or charitable deduction, the form and accompanying Schedule A will be required.

3. Where a Federal Estate Tax Return is filed solely for the purpose of electing portability, incredibly and unfortunately it is unclear as to whether 8971 and Schedule A are required:

It is not required. Looking at the statutes and the prior Notice 2015-57 by themselves, it seems clear that the Form and Schedule should not be required. Section 6035(a)(1) and (a)(2) provide that an executor required to file a return under Section 6018(a) or a beneficiary required to file a return under Section 6018(b) shall furnish the form and provide the information to the person acquiring the interest. Section 6018(a) provides that a return is required of an executor “where the gross estate of a citizen or resident exceeds the basic exclusion amount in effect under section 2010(c).” The Notice also connects the dots the same way with 6018(a). The instructions, however, say: “The filing requirement for Form 8971 does not apply to an executor of an estate that is not required to file an estate tax return because the gross estate plus adjusted taxable gifts is less than the basic exclusion amount, but who does so for the purpose of making an allocation or election respecting the generation-skipping transfer tax.” If they intended to exclude portability returns, why would they not have included them in the instructions? Just as logically, if they intended to include portability returns, why would they not have said so?

What’s the argument that we do have to file for portability only returns? Treas. Reg. 20.2010-2(a)(1) says, “An estate that elects portability will be considered, for purposes of subtitle B and subtitle F of the Internal Revenue Code (Code), to be required to file a return under section 6018(a).” Oh no! If you make a portability election and you are deemed to be required to file a return, are you forced into filing the Form 8971 and a Schedule A? Wait a minute—I thought the Portability provisions were supposed to simplify things! And what about the fact that those same regulations tell us we don’t even have to put in a value for assets which qualify for the marital or charitable deduction? How does that work? Worse yet, I understand the BNA Daily Tax Report quotes Kathy Hughes (a primary Treasury spokesman) as saying that Treasury was aware of the issue, and that this explains seemingly missing elements in the instructions. What does that mean? Well, apart from the above being something like triple hearsay, it sounds like Treasury “is thinking about it.” Great! Section 6035 and this whole idea is a train wreck

4. Where a Federal Estate Tax Return is required and the inclusion of an asset causes an increase in estate tax liability, the beneficiary receiving the property must use a value which is not LOWER than that reported on the Federal Estate’s tax Return. This is what is added by Section 1014(f). That presumably means that the consistency requirement is inapplicable to property that does not increase tax because it is part of the marital or charitable deduction (or does it—what about formula bequests?)

5. The form is due to be filed with the IRS and Schedule A is due to be delivered to each beneficiary within 30 days of the filing of the form 706. There is ambiguity about when it must be filed if it is filed late, because the instructions say that it must be filed by the earlier of the date that is 30 days after the due date or 30 days after the date the Form 706 is filed. The instructions also say that if the first Form 706 is filed after July 2015 and after the forms’ due date, the form and schedules are due within 30 days after the actual filing date.

6. If the date for the filing of Form 8971 and Schedule A is delayed by virtue of the fact that the form had not yet been released, the due date for the Form and Schedule is February 29, 2016. Notice 2015 – 57 indicates that February 29, 2016 is also the first day that the IRS will accept these forms. I would hope and think that you should be able to file them earlier than that if you are ready to do so. Otherwise it will be a very busy day on February 29, 2016.

7. The Form may be required before you know what assets are going to pass to what beneficiary. That is unfortunate, however, as you then have to list all of the possible assets that might be used to satisfy the beneficiary’s interest in the estate. Then when you actually know what assets pass to the beneficiary, it appears that you are supposed to file a supplemental Form and Schedule.

8. If the final value of the property for Federal Estate Tax purposes turns out to be different than what was reported on the Federal Estate Tax purposes, you are supposed to file a Supplemental Form and Schedule.

9. All of this ignores the fact that that things; lots of things in fact, happen to estate assets after someone dies and after a Federal Estate’s Tax value is established which may in fact affect the cost basis in the property received. But you (the executor or other responsible person who must file this form – seemingly the same person as is required to file the Form 706) are not required to report the cost basis of the asset to the beneficiary – but rather its Federal Estate Tax value as finally determined. In most cases that will be the same but not in all cases.

10. You clearly have to identify by schedule and by item number in the asset passing to the beneficiary. I believe this means that using a “see attached” for securities held in a brokerage account or trust account will probably not work for this purpose. This may well mean significantly more work for those practitioners who utilize this shortcut method.

11. The instructions go into the penalties at great length which start as low as $50 per Form 8971 to a maximum penalty of $3,193,000 per year. I guess I wouldn’t worry too much about the maximum penalty since that would imply a rather large number of Federal Estate Tax returns. And you qualify for lower maximum penalties if “your” average annual gross receipts for the 3 most recent tax years ending before the calendar year in which the information returns were due are $5 million or less (what does “your” mean? you personally? the firm?).

12. With respect to the consistency requirement and whether the question “did this asset increase estate tax liability?” should be answered “yes” or “no”, the instructions indicate that generally, any property that qualifies for a marital deduction or charitable deduction will not generate estate tax and “No” should be indicated. If, as is usually the case, the marital and charitable deduction may be determined by formula, it would seem to me in many cases the value of the asset may generate estate tax even if that particular asset were used to satisfy a marital or charitable formula.

13. What about cash? There seems to be no exception for cash. So is that to be reported? Or imagine this very common situation: you have a $6 Million estate that is essentially all securities–no cash–and that the executor prudently sells the securities and distributes the cash. Result? A 8971 is required listing all of the securities, and after the cash is distributed a supplemental 8971 would be required that would presumably be blank because there was no cash listed on the 706 to begin with, and hence nothing to list. Problem is that the statute doesn’t ask for a report of the cost basis of distributed assets, but rather the property as it is listed on the 706.

14. There are many other questions about all of this—but you have to stop somewhere—I am stopping here, with these two additional notes.

15. This form is to be filed to a slightly different address and is to be filed separately from Form 706 or any of the other Form 706 series.

16. Steve Gorin of St. Louis, Missouri suggested that if Congress had simply added Section 1014(f) and not 6035, things would be much improved. I think Steve is right. This is an extraordinarily complicated, troublesome and expensive solution to a problem that in my opinion is hardly a problem at all. 1014(f) would have been more than enough. I think the problem was that Congress wanted to provide funding for our roads and bridges, but didn’t have the fortitude and candor to either cut some other expenditure, raise revenue (taxes), or admit that they were increasing our deficit.

There, I’m done. Unfortunately, this is complicated, it is more work, there are ambiguities and many questions. Hopefully these questions may be answered within the next year or so, but in the meantime we will have to struggle with how to interpret, prepare and file these forms and Schedule A.