Treasury Finalizes LongAwaited Basis Consistency and Reporting Regulations

By Nelson H. Hunt and Olivia Mae Vrielink

Nelson H. Hunt is a partner at Neuhoff Hunt PLLC in Dallas, Texas.

Olivia Mae Vrielink is an associate at Neuhoff Hunt PLLC in Dallas, Texas.

On September 17, 2024, the Treasury Department published long-awaited final regulations under Internal Revenue Code (Code) §§ 1014(f), 6035, 6662, 6721, and 6722. Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent (Final Rule), T.D. 9991, 89 Fed. Reg. 76,356 (Sept. 17, 2024) [hereinafter Preamble to Final Regulations]. The rules under §§ 1014(f) and 6035 relate to the basis consistency and information reporting requirements Congress enacted in 2015. Generally, those rules prevent taxpayers from claiming an income tax basis that exceeds the date-of-death value of inherited property and impose reporting requirements on executors, and in some cases beneficiaries, of estates. Sections 6662, 6721, and 6722 contain rules related to penalties for failure to comply. This article summarizes the rules under §§ 1014(f) and 6035 and describes the most significant changes made by the final regulations.

Background

Section 1014(a) provides that the basis of property in the hands of a person acquiring the property from a decedent is the fair market value of the property at the date of the decedent’s death. This rule has been a feature of federal income tax law since at least 1921. See Revenue Act of 1921, § 202(a)(3), Pub. L. No. 67-98, 42 Stat. 227 (1921).

In 2015, Congress enacted § 1014(f) as a part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, § 2004, Pub. L. No. 114-41, 129 Stat. 443 (the 2015 Act). Section 1014(f)(1) provides that the basis of certain property acquired from a decedent cannot exceed that property’s final value for purposes of the federal estate tax imposed on the estate of the decedent, or, if the final value has not been determined, the value reported on a required “Statement.” See Preamble to Final Regulations, 89 Fed. Reg. at 76,357. This rule is known as the “consistent basis requirement.” See id. Property subject to the rule is known as “consistent basis property.” See id. Only property that increases an estate’s federal estate tax liability is consistent basis property. I.R.C. § 1014(f)(2). Property that is not consistent basis property is still subject to the basis adjustment rule of § 1014(a) but not the basis consistency requirement of § 1014(f).

To facilitate reporting, Congress also enacted § 6035. 2015 Act, § 2004. Section 6035(a)(1) provides, “[t]he executor of any estate required to file a return under section 6018(a) shall furnish to the Secretary and to each person acquiring any interest in property included in the decedent’s gross estate for [f]ederal estate tax purposes a statement identifying the value of each interest in such property as reported on such return and such other information with respect to such interest as the Secretary may prescribe.” Section 6035(a)(3)(A) provides that such statements shall be furnished to the IRS and the beneficiaries no later than the earlier of (i) 30 days after the due date of the federal estate tax return or (ii) 30 days after such return is filed. Section 6035(a)(3)(B) provides that if there is an adjustment to the information required to be reported, a supplemental statement must be filed no later than 30 days after the adjustment.

Not all property that is required to be reported under § 6035 is consistent basis property. For example, property that qualifies for the estate tax charitable deduction or the estate tax marital deduction does not increase the estate’s federal estate tax liability and therefore is not consistent basis property. But marital deduction property and charitable deduction property are still required to be reported under § 6035, unless the type of property in question is excepted from the reporting requirements (for example, if the property is cash).

Only estates required to file a federal estate tax return under § 6018 are subject to the reporting requirements of § 6035 and the basis consistency requirements of § 1014(f). I.R.C. §§ 6035(a)(1), 1014(f)(2). Not every executor who files an estate tax return is subject to these rules. An executor of an estate that is not required to file a federal estate tax return under § 6018 because the estate is not large enough may nevertheless choose to file the return for some other purpose, such as to elect portability, or to make a generation-skipping transfer tax exemption allocation, or as a protective filing. In those cases, the estate is not subject to the requirements of §§ 1014(f) and 6035. Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent, 81 Fed. Reg. 11,486, 11,493 (Mar. 4, 2016) (Prop. Reg. § 1.6035-1(a)(2)) [hereinafter Consistent Basis Reporting]; Treas. Reg. § 1.6035-1(b)(1), 1014(f)(1), I.R.C. § 1014(f)(1).

In January 2016, the IRS published Form 8971 and its instructions. Neither Form 8971 nor its instructions have been revised since 2016.

On March 4, 2016, the Treasury Department published proposed regulations under §§ 1014(f) and 6035. On June 27, 2016, the Treasury Department and the IRS held a public hearing about the proposed regulations. In addition to comments made at that hearing, the IRS received over 30 written comments. The preamble to the final regulations, in T.D. 9991, discusses these comments at length.

Definitions

The final regulations use several defined terms, many of which are new:

• “Allowable credits” includes any credit against the estate tax liability allowable by any section of the Code or by reason of any treaty obligation of the United States, provided the estate qualifies for and properly claims the credit by complying with all applicable rules for claiming the credit. Treas. Reg. § 1.1014-10(d)(5).

• “Beneficiary trust” means a trust, whether foreign or domestic, including without limitation a grantor retained annuity trust, charitable remainder trust, and charitable lead trust, that acquires property from a decedent’s estate. Id. § 1.6035-1(g)(1)(iii).

• “Consistent basis property” is any property (A) to which § 1014(a) applies (i.e., property acquired from a decedent); (B) that is included property, and any other property the basis of which is determined by reference to the basis of included property (for example, property acquired in a like-kind exchange or an involuntary conversion); and (C) whose value increases the estate tax liability that is payable after the application of allowable credits. Id § 1.1014-10(c)(1).

• “Consistent basis requirement” is the requirement that the initial basis in certain property be equal to or less than the property’s fair market value as finally determined for federal estate tax purposes or, if no such final value has yet been determined, the property’s reported value. Id. § 1.1014-10(a)(1).

• “Excepted property” means property excepted from the reporting requirements of § 6035 (and therefore not required to be included on Form 8971 or its Schedule A). Id § 1.6035-1(f)(1).

• “Estate tax liability” means the amount of tax imposed under chapter 11 of the Code. Id. § 1.101410(d)(3).

• “Included property” means property the value of which is included in the value of the decedent’s gross estate for federal estate tax purposes. Id. § 1.1014-10(d)(4). Included property does not refer to unreported property whose value is not reported on an estate tax return and whose value is not otherwise included in the value of the decedent’s gross estate as finally determined for federal estate tax purposes. Id.

• “Information Return” means IRS Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent. Id. § 1.6035-1(c) (1).

• “Reported value” means a property’s value as reported in a statement (Form 8971, Schedule A) received by a beneficiary. Id. § 1.1014-10(b) (2).

• “Required estate tax return” means a federal estate tax return that is required to be filed for an estate under § 6018. Id. § 1.6035-1(b) (1). Section 6018 provides that an estate tax return must be filed if the gross estate plus adjusted taxable gifts of a US citizen or resident decedent exceeds the basic exclusion amount in effect under § 2010(c). (For 2025, the basic exclusion amount is $13,990,000. See I.R.C. § 2010(c)(3)(C); Rev. Proc. 2024-40, 2024-45 I.R.B. 1100.) If an estate tax return is not required to be filed under § 6018 but is filed for another purpose, such as to elect portability, such a return is not a required estate tax return. Treas. Reg. § 1.6035-1(b)(1).

• “Statement” means Schedule A to IRS Form 8971. Id. § 1.6035-1(c)(2).

• “Unreported property” means property of a decedent’s estate whose value is not reported on an estate tax return and whose value is not otherwise included in the value of the decedent’s gross estate as finally determined for federal estate tax purposes. Id. § 1.1014-10(d)(4).

Delayed Issuance of Schedule A to a Beneficiary Who Receives Property After the Filing Deadline

Section 6035 requires executors to provide Schedules A to all beneficiaries “acquiring any interest in property.” I.R.C. § 6035(a)(1). The proposed regulations required executors to issue a Schedule A to each beneficiary on or before the earlier of 30 days after the due date of the estate tax return or 30 days after the date the estate tax return was filed with the IRS, regardless of whether the reported property had been distributed to that beneficiary at that time. Consistent Basis Reporting, 81 Fed. Reg. at 11,494 (Prop. Reg. § 1.6035-1(d)(1)). If an initial Form 8971 and Schedule(s) A identified several beneficiaries who might receive the same property, the executor was permitted, but not required, to file a supplemental Form 8971 and Schedule(s) A to specify the actual distribution of that property among the identified beneficiaries. Id. (Prop. Reg. § 1.6035-1(e)(3)(B)). As such, the proposed regulations interpreted the term “acquiring” in § 6035 to be forward looking (i.e., to include beneficiaries who may acquire an interest in property). Id. (Prop. Reg. § 1.6035-1(c)(3)) (“If, by the due date [for filing the Form 8971 and providing Schedules A], the executor has not determined what property will be used to satisfy the interest of each beneficiary, the executor must report on the [Schedule A] for each such beneficiary all of the property that the executor could use to satisfy that beneficiary’s interest.”).

Commenters heavily criticized this approach. They argued it would result in duplicate reporting because a single item of property (or interest in the property) would be reported on the Schedule A of several beneficiaries, even though some of those beneficiaries will never receive an interest or a partial interest in that property. According to commenters, this duplicate reporting may confuse beneficiaries by leading them to expect to receive all the property reported on the Schedule A furnished to them. In addition, commenters contended that this duplicate reporting is burdensome and may violate a decedent’s or beneficiary’s right to privacy and possibly result in conflicts and litigation among beneficiaries with competing interests in the estate. Preamble to Final Regulations, 89 Fed. Reg. at 76,363.

The Treasury Department and the IRS agreed with these comments, and, accordingly, the final regulations adopt an interpretation of “acquiring” that is backward-looking (i.e., to include only beneficiaries who have acquired an interest in property). Treas. Reg. § 1.6035-1(c) (4) (“[T]he term acquired property refers to property subject to reporting . . . that a beneficiary acquires. A beneficiary acquires such property when, under local law, title vests in the beneficiary or when the beneficiary otherwise has sufficient control over or connection with the property that the beneficiary is able to take action related to the property for which basis is relevant for [f]ederal income tax purposes (such as, for example, to sell or depreciate the property).”). The final regulations provide that executors no longer must provide Schedules A prospectively to all beneficiaries who may receive property; instead, executors must provide Schedules A to only those beneficiaries who have received property on or before the filing of the estate tax return. Id § 1.6035-1(c)(2), (5). If a beneficiary later acquires property subject to reporting after the due date of the estate tax return, the executor must furnish a Schedule A to that beneficiary with regard to that property on or before January 31 of the year following the beneficiary’s acquisition of the property and must file a supplemental Form 8971 with the IRS by that same January 31. Id. § 1.6035-1(c)(3)(ii).

The final regulations still permit an executor to furnish a Schedule A to a beneficiary before distribution of the property to that beneficiary, but only if the executor has reason to believe that the beneficiary in fact will acquire the property Id

§ 1.6035-1(c)(5). If the executor delivers a Schedule A to such a beneficiary and the reported property is later acquired by that beneficiary, the executor is not required to file a supplemental Form 8971 or Schedule A to report the beneficiary’s receipt of the property. Id. § 1.6035-1(c)(3)(ii). If the executor delivers a Schedule A to an anticipated beneficiary, but the property is ultimately distributed to a different beneficiary, the executor must update the beneficiary information on a supplemental Form 8971 filed with the IRS and furnish a Schedule A to the beneficiary who ultimately receives the property. Id § 1.6035-1(c)(5). The executor also must furnish an updated Schedule A to the beneficiary whose previous Schedule A included the property now distributed to another beneficiary. See id. § 1.6035-1(c) (5), (d)(2)(i). Generally, the due date for filing such a supplemental Form 8971 and furnishing updated Schedule(s) A to affected beneficiaries is 30 days after the executor determines that the property will be distributed to a different beneficiary. Id. § 1.6035-1(d)(4), (c)(3)(ii). Keep in mind that Form 8971 must be filed by its due date even if no Schedules A are attached. Id. § 1.6035-1(c)(1).

Eliminating the Subsequent Transfer Reporting Requirement for All but Trustee Beneficiaries

Under the proposed regulations, if a beneficiary received property from an estate that was reported on Schedule A, then disposed of that property in a transaction in which the transferee determined their basis in the property by reference to the beneficiary-transferor’s basis (e.g., a gift or like-kind exchange), the beneficiary-transferor was required to file a supplemental Schedule A with the IRS and provide a copy of the Schedule A to the transferee within 30 days after the transfer. Consistent Basis Reporting, 81 Fed. Reg. at 11,495 (Prop. Reg. § 1.6035-1(f)). For example, if a beneficiary received property from an estate and later gave the property to his child, the beneficiary was required to file with the IRS a supplemental Schedule A and furnish a copy of that Schedule A to the child. I.R.C. § 1015(a); Consistent Basis Reporting, 81 Fed. Reg. at 11,495 (Prop. Reg. § 1.6035-1(f)).

Commenters argued that this reporting requirement could continue for generations and thus be impossible for the IRS to monitor and enforce, especially with respect to nonresident noncitizen beneficiaries if the property is no longer in the United States. Commenters also noted that this subsequent reporting requirement creates uncertainty for executors, estate tax return preparers, and beneficiaries as to whether supplemental reporting is required, and that the failure to comply with the reporting requirement is subject to penalties. They contended this requirement is particularly unfair with respect to unsophisticated individual recipients who are likely to be unaware of the reporting requirements and, as a result, are more likely to become subject to noncompliance penalties. Finally, commenters noted that, in many cases, the obligation to report the basis of property transferred is duplicative of other required filings. Preamble to Final Regulations, 89 Fed. Reg. at 76,372.

In response to these comments, the Treasury Department chose to eliminate the subsequent transfer reporting requirement for individual beneficiaries but to retain it for trustees. Id. Accordingly, the final regulations impose the subsequent transfer reporting requirement only on trustees of trusts that receive property from an estate. Treas. Reg. § 1.6035-1(h)(1).

The supplemental reporting obligation for trustees continues to apply for each subsequent disposition until the property is distributed outright to an individual beneficiary or the property acquires a basis that is no longer related to the property’s final value as determined for estate tax purposes. Id. For example, if the trustee sells the property in a transaction where gain or loss would be recognized for income tax purposes, the trustee is not required to report that transfer on a supplemental Schedule A.

The Treasury Department also pushed back the deadline for reporting subsequent transfers. Under the proposed regulations, the due date for reporting subsequent transfers was 30 days after the transfer. Consistent Basis Reporting, 81 Fed. Reg. at 11,495 (Prop. Reg. § 1.6035-1(f)). Under the final regulations, the due date for reporting subsequent transfers is now January 31 of the year following the transfer. Treas. Reg. § 1.6035-1(h)(2).

Changing the Reporting Options in the Case of a Beneficiary Trust

Proposed Regulation § 1.6035-1(c)(2) provides that, if the beneficiary is a trust, the executor must furnish the beneficiary’s Schedule A to the trustee of the trust rather than to the beneficiaries. Commenters were concerned this rule did not take into account the variety of trust arrangements an executor may encounter. In response, the Treasury Department revised the rule to provide that, in the case of a beneficiary trust, the executor may still provide the Schedule A to the trustee. Alternatively, the executor may instead provide the Schedule A directly to the trust beneficiaries, with a copy to the trustee, if the executor reasonably believes that it is unlikely that the trust will depreciate, sell, or otherwise dispose of the property in a recognition event for income tax purposes. Treas. Reg. § 1.6035-1(g)(2)(i); Preamble to Final Regulations, 89 Fed. Reg. at 76,371. For this purpose, a trust’s beneficiaries include all potential current income beneficiaries and each remainderman who would have had a current interest in the trust if one or more of the income beneficiaries had died immediately before the decedent. Treas. Reg. § 1.6035-1(g)(2)(i); Preamble to Final Regulations, 89 Fed. Reg. at 76,371.

Eliminating the Zero Basis Rule

The proposed regulations provided that any property discovered after the filing of the estate tax return, or otherwise omitted from the estate tax return (so-called unreported property), and not later reported before the expiration of the period of limitations on assessment, had a basis of zero. Consistent Basis Reporting, 81 Fed. Reg. at 11,492 (Prop. Reg. § 1.1014-10(c)(3)(i) (B), (ii)). This was referred to as the “zero basis rule.” Preamble to Final Regulations, 89 Fed. Reg. at 76,360.

Comments regarding the practical effects of the zero basis rule contended that the rule is onerous, unduly harsh, and unfair. Commenters noted that a beneficiary receiving unreported property in many cases will not be the executor or other person having the responsibility to report the property and the beneficiary may have no ability to compel the executor to report the property on the return. Yet, under the zero basis rule, the beneficiary receiving unreported property will have an increased tax burden because of the denial of basis, whether determined under § 1014(a) (fair market value on the decedent’s date of death) or, in the alternative, a carry-over basis of the decedent’s adjusted basis in the property. Commenters noted that unreported property is more likely to arise by inadvertent omission from the estate tax return or as a result of being undiscovered, rather than from willful omission. Therefore, except in the case of willful omission by a beneficiary who is the executor or other person responsible to report the property, commenters contended that the zero basis rule is unduly harsh and unfair because it creates a 100 percent taxable gain on the sale of the property by the beneficiary. Id. at 76,361.

The Treasury Department and the IRS sympathized with these concerns about the practical effects of the zero basis rule, and the final regulations eliminate the rule. Under the final regulations, the basis of unreported property is determined under § 1014(a). Id. Under § 1014(a), the basis of property acquired from a decedent is the fair market value of the property on the date of the decedent’s death. So, if an executor omits property from an estate tax return and does not discover the omission until after the period of limitations expired, the unreported property has a basis equal to the fair market value of the property on the decedent’s date of death. Treas. Reg. § 1.1014-10(c)(1)(i), (d)(4); see also Preamble to Final Regulations, 89 Fed. Reg. at 76,361.

Adding Exceptions to the Consistent Basis Requirement of § 1014(f)

Proposed Regulation § 1.1014-10(b) (2) excluded from the consistent basis requirement only the following types of property:

• Property that qualifies for the estate tax charitable deduction under § 2055;

• Property that qualifies for the estate tax marital deduction under § 2056; and

• Tangible personal property for which an appraisal is not required under Treasury Regulation § 20.2031-6(b).

In response to comments, the Treasury Department significantly expanded these exceptions. The expanded list of exceptions is now located in Treasury Regulation § 1.1014-10(c)(2), and that list:

• Includes US dollars, and defines that term (Treas. Reg. § 1.1014-10(c) (2)(i));

• Includes cash equivalents (id. § 1.1014-10(c)(2)(ii)–(v)), life insurance proceeds (id.. § 1.1014-10(c) (2)(vi)), tax refunds (id. § 1.101410(c)(2)(vii)), and notes forgiven in full by the decedent upon death (id. § 1.1014-10(c)(2)(viii));

• Changes “tangible personal property” to “household and personal effects” for which an appraisal is not required under Treasury Regulation § 20.2031-6(b) (id § 1.1014-10(c)(2)(ix));

• Adds property the initial basis of which is not in any way determined with regard to or derived from the property’s final value as determined under Treasury Regulation § 1.1014-10(b) (1) or its reported value as determined under Treasury Regulation § 1.1014-10(b)(2), if applicable, and provides examples of such property (id. § 1.1014-10(c)(2)(x));

• Provides an added qualification to the exception for charitable deduction property and marital deduction property to clarify that the exception applies only if the value of the decedent’s entire interest in the included property is wholly deductible and equal to the total amount qualifying for those deductions (to address split interests) (id. § 1.1014-10(c)(2)(xi));

• Adds property that represents the surviving spouse’s one-half share of community property to which § 1014(b)(6) applies, regardless of whether this property is included property as defined in Treasury Regulation § 1.1014-10(d)(4) (id § 1.1014-10(c)(2)(xii));

• Adds property subject to a taxable termination for generation-skipping transfer tax purposes whose basis is adjusted under § 2654(a)(2) (id. § 1.1014-10(c)(2)(xiii)); and

• Adds “any other property that is not described in [the definition of ‘consistent basis property’ in Treasury Regulation § 1.1014-10(c)(1)(i)] or that is identified as excepted property in published guidance in the Federal Register or in the Internal Revenue Bulletin” (id. § 1.101410(c)(2)(xiv)).

Adding Exceptions to the Reporting Requirements of § 6035; Clarifying Reporting of Excepted Property

The proposed regulations under § 6035 required reporting on Form 8971 all property required to be reported on an estate tax return, as well as property whose basis is determined in whole or in part by reference to that property (for example, like-kind exchange property) (Consistent Basis Reporting, 81 Fed. Reg. at 11,493 (Prop. Reg. § 1.6035-1(b)(1)), with the following exceptions:

• Cash (other than a coin collection or other coins or bills with numismatic value) (id. at 11,493 (Prop. Reg. § 1.6035-1(b)(1)(i)));

• Income in respect of a decedent (as defined in § 691) (id. (Prop. Reg. § 1.6035-1(b)(1)(ii)));

• Tangible personal property for which an appraisal is not required under Treasury Regulation § 20.2031-6(b) (id. (Prop. Reg. § 1.6035-1(b)(1)(iii))); and

• Property sold, exchanged, or otherwise disposed of (and therefore not distributed to a beneficiary) by the estate in a transaction in which capital gain or loss is recognized (id (Prop. Reg. § 1.6035-1(b)(1)(iv))).

In response to comments, the Treasury Department significantly expanded this list of exceptions. The final regulations also introduce the term “excepted property” to describe any such property. The expanded list is now located in Treasury Regulation § 1.6035-1(f)(2), and that list:

• Replaces “cash” with “United States dollars” (Treas. Reg. § 1.6035-1(f) (2)(i));

• Adds cash equivalents (id. § 1.60351(f)(2)(ii)–(v)), life insurance proceeds (id. § 1.6035-1(f)(2)(vi)), tax refunds (id. § 1.6035-1(f)(2)(vii)), and notes forgiven in full by the decedent upon death (id. § 1.60351(f)(2)(viii));

• Changes “tangible personal property” to “household and personal effects” for which an appraisal is not required under Treasury Regulation § 20.2031-6(b) (id § 1.6035-1(f)(2)(ix));

• Adds property that, before distribution from the estate, is disposed of in one or more transactions that are recognition events for federal income tax purposes (whether or not resulting in a gain or loss, and whether or not any gain is capital or ordinary), and includes a nonexhaustive list of examples of such property (id. § 1.6035-1(f)(2)(x));

• Adds property having an initial basis that is not in any way determined with regard to or derived from the property’s fair market value for federal estate tax purposes, and includes a non-exhaustive list of examples of such property (id. § 1.6035-1(f)(2) (xi));

• Adds bonds to the extent they are redeemed by the issuer for US dollars before being distributed to a beneficiary so that any resulting gain or loss is recognized by the estate (id. § 1.6035-1(f)(2)(xii));

• Adds property included in the gross estate of a beneficiary who died before the due date of the Form 8971 (id. § 1.6035-1(f)(2)(xiii)); and

• Adds “any other property identified as excepted property in published guidance in the Federal Register or in the Internal Revenue Bulletin” (id. § 1.6035-1(f)(2)(xiv)).

The final regulations clarify that an executor must file Form 8971 even if all property subject to the reporting requirement is excepted property. Id. § 1.6035-1(f)(1). If there is excepted property, the executor must report on Form 8971 that some or all of the property subject to reporting is excepted property. Id. However, the executor is not required to identify or to provide any other information about excepted property on the Form 8971, and the executor is not required to furnish a Schedule A to the beneficiary with regard to that property. Id. Accordingly, if a beneficiary receives only excepted property, no Schedule A needs to be provided to that beneficiary. Id.

Clarifying the Scope of Included Property Subject to the Reporting Requirements of § 6035

An estate may include property for which the executor claims an estate tax marital deduction or charitable deduction. The final regulations clarify that marital deduction property and charitable deduction property must be reported unless the particular item in question is excepted property. Id. § 1.6035-1(e)(1).

An executor may distribute some estate property to a surviving spouse in satisfaction of that surviving spouse’s interest in community property not included in the gross estate and distribute some of the surviving spouse’s interest in community property to a non-spouse beneficiary. In that case, the final regulations provide that the property included in the decedent’s estate is included property subject to reporting, but property that represents the surviving spouse’s share of community property is not included property and therefore not subject to reporting, even if such property receives a basis adjustment pursuant to § 1014(b)(6). Id. § 1.6035-1(e)(1).

Other Changes, Additions, and Clarifications

The final regulations contain numerous other changes, additions, and clarifications, including:

• Guidance on how to report property to be distributed to a beneficiary trust that lacks a trustee or taxpayer identification number. See id. § 1.6035-1(g)(2)(ii).

• Clarification that the consistent basis requirement continues to apply until the entire property is sold, exchanged, or otherwise disposed of in a recognition transaction for income tax purposes (whether or not any amount of gain or loss is actually recognized) or until the property becomes includible in another decedent’s gross estate. Id. § 1.1014-10(a)(3). For a like-kind exchange under § 1031, the substituted property remains subject to the consistent basis requirement. Id. § 1.1014-10(c)(1)(i) (B); Preamble to Final Regulations, 89 Fed. Reg. at 76,357.

• Clarification that if property included in a decedent’s estate was subject to recourse or nonrecourse debt, the final value or, if applicable, the reported value of that property is determined based on the gross value of that property undiminished by debt, regardless of whether the estate tax return reports the net value of the property or separately reports the gross value and claims an estate tax deduction for the outstanding debt. Treas. Reg. § 1.1014-10(b)(3)(i); Preamble to Final Regulations, 89 Fed. Reg. at 76,358.

• Clarification that, in determining whether the property’s value increases the estate tax liability that is payable after the application of allowable credits (and is therefore “consistent basis property”), credits against the estate tax allowable by any treaty obligation of the United States shall be taken into account. Treas. Reg. § 1.1014-10(d)(5); Preamble to Final Regulations, 89 Fed. Reg. at 76,358.

• Clarification that, in determining whether property is excepted from the consistent basis requirement by virtue of qualifying for the estate tax charitable deduction or marital deduction, partially deductible property (e.g., property funding a charitable remainder trust) is not excepted and therefore remains consistent basis property. Treas. Reg. § 1.1014-10(c)(2)(xi); Preamble to Final Regulations, 89 Fed. Reg. at 76,358. However, in the case of property divided between a decedent’s surviving spouse and charity, the regulations indicate such property is consistent basis property so long as the sum of the deductions for those interests equals the value of such property as included in the decedent’s gross estate. Treas. Reg. § 1.1014-10(c)(2)(xi); Preamble to Final Regulations, 89 Fed. Reg. at 76,358–59.

• Clarification regarding the circumstances under which the value of property becomes final for purposes of the consistent basis requirement. See Treas. Reg. § 1.1014-10(b), (d)(1); Preamble to Final Regulations, 89 Fed. Reg. at 76,360.

• Statement that, although the final regulations do not provide a beneficiary a means to challenge the value of consistent basis property reported by an executor, the Treasury Department and the IRS are considering providing such an opportunity in the future. Preamble to Final Regulations, 89 Fed. Reg. at 76,362.

• Clarification that, in the case where there is an executor serving, but there is also a trust includible in the decedent’s estate, each person required to file an estate tax return (i.e., both the executor and the trustee) is subject to the § 6035 reporting requirements, but only with regard to property reported or required to be reported on the estate tax return filed by that person. Treas. Reg. § 1.6035-1(b)(2); Preamble to Final Regulations, 89 Fed. Reg. at 76,363.

• Clarification that, where multiple co-executors are serving, all co-executors are responsible for filing Form 8971, but it is sufficient if only one of the co-executors files the form and furnishes the Schedules A. Preamble to Final Regulations, 89 Fed. Reg. at 76,363.

• Clarification that post-death or other adjustments to the basis of property made under sections of the Code other than § 1014(f) do not require supplemental reporting. Treas. Reg. § 1.6035-1(d)(3)(iii); Preamble to Final Regulations, 89 Fed. Reg. at 76,366.

• Clarification that property included in the decedent’s gross estate that is distributed to the decedent’s surviving spouse in lieu of the surviving spouse’s interest in community property under state law remains subject to reporting. Treas. Reg. § 1.6035-1(e)(1).

• Discussion of the reporting of property that has a basis that is determined without reference to the property’s federal estate tax value, such as individual retirement accounts (IRAs). Preamble to Final Regulations, 89 Fed. Reg. at 76,369.

Form 8971 and Instructions

IRS Form 8971 was issued in January 2016 and has not been revised since. The most recent instructions to Form 8971 are dated September 2016. The preamble to the final regulations anticipates that revisions to Form 8971 and its instructions will be necessary. See id. at 76,373 (“To the extent not otherwise addressed in the final regulations or this preamble, these comments are best considered in contemplation of necessary or appropriate revisions to the Information Return and its instructions.”). The instructions to Form 8971 will certainly require revisions. Examples include: The guidance under “When To File” and under “Schedule A—Information Regarding Beneficiaries Acquiring Property From a Decedent” should be revised to (i) describe the option to delay issuing Schedule A to a beneficiary who has not yet received estate property as of the date the estate tax return is filed and (ii) reflect the due date of January 31 of the year following acquisition to issue Schedule A to a beneficiary who receives estate property after the estate tax return is filed.

• Those sections should be revised to provide that the requirement to supplement Form 8971 and Schedule A upon distribution of that property is mandatory.

• The instructions will need to be revised to provide that, if some of the property subject to reporting is excepted property, then the executor must disclose that fact on Form 8971 but may provide no other information regarding that property.

• The instructions should state that if a beneficiary is receiving only excepted property, then no Schedule A needs be provided to that beneficiary.

Penalties

The final regulations make no changes to the penalties the IRS may assert in the case of an inconsistent estate basis or for failure to satisfy the reporting requirements.

Subsections 6662(a) and (b)(8), as amended in 2015, impose an accuracy related penalty equal to 20% of an income tax underpayment attributable to any “inconsistent estate basis.”

Section 6662(k) provides that the term “inconsistent estate basis” means any portion of an underpayment attributable to the failure to comply with § 1014(f) (the consistent basis requirement). Proposed Regulation § 1.6662-8 incorporated this rule into the applicable regulations. The final regulations move this rule to § 1.6662-9 and add an example.

Subsection 6721(a) and (f) impose a penalty of $250, adjusted for inflation, for the failure to file an information return (which includes Form 8971) or to include all the information required to be shown on the return. See also Treas. Reg. § 301.6721-1(h)(2)(xii); I.R.C. § 6724(d) (1)(D). Code § 6724(d)(1)(D), added in

2015, provides that “information return” includes any statement required to be filed under § 6035, i.e., Form 8971.

Subsections 6722(a) and (f) impose a penalty of $250, adjusted for inflation, for the failure to furnish a payee statement (which includes Schedule A to Form 8971) or to include all the information required to be shown on that statement. See also Treas. Reg. § 301.67221(e)(2)(xxxv); I.R.C. § 6724(d)(2)(II). Code § 6724(d)(2)(II), added in 2015, provides that “payee statement” means any statement required to be furnished under section 6035 (other than an information return), i.e., Schedule A to Form 8971. For Forms 8971 required to be filed and Schedules A required to be furnished in 2025, the inflation-adjusted penalty is $330. Rev. Proc. 2023-34, 2023-48 I.R.B. 1287.

Sections 6721 and 6722 provide for reductions in penalties for timely corrections. See I.R.C. §§ 6721(b), 6722(b); Treas. Reg. § 301.6721-1(b)(2), (6). There are exceptions to penalties for certain de minimis failures. See I.R.C. §§ 6721(c), 6722(c). Also, penalties may be waived for reasonable cause. Id. § 6724(a); see Treas. Reg. § 301.6724-1(a)(2).

The preamble to the final regulations clarifies the application of penalties for the filing of (or failure to file) multiple Schedules A. See Preamble to Final Regulations, 89 Fed. Reg. at 76,372 (“A penalty applies separately to each initial or supplemental Information Return that the executor is required to file with the IRS, and to each initial or supplemental Statement that the executor is required to furnish to a beneficiary. Accordingly, only one penalty under section 6721 may be imposed for filing an incorrect Information Return, even if copies of multiple required Statements are not attached to the Information Return, but multiple penalties under section 6722 may be imposed for furnishing multiple incorrect Statements, even if the Statements were filed with the IRS as attachments to a single Information Return.”).

Applicability Dates

The proposed regulations stated they would become effective upon publication of the Treasury Decision adopting its rules as final and that the rules would apply to property acquired from a decedent or by reason of the death of a decedent whose return required by § 6018 is filed after July 31, 2015. Consistent Basis Reporting, 81 Fed. Reg. at 11,490, 11,491 (Preamble to Proposed Regulations). The final regulations push back that effective date to coincide with their date of publication. Accordingly, final Treasury Regulation § 1.101410 applies to property acquired from a decedent if the decedent’s estate tax return is filed after September 17, 2024. Treas. Reg. § 1.1014-10(f). Similarly, final Treasury Regulation § 1.6035-1 applies to executors of estates of decedents that file estate tax returns after September 17, 2024, and to trustees that receive property included in the gross estate of such a decedent. Id. § 1.6035-1(j).

As provided in the 2015 Act, the statutory rules of §§ 1014(f) and 6035 continue to apply to property with respect to which an estate tax return is filed after July 31, 2015. 2015 Act, § 2004(d). Accordingly, the consistent basis rule of § 1014(f) continues to apply to property acquired from a decedent whose estate tax return was filed after July 31, 2015, and before September 18, 2024. See Preamble to Final Regulations, 89 Fed. Reg. at 76,361. Likewise, the reporting requirements of § 6035 continue to apply to executors of estates of decedents who filed an estate tax return after July 31, 2015, and before September 18, 2024. See id. at 76,373.

Proposed regulations generally do not have the force of law until finalized. See Lecroy Rsch. Sys. Corp. v. Comm’r, 751 F.2d 123, 127 (2d Cir. 1984). Accordingly, a taxpayer need not comply with a rule that the Treasury Department included in its proposed regulations but failed to adopt in its final regulations (such as the subsequent transfer reporting requirement for individual beneficiaries).

Conclusion

The final regulations under §§ 1014(f) and 6035 represent a substantial improvement to the proposed regulations and should significantly ease the compliance burden borne by executors and beneficiaries. Practitioners who assist executors in filing federal estate tax returns will be pleased with the additional clarity and options provided. Individual beneficiaries will be relieved not to have to comply with a subsequent transfer reporting requirement or be subject to the zero basis rule. It took the Treasury Department over eight years to issue the final regulations, but the improvements they provide seem to have been worth the wait.