Orig Cost vs Stepped-Up Basis

[Burke]

Timely question. TP bought stocks at "$100." TP died, and due to stock market reductions, FMV at date of death was "$70," lower than original cost basis. Lawyer's office has told TP's spouse he can use either FMV at DOD, or original cost, whichever is greater in order to reduce gain on sale. I cannot find anything to substantiate this. Can anyone shed any light here? (IRS info refers to stepped-up basis, but in this case it is stepped-down basis.)

[fliszt]

When you fill out the 1041

stock sale goes on Schedule D (just like on the 1040). For purchase enter Inherited and then your cost (value on DOD) and then selling price. You may also take a 6 month from DOD valuation if you think the stk is going to be better off for your tax situation. After the Sch D entry, the loss (I'm assuming a loss) will transfer over to the K-1. I think it goes on line 11 B as ST Cap loss. And then as you know, the K-1's are sent to the heirs.
Larry

[Burke]

I think you misunderstood my post. There will be no 1041 filed, spouse inherited all stock. There will be no Form 706 Estate return filed either, as it is not required, so Alternate Valuation Date cannot be used. Question was: can bene use deceased's original cost basis (rather than FMV at DOD.)

[abctax]

Stepping down

Unfortunately, I think that pendulum swings both ways and that you are required to use the lower value.

[Bees Knees]

TTB page 6-3 under Property received as an inheritance says Basis for Determining Gain and Loss is:

The FMV of the property on the date of the decedent’s death or the alternate
valuation date, if used.

Nothing said about it being the greater of FMV or Basis, if FMV is less than Basis.

This agrees with IRS Pub 551, page 9 which says:

Inherited Property

Your basis in property you inherit from a dece-
dent is generally one of the following.

1) The FMV of the property at the date of the
individual’s death.

2) The FMV on the alternate valuation date if
the personal representative for the estate
chooses to use alternate valuation. For in-
formation on the alternate valuation date,
see the instructions for Form 706.

3) The value under the special-use valuation
method for real property used in farming or
a closely held business if chosen for estate
tax purposes. This method is discussed
later.

4) The decedent’s adjusted basis in land to
The extent of the value excluded from the
decedent’s taxable estate as a qualified
conservation easement. For information on
a qualified conservation easement, see the
instructions to Form 706.

If a federal estate tax return does not have to
be filed, your basis in the inherited property is its
appraised value at the date of death for state
inheritance or transmission taxes.

Again, no mention of the value being the greater of FMV or adjusted basis.

[Gretel]

I don't find or know of any exception the rule that the basis of inherited stocks is anything other than FMV as of DOD.

Seems like another lawyer who should stay out of the tax business.

[Burke]

I agree with all of your findings. Just trying to make sure, I have already told TP that is incorrect, but would throw it out just to see what sprouted up. Not that I am ever wrong......

[DonPriebe]

Seems like another lawyer who should stay out of the tax business.

He was thinking about the basis of stock acquired as a gift, where the basis can be either the donors basis or the FMV on the day of the gift, depending on the relationships between those two numbers and the eventual sales price.

[S T]

More and Comparison

From Pub 17 - Basis

Inherited Property
Your basis in property you inherit from a decedent is generally one of the following.

The FMV of the property at the date of the decedent's death.

The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation.

The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes.

The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement.


If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.

Property Received as a Gift
To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.

FMV less than donor's adjusted basis. If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. See Adjusted Basis, earlier.

Example.

You received an acre of land as a gift. At the time of the gift, the land had an FMV of $8,000. The donor's adjusted basis was $10,000. After you received the property, no events occurred to increase or decrease your basis. If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss.

If the sales price is between $8,000 and $10,000, you have neither gain nor loss.

I find it difficult to remember the rules for each scenario and always have to look them up.

Hope this helps

Sandy

[Gretel]

He was thinking about the basis of stock acquired as a gift, where the basis can be either the donors basis or the FMV on the day of the gift, depending on the relationships between those two numbers and the eventual sales price.

I know but why defend him? I don't mingle with lawyer's business.

[Burke]

In all fairness, I will have to relay that per the TP, the lawyer himself did not give him this info. It was the "girl" in his office, whether she is a secretary or paralegal I do not know, but who also qualified this advice with the fact that she checked with "others" in the firm who were quite knowledgable about stocks and this is what they confirmed. So we will give him a bye on this one.