Inheritance

[NotEasy]

Taxpayer's mother passed away in 2005. She had a brokerage account with securities holding in it.

She did not have a will when she passed away. So taxpayer had to go through a long process with the brokerage firm to claim the securities and the process was finally done in 2007.

Taxpayer then sold the securities in 2007 and received a Form 1099-B. The Form 1099-B was issued to the "Estate of <taxpayer mother's name>" and the taxpayer as the REP. It is in his deceased mother's SSN.

Should the Form 1099-B be reported on a Form 1041?

[Koss]

Estate

If the estate of the decedent is closed, then, no I don't think I would go there...

The estate is probably closed.

I would either report the sales proceeds on your client's Schedule D, where it actually belongs, using the correct basis (FMV on date of death), or...

Well, I was going to suggest using Line 21 to report IRD (income in respect of the decedent), but that won't work very well if there is a net capital gain, because your client should get the long-term capital gain tax rate.

If the IRS questions this matter, the inquiry, or audit, would be directed at the decedent--not at your client. The 1099-B bears the SSN of the decedent.

The IRS is not going to challenge or question the reporting of long term capital gain transactions on your client's return simply because he did not receive Form 1099-B.

The IRS may well inquire as to why no tax return was filed for the decedent for 2007, because of the 1099 matching program.

So you might have to deal with a live rep at the IRS at some point. But when that rep looks at the whole picture, it should be easy to close the case. You would send them a copy of your client's 2007 return, to show that the sales were accurately reported and taxed, and also send a copy of the decedent's final return. And maybe throw in the letters of appointment, which would have been issued by the probate court, designating your client as the administrator of the estate.

[NotEasy]

If the estate of the decedent is closed, then, no I don't think I would go there...

The estate is probably closed.

I would either report the sales proceeds on your client's Schedule D, where it actually belongs, using the correct basis (FMV on date of death), or...

Well, I was going to suggest using Line 21 to report IRD (income in respect of the decedent), but that won't work very well if there is a net capital gain, because your client should get the long-term capital gain tax rate.

If the IRS questions this matter, the inquiry, or audit, would be directed at the decedent--not at your client. The 1099-B bears the SSN of the decedent.

The IRS is not going to challenge or question the reporting of long term capital gain transactions on your client's return simply because he did not receive Form 1099-B.

The IRS may well inquire as to why no tax return was filed for the decedent for 2007, because of the 1099 matching program.

So you might have to deal with a live rep at the IRS at some point. But when that rep looks at the whole picture, it should be easy to close the case. You would send them a copy of your client's 2007 return, to show that the sales were accurately reported and taxed, and also send a copy of the decedent's final return. And maybe throw in the letters of appointment, which would have been issued by the probate court, designating your client as the administrator of the estate.

Thank you Koss.

If they decide to file a Form 1041 for it, who would pay for the capital gain since the date of the death? Would the capital gain be passed to the heir's tax return through a Form K-1?

[Koss]

Form 1041

That would certainly work well in terms of the outcome. Using a 1041 to report the sale, with Schedule D attached to the Form 1041, would accurately report the transaction, using the SSN of the decedent, and it would allow the gain to flow through to the beneficiary on Sch. K-1.

I guess I'm just not totally comfortable with the idea of reporting only that transaction on Form 1041, especially if no previous return was ever filed for the estate. It may raise questions about why there was no 1041 filed for 2005 or 2006, and it may raise questions about what other assets or income are in the estate...

If the estate was small enough, or otherwise structured in such a way that an estate return was never required to begin with, I am not convinced that this single transactions triggers such a requirement. If an estate return was previously filed, or should have been but wasn't, then that's a whole different ball of wax...

If there was no estate, or, perhaps the better way to put it is... if there was no estate that was required to file a return, the issuance of a Form 1099-B does not necessarily change that fact.

[NotEasy]

That would certainly work well in terms of the outcome. Using a 1041 to report the sale, with Schedule D attached to the Form 1041, would accurately report the transaction, using the SSN of the decedent, and it would allow the gain to flow through to the beneficiary on Sch. K-1.

I guess I'm just not totally comfortable with the idea of reporting only that transaction on Form 1041, especially if no previous return was ever filed for the estate. It may raise questions about why there was no 1041 filed for 2005 or 2006, and it may raise questions about what other assets or income are in the estate...

If the estate was small enough, or otherwise structured in such a way that an estate return was never required to begin with, I am not convinced that this single transactions triggers such a requirement. If an estate return was previously filed, or should have been but wasn't, then that's a whole different ball of wax...

If there was no estate, or, perhaps the better way to put it is... if there was no estate that was required to file a return, the issuance of a Form 1099-B does not necessarily change that fact.

Thank you Koss.Just a few more quick questions:

Before filing the Form 1041, do they have to first apply for a Federal ID number (Taxpayer ID number) for the estate? Can they use the SSN of the decedent as the Taxpayer ID number on the Form 1041?

Is the cost basis calculated based on the price of the securities on the date of death of the decedent, not the date that the heirs finally could claim possession of the securities?

Thank you.

[geekgirldany]

I'll add a little personal experience here. My grandfather passed away around 8 years ago. When the property was sold in 2006 they put the 1099-S in his social security number and put the name as "The Estate of..." The children (my father, uncles and aunts) split the money up. They also split up the basis. I reported it this way for my father and so did my uncles and aunts.

So far nothing has come up about it. As Koss mentioned it may have to explained to the IRS later. I would just put it on the individual return.

[Koss]

Estate Return

Before filing the Form 1041, do they have to first apply for a Federal ID number (Taxpayer ID number) for the estate? Can they use the SSN of the decedent as the Taxpayer ID number on the Form 1041?

An estate does need an EIN. But when you apply for an EIN for an estate, it will be bound to the SSN of the decedent. So it will accurately track the transactions in question.

Is the cost basis calculated based on the price of the securities on the date of death of the decedent, not the date that the heirs finally could claim possession of the securities?

Yes, generally the basis will be FMV on the date of death, unless the estate chooses an "alternate valuation date." But you probably don't wanna go there. [LOL]