Extensions Granted for Certain 2010 Estates

Under the Bush tax cuts that were enacted in 2001, no estate tax was to apply in 2010 and the income tax basis of inherited assets was to generally carryover from the decedent.  On December 17, 2010, Congress acted to extend the Bush tax cuts for two more years and also revamped the 2010 estate tax rules.  The estate tax was retroactively reinstated for 2010 at a 35% tax rate with a $5 million exemption and requiring the income tax basis of assets to be generally changed to their fair market values at the date of death.  In addition, Congress provided an election (for the 2010 tax year only) whereby estates could elect out of the reinstated 2010 estate tax regime and apply the rules of zero estate tax and carryover of income tax basis for inherited property that were originally going to apply for 2010.  The election may be beneficial for large estates.

Tax guidance and tax forms from the IRS have been slow in coming because of the complexity of these changes.  Now, in Notice 2011-76, the IRS has published guidance with respect to the due dates of the required tax forms and reporting obligations.

Estate Tax Return, Form 706:  The due date of estate tax returns of those who died from January 1, 2010 through December 16, 2010 was originally set to be September 19, 2011.  The form was provided less than two weeks ago.  Therefore, if extension Form 4768 is filed by September 19, 2011 for these estates, an extension to March 19, 2012 is permitted for both filing Form 706 and also for paying any estate tax.  However, interest will apply to the estate tax paid after September 19, 2011.  For those who died from December 17, 2010 through December 31, 2010, the regular due date and payment rules apply (nine months after death) unless extension Form 4768 is timely filed, in which case Form 706 and the payment of any tax is due 15 months from the date of death.  Interest will also apply to tax paid after the original nine-month due date, although the Notice waives late payment penalties.

Carryover Basis Return, Form 8939:  For those who died in 2010 and elect out of the reinstated estate tax, the due date of the tax return reporting carryover income tax basis of inherited assets (with adjustments for the special $1.3 million and $4.3 million basis increases) was due November 15, 2011.  The due date is now changed to January 17, 2012 and no extension request is necessary to obtain the later due date.  When carryover basis is elected, the Personal Representative of the estate is required to report the carryover basis information to the estate beneficiaries within 30 days of the due date of Form 8939.  Therefore, the due date for this requirement is also changed, from December 15, 2011 to February 16, 2012 (the Notice states the 17th).

Gains on the Sale of Inherited Assets with Carryover Basis:  Beneficiaries that sell inherited assets may not know the income tax basis of the asset sold by the due date of their 2010 income tax return (October 17, 2011 for extended individual income tax returns) because the due dates of the estate tax return and the carryover basis reporting form may be after the due date of the beneficiary's income tax return.  The beneficiary should make a good faith estimate of the income tax basis and file the income tax return on time.  When the actual basis information becomes available, an amended income tax return will be necessary to correct the basis.  The IRS notice states that underpayment penalties will be waived if a good faith estimate was used.  The amended return should bear the legend, "IR Notice 2011-76" at the top of the form.

The IRS notice does not change other due dates, such as the due date of the gift tax return (Form 709, which is due at the same time as the donor's income tax return) or the due dates of any State inheritance tax forms (Utah follows the Federal law).