Consistent Basis Requirement

The consistent basis requirement is the rule that a beneficiary's initial basis in property inherited from a decedent may not exceed the value finally determined for that property on the estate's federal estate tax return. It was enacted in 2015 and lives in two places: Internal Revenue Code section 1014(f), headed "Basis must be consistent with estate tax return," which sets the ceiling, and section 6035, headed "Basis information to persons acquiring property from decedent," which makes the executor report the values so the ceiling can be enforced.

The Treasury regulation defines the term itself. Section 1.1014-10(a)(1) says "the consistent basis requirement is the requirement that the initial basis in certain property be equal to or less than the property's final value as determined under paragraph (b)(1) of this section or, if no final value has yet been determined, the property's reported value for Federal estate tax purposes." The name used here is the regulation's own. Practitioners more often say "basis consistency rules," and the rulemaking that produced the regulations was titled "Consistent Basis Reporting Between Estate and Person Acquiring Property From Decedent," so all three phrases describe the same regime.

The problem it addresses is a mismatch of incentives. An estate wants a low value, because estate tax is charged on it. An heir wants a high basis, because capital gains tax is charged on the excess of a later sale price over basis. Before 2015 nothing forced the two figures to agree.

The exception is the first thing a reader should learn, because it decides whether any of this reaches them. Section 1014(f)(2) reads: "Paragraph (1) shall only apply to any property whose inclusion in the decedent's estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate." The regulation puts the same point in terms an executor can apply: consistent basis property is property "whose value increases the estate tax liability ... that is payable after the application of allowable credits," and "if, after the application of allowable credits, no estate tax liability is payable, no such property is subject to the consistent basis requirement."

Federal estate tax reaches a very small share of estates, so for most families the ceiling never engages. Getting this backwards is the expensive error here: it would tell readers with no estate tax exposure that their inherited basis is capped by a return nobody filed.

The reporting duty runs off the same trigger, with one important gap. Section 6035(a)(1) puts the obligation on "the executor of any estate required to file a return under section 6018(a)," who must furnish a statement of the reported values "to the Secretary and to each person acquiring any interest in property included in the decedent's gross estate." The Form 8971 instructions translate that into practice and then list when the form is not required: where "the gross estate plus adjusted taxable gifts and specific exemption is less than the basic exclusion amount applicable in the year of decedent's death," where estate tax forms other than Form 706 or Form 706-NA are filed, and where "the estate tax return is filed solely to make an allocation or election respecting the generation-skipping transfer tax, solely to elect portability of the deceased spousal exclusion amount (DSUE), or solely as a protective filing to avoid a penalty or satisfy a state law requirement."

That last carve-out matters more than it looks, because filing an estate tax return purely to preserve a deceased spouse's unused exclusion is common in estates that owe nothing. Such a return does not drag the estate into the reporting regime.

The deadlines are short and are measured from the estate tax return, not from the death. Section 6035(a)(3)(A) requires the statement no later than the earlier of 30 days after the estate tax return was due, including extensions, or 30 days after it was actually filed. Section 6035(a)(3)(B) adds that where the reported information is later adjusted, a supplemental statement is due within 30 days of the adjustment. An executor who files an estate tax return in month nine and forgets Form 8971 is late in month ten.

"Final value" has four possible meanings and the regulation enumerates them. Under section 1.1014-10(b)(1), the final value is the value reported on the estate tax return once the estate tax assessment period has expired without the IRS timely adjusting it; or a value the IRS determined or specified that the executor did not timely contest, once that period expires; or a value agreed in writing with the IRS; or a value determined by a court, once no appeal remains. Until one of those happens there is no final value, and the beneficiary's ceiling is instead the value reported on the Schedule A they received.

The requirement does not expire when the estate closes. Section 1.1014-10(a)(3) provides that it "applies as long as the initial basis in consistent basis property is related, in whole or in part, to the property's final value," and continues "regardless of the number of successive owners" until the property is sold, exchanged or otherwise disposed of in a recognition event, or becomes includible in another decedent's gross estate. It also notes that the expiration of the assessment period on an income tax return that used an incorrect basis does not discharge the duty to get the basis right on a later taxable event.

A long list of property is excepted, and the pattern behind it is worth seeing. Section 1.1014-10(c)(2) removes United States dollars, dollar-denominated demand deposits, dollar certificates of deposit, dollar cash collateral, money market fund shares priced in dollars, life insurance proceeds on the decedent's life payable in a lump sum in dollars, tax refunds, notes forgiven in full at death, household and personal effects for which no appraisal is required, interests in and distributions from retirement and deferred-compensation plans "including individual retirement arrangements as defined in sections 408 and 408A" that are expressed entirely in dollars, interests consisting entirely of the right to receive income in respect of a decedent, annuity contracts subject to section 72, and the surviving spouse's half of community property. It also excepts property that qualified wholly for the marital or charitable deduction where the deduction was properly claimed, which follows from the exception in the statute: property that produced a full deduction did not increase anybody's estate tax.

The common thread is that these items either have no valuation question at all or carry no basis derived from an estate tax value, so there is nothing for a consistency rule to police.

The penalty falls on the beneficiary, not only on the executor. The Form 8971 instructions state it under the heading "Penalties for Inconsistent Filing": "Beneficiaries who report basis in property that is inconsistent with the amount on the Schedule A may be liable for a 20% accuracy-related penalty under section 6662. Beneficiaries who report a basis in property acquired from a decedent that is 200% or more of the correct amount may be liable for a 40% penalty for a gross valuation misstatement under section 6662(h), instead of the 20% penalty." Separate penalties reach an executor who files a late or incorrect Form 8971 or fails to furnish a correct Schedule A.

1. Ask whether an estate tax return was required at all. The whole regime runs off a return filed under section 6018. No required return, no reporting duty and no ceiling.

2. Ask whether estate tax was actually payable after credits. Under section 1014(f)(2) the cap reaches only property whose inclusion increased that liability, so a return filed solely to elect portability, to make a generation-skipping allocation, or as a protective filing does not trigger it.

3. The executor files Form 8971 and furnishes a Schedule A. The deadline is the earlier of 30 days after the estate tax return was due including extensions, or 30 days after it was filed. A later adjustment means a supplemental statement within 30 days.

4. The beneficiary uses the Schedule A value as the ceiling on initial basis. Until a final value is determined, the reported value on that schedule is the limit.

5. The ceiling then travels with the property. It keeps applying, through successive owners, until the property is disposed of in a recognition event or is included in another decedent's gross estate.

A hypothetical, working through both branches. Bernard dies owning a commercial building. His estate is large enough that a federal estate tax return is required and estate tax is payable. The estate reports the building at $2,400,000, the IRS does not adjust the value, and the assessment period closes, so that becomes the final value.

His daughter Priya inherits the building and sells it four years later for $2,900,000. Her basis cannot exceed the final value, so her gain is $2,900,000 − $2,400,000 = $500,000. Had she used a later appraisal of $2,650,000 as her basis, she would have reported a gain of $2,900,000 − $2,650,000 = $250,000, understating it by $500,000 − $250,000 = $250,000 and exposing herself to the 20 percent accuracy-related penalty on the resulting underpayment.

Now change the one fact that decides it. Suppose Bernard's estate was well under the filing threshold and no estate tax return was ever required. Section 1014(f)(2) never engages, no Form 8971 is filed, and there is no reported value to be consistent with. Priya's basis is determined under the ordinary rules for property acquired from a decedent, with no ceiling imposed by this regime at all. Figures are hypothetical; the statutory tests are not.

This is an obligation rather than a choice, so what follows is what the regime achieves and where it creates work or risk.

What it achieves

• It closes a genuine mismatch, where an estate had every reason to report a low value and the heir every reason to claim a high one.
• It gives beneficiaries a figure they would otherwise have to reconstruct, sometimes decades later, for property they did not choose and did not value.
• Its scope is deliberately narrow: the cap reaches only property whose inclusion increased estate tax after credits, so most estates never meet it.
• Broad categories with no valuation question — cash, dollar deposits, lump-sum life insurance, retirement accounts, fully deducted marital and charitable property — are excepted outright.

Where it creates difficulty

• The deadline runs from the estate tax return rather than from the death, is only 30 days, and is easy for an executor to miss.
• The requirement outlives the estate, following the property through successive owners until a recognition event, so a basis figure has to be carried for years by people who were not involved in the administration.
• Until a final value is determined, the ceiling is the reported value, which can later change and trigger a supplemental Schedule A.
• The penalty falls on the beneficiary who reports the inconsistent basis, and it doubles to 40 percent where the claimed basis is 200 percent or more of the correct figure.
• The interaction with the exception is easy to state backwards, and a beneficiary told the cap applies when it does not will overpay tax on a later sale.