Inside Track: IRS draft Form 8939 leaves estate tax preparers scratching their heads:

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  • IRS draft Form 8939 leaves estate tax preparers scratching their heads

    Draft Form 8939 lacks instructions and leaves more questions than answers for executors reporting on estates of people who died in 2010.

    Robert A. Mathers

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    Jan. 19, 2011 – Have you seen the IRS draft Form 8939? If you’re like the rest of us, it may have you scratching your head. The draft form, also referred to as an Allocation of Increase in Basis for Property Received from a Decedent, was issued in December 2010.

    And while the intent behind the form is to allow executors and trustees the ability to report the allocation of basis adjustments under IRC Section 1022 for estates of decedents in 2010, the lack of instructions combined with the omission of any place on the form to report explanations leaves more questions for a preparer than answers for both preparers and the IRS.

    The form is only three pages long, but contains no instructions. Page one is very similar to Estate Tax Return Form 706. Page two allocates the $3 million spousal basis adjustment and the regular $1.3 million adjustment to transfers to the surviving spouse. Page three is for the allocation of the remaining $1.3 million basis increase to other bequests.

    Although the form might not seem complicated, without instructions, executors need to give extra thought and attention if this format makes the final cut. Executors should expect to file multiple copies of the form for most estates.

    Questions and issues raised

    Some of the questions and issues that will arise when reviewing the draft form:

    • The form asks the preparer to complete the property’s acquisition date – what does a preparer do if the carry-over basis acquisition date is not readily ascertainable?
    • Without room for an explanation, it would appear that taxpayers can move forward on technical issues with debatable attributes under Section 1022, including: determination on whether life estates, powers of appointment, and irrevocable grantor trusts are “owned by the decedent” or “received from the decedent,” as provided for in the statute.
    • What if the estate sold the property and it was not distributed? It seems as though another form, schedule, or other reporting mechanism is needed.
    • While the form asks for the fair market value of property transferred to the recipient, there is no place to require substantiation for the valuation of non-publicly traded assets (for example, closely held stock, artwork, family farms, and so on).
    • Non-cash assets in excess of $1.3 million and appreciated property whose value exceeded $25,000 received by the decedent within three years of death are required to be reported, but the form is not clear how to accomplish the disclosure.

    Presumably, this form is due by April 15, 2011. There are no provisions for extensions or amendments listed as of this writing.

    Other news from the Treasury

    While we await the final outcome of Form 8939 (and whether there will be clarity to its final form), there is more to report from the Treasury. So far, since last year, several jurisdictions have passed legislation to protect beneficiaries from the unintended consequences of the optional federal estate tax repeal. Unfortunately, Wisconsin is not one of them.

    For example, before the President signed the new tax law into effect, Pennsylvania enacted legislation that interprets certain formula clauses in testamentary documents for decedents dying in 2010 as if they refer to the federal estate tax laws of 2009. All parties involved are given the right to have a determination made as to whether the decedent intended for the formula clause to be construed under the laws in effect after Dec. 31, 2009.

    General guidance remains

    The 2010 optional estate tax repeal has left us with more questions than answers. However, the general guidance on issues still remains. It is important to remember the following:

    • File the appropriate forms for all assets – including those the decedent acquired that have more than $25,000 of appreciation.
    • If electing out of the estate tax, allocate basis to depreciated assets to re-start depreciation.
    • Don’t forget about the IRC Section 754 election that allows certain business entities the ability to reach inside of the entity to step up inside basis of certain assets (the executor has the power to allocate basis in the IRC Section 1022 regime).

    The IRS is presently accepting comments on the draft Form 8939. There is no set date as to when it may be finalized. To comment on the draft form, go to and contact the IRS through the website. Make sure to include the word DRAFT in your comments.

    About the author

    Robert A. Mathers, CPA, is a shareholder in Davis & Kuelthau, Oshkosh, practicing primarily in the corporate arena. He also holds credentials from the American Institute of CPAs (AICPA) as an ABV (Business Valuation) and PFS (Personal Financial Specialist). He provides legal and advisory services to Wisconsin corporations and their owners, focusing on closely-held businesses, and estate planning and private wealth services to individuals. He previously was national tax director at one of the country’s largest CPA firms. If you have questions regarding the draft Form 8939 or would like to discuss your thoughts on what is happening in the Treasury, please contact Bob Mathers at (920) 232.4855 or com Rmathers dkattorneys dkattorneys Rmathers com.

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