In Van Alen v. Commissioner, T.C. Memo. 2013-235, siblings inherited a cattle ranch from their father in 1994 which was valued under section 2032A. Their step-mother was the father’s executor. In 2007, the siblings sold a conservation easement on the property with the result that they recognized capital gain, at which point they argued that the estate had undervalued the property and their basis ought to be significantly higher than what was reported on the estate tax return. The court rejected the siblings argument, holding that the general rule of section 1014(a)(1) did not apply but rather 1014(a)(3) applied. This was important because 1014(a)(1) provides that basis is the fair market value of the property at the date of the decedent’s death whereas 1014(a)(3) provides that the basis for property valued under section 2032A is the value as determined under that section. The court also noted that the special use valuation agreement had been signed by the siblings, although one, who was then a minor, by his mother as his guardian ad litem. Finally, the court invoked the duty of consistency, which is usually thought to apply only when the executor and the beneficiary claiming a higher basis are identical, because the siblings benefitted from the lower value of section 2032A and had some involvement in the estate and audit, primarily by executing the special use valuation agreement.
The Obama Administration’s budget proposals include requiring basis to be based on transfer tax values. Many times taxable estates are settled by trading increases in the value of some assets with decreases in the value of others, or by trading off valuation with other positions taken on the estate tax return. Where the fiduciary and the beneficiary are identical it is fair and sensible to require consistency; in other instances, the fairness may not be clear and may put fiduciaries in a difficult position. For example, suppose the IRS insists on certain upward adjustments on audit, but is agreeable to a discounted value on a particular asset that the executor knows is likely to be sold in the next few years by the recipient beneficiary.
Turney P. Berry