Sec. 1.1014-10 Basis of property acquired from a decedent must be consistent with property's Federal estate tax value.

(i) The value reported on an estate tax return filed with the IRS, once the period of limitations on assessment (see section 6501) of estate tax has expired without that value having been timely adjusted by the IRS; or

(ii) The value determined or specified by the IRS that differs from the value reported on an estate tax return filed with the IRS and the value specified by the IRS for other included property, as defined in paragraph (d)(4) of this section, once the period of limitations on assessment applicable to the estate tax has expired without that value having been timely contested by the executor, as defined in paragraphs (d)(1) and (2) of this section, respectively; or

(iii) The value determined in a written agreement with the IRS, (whether entered into in the course of the administrative proceedings between the estate and the IRS or after the commencement of litigation), once that written agreement has been executed by both the executor and the IRS and is binding on all parties (including, but not limited to, the executor, the IRS, and the beneficiaries); or

(iv) The value determined by a court for the purpose of determining the estate tax liability of the estate, as defined in paragraph (d)(3) of this section, once the court's determination no longer can be appealed to any court.

(i) In general. Prior to the determination of the final value in accordance with paragraph (b)(1) of this section, a taxpayer may not claim an initial basis in consistent basis property in excess of the property's value as reported on the Statement described in §1.6035-1(c)(2) and required under §1.6035-1 (as supplemented). This value is referred to in this section as the reported value. A value reported on a Statement (or a supplement to the Statement) that either reports a value from an estate tax return filed after the expiration of the period of limitations on assessment applicable to that return, or a value reported for property not reported on the estate tax return, is not a reported value for purposes of this section. See §1.6035-1(d) regarding an executor's duty to supplement the Statement.

(ii) Limit on reliance on Statement not reporting final value. If the final value of consistent basis property is determined (as described in paragraph (b)(1) of this section) before the expiration of the period of limitations on assessment for a taxpayer's income tax return that reports a taxable event with regard to the property, the taxpayer's reliance on a Statement (or a supplement to the Statement) that does not report the final value of the property may result in an income tax deficiency and underpayment. See, however, section 6664 and the corresponding regulations for rules relating to waivers of penalties for certain failures due to reasonable cause.

(i) Property subject to debt. The final value or, if applicable, the reported value of property subject to recourse or non-recourse debt is determined based on the gross value of that property undiminished by the debt, regardless of whether the estate tax return reports the net value (equity of redemption value) of the property or separately reports the gross value of the property and the outstanding debt.

(ii) Special use property. The final value or, if applicable, the reported value of special use property with regard to which a recapture event (described in section 2032A(c)(1)) has occurred is increased as provided in section 1016(c) if the qualified heir makes the election under section 1016(c) and pays the amounts required under that section.

(i) In general. Except as provided in paragraph (c)(2) of this section, consistent basis property is any property--

(ii) Application. If the decedent's Federal estate tax return is filed on or before July 31, 2015, no included property and no other property described in paragraph (c)(1)(i) of this section is subject to the consistent basis requirement, even if the due date of that return is after July 31, 2015, or if one or more supplements to that return are filed with the IRS after July 31, 2015. If an estate tax liability is payable after the application of allowable credits, all property described in paragraphs (c)(1)(i)(A) and (B) of this section is considered property whose value increases the estate tax liability for purposes of paragraph (c)(1)(i)(C) of this section and, therefore, is subject to the consistent basis requirement, except as provided in paragraph (c)(2) of this section. If, after the application of allowable credits, no estate tax liability is payable, no such property is subject to the consistent basis requirement.

(i) United States dollars (as defined in paragraph (d)(6) of this section).

(ii) United States dollar-denominated demand deposits.

(iii) Certificates of deposit denominated in United States dollars.

(iv) Cash collateral denominated in United States dollars held by a third party to secure a liability (such as a deposit of purchase money or a security deposit).

(v) Shares of a registered investment company priced in United States dollars that is a money market fund under Rule 2a-7 under the Investment Company Act of 1940 (17 CFR 270.2).

(vi) Life insurance proceeds on the life of the decedent payable in a lump sum in United States dollars.

(vii) Federal, State, and local tax refunds and other refunds payable entirely in United States dollars.

(viii) Notes that are forgiven in full by the decedent upon death, whether or not denominated in United States dollars.

(ix) Household and personal effects for which an appraisal is not required under §20.2031-6(b) of this chapter.

(x) Property the initial basis of which is not in any way determined with regard to or derived from the property's final value as determined under paragraph (b)(1) of this section or its reported value as determined under paragraph (b)(2) of this section, if applicable. Such property includes but is not limited to--

(xi) Any interest in property that qualified for an estate tax marital deduction under section 2056, 2056A, or 2106(a)(3) for which such a deduction was properly claimed, and/or any interest in property that qualified for an estate tax charitable deduction under section 2055 or 2106(a)(2) for which such a deduction was properly claimed, provided that the value of the decedent's entire interest in the included property is wholly deductible and equal to the total amount qualifying for those deductions.

(xii) Property that represents the surviving spouse's one-half share of community property to which section 1014(b)(6) applies, regardless of whether this property is included property as defined in paragraph (d)(4) of this section.

(xiii) Property the basis of which is adjusted in a manner similar to section 1014(a) on the occurrence of a taxable termination that occurs on the death of a trust beneficiary pursuant to section 2654(a)(2) (to the extent the property is not then includible in the gross estate of any person).

(xiv) Any other property that is not described in paragraph (c)(1)(i) of this section or that is identified as excepted property in published guidance in the Federal Register or in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter).

(i) Final value determined by value on estate tax return. At D's death, D owned (among other assets) a private residence not subject to any debt. D's sole beneficiary is D's child C. The value of the residence is reported on the estate tax return at $300,000. The IRS accepts the return as filed and the period of limitations on assessment of estate tax expires. For purposes of the consistent basis requirement applicable to C, the final value of D's residence is $300,000, and therefore, C's initial basis in the residence is $300,000. See paragraphs (a)(2) and (b)(1)(i) of this section.

(ii) Adjustment of initial basis pursuant to other Code provisions. Several years later, C adds a master suite to the private residence at a cost of $45,000. Pursuant to section 1016(a), C's basis in the residence is increased by $45,000 to $345,000. Subsequently, C sells the residence to an unrelated third party for $450,000. C claims a basis in the residence of $345,000 and reports a gain of $105,000 ($450,000 less $345,000). C has complied with the consistent basis requirement, and C's adjustment to C's initial basis does not violate the consistent basis requirement. See paragraphs (a)(1) and (2) of this section.

(i) Final value determined on examination. The facts are the same as in paragraph (e)(1)(i) of this section (Example 1) except that, on examination, the IRS adjusts the value of the residence to $290,000 and that value is not contested before the period of limitations on assessment of estate tax expires. For purposes of the consistent basis requirement applicable to C, the final value of the residence is $290,000, and therefore, C's initial basis in the residence, before taking into account C's subsequent renovations, is $290,000. See paragraphs (a)(2) and (b)(1)(ii) of this section.

(ii) Reported value if no final value yet determined and reliance on Statement required under §1.6035-1. Prior to the determination of final value, C sells the residence for $375,000. C reports a gain of $75,000 on C's income tax return, relying on the reported value in a Statement required under §1.6035-1 and claiming an initial basis of $300,000. C has complied with the consistent basis requirement because C did not claim an initial basis in the residence in excess of its reported value before the final value was determined. However, because C claimed an initial basis in the residence that exceeds the final value, C may have an income tax deficiency and underpayment for the year of the sale if the applicable period of limitations on assessment for C's income tax return has not expired when the final value is determined. See paragraphs (b)(2)(i) and (ii) of this section.

(i) Final value determined by agreement. At D's death, D owned 50% of Partnership P, whose sole asset was a rental building with a fair market value of $10 million subject to non-recourse debt of $2 million. D's sole beneficiary is D's child C. The value of D's interest in Partnership P is reported on the estate tax return at $4 million (50% of ($10 million less $2 million)). On examination, the IRS timely adjusts the value of the partnership interest to $5.25 million and the executor of D's estate timely contests that value before the period of limitations on assessment of estate tax expires. Subsequently, the IRS and the executor of D's estate enter into a settlement agreement that provides that the value of D's interest in Partnership P for purposes of the estate tax is $4.5 million. For purposes of the consistent basis requirement applicable to C, the final value of the partnership interest is $4.5 million, and therefore, C's initial basis in the partnership interest is $4.5 million. See paragraphs (a)(2) and (b)(1)(iii) of this section.

(ii) Adjustment of initial basis pursuant to other Code provisions. C's share of Partnership P's liabilities at the date of D's death is $1 million. Under section 742 of the Internal Revenue Code and §1.742-1 of this part, C's basis in the partnership interest is $5.5 million ($4.5 million initial basis plus C's $1 million share of Partnership P's debt). C later sells the partnership interest for $5 million at a time when C's basis has not changed and C's share of the debt remains $1 million. Under section 752(d), C's amount realized on the sale includes $1 million for the reduction in C's share of partnership liabilities. Therefore, C's total amount realized is $6 million. C reports taxable gain of $0.5 million ($6 million amount realized less $5.5 million basis). C has complied with the consistent basis requirement because C did not claim an initial basis in the partnership interest that exceeds the final value of the interest, as determined under paragraph (b)(1) of this section, and C's adjustment of the initial basis in the partnership interest as reported does not violate the consistent basis requirement. See paragraphs (a)(1) and (2) of this section.

(i) Final value determined by court decision. At D's death, D owned (among other assets) a rental property. D's sole beneficiary is D's child C. The value of the rental property is reported on the estate tax return at $1 million. On examination, the IRS determines the value of the rental property to be $1.5 million. A court subsequently determines that the fair market value of the rental property for purposes of the estate tax is $1.3 million and the court's decision becomes final. For purposes of the consistent basis requirement, the final value of the rental property is $1.3 million, and therefore, C's initial basis is $1.3 million. See paragraphs (a)(2) and (b)(1)(iv) of this section.

(ii) Reliance on Statement required under §1.6035-1 and duration of consistent basis requirement. After the estate tax return is filed and before the final value is determined, C receives a Statement required under §1.6035-1 showing a reported value of $1 million for the rental property. C claims a depreciation deduction on the first income tax return C files after acquiring the property, relying on the reported value in the Statement required under §1.6035-1. C has complied with the consistent basis requirement on that return because C did not claim an initial basis in the rental property in excess of its reported value before the final value was determined. C may claim a credit or refund of income tax that may result from the increased depreciation deduction based on the final value of the rental property, but only if the period of limitations for a claim for a credit or refund of income tax for that year has not expired. C must use the final value of $1.3 million to determine C's unadjusted basis in the rental property for all open taxable years. In this case and pursuant to section 1016(a)(2), C's adjusted basis is determined by reducing the rental property's final value of $1.3 million by the greater of the depreciation deductions allowed or allowable based on the final value of $1.3 million for all prior tax years (open and closed). See paragraphs (a)(3), (b)(2)(i) and (ii) of this section.

(i) Partially deductible property subject to the consistent basis requirement. Pursuant to a bequest in D's will, Trust is established and funded with certain property, the value of which is includible in the gross estate under section 2031. Trust is a charitable remainder annuity trust described in section 664(d)(1). Trust provides that, in each taxable year during the lifetime of D's surviving child C, the trustee must pay to C an annuity of 5% of the initial net fair market value of all property passing to Trust as finally determined for Federal estate tax purposes. Upon the death of C, the trustee must distribute all of the then principal and income of Trust to organizations described in sections 170(c), 2055(a), and 2522(a) of the Code as the trustee selects, in the trustee's sole discretion. Although the executor of D's estate properly claims an estate tax charitable deduction under section 2055(e)(2)(A) for the value of the remainder interest in Trust, D's estate has an estate tax liability after application of all allowable credits. The property passing to Trust is subject to the consistent basis requirement because the value of the property is included in D's gross estate, an estate tax liability is payable after the application of all allowable credits, and the property is not described in paragraph (c)(2) of this section (in particular, the property is not wholly deductible property within the meaning of paragraph (c)(2)(xi) of this section).

(ii) Wholly deductible property not subject to the consistent basis requirement. The facts are the same as in paragraph (e)(7)(i) of this section (Example 7), except that the sole annuity beneficiary of Trust is D's surviving spouse S, and the executor of D's estate properly claims a deduction under section 2056(b)(8) for the value of S's annuity interest. Because the value of D's entire interest in the property passing to Trust qualified for either a charitable deduction under section 2055(e)(2) or a marital deduction under section 2056(b)(8), none of the property passing to Trust will be subject to the consistent basis requirement. See paragraph (c)(2)(xi) of this section.

(iii) Property not wholly deductible property if the sum of marital and charitable deductions allowed for that property is less than the value of the decedent's entire interest in the property. At the time of D's death, D owned 80 shares of voting stock in a closely-held corporation that has 100 shares of voting stock outstanding. D's will directed the executor of D's estate to distribute 40 shares of D's stock to a marital trust and 40 shares of D's stock to a charitable trust. D's executor included the value of D's 80 shares of stock in D's gross estate at $8,000,000 for purposes of the estate tax. Because of discounts applicable in valuing each of the two blocks of only 40 shares of the stock, D's executor correctly claimed a charitable deduction under section 2055(e)(2) of only $3,000,000, and correctly claimed a marital deduction under section 2056(b)(7) of only $3,000,000. D's executor determined that an estate tax was due on D's estate after the application of all allowable credits. The IRS accepted the return as filed and the period of limitations on assessment of estate tax expired. The 40 shares of stock owned by charitable trust and the 40 shares of stock owned by marital trust are not wholly deductible property within the meaning of paragraph (c)(2)(xi) of this section and are subject to the consistent basis requirement.