REVISE ACCOUNTING PAPER

TO: File of Taxpayer Husband

FROM: Professor

DATE: November 18, 2013

RE: (1) For the rental properties, does Husband receive a stepped-up basis to fair market value date of death on both halves of the community property, his owned half and the half which he inherits from his deceased spouse Wife? (One Code section’s subsections and a Tax Court Memorandum decision are the likely authorities needed.) (2) Is Husband’s new basis used for depreciation and does depreciation start anew? (Same Tax Court Memorandum decision likely the authority needed.)

CONCLUSION: Thus, under Bissey and I.R.C. section 1014(b)(1) and (b)(6), taxpayer Husband shall receive a basis in property inherited from decedent spouse Wife equal to the fair market value of the property at date of death (or 6 months thereafter if the election under I.R.C. Section 2032 is properly made.) And that basis is used for depreciation which starts anew.

REASONING:

Husband and Wife owned various real estate and other business properties as community property in California, their state of residence. On the death of Wife, all of Wife’s shares of the community property passed to the surviving spouse Husband. The properties all now have been appraised to establish date of death fair market values, which values are higher than original costs bases.

In Bissey v. Commissioner, T.C.Memo 1994-540, 68 T.C.M. 1056 (1994), the court held as follows.

Because [taxpayer] Jack and [deceased spouse] Carol held the Loumont property [at issue] as community property, each having a one-half interest, and Jack inherited Carol’s community interest in the Loumont property on her death, Section 1014(b)(1) and (6) treats Jack as if he had acquired the entire property from Carol after death. Just as decedent’s adjusted basis at the time of death has no bearing on a devisee’s basis, so too, the adjusted basis of the Loumont property immediately prior to Carol’s death has a bearing on Jack’s basis in the Loumont property after her death.

The Bissey court further stated as follows.

By reason of Carol’s death in August 1980, Jack is treated under Section 1014 as having acquired the entire Loumont property with a fresh start basis at that time. We are therefore concerned with depreciation only from August 1980 forward.

Thus, under Bissey and I.R.C. section 1014(b)(1) and (b)(6), taxpayer Husband shall receive a basis in property inherited from decedent spouse Wife equal to the fair market value of the property at date of death (or 6 months thereafter if the election under I.R.C. Section 2032 is properly made.) And that basis is used for depreciation which starts anew.

Rev. Rul. 87-98, 1987-2 CB 206 provides as follows.

I.R.C. Section 1014(a) provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall be the fair market value of the property at decedent’s death.

I.R.C. Section 1014(b)(6) provides that the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state shall be considered to have been acquired from the decedent if at least one-half of the whole of the community interest in the property was included in determining the value of the decedent’s gross estate for federal estate tax purposes.

Thus, in the case of surviving spouse Husband, Husband will receive a step-up to fair market value as the basis for the community property which he owns. The basis will be stepped up on both Husband’s owned one-half interest in community property and on the one-half interest which he inherits from Wife.

Finally, California is indeed a community property state. I.R.S. Publication 555 (Rev. Jan. 2013) at 2. And per Husband, Husband and Wife held the rental properties as community property.

Although Husband and Wife did not apparently hold property as other than community property, Rev. Rul. 87-98 also clarifies how property is determined to be community property. In the revenue ruling, the spouses were residents of a community property state. The spouses held title to property as joint tenants with right of survivorship and later executed wills declaring the property to be community property. The ruling states that such property was community property under the laws of the state involved. Rev. Rul. 87-98 indicates, “If property held in a common law estate is community property under state law, it is community property for purposes of section 1014(b)(6) of the Code regardless of the form in which title was taken.”

ATTACH: Bissey v. Comm’r., T.C. Memo 1994-540 (first page of the case from CCH and LexisNexis). And Research “History” from CCH.