On July 31, 2015, President Obama signed into law H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Act). The Act made several key tax law changes in the revenue provisions, including: (1) new FinCEN Report 114 (FBAR) filing and extension deadlines, (2) tax filing deadlines and (3) changes to consistent basis reporting between the estate and the person acquiring the property from decedent.
New FBAR Extension and Due Dates
The Act changes the due date of the FBAR to correspond with the April 15 due date of an individual’s tax return who resides in the United States. In addition, the due date to file FBARs can now be extended for a six-month period ending on Oct. 15. The Act explicitly states that “[f]or any taxpayer required to file [an FBAR] for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary.” It’s important to note that the automatic two-month extension to file an individual tax return for individuals living outside the United States will apply to the due date of the FBAR.
Tax Return Filing Deadlines
Trust related filings. The maximum extension for the returns of trusts filing Form 1041 will be a five and one half month period ending on Sept. 30 for calendar-year taxpayers. The due date of Form 3520–A, Annual Information Return of a Foreign Trust with a United States Owner, is now generally March 15 (more specifically, the 15th day of the third month after the close of the trust’s taxable year). The maximum extension for Form 3520-A is a six-month period, therefore generally until Sept. 15. The due date of Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, for calendar year filers will be April 15 with a maximum extension for a six-month period ending on Oct. 15.
Partnerships. Under the general rule regarding time for filing income tax returns, returns made on the basis of the calendar year were required to be filed on or before April 15 following the close of the calendar year. Returns made on the basis of a fiscal year were required to be filed on or before the 15th day of the fourth month following the close of the fiscal year.
The Act changed this by providing that partnership returns for taxable years beginning after Dec. 31, 2015 are required to be filed one month earlier, March 15 (or 15th day of the third month following the close of the fiscal year). However, it’s also altered the maximum extension for the returns of partnerships to six months, which results in the same extended September due date for calendar-year partnerships.
Corporations. Corporations, including S corporations, were previously required to file returns made on the basis of the calendar year on or before March 15 following the close of the calendar year. Returns made on the basis of a fiscal year were required to be filed on or before the 15th day of the third month following the close of the fiscal year.
The Act provides that C corporations for taxable years beginning after Dec. 31, 20151 will follow the general rule by having an additional month to file until April 15 (or 15th day of the fourth month following the close of the fiscal year). In addition, the automatic extension has been increased to five months to Sept. 15.2
An S corporation’s due date hasn’t been altered and continues to be March 15 (or 15th day of the third month following the close of the fiscal year).
Consistent Basis Reporting
The Act also revised the U.S. tax rules on the cost basis of property acquired from a decedent for purposes of calculating capital gains upon the subsequent sale, exchange or other disposition of such property. Generally such cost basis is the fair market value as of the date of the decedent’s death, or if elected, an alternate valuation date. This step-up in cost basis as of the decedent’s death is a significant advantage to heirs receiving transfers of appreciated property. The pre-death appreciation isn’t subject to capital gains tax. By comparison, if the recipient of the property had received it as a gift while the decedent was alive, the recipient’s cost basis would generally be limited to the adjusted cost basis of the donor (that is, no step-up), resulting in the built-in gain subject to tax when the property is sold.
The Act changes these general built-in gain rules. The step-up in cost basis for appreciated property would apply only to property whose inclusion in the decedent’s estate increased the U.S. estate tax liability (reduced by credits allowable against such tax) on the estate.
The value of the property and thus the cost basis can’t exceed the final value that’s been determined for purposes of U.S. estate tax on the estate of the decedent. Such value could be specified by the U.S. Treasury, usually the Internal Revenue Service, and would be final if the executor of the estate didn’t timely contest. Alternatively, the cost basis can’t exceed the value of such property as identified on a U.S. estate tax return, assuming the U.S. Treasury doesn’t contest such value before the expiration of the time for assessing the tax. If the value is contested, then it would be determined by a court or pursuant to a settlement agreement with the IRS. The Act authorizes the U.S. Treasury to issue regulations providing for exceptions to these rules.
In practice, the executor of the estate required to file a U.S. estate tax return must provide a statement to the IRS and to each person acquiring any interest in property included in the decedent’s gross estate for U.S. estate tax purposes. The statement must identify the value of each interest in the property as reported on the U.S. estate tax return and such other information with respect to such interest as the U.S. Treasury may prescribe.
In some cases, the executor may be unable to make a complete U.S. estate tax return. In such a scenario, each person who holds a legal or beneficial interest in the property and is required by the U.S. Treasury to file a U.S. estate tax return must provide to the U.S. Treasury and to each other such person the statement identifying the information described above.
The timing of the requisite statement will be prescribed by the U.S. Treasury, but in no case will the time be later than 30 days after the earlier of: (1) the date on which the U.S. estate tax return was filed or (2) the date on which the return was required to be filed (including extensions, if any). In any case in which an adjustment is required to the information included on a filed statement, the supplemental statement must be filed not later than 30 days after such adjustment is made.
The Act also authorizes the U.S. Treasury to issue regulations relating to the application of these rules to:
(1) property with regard to which no estate tax return is required to be filed, and
(2) situations in which a surviving joint tenant or other recipient may have better information than the executor of the estate regarding the cost basis or fair market value of the property.
Finally, the Act imposes penalties for failure to file and accuracy-related penalty for inconsistent reporting when the cost basis of the property claimed on a tax return exceeds the basis determined under the new rules discussed above.
These changes apply to property with respect to which a U.S. estate tax return is filed after the date of the enactment of the Act (July 31, 2015).
Effect on Taxpayers
Taxpayers should consult their U.S. tax advisors to determine how these changes may affect them and their tax filings for next year. The change that will likely cause the most headache to taxpayers and their advisors is the FBAR filing due date (without extension). In particular, those taxpayers who live outside the United States and have tax returns that are due by June 15 will now have to evaluate whether to extend the FBAR as well as the tax returns to Oct. 15. U.S. tax advisors and financial intermediaries should consider, and discuss, with their U.S. clients the plans for collecting information to file timely FBARs and returns early in 2016 or the process to apply for an extension by April 15.
Furthermore, non-U.S. citizens and non-U.S. domiciliaries who have U.S.-situs assets or who have U.S. heirs, U.S. trust beneficiaries or U.S. insurance/annuity beneficiaries, should contact their U.S. tax consultants as soon as possible to determine how their current succession planning may be affected. The impact on the U.S. taxation of the assets should be evaluated for the requirement discussed above for consistency of U.S. tax reporting of the assets’ tax basis (generally the value as of date of death) by the estate and by the person acquiring property from the decedent (or from certain trusts or insurance/annuity policies). Such estate tax considerations would certainly also apply to the estates of U.S. citizens and U.S. domiciliaries, as well as non-U.S. domiciliaries who are covered expatriates.
Endnotes
1. In the case of any C corporation with a taxable year ending on June 30, the amendments made by this subsection shall apply to returns for taxable years beginning after Dec. 31, 2025.
2. Increasing to six months after Jan. 1, 2026. In the case of any return for a taxable year of a C corporation that ends on June 30 and begins before Jan. 1, 2026, the automatic extension is seven months.