CPA says I can take capital loss on inherited muni-bonds
jay
My brother asked the CPA who did the tax return for the estate about this,
and the CPA says that my basis is simply the FMV at the date of death. The
CPA says that I do not need to amortize inherited bonds...and says that only
bonds that were purchased need to be amortized. This means I can take a
capital loss on the bonds.
Is what I am told really true? If so, then why don't I have to amortize
down inherited muni bonds....is this because the estate already paid estate
tax on the full FMV?
If you believe what I'm being told is false, then let me know why you
believe this.
Thanks,
J.
Paul A Thomas
"jay" <jay...@verizon.net> wrote
>I inherited some muni bonds. They were above par at the date of death.
That becomes your cost basis.
> My brother asked the CPA who did the tax return for the estate about this,
> and the CPA says that my basis is simply the FMV at the date of death.
> The CPA says that I do not need to amortize inherited bonds...and says
> that only bonds that were purchased need to be amortized.
Sounds right.
> This means I can take a capital loss on the bonds.
Are you selling them at a loss? Because if you sell them for a gain, you
can't take a capital loss, but a capital gain.
> Is what I am told really true? If so, then why don't I have to amortize
> down inherited muni bonds.
Because you didn't pay a premium on them.
> ...is this because the estate already paid estate tax on the full FMV?
Nothing is known about the estate tax** that may, or may not have been paid.
** But you should find out if any estate tax was paid.
--
Paul A. Thomas, CPA
Athens, Georgia
taxman at negia.net
jay
can't take a capital loss, but a capital gain. >>
Two of the bonds were called a couple of weeks after having been transferred
over to me. The amount redeemed was less than the FMV at date of death
(D.O.D. was over 2 years ago)....I get a loss, right?
I will hold the rest of the bonds of until they mature or are called. If
the amount redeemed is less than the FMV at the date of death, I get a loss
for those bonds too, right?
<<Because you didn't pay a premium on them.>>
When you say I didn't pay a premium, is it because I didn't PAY for the
bonds? In other words, even though the FMV on date of death was above par,
I don't have to amortize because INHERITED the bonds rather than PAID for
the ponds?
By the way, the estate did pay estate tax on the bonds.
J.
ed
jay wrote:
> Two of the bonds were called a couple of weeks after having been transferred
> over to me. The amount redeemed was less than the FMV at date of death
> (D.O.D. was over 2 years ago)....I get a loss, right?
No. The premium on the bonds is amortized to call date (per your own
research). So regardless of the FMV at DOD the bonds decreased in basis
for you to the call amuont, leaving no gain nor loss. I think you can
deduct the "loss" (difference in DOD FMV and call amount) from your
line 8b tax free income.
>
> I will hold the rest of the bonds of until they mature or are called. If
> the amount redeemed is less than the FMV at the date of death, I get a loss
> for those bonds too, right?
Wrong. The amount of your loss, which was the premium at DOD less the
call premium, was amortized to the call date. If you sold them for
less than or more than the amortized value before the call date you
could have either a capital loss or gain.
>
> <<Because you didn't pay a premium on them.>>
>
> When you say I didn't pay a premium, is it because I didn't PAY for the
> bonds? In other words, even though the FMV on date of death was above par,
> I don't have to amortize because INHERITED the bonds rather than PAID for
> the ponds?
That's not the point, and it's wrong. Because all of the premium under
any circustance is amotized to the call date, your basis is, in effect,
adjusted to the call amount, so you have no gain nor loss when the
bonds are called. That is why you must amortize the premiumn. It
makes any capital gain or loss at call a non-tax event.
jay
I agree that it's possible the Estate's CPA is wrong in telling me this, but
my Brother thinks it would be unwise for me to doubt the Estate's CPA.
I just want to confirm this...are you a CPA?
Thanks,
J.
ed
CPA and possibly he will return to advise why you don't have to
amortize just because you inherited bonds at a premiim versus actually
paying for the premium.. Ignoring that distinction, if you
amortize your premium (regardless of how the premium is
determined---DOD FMV, or paid in purchase) to the call date, you have
eliminated any premium in excess of the call in your basis as of the
call date, and if your basis is the call value how can there be any
Capital Gain or loss in a called, or matured, tax free bond?
Paul Thomas, and your estate CPA seem to imply that when you inherit a
premium bond (or when the FMV at DOD is greater than par) amortization
rules are suspended and you can take a capital loss when the bond is
called. I think you missunderstood your brother, or he missunderstood
the CPA and Paul missunderstood, or misread, your question.
I have the feeling you don't really understand what amortization is.
In this context it means that the premium gradually is reduced to Zero
at the call date and your basis reduces accordingly.
For instance, if a $50,000 bond has a $1,000 premium your basis is
$51,000 (whether you paid $51,000 for it or you inherited it with a FMV
at DOD of $51,000). If the bond is callable at par in 10 years, each
year your basis decreases by $100 (due to amortization and for
simplicity using straight-line amortization) and your basis has ben
reduced to the $50,000 par at the call date. Now if the bond is
called at par, and your basis is par, you can't have any capital gain
or loss. I think your CPA meant "*if you hold the bond to the
call date* there is no reason to physically compute the amortization
because there is no gain nor loss when the bond is called"
Conversely, if you sell the bond for $50,500 after 3 years your basis
has been reduced by $300 ( due to amortizing the premium) to $50,700
and you have a long term capital loss of $200.
So, I suggest you can make the generalized statement that "There can
be no capital loss on a called or matured tax exempt bond. Any
premium would reduce your line 8b non-taxed income ."
ed
jay
to me, and he told me that it's a confusing issue. What his CPA said was
that the accounting firm had delved into this issue and debated this issue
before. The consensus, according to my broker's personal CPA is that, while
technically you may really be supposed to amortize all bonds, in practice
nobody really amortizes inherited bonds and they just use the FMV at date of
death. So the CPA thinks that it would be no problem for me to just take
the loss.
J.
Archmedes
Well, then, there you go.
ed
are confused by it, but since you probably won't get cought you can
disobey what the law says and take a capital loss. I bow to the higher
authority, knowledge and professionalism of your Broker's CPA and his
accounting firm. You have their blessing to break the law. The IRS
will surely be impressed, also. ed
jay
What the CPA was really saying is that the law does not clearly state that I
must amortize *inherited* bonds, therefore it would not be in my best
interest to do so if the law does not clearly state this. He did not say I
was breaking the law.
From Publication 551 (Basis of Assets):
--------------------------------------------------
Stocks and Bonds
The basis of stocks or bonds you buy is generally the purchase price plus
any costs of purchase, such as commissions and recording or transfer fees.
If you get stocks or bonds other than by purchase, your basis is usually
determined by the fair market value (FMV) or the previous owner's adjusted
the basis of stock.
You must adjust the basis of stocks for certain events that occur after
purchase. See Stocks and Bonds in chapter 4 of Publication 550 for more
information on the basis of stock.
----------------------------------
The above says nothing about needing to amortize bonds here. It says that
if you get stocks or bonds "other than by purchase" then you basis is
usually determined by teh FMV or the previous owner's adjusted basis. Since
estates use the FMV then this publication seems to imply that I would use
the FMV since the Estate did not use an adjusted basis.
From Publication 550 (Investment Income and Expenses) :
----------------------------------------------------------------------
Property Received as Inheritance
If you inherited property, your basis in that property generally is its fair
market value (its appraised value on the federal estate tax return) on:
The date of the decedent's death, or
The later alternate valuation date if the estate qualifies for, and elects
to use, alternate valuation.
If no federal estate tax return was filed, use the appraised value on the
date of death for state inheritance or transmission taxes.
---------------------------------------------------------------------
Yet another publication that says I can use the FMV. If the IRS were to ask
why I did not amortize the bonds I can simply quote the above two
publications saying I can use the FMV.
Granted elsewhere in publication 550, it talks about amortizing purchased
bonds, but nowhere does it say I need to amortize *inherited* bonds.
Here is what the Tax Code itself has to say (and nowhere does it say I must
amortize the bonds):
Sec. 1014. Basis of property acquired from a decedent
TITLE 26, Subtitle A, CHAPTER 1, Subchapter O, PART II, Sec. 1014
STATUTE
(a)
In general
Except as otherwise provided in this section, 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, if not sold, exchanged, or otherwise
disposed of before the decedent's death by such person, be -
(1)
the fair market value of the property at the date of the decedent's
death, or
(2)
in the case of an election under either section 2032 or section 811(j)
of the Internal Revenue Code of 1939 where the decedent died after October
21, 1942, its value at the applicable valuation date prescribed by those
sections, or
(3)
in the case of an election under section 2032A, its value determined
under such section.
(b)
Property acquired from the decedent
For purposes of subsection (a), the following property shall be considered
to have been acquired from or to have passed from the decedent:
(1)
Property acquired by bequest, devise, or inheritance, or by the
decedent's estate from the decedent;
(2)
Property transferred by the decedent during his lifetime in trust to pay
the income for life to or on the order or direction of the decedent, with
the right reserved to the decedent at all times before his death to revoke
the trust;
(3)
In the case of decedents dying after December 31, 1951, property
transferred by the decedent during his lifetime in trust to pay the income
for life to or on the order or direction of the decedent with the right
reserved to the decedent at all times before his death to make any change in
the enjoyment thereof through the exercise of a power to alter, amend, or
terminate the trust;
(4)
Property passing without full and adequate consideration under a general
power of appointment exercised by the decedent by will;
(5)
In the case of decedents dying after August 26, 1937, property acquired
by bequest, devise, or inheritance or by the decedent's estate from the
decedent, if the property consists of stock or securities of a foreign
corporation, which with respect to its taxable year next preceding the date
of the decedent's death was, under the law applicable to such year, a
foreign personal holding company. In such case, the basis shall be the fair
market value of such property at the date of the decedent's death or the
basis in the hands of the decedent, whichever is lower;
(6)
In the case of decedents dying after December 31, 1947, property which
represents 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, or possession of the United States or any foreign country, if
at least one-half of the whole of the community interest in such property
was includible in determining the value of the decedent's gross estate under
chapter 11 of subtitle B (section 2001 and following, relating to estate
tax) or section 811 of the Internal Revenue Code of 1939;
(7)
In the case of decedents dying after October 21, 1942, and on or before
December 31, 1947, such part of any property, representing the surviving
spouse's one-half share of property held by a decedent and the surviving
spouse under the community property laws of any State, or possession of the
United States or any foreign country, as was included in determining the
value of the gross estate of the decedent, if a tax under chapter 3 of the
Internal Revenue Code of 1939 was payable on the transfer of the net estate
of the decedent. In such case, nothing in this paragraph shall reduce the
basis below that which would exist if the Revenue Act of 1948 had not been
enacted;
(8)
In the case of decedents dying after December 31, 1950, and before
January 1, 1954, property which represents the survivor's interest in a
joint and survivor's annuity if the value of any part of such interest was
required to be included in determining the value of decedent's gross estate
under section 811 of the Internal Revenue Code of 1939;
(9)
In the case of decedents dying after December 31, 1953, property
acquired from the decedent by reason of death, form of ownership, or other
conditions (including property acquired through the exercise or non-exercise
of a power of appointment), if by reason thereof the property is required to
be included in determining the value of the decedent's gross estate under
chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such
case, if the property is acquired before the death of the decedent, the
basis shall be the amount determined under subsection (a) reduced by the
amount allowed to the taxpayer as deductions in computing taxable income
under this subtitle or prior income tax laws for exhaustion, wear and tear,
obsolescence, amortization, and depletion on such property before the death
of the decedent. Such basis shall be applicable to the property commencing
on the death of the decedent. This paragraph shall not apply to -
(A)
annuities described in section 72;
(B)
property to which paragraph (5) would apply if the property had been
acquired by bequest; and
(C)
property described in any other paragraph of this subsection.
(10)
Property includible in the gross estate of the decedent under section
2044 (relating to certain property for which marital deduction was
previously allowed). In any such case, the last 3 sentences of paragraph (9)
shall apply as if such property were described in the first sentence of
paragraph (9).
(c)
Property representing income in respect of a decedent
This section shall not apply to property which constitutes a right to
receive an item of income in respect of a decedent under section 691.
(d)
Special rule with respect to DISC stock
If stock owned by a decedent in a DISC or former DISC (as defined in
section 992(a)) acquires a new basis under subsection (a), such basis
(determined before the application of this subsection) shall be reduced by
the amount (if any) which would have been included in gross income under
section 995(c) as a dividend if the decedent had lived and sold the stock at
its fair market value on the estate tax valuation date. In computing the
gain the decedent would have had if he had lived and sold the stock, his
basis shall be determined without regard to the last sentence of section
996(e)(2) (relating to reductions of basis of DISC stock). For purposes of
this subsection, the estate tax valuation date is the date of the decedent's
death or, in the case of an election under section 2032, the applicable
valuation date prescribed by that section.
(e)
Appreciated property acquired by decedent by gift within 1 year
of death
(1)
In general
In the case of a decedent dying after December 31, 1981, if -
(A)
appreciated property was acquired by the decedent by gift during the
1-year period ending on the date of the decedent's death, and
(B)
such property is acquired from the decedent by (or passes from the
decedent to) the donor of such property (or the spouse of such donor), the
basis of such property in the hands of such donor (or spouse) shall be the
adjusted basis of such property in the hands of the decedent immediately
before the death of the decedent.
(2)
Definitions
For purposes of paragraph (1) -
(A)
Appreciated property
The term ''appreciated property'' means any property if the fair
market value of such property on the day it was transferred to the decedent
by gift exceeds its adjusted basis.
(B)
Treatment of certain property sold by estate
In the case of any appreciated property described in subparagraph (A)
of paragraph (1) sold by the estate of the decedent or by a trust of which
the decedent was the grantor, rules similar to the rules of paragraph (1)
shall apply to the extent the donor of such property (or the spouse of such
donor) is entitled to the proceeds from such sale.
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 42, 179, 197, 338, 355, 382, 551,
644, 1001, 1223, 1246, 1291, 2032A, 2654 of this title.
SOURCE
AMENDMENTS
EFFECTIVE DATE OF 1983 AMENDMENT
EFFECTIVE DATE OF 1981 AMENDMENT
EFFECTIVE DATE OF 1980 AMENDMENTS AND REVIVAL OF PRIOR LAW
EFFECTIVE DATE OF 1978 AMENDMENT
EFFECTIVE DATE OF 1976 AMENDMENT
EFFECTIVE DATE OF 1971 AMENDMENT
EFFECTIVE DATE OF 1958 AMENDMENT
REPEALS
ELECTION OF CARRYOVER BASIS RULES BY CERTAIN ESTATES
REFERENCES IN TEXT
--------------------------------------------------------------------------------
Web edition produced by John Walker
J.
Arthur Kamlet
Slightly OT but quite a few months ago there was a discussion about
how to treat liquidating distributions, generally reported on a
1099.
My stock answer was that a liquidating distribution is treated as
non-taxable return of investment, but any return in excess of basis
is taxable as capital gain and reported on Sch D.
Another poster noted that liquidating distributions cannot exceed
basis, and similar to this topic, they can when the assets were
inherited at FMV lower than decedant's basis.
--
__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
ed
which is your basis. Pub 550 and 551 talk about amortizing premium,
which is definied as (generally) the value in excess of call or par.
See the definition of "premium" on page 35 of Publication 550. Pub 550
discusses amortization of Premium non-taxable Bonds and the amotization
ALWAYS starts with the taxpayers' basis, which , if inherited, is the
FMV at DOD which may or may not be at a premium to call or par.
It is inconceivable to me that anyone could gerrymander this into a
case for not amortizing premium just because establishing basis to
include bond premium in an inheritance is discussed in one place, and
amortizing bond premium (based on basis) is discussed elsewhere.
Just because this confuses a CPA doesn't make his extrapolation sound.
I suggest you think of amortization in the same light as depreciating
an inherited rental building. It is stepped up (or down) in value with
all prior depreciation forgiven and new depreciation started with the
FMV at DOD as basis. Why would amortization of bond premium be
forgiven? ed
Francis Keiser
from valuing property at date of death (or the alternate valuation date)
must be amortized. Hell in this case the conclusion is obvious!
§ 171(a)(2) of the Internal Revenue Code (Code) provides:
"(a) General Rule. -In the case of any bond, as defined in subsection (d),
the following rules shall apply to the amortizable bond premium (determined
under subsection (b)) on the bond:
. . .
(2) Tax-exempt Bonds. -In the case of any bond the interest on which is
excludable from gross income, no deduction shall be allowed for the
amortizable bond premium for the taxable year."
§ 1.171-1(c) of the Income Tax Regulations (Reg. § ) provides:
"(c) General rule
(1) Tax-exempt obligations. -A holder must amortize bond premium on a bond
that is a tax-exempt obligation. See §1.171-2(c) Example 4." (emphasis
supplied)
Reg. § 1.171-1(d) provides:
" (d) Determination of bond premium
(1) In general. -A holder acquires a bond at a premium if the holder's basis
in the bond immediately after its acquisition by the holder exceeds the sum
of all amounts payable on the bond after the acquisition date (other than
payments of qualified stated interest). This excess is bond premium, which
is amortizable under §1.171-2."
Reg. § 1.171-2(a)(4)(ii) provides, in part:
"Tax-exempt obligations. -In the case of a tax-exempt obligation, if the
bond premium allocable to an accrual period exceeds the qualified stated
interest allocable to the accrual period, the excess is a nondeductible
loss."
§ 1016(a) (a)(5) provides:
"(a) General Rule. -Proper adjustment in respect of the property shall in
all cases be made -
. . .
(5) in the case of any bond (as defined in section 171(d)) the interest on
which is wholly exempt from the tax imposed by this subtitle, to the extent
of the amortizable bond premium disallowable as a deduction pursuant to
section 171(a)(2), and in the case of any other bond (as defined in section
171(d)) to the extent of the deductions allowable pursuant to section
171(a)(1) (or the amount applied to reduce interest payments under section
171(e)(2)) with respect thereto;"
. . .
Reg. § 1.1016-5(b)(3) provides:
"Special rule for tax-exempt obligations. -A holder's basis in a tax-exempt
obligation is reduced by the amount of excess bond premium that is treated
as a nondeductible loss under §1.171-2(a)(4)(ii)"
§ 1011(a) of the Code provides:
"General Rule. -The adjusted basis for determining the gain or loss from the
sale or other disposition of property, whenever acquired, shall be the basis
(determined under section 1012 or other applicable sections of this
subchapter and subchapters C (relating to corporate distributions and
adjustments), K (relating to partners and partnerships), and P (relating to
capital gains and losses)), adjusted as provided in section 1016." (emphasis
in the original)
§ 1012 of the Code provides in part:
"The basis of property shall be the cost of such property, except as
otherwise provided in this subchapter . . "
§ 1014(a)(1) of the Code (which is in the same subchapter as § 1012)
provides:
"In General. -Except as otherwise provided in this section, the basis of