CARRYOVER BASIS.

SEC. 2005. CARRYOVER BASIS. (a) General Rule.— (1) Amendment of section 1014.— Subsection (d) of section 1014 (relating to basis of property acquired from a decedent) is amended to read as follows: “(d) Decedents Dying After December 31, 1976.— In the case of a decedent dying after December 31, 1976, the section shall not apply to any property for which a carryover basis is provided by section 1023.” (2) Carryover basis.— Part II of subchapter O of chapter I (relating to basis rules of general application) is amended by redesignating section 1023 as section 1024 and by inserting after section 1022 the following new section: “SEC. 1023. CARRYOVER BASIS FOR CERTAIN PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER DECEMBER 31, 1976. “(a) General Rule.— “(1) Carryover basis.— Except as otherwise provided in this section, the basis of carryover basis property acquired from a decedent dying after December 31, 1976, in the hands of the person so acquiring it shall be the adjusted basis of the property immediately before the death of the decedent, further adjusted as provided in this section. “(2) Lose on personal and household effects.— In the case of any carry over basis property which, in the hands of the decedent, was a personal or household effect, for purposes of determining loss, the basis of such property in the hands of the person acquiring such property from the decedent shall not exceed its fair market value. “(b) Carryover Basis Property Defined.— “(1) In general.— For purposes of this section, the term ‘carryover basis property’ means any property which is acquired from 90 STAT. 1873or passed from a decedent (within the meaning of section 1014 (b)) and which is not excluded pursuant to paragraph (2) or (3). “(2) Certain property not carryover basis property.— The term ‘carryover basis property’ does not include— “(A) any item of gross income in respect of a decedent described in section 691; “(B) property described in section 2042 (relating to proceeds of life insurance); “(C) a joint and survivor annuity under which the surviving annuitant is taxable under section 72, and payments and distributions under a deferred compensation plan described in part 1 of subchapter D of chapter 1 to the extent such payments and distributions are taxable to the decedent’s beneficiary under chapter 1; “(D) property included in the decedent’s gross estate by reason of section 2035, 2038, or 2041 which has been disposed of before the decedent’s death in a transaction in which gain or loss is recognizable for purposes of chapter 1; “(E) stock or a stock option passing from the decedent to the extent, income in respect of such stock or stock option is includable in gross income under section 422(c)(1), 423(c), or 424(c)(1); and “(F) property described in section 1014 (b)(5). “(3) $10,000 exclusion for certain assets.— “(A) Exclusion.— The term ‘carryover basis property’ docs not include any asset— “(i) which, in the hands of the decedent, was a personal or household effect, and “(ii) with respect to which the executor has made an election under this paragraph. “(B) Limitation.— The fair market value of all assets designated under this subsection with respect to any decedent shall not exceed $10,000. “(C) Election.— An election under this paragraph with respect to any asset shall be made by the executor not later than the date prescribed by section 6075(a) for filing the return of the tax imposed by section 2001 or 2101 (including extensions thereof), and shall be made in such manner as the Secretary shall by regulations prescribe. “(c) Increase in Basis for Federal and State Estate Taxes Attributable to Appreciation.— The basis of appreciated carryover basis property (determined after any adjustment under subsection (h)) which is subject to the tax imposed by section 2001 or 2101 in the hands of the person acquiring it from the decedent shall be increased by an amount which bears the same ratio to the Federal and State estate taxes as— “(1) the net appreciation in value of such property, bears to “(2) the fair market value of nil property which is subject to the tax imposed by section 2001 or 2101. “(d) $60,000 Minimum for Bases of Carryover Basis Properties.— “(1) In general.— If $60,000 exceeds the aggregate bases (as determined after any adjustment under subsection (h) or (c)) of all carryover basis property, the basis of each appreciated carryover basis property (after any adjustment under subsection (h) or (c)) shall be increased by an amount which bears the same ratio to the amount of such excess as— 90 STAT. 1874 “(A) the net appreciation in value of such property, bears to “(B) the net appreciation in value of all such property. “(2) Special rule fob personal of household effect.— For purposes of paragraph (1), the basis of any property which is a personal or household effect shall be treated as not greater than the fair market value of such property. “(3) Nonresident not citizen.— This subsection shall not apply to any carryover basis property acquired from any decedent who was (at the time of his death) a nonresident not a citizen of the United States. “(e) Further Increase in Basis for Certain State Succession Tax Paid by Transferee of Property.— If— “(1) any person acquires appreciated carryover basis property from a decedent, and “(2) such person actually pays an amount of estate, inheritance, legacy, or succession taxes with respect to such property to any State or the District of Columbia for which the estate is not liable, then the basis of such property (after any adjustment, under subsection (h), (c), or (d)) shall be increased by an amount which bears the same ratio to the aggregate amount of all such taxes paid by such person as— “(A) the net appreciation in value of such property, bears to “(B) the fair market value of all property acquired by such person which is subject to such taxes. “(f) Special Rules and Definitions for Application of Subsections (c), (d), and (e).— “(1) Fair market value limitation.— The adjustments under subsections (c), (d), and (e) shall not increase the basis of property above its fair market value. “(2) Net appreciation.— For purposes of this section, the net appreciation in value of any property is the amount by which the fair market value of such property exceeds the adjusted basis of such property immediately before the death of the decedent (as determined after any adjustment under subsection (h)). For purposes of subsection (d), such adjusted basis shall be increased by the amount of any adjustment under subsection (c), and, for purposes of subsection (e), such adjusted basis shall be increased by the amount of any adjustment under subsection (c) or (d). “(3) Federal and state estate taxes.— For purposes of subsection (c), the term ‘Federal and State estate taxes’ means— “(A) the tax imposed by section 2001 or 2101, reduced by the credits against such tax, and “(B) any estate, inheritance, legacy, or succession taxes, for which the estate is liable, actually paid by the estate to any State or the District of Columbia. “(4) Certain marital and charitable deduction property treated as not subject to tax.— For purposes of subsections (c) and (e), property shall be treated as not subject to a tax— “(A) with respect to the tax imposed by section 2001 or 210! , to the extent that a deduction is allowable with respect to such property under section 2055 or 2056 or under section 2106(a)(2), and “(B) with respect to State estate taxes and with respect to the State taxes referred to in subsection (e)(2), to the extent that such property is not subject to such taxes. 90 STAT. 1875 “(5) Appreciated carryover basis property.— For purposes of this section, the term ‘appreciated carryover basis property’ means any carryover basis property if the fair market value of such property exceeds the adjusted basis of such property immediately before the death of the decedent. “(g) Other Special Rules and Definitions.— “(1) Fair market value.— For purposes of this section, when not otherwise distinctly expressed, the term ‘fair market value’ means value as determined under chapter 11. “(2) Property passing from the decedent.— For purposes of this section, property passing from the decedent shall be treated as property acquired from the decedent. “(3) Decedent’s basis unknown.— If the facts necessary to determine the basis (unadjusted) of carryover basis property immediately before the death of the decedent are unknown to the person acquiring such property from the decedent, such basis shall be treated as being the fair market value, of such property as of the date (or approximate date) at which such property was acquired by the decedent or by the last preceding owner in whose hands it did not have a basis determined in whole or in part by reference to its basis in the hands of a prior holder. “(4) Certain mortgages.— For purposes of subsections (c), (d),and (e),if— “(A) there is an unpaid mortgage, on, or indebtedness in respect of, property, “(B) such mortgage or indebtedness does not constitute a liability of the estate, and “(C) such property is included in the gross estate undiminished by such mortgage or indebtedness, then the fair market value of such property to be treated as included in the gross estate shall be the fair market value of such property, diminished by such mortgage or indebtedness. “(h) Adjustment to Basis for December 31, 1976, Fair Market Value.— “(1) Marketable bonds and securities.— If the adjusted basis immediately before the death of the decedent of any property which is carryover basis property reflects the adjusted basis of any marketable bond or security on December 31, 1976, and if the fair market value of such bond or security on December 31, 1976, exceeded its adjusted basis on such date, then, for purposes of determining gain, the adjusted basis of such property shall be increased by the amount of such excess. “(2) Property other than marketable bonds and securities.— “(A) In general.— If— “(i) the adjusted basis immediately before the death of the decedent of any property which is carryover basis property reflects the adjusted basis on December 31, 1976, of any property other than a marketable bond or Security, and “(ii) the value of such carryover basis property (as determined with respect to the estate of the decedent without regard to section 2032) exceeds the adjusted basis of such property immediately before the death of the decedent (determined without regard to this subsection), then, for purposes of determining gain, the adjusted basis of such property immediately before the death of the decedent 90 STAT. 1876(determined without regard to this subsection) shall be increased by the amount determined under subparagraph (B). “(B) Amount of increase.— The amount of the increase under this subpat’agraph for any property is the sum of— “(i) the excess referred to in subparagraph (A)(ii), reduced by an amount equal to all adjustments for depreciation, amortization, or depletion for the holding period of such property, and then multiplied by the applicable fraction determined under subparagraph (C), and “(ii) the adjustments to basis for depreciation, amortization, or depletion which are attributable to that portion of the holding period for such property winch occurs before January 1, 1977. “(C) Applicable fraction.— For purposes of subparagraph (B)(i), the term ‘applicable fraction’ means, with respect to any property, a fraction— “(i) the numerator of which is the number of days in the holding period with respect to such property which occurs before January 1, 1977, and “(ii) the denominator of which is the total number of days in such holding period. “(D) Substantial improvements.— Under regulations prescribed by the Secretary, if there is a substantial improvement of any property, such substantial improvement shall be treated as a separate property for purposes of this paragraph. “(E) Definitions.— For purposes of this paragraph— “(i) The term ‘marketable bond or security’ means any security for which, as of December 1976, there was a market on a stock exchange, in an over-the-counter market, or otherwise. “(ii) The term ‘holding period’ means, with respect to any carryover basis property, the period during which the decedent (or, if any other person held such property immediately before the death of the decedent, such other person) held such property as determined under section 1223; except that such period shall end on the date of the decedent’s death. “(i) Regulations.— The Secretary shall prescribe such regulations as may be necessary to carry out. the purposes of this section.” (3) Amendment of section 1016.— Section 1016(a) (relating to adjustments to basis) is amended by striking out the period at the end thereof and by inserting in lieu thereof a semicolon and by adding at the end thereof the following new paragraph: “(23) to the extent provided in section 1023, relating to carryover basis for certain property acquired from a decedent dying after December 31, 1976.” (4) Amendments of section 691.— (A) Section 691(c)(2)(A) (relating to deduction for estate tax in case of income in respect of decedents) is amended to read as follows: “(A) The term ‘estate tax’ means Federal and State estate taxes (within the meaning of section 1023(f)(3)).” (B) Section 691(c)(2)(C) is amended to read as follows: “(C) The estate tax attributable to such net value shall be an amount which bears the same ratio to the estate tax as such net value bears to the value of the gross estate.” 90 STAT. 1877 (5) Repeal of section 1246(e).— Section 1246 (relating to gain on foreign investment company stock) is amended by stinking out subsection (e) and by redesignating subsections (r) and (g) as subsections (e) and (f), respectively. (b) Nonrecognition of Gain Where Certain Appreciated Carryover Basis Property Is Used in Satisfaction of a Pecuniary Request.— Part III of subchapter O of chapter 1 (relating to common uontaxable exchanges) is amended by adding at the end thereof the following new section: “SEC. 1040. USE OF CERTAIN APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY PECUNIARY REQUEST. (a) General Rule.— If the executor of the estate of any decedent satisfies the right of any person to receive a pecuniary bequest with appreciated carryover basis property (as defined in section 1023(f)(5)), then gain on such exchange shall be recognized to the estate only to the extent that, on the date of such exchange, the fair market value of such property exceeds the value of such property for purposes of chapter 11. “(b) Similar Rule for Certain Trusts.— To the extent provided in regulations prescribed by the Secretary, a ride similar to the rule provided in subsection (a) shall apply where— “(1) by reason of the death of t he decedent, a person has a right to receive from a trust a specific dollar amount which is the equivalent of a pecuniary bequest, and “(2) the trustee of the trust satisfies such right with carryover basis property to which section 1023 applies. “(c) Basis of Property Acquired in Exchange Described in Subsection (a) or (b).— The basis of property acquired in an exchange with respect to which gain realized is not recognized by reason of subsection (a) or (b) shall be the basis of such property immediately before the exchange, increased by the amount of the gain recognized to the estate or trust on the exchange.” (c) Limitation of Increase in Basis for Gift Tax Paid to That Portion of Gift Tax Attributable to Net Appreciation in Value.— Subsection (d) of section 1015 (relating to increased basis for gift tax paid) is amended by adding at the end thereof the following new paragraph: “(6) Special rule for gifts made after December 31, 1976.— (A) In general.— In the case of any gift made after December 31, 1976, the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as— “(i) the net appreciation in value of the gift, bears to “(ii) the amount of the gift. “(B) Net appreciation.— For purposes of paragraph (1), the net appreciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift,” (d) Information Requirement.— (1) In general.— Subpart A of part III of subchapter A of chapter 61 (relating to information concerning persons subject to special provisions) is amended by inserting after section 6039 the following new section: 90 STAT. 1878 “SEC. 6039A. INFORMATION REGARDING CARRYOVER BASIS PROPERTY ACQUIRED FROM A DECEDENT. “(a) In General.— Every executor (as defined in section 2203) shall furnish the Secretary such information with respect to carryover basis property to which section 1023 applies as the Secretary may by regulations prescribe. “(b) Statements To Be Furnished to Persons Who Acquire Property From a Decedent.— Every executor who is required to furnish information under subsection (a) shall furnish in writing to each person acquiring an item of such property from the decedent (or to whom the item passes from the decedent) the adjusted basis of such item.” (2) Penalties.— Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end thereof the following new section: “SEC. 6634. FAILURE TO FILE INFORMATION WITH RESPECT TO CARRY-OVER BASIS PROPERTY. “(a) Information Required To Be Furnished to the Secretary.— Any executor who fails to furnish information required under subsection (a) of section 6039A on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not to willful neglect, shall pay a penalty of $100 for each such failure, but the total amount imposed for all such failures shall not exceed $5,000. “(b) Information Required To Be Furnished to Beneficiaries.— Any executor who fails to furnish in writing to each person described in subsection (b) of section 6039A the information required under such subsection, unless it is shown that such failure is due to reasonable cause and not to willful neglect, shall pay a penalty of $50 for each such failure, but the total amount imposed for all such failures shall not exceed $2,500.” (e) Clerical Amendments.— (1) The table of sections for part II of subchapter O of chapter 1 is amended by striking out the item relating to section 1023 and inserting in lieu thereof the following: “Sec. 1023. Carryover basis for certain property acquired from a decedent dying after December 31, 1976. “Sec. 1024. Cross references.” (2) The table of sections for part III of subchapter O of chapter 1 is amended by adding at the end thereof the following: “Sec. 1040. Use of certain appreciated carryover basis property to satisfy pecuniary bequest.” (3) The table of sections for part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6039 the following: “Sec. 6039A. Information regarding carryover basis property acquired from a decedent.” (4) The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following: “Sec. 6694. Failure to die information with respect to carryover basis property.” (f) Effective Dates.— (1) Except as provided in paragraph (2), the amendments made by this section shall apply in respect of decedents dying after December 31, 1976. 90 STAT. 1879 (2) The amendment made by subsection (c) shall apply to gifts made after December 31, 1976.