Magazine article The CPA Journal

Spousal Jointly Owned Property: A New Step-Up in Basis

Magazine article The CPA Journal

Spousal Jointly Owned Property: A New Step-Up in Basis

Article excerpt

SPOUSAL JOINTLY OWNED PROPERTY: A NEW STEP-UP IN BASIS

There used to he only one exception to the rule that a surviving spouse receives a step-up in basis for one-half of the value of spousal jointly owned property. The exception relates to community property owned in the community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

COMMUNITY PROPERTY RULES

In community-property states, the husband and wife are considered as each owning one-half of the estate (excluding separate property). When one spouse dies the surviving spouse is regarded as acquiring one-half of the community property by devise, bequest, or inheritance. Therefore, the surviving spouse gets a step-up in basis in one-half of the community property.

The basis of the other half of the community property that passes to the surviving spouse is also stepped-up (IRC Sec. 1014(a)(6)). The result is that if the surviving spouse inherits the deceased spouse's share of the community property, 100% of the property receives a basis step-up (or step-down) to the fair market value at the date of death or the alternate valuation date. (See "Community Property Step-Up in Basis," The CPA Journal, May 1993)

NEW EXCEPTION

Now there is another exception.

In a September 1991 case in the U.S. District Court in Kentucky, the plaintiff, Mrs. M. Lee Gallenstein, received a step-up in basis of 100% of the property she and her deceased husband owned as joint tenants with right of survivorship (Gallenstein v. United States, 91-2 USTC 60,088 (D.C Ky)). The court found that the full value of jointly held property acquird in 1955 was includable in the gross estate of the decedent who died in 1987 because he provided all the consideration for the property. Therefore, his surviving spouse was entitled to a step-up in basis on the full value of the property, not on one-half.

The court found that the effective date of the provision in TRA 76 providing that 50% of the value of qualified joint interests creed after 176 was includible in a decedent's gross estate was not changed by the ERTA 81. Tnerefore, the "contribution test" of IRC 2040(a) was applicable to the estate of the decedent.

TAXPAYER STANCE

In 1955, Mr. Gallenstein purchased real property jointly, with right of survivorship, for $38,500 with funds derived from his earnings.

At the time of his death in 1987, the property was worth $3.7 million. Mrs. Gallenstein subsequently sold the property in 19 and in an amended 1988 return she reported the adjusted basis of the property's at $3.7 million. She contended that since the joint interest Rias created before 1977, IKC Sec. 2040(a) required the full value of the property to be included in her deceased husband's gross estate, with the result of a step-up in basis on 100% of the property. IRC Sec. 2040(a) provides as follows:

"The value of the gross estate shall include the value of all property to the extent of the interest therein held as joint tenants with right of survivorship that the decedent and any other person...in their joint names and payable to either or the sunivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the laner from the decedent for less than an adequate and full consideration in money or in money's worth."

IRS' POSITION

On the other hand, the IRS maintained that only one-half of the value of the property should be included in the estate under IRC Sec. …

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