Spousal joint tenancies: different rules apply to post-1976 and pre-1977 tenancies. (Federal Tax).

Under pre-1977 law, the entire value of joint tenancy property was included in a decedent's gross estate except for the portion of the property attributable to the consideration furnished by the survivor.

For joint interests created post-1976, the 1976 Tax Act generally replaced this consideration-furnished test with a fractional interest rule for property held by spouses with survivorship rights. Thus, when a joint tenancy is created by a transfer subject to gift tax upon creation, the property is treated as 50 percent held by each spouse for estate tax purposes.

Under the 1981 Tax Act, for estates of decedents dying after 1981, the estate of the first spouse to die includes half of the property's value--regardless of which spouse furnished the consideration to acquire the property.

Under Sec. 1014, the amount includible for estate tax purposes generally becomes the property's income tax basis. However, for community property, 100 percent of the property's fair market value on the date of the decedent's death, or applicable alternate valuation date, generally becomes the property's income tax basis [Sec. 1014(b)(6)].

Litigation 

In Hahn, 110 TC 140(1998), W and H purchased property in 1972 as joint tenants with survivorship rights. W became the property's sole owner upon H's 1991 death. H's federal estate tax return reported 100 percent of the property's date-of-death value as H's interest therein. W sold the property in 1993 and used 100 percent of that value in calculating her basis.

The IRS determined that, since H died after 1981, only 50 percent of the property's date-of-death value was includible in H's gross estate. Therefore, only 50 percent of that value should be used to calculate W's basis.

The Tax Court held that the 1981 Tax Act did not repeal the effective date of the 1976 Tax Act's 50-percent inclusion rule, which does not apply to spousal joint interests created before 1977. The court followed Gallenstein, 975 F.2d 286 (6th Cir. 1992), and Patten, 116 F. 3d 1029 (4th Cir. 1997).

The IRS has acquiesced to Hahn (IRB 2001-42, Oct. 15, 2001).

Analysis

In Hahn and the two appeals court cases, the surviving spouse furnished no consideration for the pre-1977 property. Therefore, since the deceased spouse furnished 100 percent of the consideration, it was 100 percent includible in his gross estate. Consequently, under Sec. 1014(b)(9), there was a 100 percent step-up in the property's basis.

These cases did not arise in community property states. Thus, they did not involve separate property acquired with community funds.

Of course, if community property were at issue, Sec. 1014(b)(6) would apply and Sec. 1014(b)(9) could not apply [Sec. 1014(b)(9)(C)].

The July 2001 California CPA article, "Changing the Way Couples Hold Title in California" notes: "... for the purpose of division of property upon dissolution of marriage, property acquired by the parties in joint form during marriage, including property held in joint tenancy is presumed to be community property. However, if either spouse dies before any jointly held community property is divided, the language of how the title is held in the deed will be controlling, and not the community property presumption.

"... If the property is treated as the separate property of each spouse, only the decedent's half of the property receives the stepped-up basis. If spouses hold property as joint tenants ... on the death of the first spouse the property is owned 50 percent by each spouse as separate property.

"... the property rights of husband and wife prescribed by statute may be altered by a marital property agreement. If the spouses executed a property agreement that identified the joint tenancy property as community property, the IRS has allowed stepped-up basis on both halves of the property (see IRS Revenue Ruling 87-98)."

Rev. Rul. 87-98 states: "... Because the laws of X do not make specific provision for the coexistence of a common law estate and a community property interest, taking title in a common law estate raises the presumption that the spouses intended to terminate the community interest, effectively transmuting the property's character from community to separate. This presumption is overcome by evidence that the spouses intended for the property not to be transmuted to separate property, in such a case, the community nature of the property is preserved. Under the law of X, an express statement of such intent in joint wills precludes transmutation by reason of taking title in joint tenancy."

If pre-1977 jointly held property is treated as separate property, but was acquired with community funds, the deceased spouse contributed 50 percent of the consideration pursuant to Rev. Ruls. 55-605 and 78-418. Hence, only a 50 percent step-up would be available.

If such property was not acquired with community funds, and the deceased spouse furnished 100 percent of the consideration, a 100 percent step-up would be available.

For post-1976 spousal joint tenancies treated as separate property, since only the decedent's 50 percent portion is includible in his gross estate, only a 50 percent step-up would be available.

Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at [phone] or [e-mail].