Burden of Proof When Stepping up Basis of Jointly Owned Property

Under Section 2040(a) of the Internal Revenue Code, all jointly owned property must be included within a decedent’s estate, except for any portion that can be shown to have originally belonged to the surviving joint tenant, and that was never received or acquired by the surviving joint tenant from the decedent for less than full and adequate consideration.  Section 1014 of the Internal Revenue Code will generally give a surviving joint tenant a step up in basis as to the portion of the jointly held property that was included in the decedent’s estate.  This inclusion of the jointly held property in the decedent’s estate may or may not create any estate tax due, which would or may depend upon the use of the decedent’s unified credit or use of the marital deduction depending upon who else was a joint tenant.  Regardless, the inclusion of the property in the joint tenant’s estate will allow for the step up in basis.  This step up in basis could lead to taxpayers arguing that a larger portion of the jointly held property was included within the deceased joint tenant’s estate.  A taxpayer may be able to accomplish this by failing to show that they had contributed to the property.  Thus, what happens if the surviving joint tenant or tenants fail to or makes no attempt to establish their contribution in regard to the acquisition of the jointly held property?  Can the surviving joint tenant or tenants receive a full step up in basis to the fair market value of the property as of the date of death?  Who has the burden to prove a step up in basis should be allowed and the amount of the step up in basis?

One United States Tax Court case touched on some of the issues or questions above.  In Madden v. Commissioner, 52 T.C 845 (1969) the consideration furnished test was applied when the taxpayer included one half of jointly held stock in his wife’s estate tax return.  Such inclusion was made even though the deceased wife had not paid any consideration for the stock that was included within her estate tax return.  When the taxpayer sold the stock, a stepped up basis was used in computing the gain on the sale of the stock.  The basis was challenged by the IRS and the taxpayer unsuccessfully argued that his wife’s estate had failed to prove the burden that the consideration was not paid by the wife, and thus one half of the stock should receive a step up in basis under IRC Section 1014.  As stated above, this argument was unsuccessful as the court held the taxpayer had the burden to prove, and failed to prove that the jointly held property was required to be included in the decedent’s estate.  See IRC Section 1014(b)(9).  The reasoning of the court was that a taxpayer should not receive a tax advantage by deciding whether or not to include jointly owned property within an estate.  Thus, the “requirement” issue.

Under the current law, the consideration furnished rule will likely not apply to most cases involving property that is jointly owned by spouses, and one half of the property will be included within the estate of the first spouse to pass.  However, the consideration furnished test is likely to apply to non-spousal joint tenancies  and thus Madden can be of relevance.

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