I've looked through the posts but don't see anything exactly like our family situation. Please forgive LONG post but this is unusual...

In 1991, mother in law deeded family farm (200 ac w/house) to 5 children but reserved a life interest in it. She continued to live there and paid the taxes, maintained it, etc., until a few yrs ago when she suffered a series of strokes and then died Feb. 2000. The farm was just sold in 2001 for $200,000.

Now the five kids are ready to file their tax returns and have been advised that since the property was deeded to them by Deed of Gift, they must used the donor's adjusted basis as their basis. However - how to figure it? Mother in law inherited half the property from her own father (who bought it in the 1800's for probably some nominal amount) and the other half in the early 30's again, for a nominal amount. This was a working farm by the way. They built their own home themselves, so cost of building the bungalow type home and outbuildings was also minimal. Therefore the kids are looking at practically 100% gain from the sale if they use the donor's adjusted basis.

However, they say that they could not sell the farm while the mother was alive and did not have control over it despite the "deed." They want to claim that title did not completely pass until her death and, therefore, can use Fair Market Value at time of death. That would reduce the taxable gain for them. However, the only way they can think of to establish FMV is the local tax assessment which was also woefully very low (believe it or not). Still it would reduce the taxable gain. A few of the family members are very low income, retired farmers, and a 100% taxable gain seems very cruel and unfair to them.

IRS pubs don't deal with anything like this - everything is black or white in the instructions. Does anyone have any ideas? Any tax court rulings anywhere that we can refer to?