2010 Estate Tax Payment and Carryover Basis Election Extended

From the IRS

Executors of estates of most decedents who died in 2010 can now get an automatic extension until March 19, 2012, to pay any estate tax due as well as to file an estate tax return, the IRS announced on September 13.

The announcement, in Notice 2011-76 and News Release IR-2011-91, also postponed from November 15, 2011, to January 17, 2012, the due date for Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, to be filed by estates of 2010 decedents that elect to opt out of the estate tax and instead carry over to inheritors the decedent’s basis in assets. The IRS issued Form 8939 on October 6 and its instructions on October 7. For more on Form 8939, see this month’s Tax Trends.

On September 3 the IRS released the 2010 revised version of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and issued its instructions on September 8, only 11 days before the form’s September 19 due date. The revisions were required by extensive changes to the estate and gift tax regime that Congress passed late in 2010 and made retroactive to the beginning of the year. (For more on these changes, see Ransome and Schafer, “Significant Recent Developments in Estate Planning (Part I),” 42 The Tax Adviser 614 (September 2011).)

Executors may obtain an automatic six-month extension of time to file an estate tax return and pay estate taxes due by filing Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. For decedents who died between January 1, 2010, and December 16, 2010, Form 4768 was due September 19, 2011.

Although the extension of time to file is automatic, an extension of time to pay estate tax normally is granted only for good cause shown. With its announcement, the IRS said affected estates do not have to state a reason for requesting an extension of time to pay. However, although the IRS will not impose late-payment penalties, interest will accrue on the estate tax liability from the original September 19 due date.

Estates of decedents who died between December 17, 2010, and December 31, 2010, may also receive an automatic six-month extension to file Form 706 and pay estate tax. To obtain this relief, the estate must have timely filed Form 4768 (which was due within nine months from the date of death).

Form 706 must be filed by the executor of the estate of any U.S. citizen or resident who died in 2010 if the gross estate, plus adjusted taxable gifts and specific exemption, exceeds $5 million, unless the executor makes the modified carryover basis election under Sec. 1022. Without the election, the basis of property passing from a decedent generally is its fair market value on the date of death.

The notice also provides relief for certain persons who received property under Sec. 1022 and disposed of it during 2010. Rev. Proc. 2011-41, issued August 5, 2011, provided a safe harbor for determining basis and related information regarding property received from a 2010 decedent under the Sec. 1022 election. However, recipients who disposed of such property during 2010 may not have known whether the estate’s executor would make the election and, if so, whether any basis increase allowed under Sec. 1022 would be allocated to that property. In such situations, the IRS will presume the recipient’s reasonable cause and good faith for any increase in the recipient’s tax liability by reason of the application of Sec. 1022 to the estate of a 2010 decedent and will not impose failure-to-pay or accuracy-related penalties. The IRS advises affected taxpayers to write at the top of an amended return “IR Notice 2011-76” to obtain the relief.

The notice also provides timeliness penalty relief for executors for filing or amending Form 8939, for furnishing related statements to beneficiaries, and for allocating generation-skipping transfer tax exemptions. It does not extend the due date for paying income tax or filing an income tax return for an individual or estate or for paying gift tax or filing a gift tax return.

On August 8, Patricia Thompson, chair of the AICPA’s Tax Executive Committee, wrote to the IRS  and asked that the due dates for Forms 706 and 8939 be postponed until 90 days after the release of whichever of the two forms (and its instructions) was released last. Eileen Sherr, AICPA Senior Technical Manager–Tax, said in reaction to the IRS’s September 13 announcement, “We are pleased that IRS responded to our request and estates and practitioners will get this needed filing and payment relief, but practitioners still need to get the Form 4768 in by September 19 to get the relief.”