Most practitioners are familiar with the concept of portability that was introduced in December 2010 through the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. Sec. 2010(c) was amended for decedents dying after Dec. 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. For a decedent's surviving spouse to take advantage of the portability provisions, various requirements outlined in the Internal Revenue Code and supporting regulations must be met. One of these requirements is that the executor of the decedent's estate must elect portability on a timely filed estate tax return. This item focuses on the relief available to the executor of an estate that fails to elect portability by failing to timely file an estate tax return.
Brief Overview of the Portability Election
The unused applicable exclusion amount of a deceased spouse does not automatically transfer to the surviving spouse. Under Sec. 2010(c)(5)(A), a deceased spouse's unused applicable exclusion amount (DSUE) may not be taken into account by a surviving spouse unless the executor of the estate of the deceased spouse files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on which an election is made to transfer the DSUE to the surviving spouse. Sec. 2010(c)(5)(A) goes on to state that no election may be made if the return is filed after the time prescribed by law (including extensions) for filing.
Under Regs. Sec. 20.2010-2(a)(1) and Sec. 6018(a), the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension for filing has been obtained). Therefore, the question becomes what relief, if any, is available to the executor of an estate that desires to elect portability but fails to timely file an estate tax return.
Relief for Late Portability Elections Under Rev. Proc. 2014-18
For estates of decedents dying after Dec. 31, 2010, and on or before Dec. 31, 2013, the IRS provided in Rev. Proc. 2014-18 a simplified method for estates meeting certain requirements to obtain an extension until Dec. 31, 2014, to file an estate tax return and elect portability.
To qualify for the relief provided in Rev. Proc. 2014-18, the decedent must have had a surviving spouse, died within the above-mentioned time frame, and have been a citizen or resident of the United States at death. Further, the estate must have been one that was not required to file an estate tax return under Sec. 6018(a) based upon the value of the gross estate and the adjusted taxable gifts. Generally, Sec. 6018(a)(1) requires the filing of an estate tax return in all cases when the value of the gross estate exceeds the basic exclusion amount in effect for the calendar year in which the decedent died. For example, in 2016, the basic exclusion amount is $5.45 million. Therefore, the estate of a decedent who died in 2016 will not have to file an estate tax return if the value of the estate, taking into consideration all prior taxable gifts, does not exceed the basic exclusion amount of $5.45 million. Finally, the estate must not have filed an estate tax return within the nine-month time frame as prescribed by Regs. Sec. 20.2010-2(a)(1).
Procedurally, to satisfy the requirements of the Rev. Proc. 2014-18, the executor needed to file a properly prepared estate tax return by the Dec. 31, 2014, deadline. Further, the estate tax return needed to state at the top of the form that it was being filed pursuant to Rev. Proc. 2014-18 to elect portability under Sec. 2010(c)(5)(A).
Assuming the estate met the qualifications and procedural requirements, the estate tax return would have been considered to have been timely filed and a valid election made to transfer the DSUE to the surviving spouse. No filing fee was required to take advantage of the straightforward relief provided under Rev. Proc. 2014-18.
For estates of decedents dying on or after Jan. 1, 2014, or for estates that met the qualifications of Rev. Proc. 2014-18 but did not file an estate tax return by the Dec. 31, 2014, deadline, the mechanism for obtaining relief for a late-filed estate tax return to elect portability is not only more onerous for the taxpayer but also more expensive.
Relief for Late Portability Elections Under Regs. Secs. 301.9100-1 and 301.9100-3
Estates that do not qualify for relief under Rev. Proc. 2014-18 must seek an extension of time within which to file the estate tax return to elect portability under the provisions of Regs. Secs. 301.9100-1 and 301.9100-3.
Under Regs. Sec. 20.2010-2(a)(1), an extension to elect portability may be available under the procedures in Regs. Secs. 301.9100-1 and 301.9100-3 to an estate that is not required to file an estate tax return under Sec. 6018. Therefore, consistent with Rev. Proc. 2014-18, the provision for relief does not apply to an estate that is required to file an estate tax return because the value of the gross estate exceeds the basic exclusion amount in effect at the time of the decedent's death.
Regs. Sec. 301.9100-1(c) grants the IRS the authority to extend the time to make an election or to allow relief for the failure to make a timely election. Regs. Sec. 301.9100-1(c) provides that the IRS may grant a reasonable extension under Regs. Secs. 301.9100-2 and 301.9100-3 to make a regulatory election or a statutory election.
Regs. Sec. 301.9100-1(b) defines the term "statutory election" to mean an election with a due date prescribed by statute. The term "regulatory election" is defined in Regs. Sec. 301.9100-1(b) to mean an election with a due date prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.
The Code does not specify a due date for an estate tax return filed purely for purposes of making a portability election. Rather, Regs. Sec. 20.2010-2(a), which applies to all estates electing portability, specifies the due date for making a portability election. Therefore, with respect to estates for which the executor is not required to file an estate tax return under Sec. 6018, the portability election is a regulatory election as defined in Regs. Sec. 301.9100-1(b).
Regs. Sec. 301.9100-2 provides automatic extensions for making certain regulatory and statutory elections. Regs. Sec. 301.9100-3 provides extensions for making certain regulatory elections that do not meet the requirements of Regs. Sec. 301.9100-2. As a portability election is not one of the regulatory elections eligible for automatic extension under Regs. Sec. 301.9100-2, requests for extensions to make a portability election fall under the purview of Regs. Sec. 301.9100-3.
Under Regs. Sec. 301.9100-3, a request for relief will be granted when the taxpayer provides evidence to establish to the IRS's satisfaction that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government.
Regs. Sec. 301.9100-3(b)(1) lists the ways in which a taxpayer can be deemed to have acted reasonably and in good faith. Generally, a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer failed to make the election because of intervening events beyond the taxpayer's control; failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election; the taxpayer reasonably relied on the written advice of the IRS; or the taxpayer reasonably relied on a qualified tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.
Under Regs. Sec. 301.9100-3(c)(1)(i), the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all tax years affected by the election than the taxpayer would have had if the election had been timely made. Furthermore, under Regs. Sec. 301.9100-3(c)(1)(ii), the government's interests are ordinarily prejudiced if the tax year in which the regulatory election should have been made is closed by the statute of limitation.
Procedurally, the mechanism for requesting relief under Regs. Sec. 301.9100-3 is a private letter ruling request. The request must be submitted in accordance with the applicable procedures for letter ruling requests, must contain affidavits and declarations from the parties involved, and must be accompanied by the applicable user fee, which currently is $9,800 (Rev. Proc. 2016-1).
Therefore, for estates of decedents dying on or after Jan. 1, 2014, or for estates that met the qualifications of Rev. Proc. 2014-18 but did not file an estate tax return by the Dec. 31, 2014, deadline, the only relief that is available for a late portability election is through a private letter ruling request. Relief is not automatic and is subject to the IRS's discretion based upon the facts and circumstances that led to the missed election. Further, the executor must be able to prove that he or she acted reasonably and in good faith and that granting relief will not prejudice the interests of the government. Additionally, the cost of requesting relief will be significantly greater than the cost of relief previously available under Rev. Proc. 2014-18.
Reflections
With the expiration of the simplified and cost-beneficial relief provided under Rev. Proc. 2014-18, advisers and tax professionals need to be cognizant of the deadline for filing an estate tax return and electing portability for estates that fall under the basic annual exclusion amount. Now more than ever, it is imperative that portability elections be made timely.
EditorNotes
Mark Heroux is a principal with the Tax Services Group at Baker Tilly Virchow Krause LLP in Chicago.
For additional information about these items, contact Mr. Heroux at 312-729-8005 or mark.heroux@bakertilly.com.
Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.
