IRS Extends Time for Making a Portability Election From Two to Five Years

(Parker Tax Publishing July 2022)

The IRS issued a simplified procedure for certain estates to obtain an extension of time in which to to make a portability election under Code Sec. 2010(c)(5)(A), which allows a surviving spouse to use a decedent's unused exclusion amount for subsequent transfers during life or at death. The procedure, which supersedes Rev. Proc. 2017-34, extends the period within which an estate that is not required to file an estate tax return may make the portability election from the second anniversary of the decedent's death to the fifth anniversary of the decedent's date of death. Rev. Proc. 2022-32.

Background

Under Code Sec. 2010(c), the estate of a decedent who is survived by a spouse may make a portability election. For purposes of the federal estate and gift taxes, a portability election allows the surviving spouse to apply the decedent's unused exclusion amount (deceased spousal unused exclusion amount, or DSUE amount) to the surviving spouse's own transfers during life and at death. The portability election applies to estates of decedents dying after December 31, 2010, if such decedent is survived by a spouse.

Code Sec. 2010(c)(5)(A) provides certain requirements that the estate of a deceased spouse must satisfy to elect portability, including that the estate must elect portability of the DSUE amount on an estate tax return that is filed within the time prescribed (including extensions) for filing such return. For estates that are not required to file an estate tax return under Code Sec. 6018(a) (as determined based on the value of the gross estate and adjusted taxable gifts), Reg. Sec. 20.2010-2(a)(1) clarifies that 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 of time for filing has been obtained). Reg. Sec. 20.2010-2(a)(1) further provides that an extension of time to elect portability may be available to an estate that is not required to file an estate tax return under Code Sec. 6018(a).

Rev. Proc. 2017-34

In Rev. Proc. 2017-34, the IRS provided a method for obtaining an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). In general, an extension is available to the estates of decedents dying after December 31, 2010, if that estate was not required to file an estate tax return and if such a decedent was survived by a spouse. Under Rev. Proc. 2017-34, a simplified method is available in lieu of requesting a letter ruling and is available for a period extending to the second anniversary of the decedent's date of death.

According to the IRS, it has issued numerous letter rulings granting extensions of time to make portability elections in situations in which the decedent's estate was not required to file an estate tax return and the two-year time for obtaining relief under Rev. Proc. 2017-34 had expired. The IRS said that a significant percentage of these ruling requests have been from estates of decedents who died within five years preceding the date of the request. The considerable number of ruling requests since the publication of Rev. Proc. 2017-34, the IRS concluded, indicates a need for continuing relief for the estates of decedents having no filing requirement under Code Sec. 6018(a).

Rev. Proc. 2022-32

Accordingly, on July 8 the IRS published Rev. Proc. 2022-32, which supersedes Rev. Proc. 2017-34 and extends the period within which the estate of a decedent may make the portability election under the simplified method. The procedure extends the date by which the election must be made to the fifth anniversary of the decedent's date of death.

The simplified method of Rev. Proc. 2022-32 is available to the executor of the estate of a decedent if four conditions are met. First, the decedent must be survived by a spouse, must have died after December 31, 2010, and must have been a U.S. citizen or resident on the date of death. Second, the executor must not be required to file an estate tax return under Code Sec. 6018(a) as determined based on the value of the gross estate and adjusted taxable gifts and without regard to the need to file for portability purposes. Third, the executor must not have filed an estate tax return within the time required by Reg. Sec. 20.2010-2(a)(1) for filing an estate tax return. And fourth, the executor satisfies all requirements provided in Section 4.01 (relating to the requirements for obtaining relief) under Rev. Proc. 2022-32.

Under Section 4.01 of Rev. Proc. 2022-32, a person permitted to make the portability election on behalf of the estate of a decedent - that is, an executor described in Reg. Sec. 20.2010-2(a)(6) - must file a complete and properly prepared Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on or before the fifth annual anniversary of the decedent's date of death. The Form 706 will be considered complete and properly prepared if it is prepared in accordance with Reg. Sec. 20.2010-2(a)(7). In addition, the executor must state at the top of the Form 706 that the return is "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER Sec. 2010(c)(5)(A)."

If the decedent's estate is granted relief under Rev. Proc. 2022-32, the DSUE amount of that decedent is generally available to the decedent's surviving spouse or the estate of the surviving spouse for application to the surviving spouse's transfers made on or after the decedent's date of death. However, if the increase in the surviving spouse's applicable exclusion amount attributable to the addition of the decedent's DSUE amount as of the decedent's date of death results in an overpayment of gift or estate tax by the surviving spouse or his or her estate, no claim for credit or refund may be made if the period of limitations under Code Sec. 6511(a) (generally, three years) has expired. That is, an extension of time to elect portability granted under Rev. Proc. 2022-32 does not extend the period during which the surviving spouse or the surviving spouse's estate may make a claim for credit or refund under Code Sec. 6511(a).

However, because a surviving spouse has no DSUE amount from a deceased spouse to apply to such surviving spouse's transfers until the portability election has been made by the deceased spouse's executor, a claim for credit or refund filed within the time provided in Code Sec. 6511(a) by the surviving spouse or the estate of the surviving spouse in anticipation of a Form 706 being filed to elect portability pursuant to Rev. Proc. 2022-32, and otherwise meeting applicable requirements, will be considered a protective claim for credit or refund of tax.

Example: Al dies on January 1, 2018, survived by his wife, Betty. The assets includible in Al's gross estate consist of cash in bank accounts held jointly with Betty with rights of survivorship in the amount of $4,500,000. Al made no taxable gifts during his life. Al's executor is not required to file an estate tax return under Code Sec. 6018(a) and does not file such a return. Betty dies on January 29, 2021. Her taxable estate is $17,000,000 and she made no taxable gifts during her life. Betty's executor files a Form 706 on October 29, 2021, claiming an applicable exclusion amount of $11,700,000. Betty's executor includes payment of the estate tax with the Form 706. Pursuant to Rev. Proc. 2022-32, Al's executor files a complete and properly prepared Form 706 on behalf of Al's estate on December 1, 2022, reporting a DSUE amount of $11,180,000 which includes the statement required under Section 4.01 Rev. Proc. 2022-32. The filing of the return satisfies the requirements of Rev. Proc. 2022-32 and Al's estate is deemed to have made a valid portability election. To recover the estate tax paid, Betty's executor must file a claim for credit or refund by October 29, 2024 (the end of the period of limitations under Code Sec. 6511(a)), even though a Form 706 to elect portability was not filed on behalf of Al's estate at the time Betty's estate filed its Form 706. Such a claim filed on Form 843, Claim for Refund and Request for Abatement, in anticipation of the filing of the Form 706 by Al's executor will be considered a protective claim for a credit or refund. Accordingly, as long as the Form 843 is filed on or before October 29, 2024, the IRS can consider and process that claim once Al's estate is deemed to have made a valid portability election and Betty's estate notifies the IRS that the claim for credit or refund is ready for consideration.

Example: The facts are the same as in the example above, except that Betty makes a gift of $13,000,000 on December 1, 2020, to her child. Betty has made no prior taxable gifts. On April 15, 2021, Betty's executor files a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, claiming an applicable exclusion amount of $11,580,000. Betty's executor includes payment of the gift tax with the Form 709. To recover the gift tax paid, Betty's executor must file a claim for credit or refund (protective or otherwise) within the time prescribed in Code Sec. 6511(a); in this case, April 15, 2024.

Example: Same facts as above, except that Betty's Form 709 claims an applicable exclusion amount of $22,760,000, including a DSUE amount of $11,180,000 from Al's estate. As a result, the Form 709 reports no tax due and Betty's executor tenders no gift tax. Although the portability election, once made, makes Al's DSUE amount available to Betty retroactively to Al's date of death, that DSUE amount is not available until the election is made. Because Betty's executor files the Form 709 before Al's estate makes the portability election, the claimed application of the DSUE amount will be denied and gift tax on the transfer will be assessed. Betty's executor pays the gift tax assessed. To recover that gift tax once the portability election has been made by Al's estate, Betty's executor must file a claim for credit or refund of tax (protective or otherwise) within the time prescribed in Code Sec. 6511(a).

For a discussion of making a portability election under Code Sec. 2010(c)(5)(A), see Parker Tax ¶227,215.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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