IRS Issues Simplified Procedure for Obtaining Extension to Make Portability Election

(Parker Tax Publishing June 2017)

The IRS issued a revenue procedure, effective June 9, 2017, which provides a simplified method for certain taxpayers to obtain an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The simplified method is to be used in lieu of the letter ruling process and no user fee is required for submissions filed under the revenue procedure. Rev. Proc. 2017-34.

Background

In calculating the estate tax on a decedent's estate, each estate is entitled to an exclusion amount so that no estate tax return is due if a decedent's estate is less than the applicable exclusion amount. Under Code Sec. 2010(c), the estate of a decedent who is survived by a spouse can make a portability election allowing the surviving spouse to apply the decedent's spousal unused exclusion (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)(4) defines the DSUE amount as the lesser of (1) the basic exclusion amount, or (2) the excess of the applicable exclusion amount of the last deceased spouse of the surviving spouse over the amount with respect to which the tentative tax is determined under Code Sec. 2001(b)(1) on the estate of such deceased spouse. Code Sec. 2010(c)(3) defines the basic exclusion amount as $5 million, as adjusted for inflation in each year after 2011.

Under Code Sec. 2010(c)(5)(A), the executor of the estate of a deceased spouse must satisfy certain requirement in order to elect portability and thereby make the decedent's DSUE amount available to the decedent's surviving spouse. In particular, the executor of the estate of the deceased spouse must elect portability of the DSUE amount on an estate tax return, which must include a computation of the DSUE amount. Code Sec. 2010(c)(5)(A) provides that a portability election is effective only if made on an estate tax return that is filed within the time prescribed by law (including extensions) for filing such return.

Thus, whether or not a Form 706 is otherwise required, an executor who wants to make the portability election must file Form 706 within nine months of the decedent's date of death, unless an extension of time for filing has been granted. Reg. Sec. 20.2010-2(a)(1) provides that an extension of time to elect portability will not be granted to an estate that is required to file an estate tax return, but such an extension may be available to an estate that is not required to file an estate tax return.

In Rev. Proc. 2014-18, the IRS provided a simplified method for obtaining an extension of time to make a portability election that was available to the estates of decedents dying after December 31, 2010, if such an estate was not required to file an estate tax return and if such a decedent was survived by a spouse. However, this simplified method was available only on or before December 31, 2014. The revenue procedure stated that, through that same date, the IRS would not issue letter rulings to such estates granting an extension of time to make a portability election.

According to the IRS, since December 31, 2014, it has issued numerous letter rulings granting an extension of time to elect portability under Code Sec. 2010(c)(5)(A) in situations in which the decedent's estate was not required to file an estate tax return. Many of these ruling requests, the IRS said, have involved estates of decedents that discovered the failure to elect portability not long after the due date for filing an estate tax return to elect portability. Other ruling requests, the IRS said, have involved estates of decedents with a date of death in the first years after the enactment of the portability election provisions, where the executor did not know about the need to file a return to elect portability, or did not discover the failure to elect portability, until many years later, often after the death of the surviving spouse.

Recognizing Need for Continuing Relief, IRS Issues Revenue Procedure 2017-34

In light of the considerable number of ruling requests for an extension of time to elect portability received since December 31, 2014, the IRS determined there was a need for continuing relief for the estates of decedents having no estate tax return filing requirement. As a result, on June 9, the IRS issued Rev. Proc. 2017-34, which provides taxpayers with a simplified method of obtaining a portability election extension for estates of decedents having no estate tax return filing requirement.

The simplified method provided in Rev. Proc. 2017-34 is to be used in lieu of the letter ruling process. A benefit to using the procedure in Rev. Proc. 2017-34 in lieu of the letter ruling process is that no user fee is required for submissions filed under the revenue procedure.

Deadline for Requesting Relief under Revenue Procedure 2017-34

While some taxpayers proposed that the IRS provide permanent and unlimited extension relief, the IRS rejected such requests after considering both the statutory requirement of a timely filed return and the prejudice to the government from a lack of available records and current appraisals resulting from a long delay between a decedent's death and the filing of an estate tax return for that decedent's estate. As a result, Rev. Proc. 2017-34 provides a simplified method to obtain an extension of time to elect portability that is available to the estates of decedents having no estate tax return filing requirement for a period the last day of which is the later of (1) January 2, 2018, or (2) the second anniversary of the decedent's date of death.

A taxpayer seeking relief to elect portability after the deadlines set in Rev. Proc. 2017-34 will have to do so by requesting a private letter ruling.

Procedures for Requesting Relief Under Revenue Procedure 2017-34

The requirements for relief under Rev. Proc. 2017-34 are as follows:

(1) A person permitted to make the 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 later of January 2, 2018, or the second 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).

(2) The executor filing the Form 706 on behalf of the decedent's estate must state at the top of the Form 706 that the return is "FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER SECTION 2010(c)(5)(A)."

If, subsequent to the grant of relief pursuant to Rev. Proc. 2017-34, the IRS determines that, based on the value of the gross estate and taking into account any taxable gifts, the executor was required to file an estate tax return, the grant of an extension under Rev. Proc. 2017-34 will be deemed null and void.

Impact on Refund Claims by Surviving Spouse

If the decedent's estate is granted relief under Rev. Proc. 2017-34 so that the estate tax return is considered to have been timely filed for purposes of electing portability, the DSUE amount of that decedent is 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 statute of limitations for filing a claim for credit or refund of an overpayment of tax with respect to such transfer has expired. Thus, an extension of time to elect portability granted under Rev. Proc. 2017-34 does not extend the period during which the surviving spouse or the surviving spouse's estate may make a claim for credit or refund.

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 of tax filed within the statute of limitations time frame 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. 2017-34 is considered a protective claim for credit or refund of tax.

Example: Sam dies on January 1, 2014, survived by Susan. The assets includible in Sam's gross estate consist of cash on deposit in bank accounts held jointly with Susan with rights of survivorship in the amount of $2,000,000. Sam made no taxable gifts during life. Sam's executor is not required to file an estate tax return and did not file such a return. Susan dies on January 30, 2014. Her taxable estate is $8 million and Susan made no taxable gifts during life. Susan's executor files a Form 706 on behalf of Susan's estate on October 30, 2014, claiming an applicable exclusion amount of $5,340,000. Susan's executor includes payment of the estate tax with the Form 706. Pursuant to Rev. Proc. 2017-34, Sam's executor files a complete and properly prepared Form 706 on behalf of Sam's estate on December 1, 2017, reporting a DSUE amount of $5,340,000. The executor includes at the top of the Form 706 the statement required by Rev. Proc. 2017-34. The filing of the return satisfies the requirements for a grant of relief under Rev. Proc. 2017-34 and Sam's estate is deemed to have made a valid portability election. The IRS accepts S1's return with no changes. To recover the estate tax paid, Susan's executor must file a claim for credit or refund of tax by October 30, 2017 (the end of the statute of limitations period), even though a Form 706 to elect portability has not been filed on behalf of Sam's estate by that date. Such a claim filed on Form 843, Claim for Refund and Request for Abatement, in anticipation of the filing of the Form 706 by Sam's executor is considered a protective claim for credit or refund of tax. Accordingly, as long as the Form 843 is filed on or before October 30, 2017, the IRS can consider and process that claim for credit or refund of tax once Sam's estate is deemed to have made a valid portability election and Susan's estate notifies the IRS that the claim for credit or refund is ready for consideration.

Effective Date

Rev. Proc. 2017-34 is effective June 9, 2017. If an executor filed a letter ruling request seeking an extension of time to make a portability election and that letter ruling is pending in the National Office on June 9, 2017, the IRS will close its file on the ruling request and refund the user fee, and the estate may obtain the relief granted by Rev. Proc. 2017-34 only by complying with the applicable requirements of Rev. Proc. 2017-34.

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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