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Estate and Gift Tax

New, simplified procedure for obtaining extension to make estate tax portability election

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

In a Revenue Procedure, IRS has provided a permanently available simplified method for estates to obtain an extension of time to make the estate tax portability election. The simplified method is only available to estates that are not required to file an estate tax return based on the value of the gross estate and is effective June 9, 2017.

Background—portability election. Code Sec. 2010(c) allows the estate of a decedent who is survived by a spouse to make a portability election, which allows the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life and at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount.

Code Sec. 2010(c)(5)(A) provides certain requirements that the executor of the estate of a deceased spouse must satisfy to allow the decedent’s surviving spouse to apply the decedent’s DSUE amount to the surviving spouse’s transfers. In particular, the executor of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which must include a computation of the DSUE amount. Under Code Sec. 2010(c)(5)(A), a portability election is effective only if made on a Form 706 that is filed within the time prescribed by law (including extensions) for filing such return.

Reg. § 20.2010-2(a)(1) provides that an estate that elects portability will be considered to be required to file a return under Code Sec. 6018(a). Accordingly, 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). An extension is available to an estate that is 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 and without regard to the need to file for portability election purposes. (Reg. § 20.2010-2(a)(1))

Reg. § 20.2010-2(a)(2) provides that, upon the timely filing of a complete and properly-prepared estate tax return, an executor of an estate of a decedent survived by a spouse will have elected portability of the decedent’s DSUE amount unless the executor chooses not to elect portability and satisfies the requirements in Reg. § 20.2010-2(a)(3)(i) for the election not to apply.

Where an estate is filing an estate tax return only to make a portability election, Reg. § 301.9100-3 provides the rules for granting an extension of time to elect portability. In general, under Reg. § 301.9100-3, relief will be granted if the taxpayer establishes to IRS’s satisfaction that the taxpayer acted reasonably and in good faith and that the grant of relief will not prejudice the interests of the government.

Rev Proc 2014-18, 2014-7 IRB 513 provided a simplified method for obtaining an extension of time under Reg. § 301.9100-3 to make a portability election, that was available if the estate was not required by Code Sec. 6018(a) 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 Dec. 31, 2014.

Background—refund claim statute of limitations. Generally, under Code Sec. 6511(a), a taxpayer’s claim for credit or refund of an overpayment of tax must be filed within three years from the date of filing the tax return, or within two years from the date of payment of the tax, whichever period expires later.

New permanent simplified method. IRS has provided a permanently available simplified method for estates to obtain an extension of time to make the estate tax portability election. The simplified method is only available to estates that are not required to file an estate tax return based on the value of the gross estate and is effective June 9, 2017.

IRS explained that, since Dec. 31, 2014, it has issued numerous letter rulings under Reg. § 301.9100-3 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 by Code Sec. 6018(a) to file an estate tax return. IRS determined that the considerable number of ruling requests for an extension of time to elect portability received since Dec. 31, 2014 indicates a need for continuing relief for the estates of decedents having no filing requirement under Code Sec. 6018(a). Further, the considerable number of ruling requests received has placed a significant burden on IRS.

A taxpayer who meets the requirements listed below will be deemed to meet the requirements for relief under Reg. § 301.9100-3, and relief is granted under the provisions of Reg. § 301.9100-3 to extend the time to elect portability under Code Sec. 2010(c)(5)(A). Accordingly, for purposes of electing portability, the taxpayer’s Form 706 will be considered to have been timely filed in accordance with Reg. § 20.2010-2(a)(1). (Rev Proc 2017-34, Sec. 4.02)

In order to qualify for the automatic extension, the following requirements must be met:

1. The taxpayer is the executor of the estate of a decedent who: (a) has a surviving spouse; (b) died after Dec. 31, 2010; and (c) was a citizen or resident of the U.S. on the date of death;
2. The taxpayer is 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, without regard to the need to file for portability purposes);
3. The taxpayer did not file an estate tax return within the time prescribed by Reg. § 20.2010-2(a)(1) for filing an estate tax return required to elect portability;
4. The executor must file a complete and properly-prepared Form 706 on or before the later of Jan. 2, 2018, or the second annual anniversary of the decedent’s date of death; and
5. 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 Code Sec. 2010(c)(5)(A).” (Sec. 3.01; Sec. 4.01)

IRS notes that making the simplified method of Rev Proc 2017-34 available for all eligible estates through Jan. 2, 2018 provides additional relief to the estates of decedents with a date of death in the first years after the enactment of the portability election provisions because the executors of those estates and their advisors may not have been aware of the opportunity and need to file an estate tax return to elect portability. Making the simplified method of this revenue procedure available after Jan. 2, 2018, to estates during the 2-year period immediately following the decedent’s date of death should not unduly compromise the ability of the taxpayer or IRS to compute and verify the DSUE amount because the necessary records are likely to be available during that period.

Circumstances under which the extension doesn’t apply. The new procedures do not apply to taxpayers that filed an estate tax return within the time prescribed by Reg. § 20.2010-2(a)(1) for the purpose of electing portability. Such a taxpayer either will have elected portability of the DSUE amount by timely filing that estate tax return or will have affirmatively opted out of portability in accordance with Reg. § 20.2010-2(a)(3)(i). (Sec. 3.02)

Taxpayers that are not eligible for relief under this revenue procedure because the executor does not satisfy requirements (4) and/or (5) above may request an extension of time to make the portability election under Code Sec. 2010(c)(5)(A) by requesting a letter ruling under the provisions of Reg. § 301.9100-3. (Sec. 3.03)

If, subsequent to the grant of relief pursuant to this revenue procedure, it is determined that, based on the value of the gross estate and taking into account any taxable gifts, the taxpayer was required to file an estate tax return pursuant to Code Sec. 6018(a), the grant of an extension under this revenue procedure becomes void. (Sec. 4.03)

Limitations period for claim for credit or refund by surviving spouse. 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) for filing a claim for credit or refund of an overpayment of tax with respect to such transfer has expired. That is, an extension of time to elect portability granted under this revenue procedure 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). (Sec. 5.01)

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 (see Reg. § 20.2010-3(a)(2) and Reg. § 25.2505-2(a)(2)), a claim for credit or refund of tax filed within the time prescribed 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 this revenue procedure, will be considered a protective claim for credit or refund of tax. (Sec. 5.02)

Illustration Predeceasing Spouse (S1) dies on Jan. 1, 2014, survived by Surviving Spouse (S2). The assets includible in S1’s gross estate consist of cash held jointly with S2 with rights of survivorship, in the amount of $2,000,000. S1 made no taxable gifts during life. S1’s executor is not required to file an estate tax return under Code Sec. 6018(a) and does not file such a return.S2 dies on Jan. 30, 2014. S2’s taxable estate is $8,000,000, and S2 made no taxable gifts during life. S2’s executor files a Form 706 on behalf of S2’s estate on Oct. 30, 2014, claiming an applicable exclusion amount of $5,340,000. S2’s executor includes payment of the estate tax with the Form 706.Pursuant to this revenue procedure, S1’s executor files a complete and properly prepared Form 706 on behalf of S1’s estate on Dec. 1, 2017, reporting a DSUE amount of $5,340,000. The executor includes at the top of the Form 706 the required statement. The filing of the return satisfies the requirements for a grant of relief under this revenue procedure, and S1’s estate is deemed to have made a valid portability election. IRS accepts S1’s return with no changes. To recover the estate tax paid, S2’s executor must file a claim for credit or refund of tax by Oct. 30, 2017 (the end of the period of limitations prescribed in Code Sec. 6511(a)), even though a Form 706 to elect portability has not been filed on behalf of S1’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 S1’s executor, will be considered a protective claim for credit or refund of tax. Accordingly, as long as the Form 843 is filed on or before Oct. 30, 2017, IRS can consider and process that claim for credit or refund of tax once S1’s estate is deemed to have made a valid portability election and S2’s estate notifies IRS that the claim for credit or refund is ready for consideration. (Sec. 5.03(1))

Effect of new automatic extension on letter ruling requests. Through the later of Jan. 2, 2018, or the second anniversary of a decedent’s date of death, the exclusive procedure for obtaining an extension of time under Reg. § 301.9100-3 to make a portability election under Code Sec. 2010(c)(5)(A) for the estate of a decedent, if the decedent and executor meet the requirements (1)-(3) above, is the procedure described in requirements (4) and (5) above. (Sec. 7.02)

If an executor of such an estate has filed a request for a letter ruling seeking an extension of time under Reg. § 301.9100-3 to make a portability election under Code Sec. 2010(c)(5)(A), and that letter ruling is pending in the IRS National Office on June 9, 2017, IRS will close its file on the ruling request and refund the user fee, and the estate may obtain the relief granted by this revenue procedure only by complying with requirements (4) and (5) above. (Sec. 7.02)

User fee. No user fee applies to Rev Proc 2017-34. (Sec. 1)
RIA observation: Rev Proc 2017-34 shares many of the same provisions contained in Rev Proc 2014-18.

References: For the deceased spousal unused exclusion amount, see FTC 2d/FIN ¶ R-7107; United States Tax Reporter Estate & Gift ¶ 20,104.01.

Rev Proc 2017-34, 2017-26 IRB

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