Don’t Miss Out on the New and Improved Simplified Method To Make Late Portability Election


 

In June 2017, the IRS issued Rev. Proc. 2017-34, which provides a simplified method to obtain an extension of time to make a portability election under §2010(c)(5)(A).  This new and improved offer provides instant relief to certain executors that failed to make timely portability elections. The simplified method will save executors time and money because, instead of requesting a letter ruling, paying a user fee, and waiting for a response, the DSUE amount will be available immediately upon filing a properly completed Form 706.

Why has the IRS provided taxpayers with such a generous method? The IRS is liquidating its stockpile of requests for an extension of time to elect portability. The IRS states, quite frankly, that executors have inundated the IRS with such letter ruling requests, to which the IRS likely no longer wants to allocate its limited and valuable resources. After January 2, 2018, however, this “offer” will be available for only a limited period of time after death!

Extensions before Rev. Proc. 2017-34

Prior to the issuance of Rev. Proc. 2017-34, executors that were not required to file an estate tax return under §6018(a) and failed to elect portability by filing the Form 706 before the due date set forth under Reg. §20.2010-2(a)(1), including extensions, could only obtain relief to make a late portability election by requesting a letter ruling under Reg. §301.9100-3. In the past, the IRS provided relief similar to Rev. Proc. 2017-34 when it issued Rev. Proc. 2014-18; however, this was only temporarily available for the estates of decedents who died between January 1, 2011 and December 31, 2013, if relief was sought by December 31, 2014. Once the simplified method under Rev. Proc. 2014-18 was no longer available, executors were required to request relief under Reg. §301.9100-3 and to pay the costly user fee.

The Breakdown of Rev. Proc. 2017-34

To obtain the relief provided in Rev. Proc. 2017-34, the following requirements must be met:

  • the decedent has a surviving spouse;  
  • the decedent died after December 31, 2010; 
  • the decedent was a U.S. citizen or resident on his or her date of death; 
  • the estate is not required to file Form 706 under §6018(a) (determined based on the value of the gross estate and adjusted taxable gifts and without regard to the need to file for portability purposes); and 
  • the estate did not file Form 706 within the nine month deadline (or the extension, if one was obtained). 

Once the executor determines that these requirements are met, the estate may make the portability election by properly completing Form 706 on or before the later of January 2, 2018 or the second anniversary of the decedent’s death. The executor must state at the top of the Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).” The effective date of Rev. Proc. 2017-34 is June 9, 2017.

Additional Caveats to Rev. Proc. 2017-34

In addition to the basic requirements for requesting relief under the simplified method, Rev. Proc. 2017-34 provides the following caveats:  

  1. If the IRS later determines that relief under Rev. Proc. 2017-34 was granted to an estate that was required to file an estate tax return under §6018(a), the relief will be deemed null and void.

  2. The §6511 statute of limitations remains applicable for taxpayers obtaining a credit or refund of tax by reason of a portability election made pursuant to this relief. 

  3. Executors are entitled to a refund of the user fee and to have the file on the ruling request closed if:

    1. an executor has requested a letter ruling requesting relief under Reg. §301.9100-3 to make a portability election;

    2. the letter ruling is pending in the National Office on June 9, 2017; and

    3. the executor properly completes the Form 706 in accordance with Rev. Proc. 2017-34, §4.01, as discussed above.

  4. Obviously (and per CCA 201650017), there continues to be no relief for the executor of an estate that was required to file a Form 706 under §6018(a) but failed to file the Form 706 within the nine month deadline (or the extension, if obtained).

  5. Rev. Proc. 2017-34 does not provide any relief for executors that file Form 706 and opt out of the portability election by affirmatively checking the box.

  6. The IRS will be able to examine the Form 706 at the time of the surviving spouse’s death; therefore, practitioners should make sure that no issues are hiding in the first Form 706 and everything matches up with the surviving spouse’s Form 709 or Form 706.

  7. Rev. Proc. 2017-34 includes three examples to provide additional guidance.

The Benefits of the Simplified Method under Rev. Proc. 2017-34

From the executor’s standpoint, satisfying the requirements for the simplified method under Rev. Proc. 2017-34 is vastly less burdensome than making a letter ruling request for relief under Reg. §301.9100-3. The executor does not have to demonstrate that the executor acted reasonably and in good faith, proof of which often involves an affidavit by the professional that botched the portability election or failed to properly advise the client in the first place.

Under the simplified method, the deceased spousal unused exclusion (DSUE) amount is available to the surviving spouse or the estate of the surviving spouse immediately upon filing a completed and properly prepared Form 706. Therefore, it is possible for the executor of an estate to make a late portability election under Rev. Proc. 2017-34 either before or concurrently with the surviving spouse’s Form 706 or Form 709 without having to pay the tax stated if no DSUE amount were available. The same result, however, does not occur if the surviving spouse’s Form 706 or Form 709 is filed before the deceased spouse’s executor makes a late portability election and tax is due as a result of not having the DSUE amount; rather, the surviving spouse or the surviving spouse’s executor either (i) would have to request a refund once the deceased spouse’s executor properly completes and files a Form 706 that satisfies the requirements of Rev. Proc. 2017-34, or (ii) would have to file a protective claim for a refund on Schedule PC of Form 706.

The simplified method, therefore, is much more efficient and less expensive (no user fee is required) than filing a letter ruling request and waiting for the IRS to respond. This makes Rev. Proc. 2017-34 very valuable to estates that found themselves in the predicament of failing to timely elect portability or to professionals that failed to properly advise their clients regarding the ability to elect portability. Just like any good offer, however, this simplified method will not last forever! As mentioned above, after January 2, 2018, an executor will have only two years after the decedent’s death to act. So fast action will be needed to take advantage of this offer!

For executors that fail to accept this offer within the time period granted under Rev. Proc. 2017-34, the IRS will continue issuing requests for relief under Reg. §301.9100-3 to make a late portability election for the low price of $10,000 each ruling (adjusted annually), although hopefully at a significantly curtailed request rate!

So remember, a taxpayer seeking relief to elect portability after the later of January 2, 2018 or the second anniversary of a decedent’s death may do so only by requesting a letter ruling in accordance with the requirements of Reg. §301.9100-3 and Rev. Proc. 2017-1. Plus in future requests for relief under Reg. §301.9100-3, the IRS could actually scrutinize these requests by making executors demonstrate reasonableness and good faith under Reg. §301.9100-3. This would make the failure to timely elect portability a much more costly mistake for surviving spouses, executors, and professionals alike!