Late Portability Elections by the Numbers – an Update to the ABCs of Late Portability Elections

The ABCs of Late Portability Elections, describing the basic requirements for requesting a letter ruling to allow a late portability election, was written about one year ago. The IRS has issued private letter rulings (PLRs) for three years now for late portability elections under §2010(c)(5). What do those rulings tell us?

First, there are a lot of them. As of April 10, 2017, 194 private letter rulings have been published in the last three years, allowing extensions for a late portability election. By comparison, in the same period, there have been approximately 102 letters published for IRA rollover extensions, and approximately 61 letters published for S. Corp. election extensions. Those very common requests are simply dwarfed by the number of people needing and requesting late portability relief. What this number does not tell us is how many requests for relief were withdrawn because of likely failure of the request. [1]

Second, the reason for the number of requests is easy to see – with an approximate cost of $15,000 [2]solely for the letter ruling, it only takes a total of $37,500 over the estate tax exclusion amount to break even on the request. Thus, a surviving spouse’s estate worth $6 million, what some would call ‘barely’ over the exclusion amount, can get tax relief, minus the cost to the decedent spouse’s estate, of about $166,000. This assumes, of course, that the decedent spouse’s estate has enough unused exclusion amount remaining to increase the surviving spouse’s applicable exclusion amount sufficiently to reduce or eliminate federal estate taxes. For a married couple where all of the decedent spouse’s assets go to the surviving spouse, the decedent spouse’s estate would be zero and the surviving spouse would have an estate of $10.9 million, the tax savings for a 2017 decedent would be about $2.17 million if the decedent spouse passed away in 2016 and the surviving spouse passed away in 2017.  

Reasonable Action and Good Faith

A closer look at the individual PLRs also tells an interesting story. The requests are made under Reg. §301.9100-3, which provides five different circumstances under which a request meets one of the first requirement for an extension, reasonable action and good faith:

  • the request is made before the IRS discovers the failure to make the election;
  • the failure to make the election was the result of intervening events beyond the taxpayer's control;
  • the failure to make the election was because, after exercising reasonable diligence that takes into account the taxpayer's experience and the complexity of the return or issue, 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, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.

Of those five reasons for relief published, reliance on the advice of a qualified tax professional was cited in 73% of the rulings. While those requests will almost certainly require an affidavit by the tax professional, the informal consensus among attorneys and certified accountants I have spoken with is that the cost to request relief without charging the client is a reasonable option compared to having the client sue, with its cost of litigation and loss of reputation. While it may be uncomfortable for an advisor to admit an omission, it can be economically reasonable compared to the other option.

The second most cited reason is taxpayer unawareness of the need to elect portability, while considering the taxpayer’s level of sophistication to determine whether that ignorance was reasonable. This was the cause cited in 23% of the letter rulings. The logic behind this relief is a little harder to fathom, particularly since late portability relief rulings are notoriously short on facts. However, a review of the 100 letter rulings published since the beginning of 2001, citing Reg. §301.9100-3(b)(1)(iii), and not involving a late portability election, indicates two typical scenarios: (i) the taxpayer exercises reasonable diligence by consulting a tax professional in very complicated tax situations, and (ii) the taxpayer, through acting solely on his or her own, is dealing with changes in the law (i.e., the end of the qualified family business election under §2057; enactment of LLC statutes by states). Portability certainly fits under the second category, and these rulings appear to have a more lenient standard.

To date, it appears that only one ruling for a late portability election stems from a request involving a decedent spouse who died after the adopting of the final regulations on June 15, 2015. All of the others are under former Reg. §20.2010-2T(a).

Also note that a decedent spouse’s estate that owes estate taxes cannot request late portability relief.

Prejudice to the Interests of the Government

There is also one PLR among the “ reasonable diligence”group that raises the specter of hindsight in prejudicing the interests of the government, a situation that could easily occur in making the decision to request late portability election relief. Using hindsight in making a decision to request relief involves specific facts changing between the election due date and the date relief is requested, and that makes the election advantageous. It is then up to the taxpayer to offer “strong proof” that he or she did not use hindsight in the decision to request relief. While there are currently no rulings or decisions out there involving hindsight used in the decision to apply for late portability election relief, there are PLRs and cases involving other elections and the use of hindsight that do offer insight into the requirement. The prudent advisor should look at the particular facts that may indicate a change in the taxpayer’s situation between the time the election should have been made and the actual filing date of the relief request, including the likelihood of the surviving spouse’s estate needing to use the DSUE amount.

[1] A branch representative of the associate office contacts the taxpayer or counsel within 21 calendar days to advise whether the branch representative will recommend that the associate office rule as the taxpayer requested, rule adversely on the matter, or not rule. See Rev. Proc. 2017-1, 2017-1 I.R.B. 1, §8.02, or its successors, for further information.

[2]$10,000 for the IRS fee (2017), approximately $5,000 for the drafting, affidavits, etc. These drafting fees can vary widely depending on the facts involved, the number of affidavits, and the cooperation of the parties involved.


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