1-21. Key Issue 1E 706 2/16

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1 706 2/ Preparation Pointer: The total listed in the Amount column should approximate the amount of the gross estate reduced by funeral and administration expenses, debts and mortgages, marital bequests, charitable bequests, and any federal or state estate and GST taxes paid on the amount of the estate distributed to the noncharitable estate beneficiaries. Note that the amount does not have to be exact. A reasonable estimate is sufficient. Example 1E-2 Disclosing distributions to a bypass trust. Assume the same facts as in Example 1E-1 except that 65% of Howard s estate will pass to a bypass trust (instead of his sons). In that case, line 5 of Form 706, Part 4, would list the name of the trust, the trust identification number, and the distribution amount of $6,318,604 (3,159,302 2). Preparation Pointer: When a surviving spouse beneficiary reports a beneficial interest in QTIP property, the remainder interest may pass to recipients who do not otherwise receive distributions from the estate (e.g., surviving spouse was the beneficiary of a QTIP trust, but the remainder goes to the predeceased spouse s children from a prior marriage). Because QTIP property is treated as passing from the surviving spouse, in the authors opinion, the QTIP should be included on Part 4, line 5, and identify to whom the property passes (even when these recipients may not be beneficiaries of the surviving decedent s estate). Include in the description that the property is Section 2044 (QTIP) property; thus, the IRS is put on notice that this decedent did not select the remainder beneficiary. Law Change Alert: The executor is required to furnish a statement to both (1) an estate beneficiary inheriting property from an estate, and (2) the IRS, listing the asset value reported on the estate tax return [IRC Sec. 6035(a)]. Form 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent) is to be used for this purpose. Although the statement must be provided within 30 days of the estate tax return s required filing date under IRC Sec or the date the estate tax return is filed, whichever is earlier, the IRS postponed the due date of the statement until June 30, 2016, giving it additional time to issue further guidance on the requirements (Notice ). Proposed regulations were recently released to address practitioners concerns and clarify certain issues. See Key Issue 2D for additional discussion and Illustration 2-4 for a copy of a filled-in Form Part 4 General Information, Lines 6 through 17 Line 6. If the estate is filing a protective claim for refund, the yes box should be checked and two copies of a completed Schedule PC should be attached to Form 706. See Key Issue 2F for a discussion on filing protective claims. Line 7. Generally, the value of an interest in qualified terminable interest property (QTIP) is required to be included in the donee spouse s estate at that spouse s death. Check the yes box if the decedent held a qualifying interest in a QTIP at the time of death. See Key Issue 8E for a detailed discussion of including the value of a QTIP in the donee spouse s gross estate. Lines 8a, 8b, and 8c. If the decedent filed gift tax returns (Form 709), the yes box on line 8a should be checked and a copy of the returns attached to the estate tax return. Enter the periods covered by the gift tax returns on line 8b and the IRS office where they were filed on line 8c. See Key Issue 9A for a discussion of lifetime transfers included in the decedent s gross estate. The executor should inquire whether the decedent made gifts for which a gift tax return was filed, and should make a diligent effort to obtain copies of all filed Forms 709. This inquiry can include a review of the decedent s checking and savings accounts and related financial records. Since the IRS matches Form 709 with Form 706 during the processing of Form 706, discrepancies between what is stated on line 8 and information available to the IRS can result in an examination (see Key Issue 36A). Preparation Pointer: A client who does not have records of prior gift tax returns may request copies of returns by filing Form 4506 (Request for Copy of Tax Return) or Form 4506-T (Request for Transcripts of Tax Return) with the Service Center in the location where the client lived when the return was filed. (See Table T802 for a directory of Service Center addresses for use in requesting photocopies of tax returns.) Free transcripts can also be obtained by calling the IRS s toll-free number (800) and following the prompts. The IRS charges a fee to provide an actual copy of the return; however, in many cases, a transcript (a computer print of the return information) will provide the necessary information. In the case of a client who is deceased, the return may be requested by the executor of the estate or an heir or beneficiary under the will, if the heir or beneficiary has a material interest which would be affected by the information in the return [IRC Sec. 6103(e)(3)]. In addition, the information may be requested by a duly authorized attorney in fact [IRC Sec. 6103(e)(6)]. The document authorizing the person to request the information must be attached to the Form Key Issue 1E

2 /16 Note: Attorneys, CPAs, enrolled agents, and registered tax return preparers (i.e., practitioners subject to Circular 230) who have a power of attorney on file with the IRS may use the online IRS Transcript Delivery System to request and receive tax return documents (whether or not they e-file client returns). For more information, search e-services for Tax Professionals at Line 9a. The proceeds of a life insurance policy on the decedent s life are generally required to be included in the decedent s gross estate. The yes box on line 9a should be checked and an explanation attached to Schedule D if an insurance policy on the decedent s life is excluded from the decedent s gross estate. Also, attach Form 712 (Life Insurance Statement) for each life insurance policy. (See Key Issues 6A and 6B for determining whether life insurance is included in the decedent s gross estate.) Line 9b. The value of a life insurance policy the decedent owned on the life of another individual is generally required to be included in the decedent s gross estate. The yes box on line 9b should be checked if the decedent owned an insurance policy on the life of another individual that is excluded from the decedent s gross estate. (See Key Issue 8F for a discussion of the reporting requirements for life insurance on the life of another owned by the decedent.) Line 10. Generally, the value of property held jointly with right of survivorship with someone other than the decedent s spouse is included in the gross estate based on the decedent s relative contribution to the jointly owned property s purchase price. Check the yes box on line 10 if less than the entire value of jointly owned property held with someone other than the decedent s spouse is included in the decedent s gross estate and complete and attach Schedule E. (See Key Issues 7C and 7E for a discussion of nonspousal joint interests.) Line 11a. If the decedent owned an interest in a partnership, an unincorporated business (i.e., a sole proprietorship), or a limited liability company, the yes box on line 11a should be checked and the information should be reported on Schedule F. (See Key Issue 8D for information about reporting a partnership or sole proprietorship interest.) An affirmative response is also required if the decedent owned stock in an inactive or closely held corporation (reported on Schedule B). (See Key Issue 4E for reporting a decedent s interest in a closely held business.) Line 11b. If the answer to question 11a was yes, question 11b requires disclosure of any discounts taken with respect to the value of the identified interest. Thus, if the decedent owned an interest in a partnership, unincorporated business, or closely held corporation, or a fractional interest in real estate, and the value reported on Form 706 is discounted, the yes box on line 11b must be checked and the total accumulated or effective discounts must be reported on the applicable schedule. Line 12. If the decedent made transfers as described in IRC Secs. 2035, 2036, 2037, or 2038, the box on line 12 must be checked yes and Schedule G must be completed. See Key Issue 9A for a discussion of prior transfers included in the decedent s gross estate that require Schedule G to be attached. Line 13a. See Key Issue 9A for a discussion of trusts created during the decedent s lifetime. The yes box should be checked and a Schedule G should be completed if a trust was created during the decedent s lifetime, even if the trust is not included in the gross estate. A copy of the trust instrument should also be attached. Line 13b. Include details on Schedule F and check the box on line 13b yes if the decedent possessed a power, beneficial interest, or trusteeship over a trust created by someone other than the decedent. See Key Issue 8A for a discussion of the Schedule F reporting requirements. Lines 13c and 13d. Indicate whether the decedent was receiving income from a trust created after October 22, 1986, by a parent or grandparent in the first part of line 13c. If the first line 13c answer is Yes, indicate in the second part of line 13c whether there was a GST taxable termination upon the death of the decedent under IRC Sec and attach an explanatory statement (as required by line 13d) and a copy of the trust(s) or will(s) creating the trust(s) and the name, address, and phone number of the current trustee(s). See Key Issue 32A for a discussion of GST taxable terminations. Key Issue 1E

3 706 2/ Filing Requirements TABLE OF CONTENTS KEY ISSUE DESCRIPTION PAGE Introduction A Filing Requirements for Form Filing Threshold Executor Filing Responsibility Due Date Filing Location Use of Registered Mail, Certified Mail, or a Private Delivery Service Paid Preparer Information B Filing Requirements for Nonresident Noncitizens Filing Threshold Situs of Property Estate Tax Treaties Gross Estate Limited to U.S. Property Available Exclusions, Deductions, and Credits Executor Filing Responsibility Due Date Filing Location Citizens and Residents Who Relinquish Their Citizenship or Residency C Requesting an Extension to File Form 706 and Other Transfer Tax Returns Automatic Extension of Time for Filing Form Extension for Cause Options for an Executor Who Is Out of the Country Additional Returns That Can Be Automatically Extended Filing Requirements Consequences of Obtaining a Filing Extension D Reporting Asset Basis to Those Acquiring Estate Property General Rules New Form 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent) E Notifying the IRS of a Fiduciary Relationship Filing Form Table of Contents

4 /16 Introduction Benefit of Filing Form Terminating a Fiduciary Relationship Discharge of Executor s Liability F Supplemental Returns, Claims for Refund, and Protective Claims ILLUSTRATION Amending Estate Tax Returns Filing the Refund Claim Protective Claim for Ponzi Schemes Section 2053 Protective Claim for Refund Application for an Extension of Time to File Notice to the IRS of a Fiduciary Relationship Filing Schedule PC with Form Reporting Asset Basis to Beneficiaries Introduction The federal estate tax is imposed on the transfer of property at an individual s death. Generation-skipping transfer (GST) taxes may also apply to certain transfers at an individual s death. This chapter covers the Form 706 filing requirements and various related filing requirements that are applicable for deaths occurring in Generation-skipping transfers are discussed in Chapters 29 through Chapter 32. Preparation Pointer: See Checklist C103 for a checklist of the required attachments to Form 706. See Resource R101 for an organizer to assist in filing a complete and accurate Form 706 and Checklist C102 for a Form 706 preparation checklist. References IRS Notices , IRB 315; , IRB 984; and , IRB. Rev. Procs , IRB 749; , IRB 527; , IRB; and , IRB 236. Rev. Ruls , CB 213; , CB 294; and , IRB 735. Bartels, Gordon H. Estate, 106 TC 430 (1996). Buder, Kathryn M. Estate, 436 F.3d 936, 97 AFTR 2d (8th Cir. 2006). Center Heights Lumber Co., 83 AFTR 2d (DC IN 1999). Dickow,D.Charles, 740 F Supp 2d. 231, 106 AFTR 2d (DC MA 2010). Feldman, Joseph, 47 TC 329 (1966). Nienhuys, Jan Willem, 17 TC 1149 (1952), acq CB 3. Orenstein, Harry Estate, TC Memo (2000). Proske, Paul Estate, 105 AFTR 2d (DC NJ 2010). Wilshire, Louise Schaeffer Estate, 102 AFTR 2d (DC OH 2008). KEY ISSUE 2A Filing Requirements for Form 706. Form 706 [United States Estate (and Generation-Skipping Transfer) Tax Return] is required to be filed for the estate of every U.S. citizen or resident whose (1) gross estate, valued at the date of death, plus adjusted taxable gifts and specific exemption exceeds the basic exclusion amount ($5.43 million for 2015) [IRC Sec. 6018(a)]; or (2) executor wants to elect to transfer the decedent s unused exclusion amount to the decedent s surviving spouse. Caution: The size of the gross estate is irrelevant if the return is filed to transfer the unused exclusion amount to the surviving spouse. Form 706 must be filed if the executor wishes to elect to transfer the decedent s unused estate and gift tax exclusion amount to the decedent s surviving spouse. See Key Issue 1G for a discussion on how to make this election. Note: Simplified valuation provisions may apply for those estates filing Form 706 just to make the portability election.

5 706 2/ the check. A separate Form 4768 is required for each form for which an extension request is made, and the appropriate box in Part II should be checked. Observation: According to the Form 4768 instructions, the IRS will only respond to a request for extension of time to file if it is denied. However, for an extension of time to pay, the executor files two copies of page 2, (Part V). The IRS will complete Part V (notifying the applicant whether or not the extension was approved) and return one copy to the executor. Consequences of Obtaining a Filing Extension Unfortunately, obtaining an extension of time to file does not shorten the three-year limitations period within which the IRS can assess additional estate tax. (See Chapter 36 for further discussion of estate tax examinations.) If an estate files its return after the original due date, the statutory three-year assessment period starts after the date of actual filing [IRC Sec. 6501(a)]. Example 2C-2 Consequence of obtaining an extension on the assessment limitations period. Assume the same facts as in Example 2C-1 with an automatic extension of time to file until September 19, 2016, to file the estate s Form 706. Extending the due date does not shorten the assessment period. The period for assessing additional estate tax continues for the full three years after the extended filing date (until September 19, 2019); that is, it does not end three years after the original due date of the return. Observation: Extending the time to file the Form 706 may not extend the time for at least two elections related to the estate tax return. The election to defer tax attributable to a reversionary or remainder interest (see Election E405) must be made before the estate tax return s normal due date (Reg ). In addition, the election to disclaim an interest in property (see Election E507) must be made within nine months of the later of (1) the date of death or (2) the day on which the disclaimant attains age 21. Practitioners should carefully evaluate the implications of various elections available in conjunction with the Form 706 when estimating the tax payable and extending the due date of the return. See Key Issue 1D for discussion about potential relief for failure to make a timely election in certain situations. Note: An extension of time to file generation-skipping transfer returns [i.e., Form 706-GS(T) for taxable terminations and Form 706-GS(D) for taxable distributions from a trust] is requested by filing Form See Key Issues 31A and 32A for additional discussion of taxable distributions and terminations. KEY ISSUE 2D Reporting Asset Basis to Those Acquiring Estate Property. General Rules Estates required to file Form 706 under IRC Sec. 6018(a) [i.e., because the estate exceeds the basic exclusion amount ($5.34 million in 2014, $5.43 million in 2015, and $5.45 million in 2016)] after July 31, 2015, are subject to a new reporting requirement that is intended to ensure consistency in basis reporting between the estate and its beneficiaries. The new basis consistency standard generally requires that the Section 1014 income tax basis of property received by reason of death must not exceed the value of that property for estate tax purposes [IRC Sec. 1014(f)(1)]. Observation: The IRS was concerned that values reported on Form 706 were inconsistent with the basis reported on a beneficiary s income tax return (i.e., beneficiaries overstating their income tax basis when the asset was sold, thus understating their gains). Required Reporting. IfthefilingofForm706 isrequired afterjuly31,2015,under IRCSec. 6018,the executormust file (1) an Information Return with the IRS, reporting the final value of certain property and the recipient of that property, and (2) a Statement, both with the IRS and to each beneficiary who has received (or will receive) property from a decedent, reporting the property and its final value. The Information Return is defined as Form 8971, and the Statement is Schedule A of Form 8971 [Prop. Reg (a)(1)]. These forms and due dates are discussed later in this key issue. Key Issue 2D

6 /16 Normally, filing will be required only if the basis consistency rules of IRC Sec. 1014(f) apply [i.e., the property distributed was reported on Form 706 required to be filed after July 31, 2015, and the property increases the estate tax liability (reduced by allowable credits)]. However, property included in the gross estate that fully qualifies for the marital or charitable estate tax deduction also is subject to the reporting. There is no exception in IRC Sec or the proposed regulations for excluding this property from the reporting requirement. Observation: Hopefully, the IRS will provide additional guidance for this information reporting for marital or charitable deduction property. Estates Not Subject to Reporting. The Section 6035 filing requirements do not apply to estates that file Form 706 solely to make the portability election (for a surviving spouse to claim the deceased spouse s unused exclusion amount) or to make a generation-skipping transfer (GST) tax exemption allocation or election. This is because these returns are not required to be filed by IRC Sec Also, reporting is not required for estates that file Form 706 solely to make a protective election to avoid a penalty if an asset value is later determined to cause the required filing of Form 706 [Prop. Reg (a)(2)] Defining the Final Value. The proposed regulations define final value, for determining the recipient s basis, as the value reported on Form 706 once the statute of limitations period has ended [Prop. Reg (c)]. Therefore, if the beneficiary of estate property sells the inherited assets before the final value has been determined, he or she cannot claim an initial basis for that property in excess of the value reported on the Schedule A (Form 8971) received from the executor. If the IRS adjusts the value on Forms 706 and 8971, the final value of the property is the IRS s determined value (1) once it can no longer be contested by the estate, (2) upon reaching a binding agreement by all parties, or (3) by a court s determination. Property Required to Be Reported. The reporting requirements apply to all property reported (or required to be reported) on Form 706 if filing of Form 706 is required under IRC Sec This includes all property included in the gross estate for federal estate tax purposes (with four exceptions described later). For decedents who resided in community property states, this includes only the decedent s one-half community interest, and for decedents who were nonresident noncitizens, only the property subject to U.S. estate tax is included [Prop. Reg (b)(1)]. Property Not Required to Be Reported. Certain property is not subject to the reporting requirements. The following assets do not have to be reported on Form 8971 or Schedule A (Form 8971) [Prop. Reg (b)(1)]: 1. Cash (other than a coin collection or bills with numismatic value). 2. Income in respect of a decedent (IRD), such as retirement plans and installment notes. (Note that Roth IRAs held longer than five years are not IRD and, therefore, are not eligible for this reporting exception. Roth IRAs held less than five years should report all except the post-conversion earnings. Traditional IRAs or profit sharing plans with basis should also be reported. For a discussion of IRD, see Key Issue 9H of PPC s 1041 Deskbook.) 3. Tangible personal property for which an appraisal is not required under Reg (b) (the valuation of household and personal effects valued at $3,000 or less). (See Key Issue 8B.) Therefore, if the decedent made many specific bequests, each of which is valued at $3,000 or less, such as dishes, jewelry, or furniture, or items of minimal value, such as clothing and books, reporting is not required. 4. Property sold or otherwise disposed of by the estate (and not distributed to a beneficiary) in a transaction that results in capital gain or loss recognition. Observation: Whether the sale of an asset for the value reported on Form 706 can be excluded from reporting on Form 8971 and the corresponding Schedule A is unclear since no capital gain or loss would be recognized. Identifying the Beneficiary. The executor must provide each beneficiary who receives (or will receive) property reported on Form 8971 with the required information on Schedule A (Form 8971). Sometimes identifying the beneficiary is easy, but other times, it can be challenging. The proposed regulations offer the following clarifications: Life Estates, Remainder Interests, or Contingent Interests. For life estates, the beneficiary is the life tenant; for remainder interests, it is the remainder beneficiary identified as if the life tenant were to die immediately Key Issue 2D

7 706 2/ after the decedent; for contingent interests, it is the beneficiary, unless the contingency has occurred before filing Form 8971 [Prop. Reg (c)(1)]. Trusts, Other Estates, or Other Non-individual. If the beneficiary is a trust or another estate, the executor must provide the Schedule A (Form 8971) to the trustee [not to the trust beneficiary(ies)] or executor. If the beneficiary is a business entity, the Schedule A (Form 8971) must be given to the entity [Prop. Reg (c)(2)]. Undetermined Property to Be Distributed (and thus, Undetermined Beneficiary). If,bytheduedateofForm 8971 (and its Schedule A), the executor does not know what property will be used to satisfy the interest of each beneficiary (and, therefore, cannot know the beneficiary of each property, which is often the situation), the executor must report on Schedule A for each beneficiary all of the property that could be used to satisfy that beneficiary s interest. This creates duplicate reporting and privacy concerns (e.g., families who do not get along with one another will be notified of all assets and their values). The IRS knows this creates duplicate reporting on multiple Schedules A, but this way, each beneficiary will have been advised of the final value of each property that he or she may receive and will therefore be able to comply with the basis consistency rules. Once the exact distribution has been determined, the executor may, but is not required to, file and provide a supplemental Form 8971 and Schedule(s) A [Prop. Reg (c)(3)]. (See Example 2D-3.) Example 2D-1 Reporting all property that could be used to satisfy beneficiaries interests. Marianne s will provides that all of her personal items and household effects are to be distributed among her three children, as determined by their wishes. Marianne s estate is valued at $6 million and is subject to the Section 6035 reporting requirements. Because all property could be used to satisfy each beneficiary s interest, the executor of Marianne s estate must file Form 8971 and Schedules A with the IRS, and all assets must be identified and valued on each of the three beneficiary s Schedule A. Beneficiary Not Located. If the beneficiary is not located by the due date of Form 8971 (and its corresponding Schedule A), the executor must report that on Schedule A and explain the efforts taken to locate the beneficiary. If the beneficiary is later found, the executor must, within 30 days of finding him, provide the beneficiary with his copy of Schedule A and file with the IRS a supplemental Form 8971 with an attached Schedule A for the newly-found beneficiary [Prop. Reg (c)(4)]. Supplemental Reporting for Changes. If there are any adjustments to the information reported on Form 8971 or any of its Schedules A that would cause the information, as reported, to be incorrect or incomplete, the executor must file a supplemental Information Return (in other words, a supplemental Form 8971) with the IRS, including all supplemental Schedules A, and provide a corresponding supplemental Schedule A to each beneficiary affected by the change. Examples of changes requiring a supplemental Form 8971 include [Prop. Reg (e)(2)]: Discovery of property that should have (but was not) reported on Form 706. A change in the value of property after an examination or litigation. A change in the identity of the beneficiary to whom the property is to be distributed (due to death, disclaimer, bankruptcy or otherwise). The executor s disposition of estate property in which the basis of new property received by the estate is determined in whole or in part by reference to the decedent s property. Example 2D-2 Change requiring supplemental reporting. Assume the same facts as in Example 2D-1 except that the IRS contested the value of one of the assets included in Marianne s gross estate and determined it had been undervalued on Form 706 by $400,000. The estate and the IRS reached a settlement agreement that the property had been undervalued by $325,000. The executor must file a supplemental Form 8971, along with the corresponding Schedules A, with the IRS and provide each beneficiary with a copy of his or her supplemental Schedule A. Key Issue 2D

8 /16 Caution: If the final value is later adjusted from the value reported on a prior Schedule A (Form 8971) that was provided to him or her, a beneficiary cannot rely on the value reported on that prior form. The executor may, but is not required to file or furnish a supplemental Form 8971 and Schedule A (Form 8971) for inconsequential errors or omissions (those that cannot reasonably be expected to prevent the beneficiary from receiving correct information to report on his or her tax return). Nor is the executor required to specify the actual distribution of property previously reported as being available to satisfy a beneficiary s interest [Prop. Reg (e)(3)]. (Note that the Form 8971 instructions take a different position on this issue, as discussed later.) The supplemental reporting must generally be filed within 30 days after [IRC Sec. 6035(a)(3)(B); Prop. Reg (e)(4)(i)] determining the property s final value (see the previous discussion of Defining the Final Value ); the executor s discovery of information that is otherwise incorrect or incomplete; or the filing of a supplemental Form 706 that reports property not previously included. However, if any of these events occurs before or on the date the property is distributed to the beneficiary of probate property or property held by a revocable trust at the decedent s death, the supplemental reporting is not due until 30 days after the property is distributed [Prop. Reg (e)(4)(ii)]. Example 2D-3 Change not requiring supplemental reporting. Assume the same facts as in Example 2D-1. Several months after filing Form 8971 and the three Schedules A, Marianne s children decided among themselves who would receive each of the personal and household items from Marianne s estate. The executor may, but is not required to, file a supplemental Form 8971 or corresponding Schedules A. Caution: A penalty can be assessed for failing to comply with this reporting requirement without reasonable cause (IRC Sec. 6721). For additional information, see the following discussion of penalties in the guidance on the new Form 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent). New Form 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent) The IRS recently released Form 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent), which is intended to satisfy the new basis consistency reporting requirement for estates. See Illustration 2-4 for a filled in Form General Filing Requirements. Form 8971 is to be sent separately from Form 706 (i.e., not attached to Form 706). Part I reports the decedent and executor information, and Part II reports the names, TINs, addresses, and dates of service (when the beneficiary was provided with the Schedule A) for all beneficiaries. (Schedule A is discussed later in this key issue.) Who Must File. As previously discussed, the reporting requirement applies to (1) an executor of an estate and other persons required to file Form 706 or Form 706-NA under IRC Secs. 6018(a) and 6018(b) or (2) a qualified heir required to file Form 706-A under IRC Sec. 2032A. It does not apply to an executor who is not required under IRC Sec. 6018(a) to file Form 706. Law Change Alert: According to proposed regulations, a recipient of inherited assets is subject to basis reporting if he or she distributes or transfers (by gift or otherwise) all or any portion of that property to a related person, whether directly or indirectly, the transferor must file a supplemental Schedule A (Form 8971) documenting the new ownership of this property with the IRS and furnish it to the related transferee. For this purpose, a related transferee is any (1) family member as defined in IRC Sec. 2704(c)(2), (2) controlled entity (a corporation or any other entity in which the transferor and members of the transferor s family, whether directly or indirectly, have control), and (3) trust of which the transferor is a deemed owner for income tax purposes (a grantor trust) [Prop. Reg (f)]. For a discussion of a donee s basis and holding period, see Key Issue 23G. Key Issue 2D

9 706 2/ When to File. Form 8971, including all attached Schedule(s) A, must be filed with the IRS and the Schedule A must be provided to the beneficiary listed on that Schedule A no later than the earlier of the date that is 30 days after 1. the date on which Form 706, Form 706-NA, or Form 706-A is required to be filed (including extensions granted, if any) with the IRS, or 2. the date Form 706, Form 706-NA, or Form 706-A is filed with the IRS. If the first Form 706, Form 706-NA, or Form 706-A is filed both after its due date (including extensions granted) and after July 31, 2015, the Form 8971 and Schedule(s) A are due 30 days after the filing date. There is no provision for granting an extension of time for filing Form 8971/Schedule A or providing Schedule A to beneficiaries. Note: The due date of the required statement was delayed until June 30, 2016 (Notice ). Where to File. Form 8971 (including attached Schedules A) should be sent to the IRS at: Department of the Treasury Internal Revenue Service Center Mail Stop #824G Cincinnati, OH A beneficiary can be provided his, her, or its Schedule A in person, by , by U.S. mail, or by private delivery service. The executor of the estate (or other person required to file) must certify on Form 8971 the date on which the Schedule A was provided to each beneficiary and should keep proof of mailing, proof of delivery, acknowledgement of receipt, or other relevant information for the estate s records. In cases where a trust beneficiary or another estate beneficiary has multiple trustees or executors, providing Schedule A to one trustee or executor is sufficient to meet the requirement. Schedule A. A copy of Schedule A is to be provided to the IRS and to each beneficiary (an individual, trust, or other estate) acquiring property from the estate. The beneficiary is to receive only a copy of the Schedule A with his, her, or its own name (not the entire Form 8971, nor copies of Schedule A pertaining to other beneficiaries). All property acquired (or expected to be acquired) by a beneficiary must be listed on that beneficiary s Schedule A. If the executor has not determined which beneficiary is to receive an item of property as of the due date of the Form 8971 and Schedule(s) A, the executor must list all items of property that could be used, in whole or in part, to fund the beneficiary s distribution on that beneficiary s Schedule A. (This means that the same property may be reflected on more than one Schedule A.) A supplemental Form 8971 and corresponding Schedule(s) A should be filed once the distribution to each such beneficiary has been made. Page A-2 (Schedule A Continuation Sheet) is used if additional space is needed to list all the property acquired (or expected to be acquired) by a beneficiary. Attach a copy of each completed Schedule A to Form 8971 and submit to the IRS. If the beneficiary acquired only a partial interest in the property, the executor should indicate the percentage acquired in Part 2, column B, of that beneficiary s Schedule A. Example 2D-4 Reporting distributions to beneficiaries on Schedule A (Form 8971). Amy Kenton died on September 10, 2015, leaving her taxable estate valued at $6 million ($5.772 million after estate tax) equally to her two sons Mark and John. The executor filed her estate tax return (Form 706 and provided individual Form 8971 to Mark and John on June 22, Because Form 8971 is due the earlier of 30 days after Form 706 is required to be filed or 30 days after the date Form 706 is actually filed, Form 8971 is due to the IRS by July 10, A filled in Form 8971 with the Schedule A for Mark is shown in Illustration 2-4.(John sscheduleawillbethesameinpart2,sincehereceiveshalfofthesameproperty.) Supplemental Forms 8971 and Schedule A. If information reported on Form 8971 or a Schedule A that has already been filed with the IRS or provided to a beneficiary changes [because the value, as finally determined (discussed Key Issue 2D

10 /16 previously) changes], the executor or other person required to make this filing must file a supplemental Form 8971 and affected Schedule(s) A with the IRS and provide an updated supplemental Schedule A to each affected beneficiary within 30 days of the adjustment. Note: The Form 8971 instructions and the proposed regulations contradict one another on this issue. According to the form instructions, if the executor has not determined which beneficiary is to receive a particular asset upon the due date of Form 8971 and Schedule A, he must list all items that could be used to fund the beneficiary s interest, and then, once the distribution is actually made, file a supplemental Form 8971 and corresponding Schedule(s) A. According to the proposed regulations, the executor is not required to specify the actual distribution of property previously reported as being available to satisfy a beneficiary s interest [Prop. Reg (e)(3)]. Presumably, the proposed regulations trump the form instructions. On both the supplemental Form 8971 and each supplemental Schedule A, the Supplemental Filing box should be checked and only the information that has changed should be reported. If the executor or other person required to file Form 8971 has been notified that a Form 706, Form 706-NA, or Form 706-A to which the Form 8971 and Schedule(s) A relate has been selected for examination, a copy of the supplemental Form 8971 with attached supplemental Schedule(s) A should be provided to the office conducting the examination. Penalties. If the executor of an estate or other person required to file Form 8971 fails to file a correct Form 8971 and/or Schedule A with the IRS by the due date, and reasonable cause is not shown, a penalty may be imposed under IRC Sec The penalty applies if there is a failure to file timely, a failure to include all information required to be shown on the form or schedule, a failure to include correct information on the form or schedule, or a failure to file a correct supplemental Form 8971 and/or Schedule A by the due date. A complete Form 8971 includes all Schedule(s) A. Only one penalty will apply for all failures relating to a single filing of a single Form 8971 and the Schedule(s) A required to be filed along with it. Each filing of a Form 8971 with Schedule(s) A is a separate filing, regardless as to whether the filing is of the initial Form 8971 and Schedule(s) A or a supplemental Form 8971 and Schedule(s) A. The amount of the penalty depends on when the correct Form 8971 and Schedule(s) A is filed. The penalty is: 1. $50 (for 2015 and 2016) per Form 8971 (including attached Schedule(s) A) if it is filed within 30 days after the due date. The maximum penalty is $500,000 (for 2015 and $532,000 for 2016) per year [or $175,000 for 2015 ($186,000 for 2016) if the taxpayer qualifies for lower maximum penalties] [IRC Secs. 6721(a)(1) and 6721(d)(1)(A)]. 2. $250 ($260 for 2016) per Form 8971 (including attached Schedule(s) A) if it is filed more than 30 days after the due date or if it is not filed. The maximum penalty is $3 million (for 2015 and $3.193 million for 2016) per year [$1 million for 2015 and $1.064 million for 2016 (if the taxpayer qualifies for lower maximum penalties)] [IRC Secs. 6721(a)(1) and 6721(d)(1)(B)]. Caution: Practitioners should monitor additional IRS guidance. KEY ISSUE 2E Notifying the IRS of a Fiduciary Relationship. Filing Form 56 When a fiduciary relationship is created, the fiduciary (e.g., trustee or executor) is required to notify the IRS of the relationship (IRC Sec. 6903). The notice should state the name and address of the person for whom the fiduciary is acting, the nature of the liability of such person, the year or years involved, and should be signed by the fiduciary (Reg ). Form 56 (Notice Concerning Fiduciary Relationship) is available for this purpose. A separate Form 56 (or other notice if Form 56 is not filed) should be filed for each person or entity represented. Thereafter, the fiduciary assumes the powers, rights, and duties of the taxpayer (e.g., grantor or decedent) with respect to all related federal tax matters. Key Issue 2E

11 706 2/ Ideally, notification should be filed as soon as the fiduciary relationship is established. However, it can be attached to the first Form 1041 (or final Form 1040) filed by the fiduciary and must be signed by the fiduciary in the space provided. Generally, satisfactory evidence of the authority for the fiduciary to act for another person in a fiduciary capacity must be available. In the case of court order, satisfactory evidence includes a certified copy of the order, a letters testamentary, or a signed copy of the will or other document identifying the fiduciary. Filing Form 56 will help prevent the IRS from assessing additional tax against the decedent s estate, transferee, etc., without the fiduciary s knowledge. Specifically, if the notice of the fiduciary relationship is not filed with the IRS before it sends a notice of deficiency by registered or certified mail to the last known address of the decedent in accordance with IRC Sec. 6212, or the last known address of the transferee or other person subject to income, estate, or gift tax, no notice of deficiency will be sent to the fiduciary. In such a case, sending the notice to the last known address of the decedent, transferee, or other person will be considered sufficient compliance with the requirements of the Code even if such person is deceased. In such circumstances, if no petition is filed with the Tax Court within 90 days after mailing the notice to the decedent, transferee, or other person, the tax will be assessed immediately upon the expiration of such 90-day period, and demand for payment will be made (Reg ). Thus, the fiduciary benefits from complying with IRC Sec. 6903, which insures that the IRS directs all correspondences, including notice of deficiency, to the fiduciary. Preparation Pointer: According to the Form 56 instructions, a separate Form 56 (or other notice if Form 56 is not used) should be filed for each taxpayer represented. For example, file one Form 56 for the decedent s final Form 1040 (and use the decedent s name and identifying number) and a separate Form 56 for the estate Form 1041 (and use the estate s name and identifying number). Benefit of Filing Form 56 The benefit to the fiduciary of complying with IRC Sec is to ensure the IRS will direct all correspondences, including notices of deficiency, to the fiduciary. Example 2E-1 Form 56 is filed to notify the IRS of a fiduciary relationship. Joe Peete died on August 1, His will named his son, Fred, executor of the estate. Fred filed a final Form 1040 for Joe and a Form 1041 for Joe s estate. Joe s gross estate was below the filing threshold and he did not have a surviving spouse. Thus, his estate was not subject to Form 706 filing. No Form 56 (or other notice) was ever filed with the IRS. On June 3, 2015, the IRS sent Joe a notice of deficiency (i.e., a 90-day letter) concerning a tax shelter deal for the 2012 tax year. The notice was sent by certified mail and returned to the IRS when the Post Office could not make delivery. At the end of the 90-day period, the IRS assessed additional tax for The right to appeal was forfeited because Fred failed to notify the IRS of his fiduciary relationship with Joe s estate. See Illustration 2-2 for a completed Form 56 (establishing a fiduciary relationship with regard to the Form 1040) that Fred could have filedwhenhewasappointedexecutor. Observation: If Form 1041 for the estate will be filed before Form 706, completing another Form 56 (on behalf of the estate) will satisfy the notification of a fiduciary relationship. Note that no special notice of qualification as executor of an estate is required to be filed. The requirement of IRC Sec for notification of qualification as executor of an estate is satisfied by the filing of the estate tax return (Reg ). Terminating a Fiduciary Relationship When the fiduciary relationship has terminated, the fiduciary must file written notice of the termination in order to be relieved of any further duty regarding IRS matters. Part II of Form 56 (revised in 2015) can be used for this notice. Discharge of Executor s Liability The executor remains personally liable for the tax, including any related penalties, although the IRS will first seek to collect tax from the taxpayer s estate or from the estate of the transferee (heir, donee) of the taxpayer s property Key Issue 2E

12 /16 (Regs and ). Discharge of the fiduciary by the state probate court does not terminate his personal liability for federal taxes [Reg (b)-2]. The IRS clarified the circumstances when an executor is personally liable for the estate s liability when assets have been distributed to beneficiaries. If the executor knew or should have known about an outstanding IRS claim, or if the executor received assets as an estate beneficiary, he or she can be held liable for estate debts (CCA ). IRC Sec allows the executor of an estate to make written application for release from personal liability from the decedent s income and gift taxes after the filing of the applicable returns. IRC Sec allows the executor of the estate to make written application for release from personal liability for the estate tax. (See Key Issue 22G for a discussion of requesting a discharge of personal liability for the executor.) Observation: Because of their personal liability for estate tax, executors are usually advised to defer distributions to beneficiaries until an estate tax closing letter is received. Law Change Alert: For returns filed after May 31, 2015, the IRS will not automatically issue an estate tax closing letter. The letter will only be issued if it is requested by the taxpayer. An alternative to receiving an estate closing letter is an account transcript, available online to registered tax professionals using the Transcript Delivery System (TDS) or to authorized representatives making requests using Form 4506-T. The transcript containing the transaction code 421 indicates that Form 706 has been accepted as filed or that the examination is complete. If code 421 is not shown, the tax return is still under review. Those requesting the letter or transcript should wait four to six months after filing the estate tax return to allow the IRS time to process the return. KEY ISSUE 2F Supplemental Returns, Claims for Refund, and Protective Claims. After an estate tax return is filed, additional information may become available, which if known when the return was filed, would have resulted in a different tax liability. For example, estate litigation that could affect the calculation of the final estate tax is pending and a resolution will not be reached prior to the time the return is due. Once the litigation is resolved, an accurate calculation of the estate tax is made. The correct tax calculation may be more or less than the tax liability reported on the original return. If additional information is located, a supplemental Form 706 or a Form 843 (Claim for Refund and Request for Abatement) may be filed. Amending Estate Tax Returns Even though the originally filed Form 706 reflected what was known initially, facts discovered post-filing may require or justify making changes to the return. The appropriate form to file depends on what changes need to be made. The Internal Revenue Code does not technically provide for amending estate tax returns. However, supplemental information may be filed with the IRS to obtain a redetermination of the estate tax by filing another Form 706 [Reg (d)]. If additional assets are discovered or other issues arise that would cause an increase to the tax due, a supplemental Form 706 needs to be filed. The revised Form 706 should include the words Supplemental Information across the top of page 1 and copies of pages 1, 2, 3, and 4 of the original Form 706 (or audited Form 706 if values were changed) should be attached. If the executor has been notified of an estate tax examination, additional information should be provided to the office conducting the examination. Filing the Refund Claim If the supplemental information being submitted creates a request for refund, Form 843 (Claim for Refund and Request for Abatement) can be completed in lieu of the Supplementary 706. To receive an estate tax credit or refund from the IRS, a taxpayer must generally file a claim within the later of three years from filing the estate tax return or two years from paying the tax [IRC Sec. 6511(a)]. However, if the refund is based on a state or foreign death tax credit, generally the claim must be filed within four years of filing the estate tax return [IRC Secs. 2011(c) and 2014(e)]. When a refund is barred because the claim was not filed timely, court ordered equitable recoupment may offset the estate tax overpayment against the decedent s gift or income tax deficiencies. The equitable recoupment remedy requires that (1) the refund is barred by time; (2) the refund arose from the same transaction, item, or taxable event as the deficiency; and (3) the transaction, item, or taxable event affected (or was subjected to) two taxes. In addition, when the transaction, item, or taxable event involves two or more taxpayers, there must be a basis for treating the taxpayers as one. Key Issue 2F

13 706 2/ A failure to deduct pending income tax deficiency claims for estate tax purposes has been held to meet the requirements for equitable recoupment. Thus, estate tax overpayments were applied to the decedent s income tax deficiencies (Bartels Estate and Orenstein Estate). In another case, the court ruled that the government was entitled to equitable recoupment of estate taxes to the extent tax would have been imposed on an estate for which an erroneous QTIP election was claimed. The QTIP property was included in the wife s estate (the surviving spouse), but later, estate representatives asserted claims for refund based on the fact that the trust should have been taxed in the first (husband s) estate. The court found that the requirements for equitable recoupment were satisfied, but denied the government s claim to interest on the unpaid tax (Buder). Claims for credit or refund can be either formal or informal. Formal claims are filed by the taxpayer on the proper IRS form. Form 843 (Claim for Refund and Request for Abatement) can be used to claim a refund of estate, gift, or excise tax. A separate claim on Form 843 must be filed for each type of tax and for each tax period [Reg (d)]. An informal claim for refund can be submitted in any other form of writing. The IRS does not consider an oral request, either by telephone or interview, as a formal or informal claim. However, the U.S. District Court in Ohio allowed a refund claim filed after two years from the payment date. Communications between an executor and the IRS was considered an informal claim within the two-year statute of limitations that was later perfected by filing Form 843 (Wilshire). Observation: A claim for refund must be made by the taxpayer. A suit filed by a decedent s closely held corporation and its president that sought recovery of estate taxes was dismissed because neither the corporation nor its president was the taxpayer (Center Heights Lumber Co.). Caution: Filing a supplemental Form 706 or a claim for refund on Form 843 will reopen a closed estate. The entire estate, not just the issues raised on the claim or supplemental return, can be reexamined. Protective Claim for Ponzi Schemes According to an IRS spokesperson, there are no immediate plans to issue guidance for how to report investments where the decedent has been the victim of an investment theft. Although guidance has been issued for income tax related issues (Rev. Rul , Rev. Proc , and Rev. Proc ), there are still many unanswered questions. Until some of issues are resolved so that guidance can be issued, the IRS spokesperson suggested filing a protective claim for refund at the same time Form 706 is filed. See Key Issue 4B for additional discussion of reporting such investments. Section 2053 Protective Claim for Refund Regulations prohibit a deduction for claims against a decedent s estate until the obligation is fixed and certain to be paid (Regs and ). However, the certainty or amount of the claim against the estate may not be known when the estate tax return is filed or before the time for filing a claim for refund expires. The executor of the estate can preserve the right to deduct the payment by filing a protective claim for refund before the statute of limitation expires. Note: In October 2011, the IRS released guidance on the procedure for filing a protective claim for refund and for notifying the IRS of the settlement of a claim related to IRC Sec (Rev. Proc ). The guidance provided in the revenue procedure applies only to Section 2053 protective claims. Procedures for Filing the Section 2053 Protective Claim for Estates Created after Protective refund claims for decedents who die after December 31, 2011, are made by filing Form 843 as described previously, or by filing Schedule PC with Form 706. The schedule is also used to notify the IRS that a claim has been settled and that the refund request is ready for consideration, as discussed later in this key issue. If the initial protective claim for refund is submitted after Form 706 has been filed, the protective claim should be filed on Form 843 (Claim for Refund and Request for Abatement) rather than Schedule PC. Caution: Schedule PC is used only for protective claims for refund associated with IRC Sec Key Issue 2F