ARTICLE * Making the Portability Election Simpler: Rev. Proc , I.R.B. 1282

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1 ARTICLE * Making the Portability Election Simpler: Rev. Proc , I.R.B. 282 Keri D. Brown & Benjamin A. Cohen-Kurzrock On June 0, 207, the I.R.S. released Rev. Proc , I.R.B. 282, which provides ordinary millionaires (i.e., people with a gross estate and adjusted taxable gifts below the basic exclusion amount, which is currently $5.49 million) some regulatory relief with respect to making a portability election. Under Rev. Proc , that portability election must be made on or before January 2, 208, or the second anniversary of the decedent s date of death. It, therefore, may be important to act fast in some (older) cases. Otherwise, a surviving spouse may be unable to take advantage of a deceased spousal unused exclusion ( DSUE ) amount. This article summarizes Rev. Proc and some of the issues it addresses. I. The Estate Tax Return, the DSUE Amount, and the Portability Election Certain legal issues provide the backdrop upon which Rev. Proc is placed. Those issues include the instances in which an executor is obligated to file an estate tax return, the unified credit against the estate tax (and the DSUE amount), and the portability election, all of which are discussed below. The I.R.C. does not require every estate to file an estate tax return; rather, I.R.C. 608 requires that an executor file an estate tax return if the gross estate of the decedent exceeds the applicable basic exclusion amount (or $60,000 in the case of a nonresident). I.R.C. 200 establishes that the basic exclusion amount is $5 million, adjusted for inflation each year after For 207, the amount equals $5.49 million. 3 I.R.C. 200 also establishes a unified credit against the estate tax equal to (A) the basic exclusion amount, plus (B) in the case of a surviving spouse, the DSUE amount. 4 As its name suggests, the DSUE amount is equal to the unused portion of the deceased spouse s unified credit. 5 A portability election is required for a surviving spouse to take advantage of a DSUE amount. 6 The portability election is an irrevocable election made by the executor on the timely filed estate tax return of the deceased spouse. 7 The due date for an estate tax return is nine months after the decedent s date of death, plus any extensions granted by the I.R.S. 8 Estates that are not otherwise required to file an estate tax return pursuant to I.R.C. 608 may apply for Treas. Reg relief to obtain an extension of time within which the portability election may be made. 9 In cases other than those in which certain automatic extensions are sought, 0 the I.R.S. will grant a taxpayer s request for Treas. Reg relief provided that there is sufficient evidence establishing that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government

2 II. A Simpler Way to Obtain an Extension of Time to Make a Portability Election After issuing several letter rulings granting Treas. Reg relief to make portability elections, the I.R.S. determined that it was appropriate to provide a simplified method by which an extension of time to make a portability election could be obtained. 2 Thus, under Rev. Proc , an executor of an estate was deemed to have received an automatic extension of time to make a portability election if the following requirements were met: () The taxpayer was the executor of the estate of a decedent who (a) has a surviving spouse, (b) died after December 3, 200, and on or before December 3, 203, and (c) was a citizen or resident of the United States on the date of death; (2) The taxpayer was not required to file an estate tax return under I.R.C. 608(a); (3) The taxpayer had not already filed a timely estate tax return before the effective date of Rev. Proc (January 27, 204); (4) The taxpayer filed a complete and properly-prepared estate tax return on or before December 3, 204; and (5) The top of the estate tax return included a statement that it was FILED PURSUANT TO REV. PROC TO ELECT PORTABILITY UNDER 200(c)(5)(A). 3 By its terms, Rev. Proc did not apply to decedents who died after December 3, 203. The practice of obtaining an extension of time to make a portability election through a letter ruling seeking Treas. Reg relief, therefore, resumed. 4 After granting numerous rulings, the I.R.S. recognized the need for continuing relief for estates not otherwise required to file an estate tax return (and for itself, considering the administrative burden associated with reviewing letter ruling requests that were apparently invariably granted). 5 Rev. Proc provides that relief. Under Rev. Proc , an executor of a decedent s estate is deemed to have made a timely portability election (without actually having to file for Treas. Reg relief) if the following requirements (which are substantially similar to the requirements for using the simplified method under Rev. Proc ) are met: () The decedent (a) was survived by a spouse, (b) died after December 3, 200, and (c) was a citizen or resident of the United States on the date of death; (2) The executor is not required to file an estate tax return under I.R.C. 608(a) as determined based on the value of the gross estate and adjusted taxable gifts and without regard for the need to file for portability purposes;

3 (3) The executor did not file an estate tax return within the time required by Treas. Reg (a)() for filing an estate tax return; 6 (4) The executor files a complete and properly prepared Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on or before the later of January 2, 208, or the second annual anniversary of the decedent s date of death; 7 and (5) The top of the estate tax return includes a statement that it is FILED PURSUANT TO REV. PROC TO ELECT PORTABILITY UNDER 200(c)(5)(A). 8 The simplified method provides the exclusive means by which an extension of time to make a portability election may be obtained for situations in which requirements () through (3) (described immediately above) are satisfied. 9 For cases that fall outside the scope of Rev. Proc , it may still be possible to pursue Treas. Reg relief. 20 III. Conclusion and Practice Considerations Rev. Proc appears to provide taxpayers with an efficient method by which a portability election may be made. A proper portability election may have real value to a surviving spouse, as the DSUE amount could offset a tax liability. It follows that practitioners may want to keep the following considerations in mind when thinking about Rev. Proc Mark January 2, 208, on your calendar. That date is important under Rev. Proc because it is the earliest date after which the I.R.S. may determine that a portability election was untimely for cases subject to Rev. Proc Review (older) client files of first-to-die spouses. It is very possible that an estate tax return was not filed after the death of a first-to-die spouse who was an ordinary millionaire. When the client file of a first-to-die spouse is reviewed, it is important to verify that it contains a complete and properly prepared estate tax return. If it does not, steps should be taken to determine whether filing an estate tax return to make the portability election is appropriate. Evaluate how a gift or estate tax audit may affect the portability election when determining the time at which to file an estate tax return. The I.R.S. has three (or, in some cases, more) years after the gift or estate tax return is filed to audit that return and assess additional tax. 2 If the Commissioner audits an estate tax return in which a portability election is made using Rev. Proc and it is determined 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 under 608(a), then the deemed extension of time to make the portability election is null and

4 void ab initio. That could mean that the surviving spouse is unable to take advantage of the DSUE amount. Keep refund opportunities in mind. As a preliminary matter, the I.R.S. made clear that it will return all users fees for pending letter ruling requests as of June 9, 207, seeking Treas. Reg relief to make a portability election. 2 The I.R.S. also made it clear that overpayments of gift or estate tax of the surviving spouse by applying the DSUE amount will not reopen or extend the time within which a claim for refund pursuant to I.R.C. 65(a) must be made. 3 Thus, for the surviving spouse (or his or her estate) to claim a refund arising out of that type of overpayment, a timely claim for refund (or, in some cases, a timely protective claim for refund) should be filed. 4 The materials in this article are made available by Baker Botts L.L.P. for informational purposes only and should not be considered as formal legal advice. Persons should not act upon information in this article without seeking professional legal counsel. Keri D. Brown is a partner at Baker Botts L.L.P. Keri handles federal estate, gift, and income tax litigation and controversy work, including disputes and litigation with the Department of Justice and the I.R.S. She has assisted clients in cases in the United States Tax Court, United States District Courts, and United States Courts of Appeals. She also represents fiduciaries of trusts and estates in state courts with respect to administration and fiduciary duty issues. Benjamin A. Cohen-Kurzrock (J.D., C.P.A.) is an associate at Baker Botts L.L.P. Benjamin s practice focuses on all aspects of next generation planning and controversies for high net worth clients, including () federal estate, gift, and generation skipping transfer tax considerations, (2) the design and use of trusts and closely held entities, (3) valuation of business interests and other hard to value assets, and (4) trust and estate administration. He also represents fiduciaries of trusts and estates in state courts with respect to administration and fiduciary duty issues. I.R.C. 608(a)()-(2). 2 I.R.C. 200(c)(3) 3 Rev. Proc , I.R.B. 707, I.R.C. 200(a), (c)(2). 5 I.R.C. 200(c)(4); Treas. Reg (d)(4). 6 I.R.C. 200(c)(5)(A). 7 I.R.C. 200(c)(5)(A); Treas. Reg (a). The election is a component of Part 6 of the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. See Treas. Reg (a)(2) (automatic opt-in election). 8 I.R.C. 6075(a); Treas. Reg Treas. Reg (a)(). 0 See generally Treas. Reg Treas. Reg (a). 2 Rev. Proc , I.R.B. 53, 2.03(3). Rev. Proc , I.R.B. 282, Rev. Proc , I.R.B. 282, Rev. Proc , I.R.B. 282, Rev. Proc , I.R.B. 282,

5 3 Rev. Proc , I.R.B. 53, Rev. Proc , I.R.B. 282, 2.02(4). 5 Rev. Proc , I.R.B. 282, 2.02(4)-(5). 6 Because an executor automatically makes a portability election by filing a timely estate tax return, the simplified method is not necessary for those returns. 7 To determine whether an estate tax return is complete and properly prepared, see Treas. Reg (a)(7). 8 Rev. Proc , I.R.B. 282, 3.0, Rev. Proc , I.R.B. 282, Rev. Proc , I.R.B. 282, I.R.C. 650(a), (e)(2). For a return filed early, the limitations period begins to run on the due date for that return. I.R.C. 650(b)(). Inadequately disclosed gifts may be particularly insidious because of their limitations period. I.R.C. 650(c)(9); see Treas. Reg (c)-(f)(2)-(4) (adequate disclosure requirements)