In Revenue Procedure 2014-18 issued on Jan. 27, 2014,1 the Internal Revenue Service announced a simplified method for certain taxpayers to make a portability election for smaller estates that didn’t timely file an estate tax return to elect portability. Without this Rev. Proc., those taxpayers needed to request a private letter ruling from the IRS in accordance with Treasury Regulations Section 301.9100-3 and pay a user fee of up to $10,000 to obtain relief. Rev. Proc. 2014-18 will allow taxpayers who meet certain criteria to obtain an extension of time to make a portability election simply by filing an estate tax return in accordance with the procedure the IRS has set forth.
A portability election is an election under Internal Revenue Code Section 2010(c)(5)(A) to transfer a decedent’s unused exclusion amount (known as a deceased spousal unused exclusion (DSUE) amount) to the decedent’s surviving spouse. If a portability election has been made, the surviving spouse will have her own exclusion amount ($5.34 million in 2014 less certain lifetime gifts) plus the DSUE amount. The surviving spouse can then use the DSUE amount, with some restrictions,2 with her remaining exclusion amount to make gratuitous transfers during life and at death before being subject to federal gift and estate tax.
This election is particularly important when the surviving spouse has assets that may trigger federal estate tax on her death that could be sheltered by the DSUE amount. The example used in the Rev. Proc. involves a decedent dying in 2011 with a $2 million estate and a surviving spouse who dies later in 2011 with an $8 million estate. If a portability election had been made on the decedent’s estate tax return, the remaining exclusion amount of $3 million would have been transferred to the surviving spouse. In such case, the surviving spouse would have had $8 million of exclusion ($5 million exclusion amount plus $3 million DSUE amount), and the estate wouldn’t have to pay a federal estate tax. If a portability election wasn’t made, the surviving spouse’s estate would owe estate tax on the amount over the surviving spouse’s $5 million exclusion.
To qualify for the simplified method under Rev. Proc. 2014-18, the decedent must have had a surviving spouse, died after Dec. 31, 2010 and on or before Dec. 31, 2013 and been a U.S. citizen or resident at death. In addition, the executor must not have been required to file an estate tax return under IRC Section 6018(a) (as determined based on the value of the gross estate and adjusted taxable gifts), and the executor must not have filed an estate tax return within the time prescribed for filing to elect portability.3
If the taxpayer meets the foregoing criteria, a portability election can be made for the estate by filing a Form 706 estate tax return no later than Dec. 31, 2014. The return must be properly completed in accordance with the Temporary Treasury Regulations for returns filed to elect portability4 and must indicate that it’s being filed pursuant to the Rev. Proc.5
If the taxpayer qualifies and files the estate tax return in accordance with the procedure set forth, the taxpayer will be deemed to meet requirements of Treas. Regs. Section 301.9100-3, and the Form 706 will be considered to have been timely filed. Importantly, the taxpayer isn’t required to produce evidence to establish that the taxpayer acted reasonably and in good faith and that the grant of relief won’t prejudice the interests of the government, as is typically required in a request for Section 301.9100 relief. This criteria is deemed to be satisfied under Rev. Proc. 2014-18. If the estate tax return is properly filed pursuant to this procedure, the executor will receive an estate tax closing letter acknowledging receipt of the return.
The Rev. Proc. also confirms that a protective claim for refund can be filed with respect to a surviving spouse’s estate tax return pending the filing of an estate tax return for the first deceased spouse and granting of a portability election. A claim for refund on an estate tax return must be filed within the earlier of three years from the date of filing and two years from the date of payment.6 The Rev. Proc. doesn’t extend this deadline, but it’s possible that a claim for refund would need to be filed before the deadline to file for the portability election in accordance with Rev. Proc. 2014-18.
Rev. Proc. 2014-18 provides a cost-efficient method to elect portability for those taxpayers who didn’t have sufficient information to make the election timely and were not otherwise required to file an estate tax return. In addition, this relief will affect the estates of decedents who were in same-sex marriages and couldn’t have filed an estate tax return to elect portability until the aftermath of the Supreme Court’s recent decision striking down section 3 of the Defense of Marriage Act made this possible.7
Importantly, Rev. Proc. 2014-18 doesn’t provide relief when the executor was required to file an estate tax return because the size of the gross estate with adjusted taxable gifts exceeded the decedent’s exclusion amount or when the executor filed an estate tax return timely but failed to elect portability.
For taxpayers who might otherwise qualify but don’t satisfy the procedural requirements or for estates of decedents dying after Dec. 31, 2013, Section 301.9100-3 relief will continue to be available to request an extension of time to make a portability election.
This Rev. Proc. comes exactly four months after the American Bar Association, Section of Real Property, Trust and Estate Law (RPTE) submitted comments to the IRS, recommending a simplified procedure to make a portability election for executors who would have otherwise had to request Section 301.9100-3 relief. In support of its recommendation, the RPTE comments cited the newness of both portability and the election method, the fact that the temporary portability regulations weren’t issued until June 2012 describing the procedure for estates not otherwise required to file a return and the cost to smaller estates to request a ruling to obtain 9100 relief. The RPTE comments further noted that in light of the foregoing, many of the relief requests would likely be granted, and therefore, a simplified procedure would ultimately be a cost-savings for the government. Rev. Proc. 2014-18 doesn’t address the second recommendation made by RPTE with respect to Section 301.9100-2 relief for taxpayers who filed a timely return that failed to elect portability and amended the return within six months of the due date of the original return.
If a taxpayer made a request for relief that’s pending in the national office as of Jan. 27, 2014, a taxpayer who would otherwise qualify for the simplified procedure under Rev. Proc. 2014-18 may withdraw the PLR request and receive a refund of the user fee. Pending PLRs will be processed if the taxpayer doesn’t notify the national office before March 10, 2014, or the issuance of its letter ruling, if earlier, that the taxpayer will rely on the Rev. Proc. and withdraw its request.
1. Revenue Procedure 2014-18, 2014-7 IRB.
2. See Treasury Regulations Section 20.2010-3T.
3. See Treas. Regs. Section 20.2010-2T(a)(1).
4. Treas. Regs. Section 20.2010-2T(a)(7).
5. Specifically, under Section 4.01(2) of Rev. Proc. 2014-18, there should be a statement at the top of the Form 706 which reads “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”
6. Section 6511(a).
7. See United States v. Windsor, 111 AFTR 2d 2013-2385 (S. Ct June 26, 2013), Rev. Rul. 2013-17, 2013-38 IRB 201.