• New revenue procedure provides method to obtain extension of time to make portability election for certain estates—Revenue Procedure 2014-18 describes the method for applying for an extension to elect portability for a decedent’s unused exclusion amount on Form 706. Under Internal Revenue Code Section 2010 and the temporary regulations issued in 2012 (Temporary Regulations Section 20.2010-2T), a portability election is effective only if made on a Form 706 that’s filed within nine months of a decedent’s date of death or the last day of a period covered by an extension if one has been obtained.
The Rev. Proc. provides that the executor of a decedent’s estate may apply for an extension of the deadline to make a portability election if the decedent: (1) had a surviving spouse, (2) died between Dec. 31, 2010 and Dec. 31, 2013, (3) was a U.S. citizen or resident, (4) wasn’t required to file a return under IRC Section 6018(a) based on the value of the gross estate and adjusted taxable gifts, (5) failed to file an estate tax return within the time required by the temporary regulations, and (6) files a complete Form 706 beforeDec. 31, 2014. The definition of what constitutes a complete return is found in Temp. Regs. Section 20.2010-2T and allows for certain streamlined procedures for reporting the value of property that’s eligible for the marital or charitable deductions. The executor is instructed to note at the top of the Form 706 that it’s “Filed Pursuant to Rev. Proc. 2014-18 To Elect Portability Under 2010(c)(5)(A).” If the decedent meets the above requirements, the election will be considered timely and the taxpayer will receive an estate tax closing letter acknowledging receipt of Form 706.
The Rev. Proc. acknowledges United States v. Windsor, which held the terms “spouse,” “husband” and “wife” include persons of the same sex who are married to each other and notes Revenue Ruling 2013-17, which provided that the Windsor holding will apply prospectively as of Sept. 16, 2013. Therefore, executors for decedents who meet the above requirements and had same-sex surviving spouses are eligible to apply for extensions of portability as well.
Regarding claims for refunds, the Rev. Proc. explains that a surviving spouse who wishes to obtain a credit or refund (based on the portability election for the decedent spouse made according to the Rev. Proc.) must file for one before the expiration of the limitations period under IRC Section 6511(a), which is within the later of: (1) three years from the time the surviving spouse’s return was filed, or (2) two years from the time the tax was paid by the surviving spouse, regardless of whether the executor of the decedent’s estate has applied for an extension of the portability election. If the decedent spouse’s application to extend portability hasn’t been filed by the time the surviving spouse files for a credit or refund, the surviving spouse’s filing will be treated as a protective claim for credit or refund.
• Proposed regulation issued on determining basis in interests in tax-exempt trusts—In 2008, the Internal Revenue Service designated certain transactions with charitable remainder trusts (CRTs) as transactions of interest. The transactions of interest were those in which: (1) a taxable beneficiary transferred appreciated assets to a CRT, (2) the CRT sold the appreciated assets and reinvested the proceeds, and (3) the taxable beneficiary then sold his entire term interest in the CRT. In the transactions, the taxable beneficiary took the position that his basis was a share of the uniform basis of the trust after the reinvestment—which would be the basis of the purchased assets. Therefore, through this series of transactions, the beneficiary obtained the benefit of reinvesting the appreciated assets without being subject to capital gains tax.
When a beneficiary sells his entire interest in a trust, IRC Section 1001(e)(3) applies such that the seller realizes capital gains on the excess of the amount realized from the sale of the trust interest over the seller’s basis in the trust interest. The basis of an interest in a trust is determined under Treasury Regulations Section 1.1014-5, which allocates the adjusted uniform basis using the factors for valuing life estates and remainder interests. The proposed regulations, however, amend Treas. Regs. Section 1.1014-5 to adjust the basis of a term interest in a charitable trust by reducing it by: (1) the amount of undistributed net ordinary income, and (2) undistributed net capital gain. In this manner, the seller’s basis is adjusted to exclude a share of the built-in capital gains, therefore causing the seller to recognize his share of the gain.
The proposed regulation, NPRM REG-154890-03 (Jan. 17, 2014) would apply to sales and dispositions of interests in charitable remainder annuity trusts or charitable
remainder unitrusts occurring on or after Jan. 1, 2014.
• Private letter ruling determines that reorganization won’t terminate estate tax payment deferral under IRC Section 6166—In PLR 201403012 (Sept. 25, 2013), the IRS ruled that a reorganization of an estate’s interest in a business wouldn’t affect its election to defer the payment of estate tax attributable to the business interest under Section 6166.
The decedent died owning interests in several closely held general partnerships, limited liability companies (LLCs) and corporations. The estate timely filed Form 706 and made an election under Section 6166 to defer the payment of estate tax related to those interests.
One of the general partnerships owned interests in real estate. The general partnership planned to distribute each of the properties to its partners, pro rata, which included the estate. Then, the estate planned to contribute each real estate interest to a new LLC. The new LLC would continue the active business of managing the real estate previously run by the general partnership. There was no withdrawal of money or other property. The proposed transaction simply converted the ownership of the interests in the real estate from a general partnership to an LLC.
The estate requested a PLR to ensure that the transaction wouldn’t jeopardize the estate tax payment deferral it had obtained under Section 6166. Under Section 6166(g), if a portion of an interest in a closely held business that qualifies for the deferral is distributed, sold or otherwise disposed of, or money or other property attributable to such an interest is withdrawn, and the aggregate of such distributions, sales, exchanges or withdrawals equals or exceeds 50 percent of the value of the trade or business, then the extension ceases to apply and any unpaid portion of the tax is required to be paid on demand by the IRS. The estate’s interest to be transferred from the general partnership to the LLC exceeded the 50 percent threshold so the question was whether the transfer was a “distribution, sale, exchange or other disposition” under Section 6166(g).
The PLR held that because the transaction allowed the business to continue to operate in substantially the same manner, it didn’t materially alter the business. In addition, the estate claimed there would be no withdrawal of money or other property: The decedent’s estate held the same proportionate interest in each LLC as it had in the general partnership. For all these reasons, the transaction wouldn’t accelerate installment payments of the estate tax, and the deferral under Section 6166 continued.