Wednesday, December 18, 2013

Estate Tax Portability -- What Is A Complete And Properly-Prepared Estate Tax Return?

Lewis Saret, for Forbes writes: To make a valid portability election, the Service requires a decedent’s estate to make the election on a timely filed estate tax return that is “complete and properly-prepared.”

Issue. In general, executors who are required to file an estate tax return under Internal Revenue Code (“Code”) Sec. 6018(a) must establish and substantiate the values reported on the return in order for it to be considered complete and properly-prepared. However, some executors are not required to file an estate tax return under the Code and would only choose to do so for the purpose of making the portability election. As a result, there is an issue regarding the cost and burden associated with filing an estate tax return and establishing and substantiating the values on the return solely to elect portability.

Rule. The temporary portability regulations provide that an estate tax return that meets all applicable requirements is considered a “complete and properly-prepared” estate tax return. However, the regulations provide an exception for executors of estates that are not otherwise required to file an estate tax return under Code Sec. 6018(a). For estates filing an estate tax return solely to elect portability, the executor does not have to report the value of certain property that qualifies for the marital or charitable deduction.

If an executor uses this exception when filing an estate tax return, the executor must estimate the total value of the gross estate, including the values of property that do not have to be reported under this special rule.  The preamble to the temporary regulations indicates that the instructions for filing an estate tax return will provide ranges of dollar values, and the executor must identify on the estate tax return the particular range within which falls the executor’s best estimate of the total gross estate.

Caution. The temporary regulations provide several instances where this special rule is not available for certain types of marital deduction or charitable deduction property.

Caution. The inquiry required to determine the executor’s best estimate is the same an executor of any estate must make under current law to determine whether the estate is required to file an estate tax return pursuant to Code Sec. 6018(a).

Caution. The general catch-all relief provisions found in the Treasury Regulations will not apply to a missed portability election because the portability election is a statutory election. Generally, the IRS is not authorized to offer relief for statutory elections that are also regulatory elections. While Treasury Regulations do allow for extensions for certain statutory elections if the taxpayer timely filed the return but failed to make the election, it is unclear whether this relief is available for a missed filing of an estate tax return to make the portability election.

This post discusses one of several issues concerning how to make a valid portability election.  Future posts will discuss other key issues.  Written with assistance from Allaya Lloyd.


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