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Automatic Relief for Missed Portablility Elections: IRS Issues Revenue Procedure 2014-18

Posted in Estate and Gift Tax

The Internal Revenue Service just released Revenue Procedure 2014-18, which provides relief for surviving spouses who missed the opportunity to take advantage of portability under the new estate tax law.

Portability refers to a surviving spouse’s right under the new tax law to “inherit” her deceased spouse’s unused federal estate tax exclusion.  Portability is not an automatic right.  It requires an election on a timely filed federal estate tax return (Form 706).  Before this revenue procedure, if an executor failed to timely file Form 706 to elect portability, the surviving spouse lost the right to her deceased spouse’s unused exclusion amount.  With the top federal estate tax rate at 40% and the exclusion amount now over $5 million, the estate tax cost of this missed filing could exceed $2 million.

The relief granted under the revenue procedure applies only if:

  1. The decedent died after December 31, 2010, and on or before December 31, 2013;
  2. The decedent was survived by a spouse;
  3. The decedent was a citizen or resident of the United States;
  4. No Form 706 was required to be filed because the value of the gross estate and adjusted taxable gifts did not reach the filing limit; and
  5. No Form 706 was timely filed.

If these five conditions are satisfied, then the failure to file can be cured if Form 706 is filed before December 31, 2014 and the person filing the return states at the top that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)”.

In addition, if the failure to elect portability resulted in the payment of estate tax by the estate of the second spouse to die, then a refund is likely available.  Generally, a claim for refund must be filed by the later of: (a) three years from the date Form 706 is filed; or (b) within two years of the payment of the tax.

The revenue procedure provides this example of how the relief is intended to work:

  • Predeceasing spouse (S1) dies on January 1, 2011, survived by a spouse, S2.  S1 has a gross estate of $2 million and made no taxable gifts, so no Form 706 was required and no Form 706 was filed.
  • S2 dies on January 14, 2011 with a taxable estate of $8 million.
  • S2′s executor files Form 706 on October 14, 2011, and pays the estate tax on the $3 million in excess of S2′s $5 million applicable exclusion amount.
  • Assuming S1 files a Form 706 under this revenue procedure, S2′s executor can get a refund of the estate tax paid, so long as S2′s refund claim is filed on time.

The example shows that it is possible that the deadline for filing a claim for refund (in the example, October 14, 2014) could pass before the deadline for filing Form 706 under the revenue procedure (December 31, 2014).  If that happens, then the claim for refund would be a protective claim, which would be processed only after S1′s Form 706 was filed.

This revenue procedure appears to be the Service’s attempt to put taxpayers in traditional marriages on the same footing with taxpayers in same sex marriages.  The revenue procedure references the Windsor case and Revenue Ruling 2013-17, which was issued shortly after Windsor.  Revenue Ruling 2013-17 allows a taxpayer in a same sex marriage to amend tax returns and file claims for refunds in cases where marital status affects a tax filing.  Portability is just one example of why a partner in a same sex marriage would benefit from being recognized as married for federal tax purposes.

Regardless of the reason for its issuance, Revenue Procedure 2014-18 is a gift to any surviving spouse who missed out on a portability election.  In cases where this mistake resulted in the surviving spouse’s estate paying estate tax, the amount of this gift could be in excess of $2 million!