Election Out of Estate Taxation and Filing Form 8939
Notice 2011-66. On August 5th the Internal Revenue Service issued Notice 2011-66, which provides long-awaited guidance on the procedures for filing Form 8939. Form 8939 permits executors administering the estates of decedents who died in 2010 to elect out of estate taxation and into the carryover basis rules of Code § 1022. Form 8939 also provides the method for allocating basis among the assets of a decedent who died in 2010.
Generally, an executor must file Form 8939 on or before November 15, 2011. If an executor files Form 8939 prior to November 15, 2011, the executor may amend or revoke the Form 8939 before November 15, 2011. Importantly, however, the IRS will not grant extensions of time to file a Form 8939 and will not accept any Form 8939 or any amended Form 8939 filed after November 15, 2011 (with limited exceptions described below).
Unusually, the IRS has issued guidance on Form 8939 before issuing the final version of the Form. Moreover, while the IRS has previously stated that Form 8939 would not be due any sooner than 90 days from the date the Form is released, it appears that the IRS may not release the final version of the Form until sometime this fall. Nevertheless, the IRS has also issued Rev. Proc. 2011-41, which provides safe harbor guidance regarding property acquired from estates of decedents who died in 2010. Executors should review Rev. Proc. 2011-41, in addition to Notice 2011-66.
Executor Defined. The “executor” is responsible for filing Form 8939. For purposes of these rules, references to an “executor” shall be construed in the same manner as Code § 2203. Accordingly, if an executor has been appointed and qualified under state law, the IRS generally will only accept a Form 8939 filed by such executor. If an executor has not been appointed under state law, any person in actual or constructive possession of property acquired from the decedent may file a Form 8939 for property that he or she actually or constructively possesses.
Where a decedent has been able to avoid probate by funding a revocable trust during his or her lifetime, the filing duties will typically fall on the trustee or trustees of the decedent’s revocable trust. There could be circumstances, however, where there are several trusts in existence, or several persons in “constructive” possession of a decedent’s assets at death. In such circumstances, filings would then need to be coordinated among the “executors” of the decedent’s estate.
Effects of Filing Both Form 706 and Form 8939. If one or more executors file both Form 706 (federal estate tax return) and Form 8939 for the same decedent, the IRS will issue a letter to the persons who filed such forms. The letter will include the name and address of each person who filed the respective forms, and will explain that each of those persons must collectively sign and file either a restated Form 706 or a restated Form 8939 on or before 90 days from the date the IRS mails such letters. If no restated Form 706 or Form 8939, signed by each person who previously filed any such forms, is filed within that 90-day period, the IRS will determine whether the executor has made a Code § 1022 election (carryover basis) for the decedent’s estate or whether the decedent’s estate is subject to Chapter 11 of the Internal Revenue Code (estate tax).
In making this determination, the IRS will consider all relevant facts and circumstances disclosed to the IRS, including: (i) the relative total fair market values of the decedent’s property in the possession of the executors and (ii) the nature and significance of the economic impact of the Code § 1022 election (or its loss) on the beneficial owners of the property held by each executor. Therefore, where more than one executor is serving (or is deemed to be serving), it is important that all executors make a unanimous decision regarding whether to elect out of estate taxation and into the carryover basis rules of Code § 1022.
Effects of Filing Multiple Forms 8939. If the IRS receives multiple Forms 8939 that collectively purport to allocate basis increase in an amount greater than the amount of basis increase available to the estate, the IRS will issue a letter to each person who filed such a form. The letter will include the name and address of each other person who filed a Form 8939 with respect to the decedent, and will explain that each of those persons must collectively sign and file a single, restated Form 8939 allocating available basis increase in order to make the Code § 1022 election. The restated Form 8939 must be filed on or before 90 days from the date the IRS mails such letters. If no restated Form 8939, signed by each such person who previously submitted a Form 8939, is filed within that 90-day period, the IRS will allocate the available basis increase as the IRS, in its discretion, may determine. In making this determination and exercising its discretion, the IRS will consider all relevant facts and circumstances disclosed to the IRS. Again, for circumstances where multiple “executors” are filing several Forms 8939, it will be important that the allocation of additional basis is properly coordinated among the executors.
Limited Extensions of Time. For persons qualifying under Code § 7508 (persons serving in a combat zone) or Code § 7508A (Presidentially declared disasters), the due date for filing a Form 8939 is postponed as provided in those sections. An executor filing a Form 8939 after November 15, 2011, pursuant to Code §§ 7508 or 7508A should write “Filed Pursuant to Section 7508” or “Filed Pursuant to Section 7508A,” as applicable, on the top of the form. Furthermore, for decedents qualifying for relief under Code § 692 (decedents who died in active military service, astronauts who died in the line of duty, and terrorist victims), an executor must file a Form 8939 to make the Code §1022 election.
Relief Provisions. The IRS has provided four circumstances where relief may be granted from the strict filing requirements established under the Notice.
- Spousal Basis Adjustment. An executor may file an amended Form 8939 after November 15, 2011 for the sole purpose of allocating the “Spousal Property Basis Increase” (as that term is defined in Code § 1022(c)(2)), among eligible property, provided that the following requirements are satisfied:
- the original Form 8939 must be timely filed and complete when filed except for the allocation of the full amount of the Spousal Property Basis Increase to the eligible property reported on that Form 8939; and
- each amended Form 8939 must be filed no more than 90 days after the date of the distribution of the qualified spousal property to which Spousal Property Basis Increase is allocated on that amended Form 8939.
- Section 301.9100-2 Relief. If an executor has timely filed Form 8939, the executor may file an amended Form 8939 under the provisions of Treas. Regs. § 301.9100-2(b) on or before May 15, 2012, for any purpose except to make or revoke a Code § 1022 election. The executor must write “Filed Pursuant to Section 301.9100-2” on the top of the amended Form 8939.
- Section 301.9100-3 Relief. An executor may apply for relief to supplement a timely filed Form 8939 under Treas. Regs. § 301.9100-3. A request for relief to supplement a timely filed Form 8939 is limited to an extension of time to allocate any basis increase that has not previously been validly allocated, and such relief, if appropriate, will be granted only if:
- after filing the Form 8939, the executor discovers additional property to which remaining basis increase could be allocated; or
- the fair market value of the property reported on the Form 8939 is adjusted as the result of an IRS examination or inquiry.
- Section 301.9100-3 Relief. Lastly, an executor may apply for relief under Treas. Regs. § 301.9100-3 by requesting an extension of the time in which to file the Form 8939. The IRS may grant such relief if the requirements of Treas. Regs. § 301.9100-3 are satisfied. Taxpayers should be aware, however, that in this context, the amount of time that has elapsed since the decedent’s death may constitute a lack of reasonableness and good faith on behalf of the executor that may prevent the IRS from granting the requested relief on the grounds that it prejudices the interests of the government. For instance, the IRS may prevent an executor from using hindsight to achieve a more favorable tax result or from relying on a lack of records available to establish what property was or was not owned by the decedent at death.
IRS Adjustment of Basis. The recipient’s basis in a particular piece of property (including the amount of basis increase allocated to that property) is subject to adjustment by the IRS upon examination of any tax return reporting a value dependent upon the property’s basis. For instance, the IRS could adjust a taxpayer’s basis after examining a tax return reporting the property’s depreciation, sale, or other disposition that triggered gain or loss on the property. Consequently, it does not appear that the IRS will issue a closing letter or other mechanism that would otherwise bind the IRS to the basis amounts reported on the Form 8939.
Coordination of Code §§ 645 and 1022. Under Code § 645, an executor of an estate and the trustee of a qualified revocable trust can elect that the trust be treated as part of the estate (and not as a separate trust) for income tax purposes for all taxable years of the estate ending after the date of the decedent’s death and before the “applicable date.” Code § 645(b)(2) defines the applicable date as “the date which is 2 years after the date of the decedent’s death,” if no estate tax return is required to be filed, and “the date which is 6 months after the date of the final determination of the [estate tax] liability,” if an estate tax return is required to be filed. Because no estate tax return is required to be filed if an executor makes a Code § 1022 election, the applicable date is the date that is 2 years after the date of the decedent’s death for purposes of making the Code § 645 election.
Allocating Generation Skipping Tax Exemption for 2010 Transfers.
Decedents Who Died in 2010. The generation skipping transfer tax (the “GST tax”) was retroactively reinstated and applies to the estates of all decedents who died in 2010, regardless of whether a Code §1022 election is made. For 2010 only, however, the GST tax rate is 0% for taxable transfers and distributions. If an executor of a decedent who died in 2010 makes the Code § 1022 election, the executor may allocate the decedent’s available GST tax exemption by attaching Schedule R of Form 8939 to the Form 8939 for that decedent’s estate. If the Form 8939 is timely filed, this allocation will be considered a timely allocation of the decedent’s GST exemption under Code § 2632.
Inter Vivos Direct Skips. In the case of inter vivos direct skips that occurred in 2010, if the donor wishes to pay GST tax at the rate of 0% (and therefore does not wish to have any GST exemption allocated to that transfer), the donor may elect out of the automatic allocation of GST tax exemption in one of two ways:
- Affirmative Election Out of Automatic Allocation on Form 709. First, the donor affirmatively may elect out of the automatic allocation by describing, on a timely filed Form 709, both the transfer and the extent to which the automatic allocation should not apply. See Treas. Regs. § 26.2632-1(b)(1)(i); or
- Deemed Payment of GST Tax with Form 709. Alternatively, Treas. Regs. § 26.2632-1 provides that “a timely filed Form 709 accompanied by payment of the GST tax (as shown on the return with respect to the direct skip) is sufficient to prevent an automatic allocation of GST exemption with respect to the transferred property.” The IRS has rightly determined that a donor would never want to allocate GST exemption to an outright transfer made in 2010 to a skip person, because such transfer constitutes a direct skip to which a 0% tax rate would apply. Consequently, the IRS will interpret the 2010 reporting of an outright, inter vivos direct skip on a timely filed Form 709 as the payment of GST tax (at the 0% rate). The IRS will view this phantom payment of GST tax as an election out of the automatic allocation of GST exemption to that direct skip. This interpretation also applies to a direct skip not in trust occurring at the close of an estate tax inclusion period (an “ETIP”) in 2010, other than by reason of the donor’s death.
Direct Skips Made in Trust, or at Death. Because there are times that a donor may want to allocate GST exemption to a 2010 direct skip made to a trust (e.g., a dynasty trust for multiple generations), the IRS interpretation of “deemed” payments of tax will not apply to any transfer in trust that is a direct skip or that occurs at the end of an ETIP. In addition, because the deemed payment only applies to inter vivos direct skips, it will also not apply to any direct skip, or to the close of an ETIP, by reason of the donor’s death.
GST Tax Filing Deadlines. Section 301(d)(2) of the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (the “Tax Relief Act”) extended the time for filing any return required under Code § 2662 (including any election required to be made on such return) to report a GST tax transfer made after December 31, 2009, and before December 17, 2010, to September 17, 2011. Because September 17, 2011 falls on a Saturday, the due date for filing a return reporting a direct skip, a taxable distribution, or a taxable termination (including any election required to be made on such return) that occurred on or after January 1, 2010, through December 16, 2010, is September 19, 2011, including extensions. There is an exception for a Schedule R attached to Form 8939, which is due on or before November 15, 2011.
The language of the Tax Relief Act does not extend the due date of all gift and GST tax returns for 2010. Specifically, to the extent a return relates to an indirect skip, or to a direct skip occurring after December 16, 2010, the due date of the return is not extended. Thus, the due date for filing a Form 709 that does not report a GST tax transfer or that reports a GST tax transfer (or any election pertaining to such transfer) that occurs on or after December 17, 2010, through December 31, 2010, was April 18, 2011, including extensions. In addition, the due date for filing a Form 709 to elect to treat a trust as a GST trust or to allocate GST tax exemption to a transfer occurring during 2010 under Treas. Regs. § 26.2632-1(b)(3) or (4), was April 18, 2011, including extensions. Despite this, if a donor timely filed Form 709 for the taxable year ending December 31, 2010, but failed to allocate GST exemption to a transfer occurring during such year, a taxpayer may be able to seek relief under Treas. Regs. § 301.9100-2.
Notice 2011-66 provides executors with helpful guidance on the timing and procedures for filing Form 8939 for decedents who died in 2010. Additional guidance on the rules for allocating basis can be found in Rev. Proc. 2011-41. We are optimistic that the actual forms and instructions will be released in the next several weeks, and that the advanced guidance in Notice 2011-66 and Rev. Proc. 2011-41 will prove to have been helpful in the interim.