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Form 8939 Guidance Concerning Section 1022 Election and Filing Requirements

Published: August 9th, 2011

By: Matthew J. Ahearn

By Matthew J. Ahearn and Brian M. Malec

On August 5, 2011, the IRS released long-awaited guidance for estates of decedents dying in 2010 in the form of IRS Notice 2011-66 (the “Notice”). The Notice addresses certain issues relating to the election out of the federal estate tax for decedents dying in 2010. The Notice applies to executors of the estates of 2010 decedents and to recipients of property acquired from such decedents, if the estate elects out of the federal estate tax.

Below is a summary of the procedural aspects of the Notice concerning the election to opt out of the estate tax and the filing requirements relative thereto, and certain questions that arise as a result of the guidance contained therein:

A. Making the Election

The election to apply the carryover basis rules under section 1022 in lieu of the federal estate tax for a decedent dying in 2010 is made by the executor on a timely filed Form 8939. The election is irrevocable once made, subject to certain exceptions discussed below. Prior documentation filed with the IRS purporting to make the election is not sufficient and must be replaced by a timely filed Form 8939. Further, a conditional election, such as an election that would take effect if an estate tax audit resulted in additional tax, is prohibited.

B. Due Date of Form 8939

The due date for filing Form 8939 is November 15, 2011. The IRS will not grant extensions of time to file a Form 8939 and, generally, will not accept a Form 8939 filed after the due date. However, an extension of time to file Form 8939 may be obtained only if the taxpayer qualifies for relief under §301.9100-3 by establishing to the satisfaction of the IRS that the taxpayer acted reasonably and in good faith, and the extension will not prejudice the interests of the Government. The grant of this extension is solely within the discretion of the IRS. The IRS has stated that the amount of time since the decedent’s death may constitute a lack of reasonableness and good faith and/or prejudice the interests of the Government; therefore, it appears relief under §301.9100-3 will be difficult to obtain.

The deadline for filing a Form 706 has not been extended. For decedents who died between January 1, 2010 and December 17, 2010, the due date for filing a Form 706 remains September 19, 2011 (because September 17, 2011 falls on a Saturday). For a decedent dying after December 17, 2011 and on or before December 31, 2011, the due date of a Form 706 is the standard 9 months after date of death. Accordingly, the Form 8939 is not due until at least one and a half months after the due date of a Form 706 for a 2010 decedent. If an executor is still undecided about whether to elect out of the estate tax, that decision should be made prior to the deadline for filing the Form 706. Although an executor of a 2010 decedent could seek an automatic 6 month extension to file a Form 706, the executor is generally required to pay the estimated estate tax at the time of filing the extension request (unless an extension of time to pay is also granted).

C. Amended or Supplemental Form 8939

The IRS will generally not accept an amended Form 8939 filed after the due date, except in limited circumstances. These exceptions, which all require a Form 8939 to have been timely filed, are as follows:

1. An amended Form 8939 may be filed for the sole purpose of allocating Spousal Property Basis Increase among eligible property provided (1) Form 8939 was timely filed and complete except that the full amount of Spousal Property Basis Increase was not allocated on the original Form 8939, and (2) the amended Form 8939 is filed within 90 days after the date of distribution of the qualified property to which the Spousal Property Basis Increase is allocated. This exception is important because Spousal Property Basis Increase cannot be allocated to property until such property has been distributed outright to the spouse or to a QTIP-like trust as of the date Form 8939 is filed. It appears that the 90 day filing requirement may result in an executor having to file multiple amended returns if all property to which Spousal Property Basis Increase is intended to be allocated cannot be distributed before the expiration of such 90 day period. Additionally, it does not appear this exception can be used to reallocate Spousal Property Basis Increase among qualified property.

2. An executor may file an amended Form 8939 pursuant to Treasury Regulation § 301.9100-2(b) by May 15, 2012, provided a Form 8939 was timely filed. Section 301.9100-2(b) provides an automatic extension of 6 months from the due date of a return to make a regulatory or statutory election, provided the taxpayer timely filed its return and took corrective action within the 6 month extension period. Under this exception, the amended Form 8939 may be filed for any purpose, except to make or revoke the section 1022 election.

3. An executor may apply for relief pursuant to Treasury Regulation § 301.9100-3 to supplement a timely filed Form 8939 if the executor can show that he or she acted reasonably and in good faith, and the interests of the government will not be prejudiced. An extension of time pursuant to this exception will be granted only if the executor discovers additional property to which Basis Increase can be allocated, and/or the fair market value of property reported on Form 8939 is adjusted as a result of an IRS examination or inquiry. In addition, only Basis Increase that was not previously allocated may be allocated on the amended Form 8939. In other words, an executor cannot use this exception to change basis allocations made on a previously filed Form 8939.

D. Multiple Executors

If an executor (as defined in Code section 2203) has been appointed and is acting for the decedent’s estate, the IRS will generally only accept Forms 8939 filed by such executor.

If no executor has been appointed (for example, when all assets are nonprobate assets), then any person in actual or constructive possession may file a Form 8939. This may result in the filing of multiple Forms 8939 and could easily lead to disputes in situations where there is not enough basis to be allocated among all of the decedent’s property. If multiple Forms 8939 are filed, the Notice states that the IRS will send a letter to all parties who filed a Form 8939 and give them 90 days to collectively file a single, restated Form 8939. If the parties do not collectively file a single Form 8939 within 90 days, then the IRS will allocate the available Basis Increase as it sees fit based on all relevant facts and circumstances. The IRS is not required to allocate the Basis Increase in any particular manner and it is unclear how the IRS would exercise its discretion in such a situation. The Notice hints that the IRS would allocate Basis Increase pro rata based on the amount of unrecognized appreciation in the property, but this may not minimize the total inherent tax burden. In any event, this uncertainty should incentivize the multiple executors to reach an agreement among themselves and file a single Form 8939 within the 90 day period.

E. Filing of Form 8939 and Form 706

In the event that a Form 8939 and Form 706 is filed for the same decedent, the IRS will send a letter to each person who filed such return. These persons must collectively sign and file either a restated Form 8939 or Form 706 within 90 days of the mailing of the letter by the IRS. If neither is filed within the 90 day period, the IRS will determine whether a section 1022 election has been made or whether the estate is subject to chapter 11 of the Code. The IRS will consider all facts and circumstances, specifically including the fair market value of property and the impact of the section 1022 election; however, there is no requirement that the IRS minimize the amount of tax currently due.

Stay tuned for additional posts this week addressing guidance in the Notice on the allocation of GST exemption for inter vivos and testamentary transfers from 2010 decedents and certain other collateral issues arising from the determination of basis under section 1022 of the Code.