IRS Grants Relief To Small Estates

(…and possibly their valuation consultant?)

Rev. Proc. 2014-18 provides a simplified method for certain taxpayers to obtain an extension to elect portability under Code Sec. 2010(c)(5)(A). This method allows a widow or widower to apply a deceased spouses unused exclusion (DSUE) amount to the surviving spouse’s subsequent transfers during life or at death. In these situations, the ability to file and use the DSUE amount is a must.

IRS Grants Relief To Small Estates

On January 27, 2014, the Internal Revenue Service (IRS) issued Rev. Proc. 2014-18, which provides much needed relief for small estates that failed to file an estate return to elect portability for the deceased spouse’s unused estate exemption (DSUE), if done by December 31, 2014. This relief is only available if the estate was not required to file because assets were valued under the exemption for filing.¹ This revenue procedure is also important in light of the United States v. Windsor, 570 U.S. ___, 133 S.Ct. 2675 (2013), decision since it provides relief to same-sex marriage and an avenue to recover estate tax paid by estates that failed to elect portability during this period.

After December 31, 2014, the simplified election may be lost at great tax cost to some second-to-die estates. Action now by such estates is critical. Failure to file could lead to a professional malpractice claim against legal counsel (if they advised the estate that it did not have to file the 706 because it was not taxable and failed to follow up) and tax preparers.

Code Section 6018(a) requires that an estate file a U.S. Estate and Gift Tax Return in a timely fashion (normally nine months after date of death unless extended up to six months) to make the portability election allowing a surviving spouse to use part of the election not used by the first to die.

The IRS concluded that it would allow automatic relief if an estate files a late election for deaths after December 31, 2010, and before December 31, 2013, filed by December 31, 2014, if the decedent had a surviving spouse and the decedent was a U.S. citizen or resident at the time of death.

Many estates—to save expenses—elected not to file Form 706 since the estate was valued at just $5 million in assets (adjusted for inflation each year after 2011). This may be a very costly choice if assets held by the surviving spouse appreciate, resulting in much higher estate tax to the estate of the second-to-die spouse. Even when the estate is not taxable, it is advisable to lock the fair market value of a business asset—obtain a qualified valuation—in anticipation of a subsequent events, which entails a valuation of the machinery and equipment, underlying assets, and equity.

How many times in your career have you witnessed a small business grow in value over long time frames after a spouse dies? In our Dallas office, our firm is seeing significant interest by estates now in preparing a valuation report on assets for decedents dying after January 1, 2010, and before December 31, 2013.

To take advantage of the relief, a person eligible to file an estate return must file a “complete and properly prepared” Form 706 by December 31, 2014, and place at the top of the filing:

“FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER 2010 ( c )(5)A)”

The relief is only granted if, on review, the estate was not required to file a return absent the spousal election, Rev Proc. 2014-18 (4) (.03). Therefore, this relief does not apply to help estates that should have filed because their assets (including prior taxable gifts) should have filed.

Valuators may do themselves a real favor by advising professionals in the referral network of this revenue procedure and applicable client base of this opportunity. It may save them a lot of money.

Joseph D. Brophy, MBA, CPA, ABV, CVA, CM&AA, has experience as a CPA advisor to clients buying and selling companies and as a business owner himself. Mr. Brophy holds BBA and MBA degrees from the University of North Texas. He has also served as an officer in both public and private companies before establishing Joseph D. Brophy, CPA, PC, in Dallas in 1985 to concentrate on tax issues and business advisory services. His CPA office is on Turtle Creek Boulevard in the Oak Lawn neighborhood of Dallas.

Roberto Castro, Esq., MST, MBA, CVA, CMEA, CPVA, is a managing member of Central Washington Appraisal, Economic, and Forensic Advisors, LLC, which provides machinery and equipment and business valuation appraisals and, in addition, litigation support services (lost profits damages consulting and expert witness services). The Law Office of Roberto Castro, PLLC, is a general practice law firm focused on bankruptcy/insolvency, estate and gift, real estate, business law, and succession issues in Central Washington State. Both are new firms that opened in 2014. Mr. Castro also serves as technical editor of NACVA’s QuickRead. He can be reached at either Roberto.Castro@wasatchbusval.com or RobertoC1@NACVA.com.

¹The IRS issued Notice 2011-82 alerting executors to file a Form 706 to elect the portability exclusion. See also IRB 2012-28 (July 9, 2012) (Portability of a Deceased Spousal Unused Exclusion Amount (DUSE))