IRA Saves A Missed Alternate Valuation Election

When an estate exceeds the applicable exclusion amount (the “Exemption”) of $5.490 million, a taxpayer is required to file a Form 706 for the decedent’s estate. Under the Internal Revenue Code (the “Code”), assets are valued as of the date of death. However, the Code provides that IF the value of assets have decreased AND such reduction reduces estate taxes, the taxpayer can use the valuation date 6 months after the date of death (or earlier if the asset is sold), (the “alternate valuation date”).

This favorable provision allows an estate to be able to use a reduced value when a downtown in the market reduces the value of the estate. As estate taxes are due 9 months from the date of death, it is unfair to impose the estate tax on an inflated value in circumstances beyond the control of the taxpayer.

In private letter ruling (“PLR”) 201719014, the taxpayers, (co-personal representatives), hired an attorney to prepare the Form 706. Unfortunately, the attorney did not advise the taxpayers to  make the alternate valuation election. Later, the taxpayers retained an accounting firm to prepare the decedent’s income tax returns. The accounting firm found the mistake and advised the taxpayers about alternate valuation.

Approximately 1 year AFTER the due date of the From 706, the taxpayers filed an “amended” From 706 utilizing the alternate valuation date. Unfortunately, under the treasury regulations, a request for an extension of time could only be made no later than 1 year after the due date of the return. This amended return was filed more than 1 year AFTER the due date of the return.

However, under treasury regulation section 301-9100-1(c), the IRS can grant an extension of time to make a regulatory election when the taxpayer acts reasonably and in good faith. The statute further provides that the “reasonable and good faith” standard is met if the taxpayer reasonably relied on a qualified tax professional and the tax professional failed to make or advise the taxpayer to make the election. Thus, an extension of time to file make the election was granted.

ADVICE: This is an easy election to miss if you do not have competent advisors helping you file an estate tax return. ALWAYS consider this alternate valuation election as the election can save taxes. Always consider in a down market. This attorney, or the attorney’s malpractice carrier, not only had to pay the CPA fees to prepare the return, but also the cost of the private letter ruling.

WORD OF THE WEEK: Regulatory election vs. statutory election: If  the statute under the Code states that the election must be made within 9 months, such election is a “statutory election”for which there are special provisions of granting an extension.  If, however, the due date of 9 months after the date of death is found in the regulations interpreting such Code section, then such election is a “regulatory election” which has broader provisions to grant an extension.

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