PLR 200339025: Estate receives late family-owned business deduction election relief

Plain-English summary

An estate's tax return preparer omitted the election for the qualified family-owned business interest deduction under IRC § 2057 and did not advise the executor about it. Another law firm discovered the omission while preparing a state estate tax return, and the estate filed a supplemental federal return. The IRS granted an extension through the date the supplemental return was filed, finding the requirements for late election relief satisfied. It did not decide whether the estate actually qualified for the deduction; the estate retained the burden to establish that.

Ruling snapshot

• Question: May the estate make a late § 2057 election on its supplemental estate tax return?
• Outcome: Approved through the date the supplemental return was filed.
• Key authorities: IRC § 2057(b)(1)(B); Treas. Reg. § 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200339025
Washington, DC 20224
Release Date: 09/26/2003
Index No.: 2057.00-00; 9100.22-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:B04 - PLR - 121789-03
Date:
Re: JUNE 20, 2003

Legend

Decedent
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X
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Date 1
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Date 2
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Date 3
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Date 4
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State 1
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State 2
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State 1 Law Firm =
State 2 Law Firm =

Dear
:

This is in response to your authorized representative’s letter, dated March 18, 2003, and subsequent correspondence, submitted on behalf of Decedent’s estate, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make an election under § 2057(b)(1)(B) of the Internal Revenue Code.

The facts and representations submitted are summarized as follows: Decedent died testate, a resident of State1, on Date 1. Decedent's gross estate consisted primarily of closely-held corporation stock and real estate. X, as executrix of Decedent’s estate, engaged State 1 Law Firm to prepare the federal estate tax return, Form 706, and handle probate and related estate administration matters. The estate timely filed Form 4768, Application for Extension of Time to File a Return, and received an extension to file the return until Date 2. State 1 Law Firm prepared and timely filed Decedent's federal estate tax return on Date 3. In preparation of Form 706, State 1 Law Firm failed to include Schedule T, Qualified Family-Owned Business Interest

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Deduction. State 1 Law Firm did not advise X, as executrix, of the existence or applicability of the § 2057(b)(1)(B) election and, accordingly, an election under
§ 2057(b)(1)(B) was not made.

State 2 Law Firm was engaged to prepare the State 2 estate tax return. In preparation of the State 2 estate tax return, State 2 Law Firm questioned why the § 2057(a) deduction was not elected. This was the first time X was made aware of the § 2057(b)(1)(B) election. On Date 4, State 1 Law Firm prepared and filed a supplemental Form 706 and made an election under § 2057(b)(1)(B) to have § 2057 apply.

Decedent's estate requests an extension of time under §§ 301.9100-1 and 301.9100-3 to make an election under § 2057(b)(1)(B) to deduct the adjusted value of Decedent's qualified family-owned business interests.

Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

Section 2057(a)(1) provides that for purposes of the tax imposed by § 2001, in the case of an estate of a decedent to which this section applies, the value of the taxable estate shall be determined by deducting from the value of the gross estate the adjusted value of the qualified family-owned business interests of the decedent. Section 2057(a)(2) provides that the deduction allowed by § 2057 shall not exceed $675,000.

Section 2057(b)(1) provides, generally, that § 2057 shall apply to an estate if (A) the decedent was (at the date of the decedent's death) a citizen or resident of the United States, (B) the executor elects the application of this section and files the agreement referred to in § 2057(h), (C) the sum of the adjusted value of the qualified family-owned business interests described in § 2057(b)(2), plus the amount of the gifts of such interests determined under § 2057(b)(3), exceeds 50 percent of the adjusted gross estate, and (D) during the 8-year period ending on the date of the decedent's death there have been periods aggregating 5 years or more during which such interests were owned by the decedent or a member of the decedent's family, and there was material participation (within the meaning of § 2032A(e)(6)) by the decedent or a member of the decedent's family in the operation of the business to which such interests relate.

Section 2057(b)(2) provides that the qualified family-owned business interests described in this paragraph are the interests which are included in determining the value of the gross estate, and are acquired by any qualified heir from, or passed to any qualified heir from, the decedent (within the meaning of § 2032A(e)(9)).

Section 2057(e)(1) provides, generally, that for purposes of § 2057, the term "qualified family-owned business interest" means an interest as a proprietor in a trade or business carried on as a proprietorship, or an interest in an entity carrying on a trade

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or business, if: (1) at least 50 percent of such entity is owned (directly or indirectly) by the decedent and members of the decedent's family; (2) at least 70 percent of such entity is so owned by members of 2 families and at least 30 percent of such entity is so owned by the decedent and members of the decedent's family; or (3) at least 90 percent of such entity is so owned by members of 3 families and at least 30 percent of such entity is so owned by the decedent and members of the decedent's family.

Section 2057(i)(3)(H) provides that for purposes of § 2057, rules similar to the rules under §§ 2032A(d)(1) and (3) (relating to election; agreement) shall apply.

Section 2032A(d)(1) provides that the election under § 2032A shall be made on the return of tax imposed by § 2001. The election shall be made in such manner as the Secretary shall by regulations prescribe. Such an election, once made, shall be irrevocable. Section 2032A(d)(3) provides that the Secretary shall prescribe procedures which provide that in any case in which the executor makes an election under § 2032A(d)(1) (and submits the agreement referred to in § 2032A(d)(2)) within the time prescribed therefor, the executor will have a reasonable period of time (not exceeding 90 days) after notification of such failure to provide such information.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Section 301.9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government.

Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.

Based on the facts submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, an extension of time to make the election under § 2057 is granted until Date 4, the date on which the supplemental Form 706 was filed.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

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Except as specifically ruled herein, we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the Code. Specifically, we express or imply no opinion on whether the estate qualifies for the deduction under § 2057. The burden to establish to the Service's satisfaction that all of the requirements of § 2057 are met remains with the Decedent’s estate.

In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representative.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Heather C. Maloy
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for § 6110 purposes
Copy of this letter

cc:

                            Initiator               Reviewer    Reviewer       Reviewer   Reviewer          Reviewer                  Reviewer

Code
Surname
Date
Form 1937-A (Rev 6-80) Correspondence Approval and Clearance
Department of the Treasury/Internal Revenue Service
*U.S. GPO 1989-224-484