PLR 200620020: Estate gets more time to elect family business deduction

Plain-English summary

An estate did not elect the qualified family-owned business deduction on its timely filed estate tax return because its original stock valuation did not meet the threshold for the election. A proposed settlement with the IRS later increased the stock value, prompting a request for more time. The IRS found that the estate acted reasonably and in good faith and granted 60 days from the letter to make the election on a supplemental Form 706. The ruling addresses the deadline only; the estate still must establish that it qualifies for the deduction under IRC § 2057.

Ruling snapshot

• Question: Could the estate make a late election for the qualified family-owned business deduction?
• Outcome: Approved; it received 60 days from the letter to file the election.
• Key authorities: IRC § 2057; Treas. Reg. §§ 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200620020
Third Party Communication: None
Release Date: 5/19/2006
Date of Communication: Not Applicable
Index Number: 2057.00-00, 9100.00-00
Person To Contact:
------------------------------------------------------ ----------------, ID No. -------------
--------------------------------------
Telephone Number:
------------------
---------------------
-----------------------------
Refer Reply To:
CC:PSI:B09
PLR-161357-05
-
Date:
February 06, 2006

Legend

Decedent = -----------------------------------------------------------------------------------------
-----------------------
Date 1 = -------------------
X = --------
Corporation = -----------------------------------------------
Accounting = ------------------------------------
Firm
Y = -----------
Year 1 = -------
Z = --------------

Dear -------------------:

This is in response to your authorized representative’s letter, dated December 1, 2005, 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 submitted and representations made are summarized as follows:
Decedent died on Date 1. At the time of Decedent’s death, Decedent owned X shares of stock in Corporation. During the administration of Decedent’s estate, Accounting Firm was hired to determine the value of Decedent’s stock in Corporation. Accounting Firm determined that the value of Decedent’s stock in Corporation at Decedent’s death was $Y. Decedent’s Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) was timely filed, however, the qualified family-owned business interest (QFOBI) election under § 2057(b)(1)(B) was not made because based on the value of the Corporation stock, as reported on the Form 706, Decedent’s estate did not satisfy the threshold requirements to make the election.

PLR-161357-05
2

Decedent’s Form 706 was subsequently examined by the Internal Revenue Service. In Year 1, Decedent’s estate and the Appeals Office of the Internal Revenue Service entered into a proposed settlement agreement that increased to $Z the value of the shares of Corporation stock owned by Decedent at his death. 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.

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time 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.

PLR-161357-05
3

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 taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Therefore, an extension of time is granted until 60 days from the date of this letter for making an election under § 2057. The election should be made on a supplemental Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return, and filed with the Internal Revenue Service Center, Cincinnati, OH 45999. A copy of this letter should be attached to the supplemental Form 706. A copy is enclosed for this purpose.

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.

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 of establishing to the satisfaction of the Service that all of the requirements of § 2057 have been met remains with Decedent’s estate.

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

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

Sincerely,

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

Enclosures
Copy for § 6110 purposes
Copy of letter