QTIP Election Can Be Ignored Where It Was Not Necessary to Reduce the Estate Tax to Zero

Revenue Procedure 2016-49 provides procedures to disregard and treat as null and void for transfer tax purposes a qualified terminable interest property (QTIP) election in situations where the QTIP election was not necessary to reduce the estate tax liability to zero. 

This guidance provides that such procedures are unavailable where QTIP elections are made in estates in which the executor elected portability of the deceased spousal unused exclusion (DSUE) amount under § 2010(c)(5)(A).  This guidance modifies and supersedes Rev. Proc. 2001-38, 2001-1 C.B. 1335. 

Advantageous 2017 Application Filing Deadline Extended: Complete and accurate certification applications filed before October 1, 2016 will have an effective date of certification of January 1, 2017, even if the date of the CPEO’s notice of certification is after January 1, 2017. The prior guidance had a September 1, 2016 deadline for this special transition rule.

CPA Working Capital Statements Can Be Provided in a Note: Treasury and IRS anticipate revising the requirements of the temporary regulations and Revenue Procedure 2016-33 to allow the audited financial statements covered by the CPA opinion to include a note to the financial statements that states that the financial statements reflect positive working capital. The note must still provide in detail a calculation of the working capital. In the case of a CPEO applicant that is a member of a controlled group of which other members are CPEO applicants or CPEOs, the note to the financial statements of the combined or consolidated annual audited financial statements for the controlled group must state that the individual financial statements of each CPEO applicant or CPEO that is a member of the controlled group reflect positive working capital (as defined by GAAP).

CPA Statements Re: Accrual Accounting Eliminated: Because GAAP requires the use of an accrual method of accounting and the required CPA opinion must state that a CPEO applicant’s or CPEO’s audited annual financial statements are presented fairly in accordance with GAAP, the separate requirement for a CPA opinion stating that such financial statements “reflect that the CPEO . . . computes its taxable income using an accrual method of accounting” is unnecessary. Treasury and IRS anticipate revising the Revenue Procedure 2016-33 to eliminate the requirement of a CPA statement re: accrual accounting.

Working Capital Transition Rule for Years Ending Before September 30, 2016: For fiscal years ending before September 30, 2016, a special transition rule is provided allowing the CPEO applicant to submit a separate statement, signed under penalties of perjury by a responsible individual of the CPEO applicant, that the financial statements reflect positive working capital for the fiscal year. That responsible individual statement could be provided in lieu of the CPA opinion or Note to the Financial Statement, described above. However, the statement by the responsible individual must also provide in detail a calculation of the CPEO applicant’s working capital. In the case of a CPEO applicant that is a member of a controlled group of which other members are also CPEO applicants or CPEOs, the CPEO applicant must submit its own separate statement by a responsible individual re: positive working capital, again setting forth in detail a calculation of the individual CPEO applicant’s working capital.

CPA Declaration Re: Authorization to Represent the CPEO Eliminated: The requirements in the proposed regulation and Revenue Procedure 2016-33 that the CPA file a written declaration with the IRS that he or she is authorized to represent the CPEO applicant or CPEO before the IRS will be eliminated.

Disregarded Entities May Apply for Certification: Treasury and the IRS anticipate that the final regulations under section 7705 will not prohibit a business entity that is disregarded as separate from its owner from becoming a CPEO. In addition, Treasury and the IRS anticipate revising the definition of Responsible Individual, to also include: (1) in the case of a disregarded entity owned by a corporation or partnership, the Responsible Individuals of that corporation or partnership (as defined by the regulations); and (2) in the case of a disregarded entity owned by an individual, the individual owner. Treasury and the IRS also anticipate providing in the final regulations that CPEO applicants and CPEOs that, but for their status as disregarded entities would separately be members of a controlled group, are treated as members of a controlled group.

Sole Proprietorships Can Apply for Certification: Treasury and IRS anticipate that the final regulations will expressly allow sole proprietorships to apply for certification as a CPEO.

Taxpayers Can Rely on Notice 2016-49: Treasury/IRS expressly confirm that the statements in Notice 2016-49 that the final regulations and future updated revenue procedures, when issued, will address the issues identified in Notice 2016-49 in the manner indicated in that Notice (as described above). Pending the issuance of final regulations and the updated revenue procedure, taxpayers may rely on the guidance contained in this notice. 

Revenue Procedure 2016-49 will be published in IRB 2016-42 on October 17, 2016.

 

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Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.

 

 

 

Sources:

IRS

NAPEO