In Notice 2017-15, the IRS spelled out the procedures same-sex married couples should use to recalculate the transfer-tax treatment for property transferred to spouses before the U.S. Supreme Court invalidated Section 3 of the Defense of Marriage Act (DOMA) in Windsor, 133 S. Ct. 2675 (2013).
DOMA, which was enacted in 1996, defined marriage for federal law purposes as the legal union of one man and one woman. Under Section 3 of DOMA, same-sex marriage was not recognized for any federal purposes, including the filing of joint tax returns and the unlimited marital estate tax deduction. In Windsor, the Supreme Court held that Section 3 of DOMA was unconstitutional because it violated the Fifth Amendment’s Due Process Clause by denying equal protection to same-sex couples who are lawfully married in their states.
According to the notice, to the extent that the applicable exclusion amount from estate or gift tax was applied to a transfer between spouses that did not qualify for the marital deduction for federal estate or gift tax purposes at the time of the transfer solely because of DOMA, taxpayers will be permitted to establish that the transfer qualified for the marital deduction and recover the applicable exclusion amount previously applied on a return because of the transfer, even if the statute of limitation for that return under Sec. 6501 or 6511 has expired. However, if qualifying for the marital deduction or a reverse qualified terminable interest property (QTIP) election would require a QTIP, qualified domestic trust (QDOT), or reverse QTIP election, those taxpayers will have to request relief under Regs. Sec. 301.9100-3 to make the election.
As long as the limitation period for filing claims for credits or refunds under Sec. 6511 has not expired, a taxpayer may file an amended Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, or a supplemental Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, to claim the marital deduction for a gift or bequest to the taxpayer’s same-sex spouse and to restore the applicable exclusion amount allocated to that transfer. However, the IRS warns, once the assessment limitation period has expired, neither the value of the transferred interest nor any position concerning a legal issue (other than the existence of the marriage) related to the transfer can be changed pursuant to Notice 2017-15. Similarly, no credit or refund of the tax paid on that marital gift can be given once the limitation period on claims for credits or refunds has expired.
If the limitation period has expired, the notice allows the taxpayer to recalculate the taxpayer’s remaining applicable exclusion amount as a result of recognizing the taxpayer’s marriage to the taxpayer’s spouse. The taxpayer must recalculate the taxpayer’s remaining applicable exclusion amount, in accordance with IRS forms and instructions, on a Form 709 (preferably, the first Form 709 required to be filed by the taxpayer after this notice is issued), or on a supplemental Form 706, if not reported on Form 709.
The taxpayer should include a statement at the top of either form that the return is being “FILED PURSUANT TO NOTICE 2017-15.” The taxpayer must also attach a statement supporting the marital deduction claim and detailing the recalculation of the taxpayer’s remaining applicable exclusion amount as directed by the IRS in its forms and instructions.
The notice similarly provides relief for generation-skipping transfer (GST) tax purposes by allowing taxpayers to recalculate their available GST exemption based on the Windsor decision. The notice states that a taxpayer should recalculate his or her available GST exemption in accordance with the instructions for filing Forms 706 or 709 and report the available GST exemption based upon that recalculation, on a Form 709 (preferably, the first Form 709 required to be filed by the taxpayer after the issuance of this notice), on an amended Form 709 (if the limitation period under Sec. 6511 has not expired), or on the Form 706 for the taxpayer’s estate if not reported on a Form 709.
The taxpayer should put the same notation at the top of the form as for the estate or gift tax relief: “FILED PURSUANT TO NOTICE 2017-15.” Moreover, the taxpayer should attach a statement that the taxpayer’s allocation of GST exemption in a prior year is void pursuant to Notice 2017-15 and a copy of the computation of the resulting exemption allocation(s) and the amount of exemption remaining available to that taxpayer.
In a letter to the IRS dated Oct. 30, 2013, the AICPA requested guidance on various unanswered estate and income tax questions after Windsor, including the treatment of the estate tax applicable exclusion. This IRS guidance answers many of those estate tax questions in a taxpayer-favorable way.
—Sally Schreiber (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.