QDOT trustee granted late citizenship-notice relief

Plain-English summary

A qualified domestic trust was established for a surviving spouse who was not a U.S. citizen when the decedent died. The spouse later became a citizen after continuously residing in the United States. The original trust company did not advise that a final Form 706-QDT was required, and the successor trustee discovered the omission after taking office. The IRS found that the trustee met the regulatory standards for late-election relief. It granted 120 days to file the final Form 706-QDT notifying and certifying the spouse's citizenship, which would end the trust's exposure to the special estate tax under IRC § 2056A.

Ruling snapshot

• Question: Could the QDOT trustee file a late final Form 706-QDT reporting the surviving spouse's U.S. citizenship?
• Outcome: Approved, 120-day extension
• Key authorities: IRC § 2056A(b)(12); Treas. Reg. §§ 20.2056A-10(a) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201622021
Release Date: 5/27/2016
Index Number: 2056A.00-00, 9100.00-00

---------------------------------------------                  Person To Contact:
------------------------------------------------------------   ----------------------------, ID No. ------------
------------------------                                       Telephone Number:
--------------------------------------------                   --------------------
---------------------------------                              Refer Reply To:
                                                                CC:PSI:B04 – PLR-130117-15
                                                                Date:
                                                               February 26, 2016
Re: --------------------------------------
------------------------------------------------------------

Decedent                            = -------------------------------
Spouse                              = -------------------------------------------------------------
Trust Company 1                     = ------------------------------------------------------
Trust Company 2                     = --------------------------------------------
Trust 1                             = ------------------------------------------------------------------------------
                                    ---------
Trust 2                             = ------------------------------------------------------------------------------
Trust 3                             = ------------------------------------------------------------------------------
Date 1                              = ------------------
Date 2                              = ---------------------
Date 3                              = --------------------
Date 4                              = ------------------
Date 5                              = ------------------

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

       This letter responds to your authorized representative’s letter of
September 9, 2015, requesting an extension of time under § 301.9100 of the Procedure
and Administration Regulations to file the notice and certification required under
§ 20.2056A-10(a)(2) of the Estate Tax Regulations that Spouse has become a United
States citizen

         The facts and representations submitted are as follows:

       Decedent died testate on Date 1, survived by Spouse, who was not a United
States citizen as of Date 1.

      Under the terms of Section II of Decedent’s Will, the residue of Decedent’s estate
passed to Trust 1. Under Section V of Trust 1, Trust 2 was established for the benefit of
Spouse. Spouse was not a United States citizen at the time of Decedent’s death.
Decedent’s estate timely filed a Form 706, United States Estate (and Generation-
PLR-130117-15                               2

skipping) Transfer Tax Return on Date 2. The executor made an election (on Schedule
M of the return) under § 2056A(d) to treat Trust 2 as a qualified domestic trust (QDOT)
and claimed an estate tax deduction for the value of the property transferred to the
QDOT. Spouse and Trust Company 2, a domestic trust company, are the current
co-trustees. Spouse and Trust Company 1, a domestic trust company, were the initial
co-trustees.

        On Date 3, Spouse became a United States citizen. It is represented that
Spouse has continuously resided in the United States from the date of Decedent's death
until the time that Spouse became a United States citizen.

       Trust Company 1 failed to advise Spouse that Trustee must file the final Form
706-QDT (U.S. Estate Tax Returns for Qualified Domestic Trusts) as required under
§ 20.2056A-10(a)(2), in order that QDOT will no longer be subject to the estate tax
imposed under § 2056A(b), and Trust Company 1 did not file a final Form 706-QDT.
Trust Company 2 discovered that the final Form 706-QDT had not been filed when they
commenced serving as the co-trustee of Trust 2 on Date 5. Subsequent to Spouse
becoming a United States citizen, the assets of Trust 2 were transferred to Trust 3.

      Trustees requests a ruling that an extension of time be granted pursuant to
§ 301.9100-3 of the Procedure and Administration Regulations to file a final
Form 706-QDT notifying and certifying to the Internal Revenue Service that Spouse has
become a United States citizen, as required by § 20.2056A-10(a)(2).

      LAW AND ANALYSIS

     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 2056(a) provides that, for purposes of the tax imposed by § 2001, the
value of the taxable estate is to be determined by deducting from the value of the gross
estate an amount equal to the value of any interest in property that passes or has
passed from the decedent to the surviving spouse. Section 2056(d)(1)(A) and
2056(d)(2)(A) provides that if the surviving spouse of the decedent is not a United
States citizen, the marital deduction is not allowed under § 2056(a), unless the property
passes to the surviving spouse in a qualified domestic trust.

       Under § 2056A(a), a qualified domestic trust is any trust in which: (1) the trust
instrument requires that at least one trustee of the trust be an individual citizen of the
United States or a domestic corporation and provides that no distribution (other than
income) may be made from the trust unless a United States trustee has the right to
withhold from such distribution the tax imposed under § 2056A(b) on the distribution; (2)
the trust meets the requirements as the Secretary may by regulations prescribe to
PLR-130117-15                                3

ensure collection of the tax imposed by § 2056A(b); and (3) an election is made by the
executor of the decedent with respect to the trust.

       Under § 2056A(b)(1)(A), an estate tax is imposed on any distribution of principal
from the qualified domestic trust (other than on account of hardship) before the date of
death of the surviving spouse. In addition, under § 2056A(b)(1)(B) an estate tax is
imposed on the value of the property remaining in a qualified domestic trust on the date
of the death of the surviving spouse.

        Under § 2056A(b)(12) and § 20.2056A-10(a)(1) and (2) of the Estate Tax
Regulations, a QDOT is no longer subject to the estate tax imposed under § 2056A(b) if
the surviving spouse becomes a citizen of the United States, and the spouse was a
resident of the United States at all times after the death of the decedent and before
becoming a United States citizen, and the U.S. Trustee of the qualified domestic trust
notifies the Internal Revenue Service and certifies in writing that the surviving spouse
has become a United States citizen. Notice is to be made by filing a final Form 706-
QDT on or before April 15th of the calendar year following the year that the surviving
spouse becomes a citizen, unless an extension of time of up to 6 months for filing is
granted under § 6081.

        Under § 301.9100-1(c) of the Procedure and Administration Regulations, 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 301.9100-2 provides automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.

       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). The time for filing the notice required under
§ 20.2056A-10(a)(2) is not expressly pre-scribed by statute. Accordingly, the trustee
may seek an extension of time to file with the Internal Revenue Service the required
notice and certification that Spouse has become a United States citizen.

       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.
PLR-130117-15                                 4


       Based on the facts submitted and the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Therefore, the trustee is granted
an extension of time of 120 days from the date of this letter to file with the Internal
Revenue Service the required notice and certification that Spouse has become a citizen
of the United States. The required notice and certification should be made on a
Form 706-QDT. The Form 706-QDT should be filed with the Internal Revenue Service
Center, Cincinnati, OH 45999. A copy of this letter should be attached to the Form 706-
QDT. A copy is enclosed for this purpose.

       Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

      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.

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

      The rulings contained in this letter are 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.

                                           Sincerely yours,

                                           Associate Chief Counsel
                                           (Passthroughs & Special Industries



                                    By:    Lorraine E. Gardner
                                           Lorraine E. Gardner
                                           Senior Counsel, Branch 4
                                           Office of Associate Chief Counsel
                                           (Passthroughs and Special Industries)

Enclosure
      Copy for section 6110 purposes


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