In Notice 2017-15, the IRS provides special administrative procedures for allowing certain taxpayers and the executors of certain estates to recalculate a taxpayer's remaining applicable exclusion amount and remaining generation-skipping transfer (GST) exemption to the extent the exclusion or exemption was allocated to certain transfers made while the taxpayer was married to a person of the same gender.

Background

Before the Supreme Court issued its decision in United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675 (2013) (see Tax Alert 2013-1233), same-gender marriages were not recognized for federal tax purposes so same-gender spouses: (1) were not treated as married for gift tax, estate or GST tax purposes, (2) could not claim a marital deduction for gifts or bequests to one another, and (3) were required to determine generation assignments for GST tax purposes based on age rather than on familial relationship with their spouse.

Following Windsor, the IRS published Revenue Ruling 2013-17 (see Tax Alert 2013-1659), ruling that same-gender couples who are legally married in state and foreign jurisdictions recognizing same-gender spouses will be treated as married for US federal tax purposes, prospectively as of September 16, 2013. Final regulations (TD 9785) published in September 2016 amended the regulations under Section 7701 to reflect that same-gender marriages are recognized for federal tax purposes.

Applicable law and effect of Windsor

Estate tax

An estate tax is imposed under Section 2001(a) on the transfer of a taxable estate from every decedent who was a US citizen or resident at time of death. The estate may claim a credit provided under Section 2010(a) for an "applicable credit amount" against the estate tax imposed in Section 2001. The applicable credit amount is defined as "the amount of the tentative tax that would be determined under [Section] 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount" (Section 2010(c)(1)). The applicable exclusion amount equals the sum of the basic exclusion amount ($5 million), plus the deceased spousal unused exclusion amount (Section 2010(c)(2)). Generally, the value of the decedent's taxable estate is determined by deducting from the gross estate an estate tax marital deduction — the value of all property interests passing to the surviving spouse (Section 2056(a)).

Gift tax

Section 2505(a) allows a credit against the gift tax imposed under Section 2501 for the applicable credit amount under Section 2010(c) that would apply if the donor died at the end of the calendar year, minus the sum of the amounts allowable as a credit to the individual under Section 2505 for all preceding calendar periods. When a donor gifts an interest in property to his or her spouse, a gift tax marital deduction generally allows the amount of the donor's taxable gifts for that calendar year to be reduced by the total value of gifts given to the spouse (Section 2523(a)).

Current law allows a taxpayer to file an amended gift tax return or a supplemental estate tax return to claim a marital deduction for a gift or bequest to the taxpayer's same-gender spouse and to restore the applicable exclusion amount allocated to the transfer, as long as the limitations period for filing a claim for credit or refund under Section 6511 has not expired. Notice 2017-15 provides that, if the limitations period has expired, the taxpayer may recalculate his remaining applicable exclusion amount as a result of recognizing his same-gender marriage. But, "once the limitations period on assessment of tax 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" under Notice 2017-15, and no tax credit or refund will be paid on the marital gift if the limitations period has expired for requesting a credit or refund.

A taxpayer must recalculate any remaining applicable exclusion amount: (1) using a Form 709 gift tax return, an amended Form 709, or a Form 706 estate tax return; (2) writing at the top of the form that the return is "FILED PURSUANT TO NOTICE 2017-15"; and (3) attaching a statement supporting the claim and detailing the taxpayer's recalculation.

Generation-skipping transfer (GST) tax

Generation-skipping transfers are taxed under Section 2601 and defined under Section 2611(a) as "a taxable distribution, a taxable termination, or a direct skip, all of which are transfers to or for the benefit of one or more skip persons." A skip person is defined as: (1) a person assigned to a generation that is two or more generations below the generation assignment to the transferor; or (2) a trust, if all interests in the trust are held by skip persons or if there is no person holding an interest in the trust and at no time after the transfer a distribution may be made from the trust to a non-skip person (Section 2613(a)). Under Section 2651, a person's generation is determined "based on the transferee's familial relationship to the transferor or the transferor's spouse, or if there is no such relationship, then based on the difference in age between the transferor and transferee."

Prior to the Supreme Court's decision in Windsor, determinations regarding a person's generation with regard to same-gender spouses would be made based on the ages of the individuals, as no family relationship was recognized under federal law. If these generational assignments caused the same-gender spouse, or any of his descendants, to be considered a skip person, the transferor spouse's gift would be subject to GST tax, except to the extent the transferor allocated his GST exemption to the gift.

In light of Windsor, determinations regarding generations with regard to same-gender spouses will be made according to familial relationship, just as these determinations are made with regard to opposite-gender spouses. Post-Windsor, the application of familial rules to determine generation means that same-gender spouses are automatically considered to be of the same generation (regardless of any age difference between them); their children are considered one generation below the spouses; and their grandchildren are considered two generations below the spouses and thus, would be skip persons.

A taxpayer should recalculate and report any available GST exemption: (1) using a Form 709 gift tax return, an amended Form 709, or a Form 706 estate tax return; (2) writing at the top of the form that the return is "FILED PURSUANT TO NOTICE 2017-15"; and (3) attaching a statement indicating that "the taxpayer's allocation of GST exemption in a prior year is void pursuant to [Notice 2017-15,] a copy of the computation of the resulting exemption allocation(s) and the amount of the exemption remaining available to that taxpayer."

The notice states that the IRS will post on its website worksheets and instructions to Forms 706 and 709 to be used to properly calculate and report both the recalculated applicable exclusion amount and remaining exemption amount.

Implications

Prior to the decision in Windsor, same-gender couples who were legally married were not allowed to take advantage of the marital deduction for gift and estate tax purposes that would have negated any gift or estate taxes resulting from gratuitous transfers between them. Also prior to Windsor, the transferee spouse (and his lineal descendants) could be considered skip persons, meaning the gift from the transferor spouse would be subject to GST tax, except to the extent the transferor's GST exemption was allocated to the gift. The result of not respecting the marriage of same-gender couples for federal tax purposes was that same-gender couples were forced to use their applicable credit amount and possibly their GST exemption amount to negate any gift, estate, and/or GST taxes that may have resulted from a transfer between them.

Notice 2015-17 explains how the IRS will give retroactive effect to the decision in Windsor and allow same-gender couples to reclaim any applicable credit amount and possibly any GST exemption amount that they may have used regarding gratuitous transfers between them in years prior to Windsor. It makes clear, however, that the IRS will not refund any amounts that may have been paid with the filing of these returns if the statute of limitations has run on any gift or estate tax return that has been filed. Instead, these amounts will be recognized as gift tax paid or payable for purposes of the computation of the estate tax. The notice also provides that it does not extend the statute of limitations on a gift tax return that has been filed in order to allow an individual to elect to split gifts between spouses.

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