Sec. 2032(d)(2) Time Limit for Electing AVD

In Est. of Eddy, 115 TC No. 10, the Tax Court ruled that an executor could not elect the alternate valuation date (AVD) for valuing a decedent's property, because the estate tax return was not filed within 27 months after the decedent's death. The estate was required to use the date-of-death (DOD) value, resulting in over $370,000 in additional estate tax. For decedents whose estates include significant investments in stocks or bonds, the AVD has become increasingly important (due to volatile stock and bond markets).

Sec. 2031 requires that the DOD be used to value property. However, Sec. 2032 allows the executor to elect to value all of the property as of six months after the DOD (the AVD), if such election decreases the gross estate and the sum of the estate and the generation-skipping transfer (GST) taxes after credits. If the AVD is elected, any property disposed of within six months after the decedent's death is valued on the disposal date. Sec. 2032(d)(2) specifies that the AVD election may not be made if the estate tax return "is filed more than 1 year after the time prescribed by law (including extensions) for filing such return." The election is made on the return and, once made, is irrevocable.

Whether or not the AVD is elected, Sec. 6075(a) requires the estate tax return to be filed within nine months after the DOD. Under Sec. 6081(a), the IRS may grant an extension that does not exceed six months, unless the executor is abroad. (For a discussion of proposed regulations on this issue, see NewsNotes, "Estate Tax Automatic Extension," p. 833, this issue.) Therefore, the return is due, even with a six-month extension, no later than 15 months after the decedent's death. Thus, because Sec. 2032(d)(2) requires the AVD election to be made within one year after the extended due date, the AVD must be elected within 27 months after the decedent's death if the executor has obtained a six-month extension under Sec. 6081(a).

Edward Eddy died on April 13, 1993. Over 90% of his gross estate consisted of Browning-Ferris stock, which is publicly traded. Because Eddy's shares constituted 1.4% of Browning-Ferris' outstanding stock, the executor hired a brokerage firm to determine the blockage discount, which did not complete this task by the estate tax return's extended due date of July 13, 1994. The executor then hired another firm, which determined that a discount of 75 cents per share (or $178,014) should apply on the AVD. The new firm completed this analysis by Nov. 29, 1994, but the executor did not file the return until Jan. 19, 1996; the statutory deadline to elect the AVD was July 13, 1995.

The estate reported $5,721,987 as the AVD value of the taxable estate, which reflected a decline in value of the Browning-Ferris stock of approximately $680,000 since Eddy's death. The estate claimed that Rev. Proc. 92-85 and the regulations give the IRS discretion to extend the AVD election deadline. The Service rejected this argument and determined the DOD value of the taxable estate was $6,399,230, which reflected the blockage discount. The disallowance of the AVD resulted in additional estate tax in excess of $370,000.

The Tax Court ruled that the AVD cannot be elected on a return filed more than 27 months after a decedent's death, and that the Service has no discretion to extend the AVD election deadline. The court also ruled that Rev. Proc. 92-85 did not apply to the AVD election; Rev. Proc. 92-85 applied only to extensions of time for elections required by statute to be made by the due date of the return or the due date including extensions. Sec. 2032(d)(2) allows an additional year from these dates for the AVD election. (Rev. Proc. 92-85 was superseded by Regs. Sec. 301.9100-1 through -3, which made no significant changes on this issue.)

Language in Est. of Eddy also clarifies that the AVD election can be made on a timely filed return up to 12 months after its due date. Finally, the Tax Court sustained a late-filing penalty under Sec. 6651(a), ruling that the estate did not have reasonable cause for filing after the extended due date.

Because the effective estate tax rates range from 37% to 55%, it is essential that the AVD election be made on an estate tax return filed within 27 months after the decedent's death (or within 21 months if no extension to file is obtained). The only possible exception to the 27-month requirement is when an executor is abroad. Neither Sec. 6081(a) nor Regs. Sec. 20.6081-1(a) specifies the permissible extension beyond the normal six-month maximum in this situation. Presumably, it is a matter of IRS judgment. Finally, Est. of Eddy arguably also applies to certain GST tax property transfers, because Sec. 2624(b) and (c) specifically allow the Sec. 2032 AVD election to be made for these transfers.

From Peter Barton, MBA, CPA, J.D., Professor of Accounting, University of Wisconsin-Whitewater, Whitewater, WI (Not associated with AFAi)