IRS Provides Guidance on Trust's Sec. 645 Election and Short-Year Return

Under Sec. 645, a qualified revocable trust may elect to be treated and taxed for income tax purposes as part of an estate (and not as a separate trust) for all tax years of the estate ending after the date of the decedent's death and before the applicable date described in Sec. 645(b)(2).

Rev. Proc. 98-13 sets forth procedures for making the Sec. 645 election and filing the appropriate tax returns. A qualified revocable trust making a Sec. 645 election generally must obtain a taxpayer identification number (TIN) and file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for the trust's short tax year beginning with the decedent's death and ending December 31 of that year. A trust does not have to file a short-year return if (1) it filed the Form 1041 for the estate's first tax year before the due date for filing a Form 1041 for the trust for the tax year ending after the date of the decedent's death; (2) it reports the trust items attributable to the decedent under Regs. Sec. 1.671-4(b)(2)(i)(A) or (B); and (3) the entire trust is a qualified revocable trust.

Under Rev. Proc. 98-13, if the trust must file a Form 1041 for the short tax year, it must attach a copy of the required election statement to that form. The trust must attach the original of the required statement to the Form 1041 filed for the estate's first tax year. The Sec. 645 election is considered as having been made on the first of the filing of (1) the estate's Form 1041 with the original required statement attached or (2) the trust's Form 1041 with the copy of the required statement attached. Once the trust makes the election, it must exclude the items of income, deduction and credit attributable to its short year from its Form 1041 and report them on the estate's Form 1041.

Proposed regulations under Sec. 645 contain different procedures for making the election and filing the trust's short-year return. These proposed procedures will replace the procedures in Rev. Proc. 98-13 when the regulations are finalized. Under Prop. Regs. Sec. 1.645-1(c), the Sec. 645 election is considered made on the filing of the Form 1041, with the required election statement attached, for the first tax year of the estate or, if there is no personal representative, for the first tax year of the trust filing as an estate. Prop. Regs. Sec. 1.645-1(d)(1)(i) and (ii)(A) also provide that if the trust intends to make a Sec. 645 election, it does not have to obtain a TIN or file a Form 1041 for the short year. In such a situation, the trust must include the items of income, deduction and credit on the combined Form 1041 for itself and the related estate under the TIN for the related estate.

The IRS has received numerous requests that taxpayers be permitted to use the procedures in the proposed regulations prior to the time that the final regulations are issued. Accordingly, estates and qualifying revocable trusts of decedents who die after 1999 and before the effective date of the final Sec. 645 regulations may choose to use either the election and reporting procedures set forth in Rev. Proc. 98-13 or the election and reporting procedures set forth in Prop. Regs. Secs. 1.645-1(c) and (d)(1)(i) and (ii)(A).

IRS Notice 2001-26, IRB 2001-13