IRS Grants Extension for QTIP Election Due to Tax Professional Error

Taxpayer's $x QTIP Election Mistake: A Costly Oversight

The IRS granted a taxpayer’s request for an extension to make a qualified terminable interest property (QTIP) election under § 2056(b)(7) after a tax professional’s error on the decedent’s Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, threatened to forfeit a $x marital trust deduction. The estate’s failure to include the Marital Trust as QTIP property on Schedule M of the original Form 706—filed on Date 3—was corrected in a Supplemental Form 706 submitted on Date 4. The IRS’s rare relief under §§ 301.9100-1 and 301.9100-3 hinged on the specific facts: the estate’s reliance on professional counsel, the timely correction, and the absence of tax avoidance motives. The Marital Trust, valued at $x, was allocated to defer both federal and state estate tax until the surviving spouse’s death, underscoring the high stakes of the missed election.

The Facts: How a Tax Professional's Error Threatened Estate Tax Deferral

On Date 1, Decedent established a revocable trust, which became irrevocable upon death on Date 2. The trust’s Article Third directed the trustees to hold the trust estate for the benefit of the surviving spouse during her lifetime. The trust required the trustees to pay the spouse the trust’s income at least quarterly, with discretion to distribute principal for the spouse’s health, welfare, maintenance, or nursing home care. This structure was designed to qualify as a marital trust under § 2056(b)(7), allowing the estate to defer both federal and state estate taxes until the spouse’s death.

Decedent’s estate plan hinged on leveraging the federal basic exclusion amount under § 2010(c)—then $12.92 million—and the State basic exclusion amount under State Statute, which was lower. To defer tax liability, the trustees allocated property exceeding the state exclusion to a Marital Trust valued at $x, ensuring the estate’s taxable value remained below the federal threshold. The strategy relied on the marital deduction under § 2056(b)(7), which permits a deduction for property passing to a surviving spouse, provided the executor elects Qualified Terminable Interest Property (QTIP) treatment on Form 706, Schedule M.

Spouse retained Tax Professional to prepare Decedent’s Form 706, due 9 months after death under § 6075(a). Tax Professional filed the original return on Date 3, but omitted the Marital Trust from Schedule M, failing to check the QTIP election box or include the required description of the trust property. The error went unnoticed until a subsequent review, at which point Tax Professional filed a Supplemental Form 706 on Date 4, correcting the omission by listing the Marital Trust as QTIP property on Schedule M. The estate’s reliance on professional counsel, the timely correction, and the absence of tax avoidance motives became critical to the IRS’s later analysis under § 301.9100-3. Without the QTIP election, the Marital Trust’s assets would have been taxable in Decedent’s estate, forfeiting the deferral strategy and triggering an immediate tax liability.

The IRS's Rationale: Why Relief Was Granted Under § 301.9100-3

The IRS’s decision to grant relief under § 301.9100-3 hinged on the estate’s ability to demonstrate that it met the three statutory requirements for an extension of time to make a regulatory election. First, the estate had to show that the QTIP election under § 2056(b)(7) was not made due to reasonable cause. Second, it had to establish that the failure to elect was made in good faith. Third, the estate had to prove that granting relief would not prejudice the interests of the government.

The QTIP election itself is governed by § 2056(b)(7), which allows a marital deduction for property passing to a surviving spouse if the executor elects QTIP treatment on the estate tax return. The election must be made on Form 706, Schedule M, and once made, it is irrevocable. The statute defines "qualified terminable interest property" as property that passes from the decedent, in which the surviving spouse has a qualifying income interest for life, and for which an election under § 2056(b)(7) is made. A "qualifying income interest for life" requires that the surviving spouse is entitled to all the income from the property, payable annually or more frequently, and no person has a power to appoint any part of the property to any person other than the surviving spouse. The election is made by the executor on the estate tax return, and the term "return of tax imposed by § 2001" includes the last estate tax return filed by the executor on or before the due date, including extensions, or the first estate tax return filed after the due date if a timely return was not filed.

Under § 301.9100-3, the IRS may grant an extension of time to make a regulatory election if the taxpayer acted reasonably and in good faith, and granting relief will not prejudice the interests of the government. The regulation specifically 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. The regulation further states that requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government.

In this case, the estate’s reliance on professional counsel became the linchpin of its argument for relief. The IRS concluded that the estate had met the requirements of § 301.9100-3 because the estate acted reasonably and in good faith by relying on the tax professional’s advice, and the late election did not prejudice the government’s interests. The Supplemental Form 706 filed on Date 4 corrected the omission by listing the Marital Trust as QTIP property on Schedule M, demonstrating the estate’s diligence in addressing the oversight. The absence of tax avoidance motives further supported the estate’s claim that granting relief would not prejudice the government. As a result, the IRS granted the executors an extension of time to make the QTIP election under § 2056(b)(7) with respect to the Marital Trust.

Implications: What This PLR Means for Taxpayers and Professionals

This Private Letter Ruling (PLR-102638-26) underscores the critical importance of meticulous review of Form 706 and Schedule M when making a Qualified Terminable Interest Property (QTIP) election under § 2056(b)(7). The IRS’s decision to grant relief under § 301.9100-3—which permits extensions for late regulatory elections—hinged on the estate’s timely filing of a supplemental Form 706 and the absence of tax avoidance motives. Taxpayers and professionals should treat this ruling as a cautionary tale about the consequences of oversight in estate tax planning.

For tax professionals, the case highlights the narrow window for relief under § 301.9100-3, which allows extensions for late elections if the taxpayer demonstrates reasonable cause and files the request within a reasonable time. The IRS’s willingness to grant relief here stemmed from the estate’s prompt correction of the error and the lack of prejudice to the government’s interests. However, the ruling does not create a precedent (§ 6110(k)(3) explicitly prohibits PLRs from being cited as authority), meaning future cases will be evaluated on their own facts. Taxpayers relying on this PLR for similar circumstances do so at their own risk, as the IRS’s discretion is highly fact-specific.

The case also serves as a reminder of the risks of professional reliance. The estate’s error—a failure to list the Marital Trust as QTIP property on Schedule M—was corrected only after the original filing, demonstrating how easily oversight can occur. Professionals must ensure that all QTIP elections are properly documented and that Schedule M is complete before submitting Form 706. The IRS’s grant of relief in this instance should not be interpreted as an invitation to cut corners; rather, it reflects the estate’s diligent response to the mistake. For taxpayers in similar situations, the lesson is clear: act quickly, document thoroughly, and consult a tax advisor to avoid disallowance of the marital deduction.

Ultimately, this PLR reinforces that QTIP elections are not forgiving of errors. The IRS’s decision to grant relief here was driven by specific, favorable facts—a corrected filing, no tax avoidance motives, and timely action—but future cases may not fare as well. Taxpayers and professionals should treat this ruling as a best-case scenario rather than a template for success. The safest path remains strict compliance with Form 706 and Schedule M requirements to prevent the need for § 301.9100-3 relief in the first place.