Repeal of excess retirement accumulations tax creates refund opportunity.

Until a few years ago, the Code penalized individuals who saved too much in qualified retirement plans. The "excess retirement accumulations excise tax" was a 15% tax imposed under Sec. 4980A. This tax did not apply during the plan participant's life, but, rather, after the participant's death. The tax was paid by the estate on excess retirement accumulations, which were defined as the excess of the present value of the decedent's interest in all qualified retirement plans over the present value of a single life annuity with annual payments equal to the annual excess retirement distribution limit. This excise tax was computed on Schedule S of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

If a decedent's surviving spouse was the beneficiary of all but a de minimis portion of all qualified retirement plan benefits, a special election could be made under Sec. 4980A(d)(5) to defer this excise tax. Using the Sec. 4980A(d)(5) election, the beneficiary-spouse would elect on the decedent's estate tax return not to have the excise tax apply. Rather, distributions received from the decedent's qualified retirement plans would be aggregated with any distributions received by the surviving spouse from his own qualified retirement plans to determine the amount ultimately subjected to the 15% excise tax in the surviving spouse's estate.

Tax deferral is generally a prudent course of action, so most eligible estates probably made Sec. 4980A(d)(5) elections. However, in certain cases, the election may not have been made for legitimate reasons.

The Taxpayer Relief Act of 1997 repealed this excise tax, effective for estates of decedents dying after 1996. This creates a refund opportunity for those estates that did not make the election under Sec. 4980A(d)(5) and, instead, paid the excise tax as part of the decedent's estate. In this situation, the decision not to make the Sec. 4980A(d)(5) election should be revisited.

Given the repeal, making a Sec. 4980A(d)(5) election will generally completely avoid the excess retirement accumulations excise tax. Letter Ruling 9815053 stated that inherited retirement benefits would escape the excess retirement accumulations excise tax (as a result of its repeal), as long as the surviving spouse was alive as of Dec. 31, 1996.

In Letter Ruling 9437041, the IRS ruled that a Sec. 4980A(d)(5) election could generally be made at any time within the three-year statute of limitations (SOL) period for filing an amended Form 706. If the SOL has not closed on the estate tax return for the period during which the excise tax was paid, an election under Sec. 4980A(d)(5) can be made.

To make the election, the estate should file an amended Form 706, Schedule S, checking the box at Part I, Line 1 and completing lines 2 through 12. A statement clearly indicating the spouse is making a Sec. 4980A(d)(5) election must be signed by the surviving spouse and attached to the amended Form 706. In addition, Form 843, Claim for Refund and Request for Abatement, should be filed along with the amended Form 706.

The repeal of this excise tax has created a refund opportunity for certain estates. Practitioners need to recognize this opportunity and evaluate whether a Sec. 4980A(d)(5) election should be made. Practitioners need to be aware that the three-year SOL for filing such amended returns will begin tolling in the near future.

FROM DANIEL P. DOIRON, CPA, CVA, ALBIN, RANDALL & BENNETT, CPAs, LEWISTON, ME