Estate’s portability electionheld invalid

The Tax Court denied an estate’s claim of a deceased spousal unused exemption (DSUE) amount, holding that the decedent’s predeceased spouse’s estate did not make a valid portability election (i.e., an election to allow the surviving spouse or the surviving spouse’s estate to use the DSUE of the predeceased spouse) because it did not file a timely estate tax return under Sec. 2010(c)(5)(A), nor did it qualify for the safe harbor in Rev. Proc. 2017-34.

Facts: Billy S. Rowland died in January 2018, nearly two years after the death of his wife, Fay Rowland. The value of the estate of Fay Rowland (Fay’s estate) was under the floor for estate tax liability, which is known as the basic exclusion amount. Under Sec. 2010(c)(2)(B), the estate of Billy Rowland (Billy’s estate) later sought to use the DSUE (i.e., the difference between the basic exclusion amount and the value of Fay’s estate) to reduce Billy’s estate.

Fay had executed a trust agreement in 1990, amended in 2002 and 2010, which established specific bequests totaling $950,000 to her son, daughter, friends, grandchildren, a trust for a great-grandchild, and a collegiate foundation. It also provided for a distribution to a charitable family foundation.

When Fay died in 2016, the executor of her estate obtained an automatic extension until July 8, 2017, to file her Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return (Fay’s return). The executor, though, failed to file a timely return, with the IRS receiving Fay’s return on Jan. 2, 2018. Consistent with an intent to make a portability election for Fay’s DSUE and to qualify for the safe harbor in Rev. Proc. 2017-34, Fay’s return displayed at the top of page 1 “FILED PURSUANT TO REV PROC 2017-34 TO ELECT PORT SEC 2010(c)(5)(A).” Fay’s return reflected a gross estate of $3 million and a DSUE amount of $3,712,562. However, the return did not include specific information about any of her assets, which included stocks, real property, notes receivable, and bank accounts, including only an estimate of the gross estate’s value.

After Billy died, the executor of his estate timely filed his Form 706 (Billy’s return). That return added Fay’s DSUE to the 2018 basic exclusion amount, for a total exclusion of $14,892,562. The return reported a net estate tax of $4,477,555, which generated a refund of $22,445, based on an earlier payment of $4.5 million.

After selecting Billy’s return for examination, the IRS issued a notice of deficiency, determining that his estate was ineligible to claim the DSUE amount. In the notice, the IRS explained that Fay’s return had not been filed within the time to make the portability election under the applicable regulations, so her return had to satisfy the requirements of the safe harbor set forth in Rev. Proc. 2017-34 to be deemed timely for purposes of the portability election. The notice concluded that Fay’s return did not satisfy the safe-harbor requirements because it was not a “complete and properly prepared estate tax return” as required by Rev. Proc. 2017-34. The IRS concluded it was not a complete and properly prepared estate tax return because it did not provide complete descriptions or valuation information for the property making up Fay’s estate, and it was ineligible to estimate the value of the property under Regs. Sec. 20.2010-2(a)(7)(ii).

Billy’s estate challenged the IRS’s determinations in the deficiency notice in Tax Court. The IRS moved for partial summary judgment, asserting that Fay’s estate did not timely file her return and the return did not qualify for the safe harbor in Rev. Proc. 2017-34, so its portability election was invalid. Thus, it asserted, Billy’s estate could not use Fay’s DSUE amount on his return.

Issues: A decedent’s taxable estate is determined by reducing the value of the gross estate by the value of any deductions permissible under Sec. 2051. The gross estate includes the value of any property the decedent had an interest in at the time of death (Sec. 2033). Allowable deductions under Secs. 2055 and 2056 include the amounts of any bequests, legacies, devises, or transfers for certain recognized charitable purposes and the value of property passing from a decedent to a surviving spouse.

Sec. 2010 provides for a unified credit against any estate tax, effectively reducing the value of the gross estate for purposes of calculating the tax. The credit is the sum of the basic exclusion amount (for 2018, $11,180,000) and, in the case of a surviving spouse, the DSUE amount. The DSUE amount is the lesser of the basic exclusion amount or “the excess of — (i) the applicable exclusion amount of the last such deceased spouse of such surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under section 2001(b)(1) on the estate of such deceased spouse” (Sec. 2010(c)(4)).

Sec. 2010(c)(5)(A) states that a DSUE amount cannot be claimed by a surviving spouse unless the executor of the deceased spouse’s estate timely files an estate tax return on which the DSUE amount is computed and a portability election is made. Billy’s estate and the IRS agreed that Fay’s return included a computation of the DSUE amount and made a portability election. Thus, the issue left for the Tax Court to decide was whether Fay’s estate timely filed its return under Sec. 2010(c)(5)(A) or if it should be treated as timely filed under the safe harbor in Rev. Proc. 2017-34.

Under Regs. Sec. 20.2010-2(a)(1), the due date of an estate tax return making the portability election is nine months after the decedent’s date of death or by the last day of a timely filed extension. Rev. Proc. 2017-34 provides a safe harbor for estates having no filing requirement under Sec. 6018(a) (other than to make a portability election), under which an estate tax return will be considered timely if filed by the later of Jan. 2, 2018, or the second anniversary of the decedent’s date of death, if the estate tax return is complete and properly prepared in accordance with Regs. Sec. 20.2010-2(a)(7).

As noted above, under Sec. 2010(c)(5)(A), a portability election may not be made if the estate tax return of the deceased spouse is filed after the extended due date has passed for the return. It was undisputed that Fay’s executor did not file the return by its extended due date, so the court determined that Fay’s return was ineligible to make the portability election under Sec. 2010(c)(5)(A).

With regard to the Rev. Proc. 2017-34 safe harbor, because Fay’s return was filed on Jan. 2, 2018, it was within the safe-harbor requirement for the time of filing because it was filed on or before the later of Jan. 2, 2018, or the second anniversary of her date of death. However, the Tax Court found that Fay’s return did not qualify for the Rev. Proc. 2017-34 safe harbor because it was not prepared in compliance with the Form 706 instructions.

Rev. Proc. 2017-34, Section 4.01(1), provides that to qualify for the safe harbor, an estate tax return must be complete and properly prepared in accordance with Regs. Sec. 20.2010-2(a)(7). Under Regs. Sec. 20.2010-2(a)(7)(i), an estate tax return will be considered complete and properly prepared only if it is prepared in accordance with the return’s instructions. Fay’s return did not provide valuation information regarding each of the interests in property reported on its various schedules, as required by the Form 706 instructions. Thus, the Tax Court found that her form was not complete and properly prepared in accordance with Regs. Sec. 20.2010-2(a)(7), and the Rev. Proc. 2017-34 safe harbor did not apply.

The Tax Court also analyzed whether Fay’s return could be considered properly prepared under the special rule in Regs. Sec. 20.2010-2(a)(7)(ii), which relaxes valuation reporting requirements for marital and charitable deduction property. The court found that it could not. First, the court found that the rule had been improperly applied to all the assets in Fay’s estate “across the board” and not only to the estate’s marital and charitable deduction property. As Fay’s estate plainly contained property that did not pass to Billy or charity, Fay’s return did not satisfy Regs. Sec. 20.2010-2(a)(7)(ii) and therefore was not complete and properly prepared.

Second, the court found that Fay’s return had also erred in applying the relaxed reporting requirements of Regs. Sec. 20.2010-2(a)(7)(ii) to the marital and charitable deduction property of her estate. Under Regs. Sec. 20.2010-2(a)(7)(ii)(A)(1), that standard for reporting does not apply where the “value of such property relates to, affects, or is needed to determine, the value passing from the decedent to a recipient other than the recipient of the marital or charitable deduction property.” According to the Tax Court, the value of the property passing to the family charitable foundation and Billy related to, affected, or was needed to determine the value passing to the trusts for Fay’s grandchildren. Consequently, relaxed reporting under Regs. Sec. 20.2010-2(a)(7)(ii) also did not apply to the marital and charitable deduction property in Fay’s estate.

Billy’s estate claimed that the Form 706 instructions and the regulations were unclear and that the errors on Fay’s return did not defeat the validity of the return or the DSUE election. According to the estate, the IRS suffered no harm because the return reported enough information to verify the DSUE amount, and thus it substantially complied with the relevant requirements.

However, the Tax Court determined, assuming that the doctrine of substantial compliance was available for making a valid portability election, it did not apply because Fay’s return could not be seen as doing all that was reasonably possible to comply with Regs. Sec. 20.2010-2(a)(7). This regulation requires a return making a portability election to satisfy the requirements of the Form 706 instructions. The court observed that the return fell well short of providing the necessary information to meet this standard, providing only a fraction of the detailed item-by-item value reporting required to support the claimed gross estate and DSUE amount.

Billy’s estate also argued for the application of the doctrine of equitable estoppel, positing that the IRS’s failure to alert the estate of the problems with his wife’s return was misleading silence. However, the Tax Court denied that argument as well, finding that the estate had failed to establish the necessary prerequisites for estoppel in the Sixth Circuit (the circuit to which an appeal of the case would lie), including the requirement that there be affirmative misconduct by the government.

Holding: The Tax Court granted the IRS’s motion for partial summary judgment in full. The court held that Fay’s estate return had failed to make a valid portability election because the return was not timely filed under Sec. 2010(c)(5)(A) and did not qualify as timely filed under the Rev. Proc. 2017-34 safe harbor. Consequently, Billy’s estate could not claim the DSUE amount to reduce its taxable estate.

• Estate of Rowland, T.C. Memo. 2025-76

— Thomas Godwin, CPA, CGMA, Ph.D., and John McKinley, CPA, CGMA, J.D., LL.M., are both professors of the practice in accounting and taxation in the SC Johnson College of Business, and Brady Ling is an MPS graduate of the SC Johnson College of Business, all at Cornell University. To comment on this column, contact Paul Bonner the JofA‘s tax editor.