Loss of Deceased Spouse Unused Exclusion
Estate Administration, Estate and Gift Tax, Fiduciaries, Regulatory, Revenue Procedures, Tax, Tax Controversy, Tax Court
In a recent case out of the Tax Court, a surviving spouse’s Estate was denied the portability of the Deceased Spouse’s Unused Exclusion (“DSUE”) from the decedent’s spouse who had passed away two years before the survivor.[1] The Estate Tax Return (“706”) for the decedent’s spouse, while filed, was not “complete and properly prepared” and therefore did not satisfy the filing requirements for a late-filed return for portability purposes under Rev. Proc. 2017-34 (discussed below).[2] We have previously written about the importance of a properly prepared Estate Tax Return, and this case serves as a prime example of that, albeit for a different reason than was the main subject of that article.[3]
Billy Rowland (“Billy”) passed away in 2018. His wife, Fay Rowland (“Fay”) passed away two years prior, on April 8, 2016. Fay’s Executor filed for an automatic extension of her 706, thus extending the due date from nine months after death to fifteen months after death, resulting in a due date of July 8, 2017. However, the 706 was not filed until December 29, 2017. The 706 did state that it was “Filed Pursuant to Rev. Proc. 2017-34 to Elect Portability under § 2010(c)(5)(A).” For 2016, the year of Fay’s passing, the estate tax exemption amount was $5,450,000. The 706 showed a gross estate of $3,000,000 and payments to thirteen beneficiaries totaling $1,401,000 as well as prior taxable gifts of $237,438. After accounting for other deductions, the DSUE was calculated to be $3,712,562. The 706 listed numerous assets comprising the gross estate but did not provide values for any of them. It only provided an estimated value of the gross estate.
Billy’s Estate filed his 706 and, relying on the DSUE of $3,712,562 from Fay, showed an applicable exclusion of $14,892,562 ($11,180,000 from Billy and the balance from Fay). Billy’s 706 showed a net tax due of $4,477,555. Billy’s 706 was audited and the IRS denied Billy’s Estate the use of the DSUE from Fay since it was not claimed properly. Billy’s Estate contested this in his Tax Court Petition. The IRS filed a Partial Motion for Summary Judgment on the DSUE issue, and that is what the current opinion addresses.
To understand the issue, let’s first start with what portability and the DSUE is in the first place. Under IRC § 2010(c)(2)(B) allows a decedent to take advantage of the DSUE of his or her predeceased spouse, with § 2010(c)(5) requiring that the use of a DSUE requires an election. This election is made on a 706 filed by the deceased spouse’s executor and “No election may be made under this subparagraph if such return is filed after the time prescribed by law (including extensions) for filing such return.”[4] Accordingly the 706 electing the DSUE must be timely filed.[5]
However, under Rev. Proc. 2017-34, the IRS provided for “a simplified method for certain taxpayers to obtain an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to make a ’portability’ election under § 2010(c)(5)(A) of the Internal Revenue Code” and extended the deadline for returns to two years after the date of death. Rev. Proc. 2017-34 provided that the returns field pursuant to the Rev. Proc. must be “complete and properly prepared”.
Prior to this, the IRS had issued a host of Private Letter Rulings granting extensions on a case by case basis, but this was a timely and costly endeavor for the taxpayer. While not applicable to this case, I do want to highlight that Rev. Proc. 2022-32, which now supersedes Rev. Proc. 2017-34, and extends this deadline from two years to five years.
Also relevant to this case is Treas. Reg. § 20.2010-2(a)(7)(ii), which provides for a simplified procedure for claiming the DSUE on a 706 where the estate is not required to file a return under § 6018(a) and all assets of the Estate are eligible for either the marital or charitable deduction. When applicable, no asset values are required on the 706 but only “the description, ownership, and/or beneficiary of such property, along with all other information necessary to establish the right of the estate to the deduction.” However, the simplified procedure does not apply if “[t]he 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.”[6] In other words, where there are assets passing to other individuals or entities in a manner that does not qualify for the marital or charitable deduction, then the simplified reporting is not applicable.
The Court walked through all of the issues discussed above to reach its conclusion. First, Fay’s 706 was not timely filed. However, it was filed within the two-year timeframe provided by Rev. Proc. 2017-34. So as far as timing is concerned, it was okay.
However, while timing was not an issue, Fay’s 706 failed to list asset values and Billy’s Estate, the taxpayer at issue here, claimed eligibility for this simplified method pursuant to Treas. Reg. § 20.2010-2(a)(7)(ii) as to Fay’s 706. But as noted above, the simplified method for valuing assets is not applicable where assets are passing to others in a manner that they do not qualify for the marital or charitable deduction. In Fay’s case, she left assets to thirteen individuals other than Billy and used $1,410,000 of her exemption on such bequests. This fact kept Fay’s Estate from being eligible to take advantage of Treas. Reg. § 20.2010-2(a)(7)(ii). Without the benefit of Treas. Reg. § 20.2010-2(a)(7)(ii), Fay’s 706 was not complete and properly prepared since it had no asset values, thus making it ineligible to qualify for the extension under Rev. Proc. 2017-34. Accordingly, the Tax Court granted the IRS’s Partial Motion for Summary Judgement as to the DSUE issue.
As noted in our prior article on the importance of property preparing the 706, estate tax returns are not as common as they once were due to the increased estate tax exemption amount which currently sits at $13,990,000 and will go up to $15,000,000 in 2026 as part of the One Big Beautiful Bill.
To quote our prior article: Given the importance of the 706 and the disastrous consequences in terms of estate and generation-skipping tax (“GST”) that can occur where an election is missed on the 706, practitioners and clients alike should pay extra careful attention when a 706 is required to be filed. In addition to missed elections and missed GST allocations, the 706 also serves as the estate’s “opening position,” if you will, in an eventual audit from the IRS, a common occurrence in a large taxable estate.
[1] Estate of Rowland v. Comm’r, TC Memo 2025-76.
[2] Id.
[3] Charles J. Allen, The Importance of a Properly Prepared Form 706 Estate Tax Return, Edmondson Sage Allen, PLLC., https://www.esapllc.com/the-importance-of-a-properly-prepared-form-706/ (Nov. 3, 2022).
[4] IRC § 2010(c)(5)(A).
[5] In addition. IRC § 2010(c)(5)(B) provides that the statute of limitations under § 6501 does not prevent the IRS from examining the return claiming the DSUE for purposes of determining if the DSUE was properly claimed. While this was not applicable in the present case, it is important to note as a 706 claiming DSUE could be examined for purposes of the DSUE eligibility long after the statute of limitations has expired for that return.
[6] Treas. Reg. § 20.2010-2(a)(7)(ii)(A)(1).
