Unused Estate Tax Exclusion Lost Due to Failure to Make a Valid Portability Election

(Parker Tax Publishing July 2025)

The Tax Court held that a taxpayer's estate was not allowed to reduce the value of the estate by the amount by the taxpayer's deceased wife's unused exclusion amount (i.e., the deceased spousal unused exclusion) because the estate tax return for the taxpayer's deceased wife was not timely filed. The court also found that the safe harbor provided in Rev. Proc. 2017-34 did not apply because the deceased wife's estate merely estimated the gross value of her estate. Estate of Rowland v. Comm'r, T.C. Memo. 2025-76.

Background

Billy Rowland, a successful businessman from Lorain, Ohio, passed away in late January 2018, two years after his wife, Fay. The value of Fay's estate was under the floor for estate tax liability, which is known as the basic exclusion amount. As permitted by Code Sec. 2010(c)(2)(B), Billy's estate later sought to use (or "port") the difference between the basic exclusion amount and the value of Fay's estate, i.e., the deceased spousal unused exclusion (DSUE), to reduce Billy's taxable estate.

Under Code Sec. 2010(c)(5)(A), a DSUE amount may not be claimed by a surviving spouse unless the deceased spouse's executor makes an election on the deceased spouse's timely filed estate tax return. Generally, the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). An additional safe harbor is provided in Rev. Proc. 2017-34, which states that "a complete and properly prepared" estate tax return will be considered timely if filed "on or before the later of January 2, 2018, or the second annual anniversary of the decedent's date of death."

Under Rev. Proc. 2017-34, a return is considered "complete and properly prepared" if it is prepared in accordance with Reg. Sec. 20.2010-2(a)(7). For its part, Reg. Sec. 20.2010-2(a)(7) pins the meaning of "complete and properly prepared" to compliance with the instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Form 706 includes various schedules related to different types of property: Each schedule requires a listing of properties that fit within the subject matter of the schedule, as well as its value at the date of the decedent's death.

Observation: Rev. Proc. 2017-34 was superseded by Rev. Proc. 2022-32, which provides a simplified method for taxpayers to obtain an extension to make a portability election.

After auditing Billy's estate tax return, the IRS issued a notice of deficiency determining that Billy's estate was ineligible to claim the DSUE amount because Fay's estate failed to make a proper portability election. The notice first observed that Fay's return had not been filed within the time to elect portability. It also concluded that Fay's return was not a "complete and properly prepared estate tax return" as required by Rev. Proc. 2017-34 because (1) it did not provide complete descriptions or valuation information for the property making up Fay's Estate and (2) it was ineligible to estimate the value of the property under Reg. Sec. 20.2010-2(a)(7)(ii).

Specifically, the notice stated that Fay's will provided for certain nonmarital bequests of property to various individuals, which needed to be itemized and valued on Fay's return in order to comply with Reg. Sec. 20.2010-2(a)(7). After noting that Fay's residuary property would pass to her trust under her will, the notice also explained that the structure of the trust agreement precluded the estimated reporting approach employed on Fay's return and required the itemization and valuation of all property. Because Fay's return merely estimated the gross value of Fay's estate, it did not comply with Reg. Sec. 20.2010-2(a)(7) and could not take advantage of the safe harbor.

Billy's estate challenged the notice of deficiency in the Tax Court. The IRS moved for partial summary judgment, asserting that Fay's estate neither timely filed its return nor qualified for the Rev. Proc. 2017-34 safe harbor. Billy's estate responded that any errors should be excused on the grounds of substantial compliance or equitable estoppel. According to Billy's estate, Fay's return reported the information necessary for the IRS to verify the DSUE amount. Billy's estate further argued that the IRS's failure to alert Billy's estate to problems with Fay's return constituted a misleading silence and that such silence deprived Fay's estate of the opportunity to correct any errors.

Analysis

The Tax Court granted the IRS's motion for partial summary judgment. The court found that, as a matter of law, Fay's return failed to make a timely portability election under Rev. Proc. 2017-34, and Billy's Estate therefore could not port the DSUE amount to reduce its taxable estate.

Fay's return failed to make a proper portability election, the court found, because her estate tax return was not filed by the deadline. Fay's return also did not qualify for the safe harbor embodied in Rev. Proc. 2017-34 because the procedure requires a "complete and properly prepared" return to be filed in accordance with Reg. Sec. 20.2010-2(a)(7). In the court's view, Fay's return did not qualify because it did not provide valuation information regarding each of the interests in property reported on the various schedules. The court noted that these omissions contravened the Form 706 instructions, which Reg. Sec. 20.2010-2(a)(7)(i) treats as necessary for a complete and properly prepared return. Fay's return was not entitled to estimate the gross value of Fay's Estate, the court said, but instead was required to provide specific valuation information for each property interest listed in the schedules. Fay's return thus did not constitute a complete and properly prepared return eligible for the Rev. Proc. 2017-34 safe harbor.

The court rejected Billy's Estate's arguments regarding substantial compliance and equitable estoppel. The court said that, assuming substantial compliance applied in the context of the Rev. Proc. 2017-34 safe harbor (an issue the court did not need to decide), Fay's return did not measure up under that doctrine. Substantial compliance, the court explained, is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible yet nevertheless fails to comply with the specific requirements of a provision. In the court's view, Fay's return fell well short of providing the requisite information. Moreover, the court found that the errors and omissions on Fay's return prevented the IRS from verifying the DSUE amount. The fact that the IRS could use the specific bequests on Fay's return together with the trust agreement to somehow reverse engineer the DSUE amount did not, in the court's view, stand in for the required information missing from the face of the return.

The IRS's purported to alert Billy's Estate to problems with Fay's return was not grounds for equitable estoppel. There are four essential elements to establish equitable estoppel against the IRS: (1) that there was a false representation or wrongful misleading silence; (2) the error must be in a statement of fact and not in an opinion or a statement of law; (3) the person claiming the benefits of estoppel must be ignorant of the true facts; and (4) he must be adversely affected by the IRS's acts or statements. The court found that there was no act of affirmative misconduct on the part of the IRS, and that the IRS's purported misleading silence related not to a statement of fact but to the IRS's legal position that Fay's return did not comply with Reg. Sec. 20.2010-2(a)(7).

For a discussion of rules for making a portability election, see Parker Tax ¶227,215.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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