Background of the Case
In the recent court case Estate of Rowland v. Commissioner, the portability of the Deceased Spousal Unused Exclusion (DSUE) was disallowed due to estimated value reporting and the late filing of the election. The taxpayer, Billy Rowland, passed away on January 24, 2018, and the executor of his estate timely filed an estate tax return. His filing reported an exclusion of $14,892,562. This amount consisted of his Basic Exclusion Amount (BEA) of $11,180,000 (the 2018 amount) plus an additional $3,712,562 exclusion from his predeceased wife, Fay. Upon IRS examination, the IRS determined that Billy’s estate was ineligible to claim the DSUE amount of $3,712,562.
Fay Rowland passed away on April 8, 2016. Her gross estate was less than the 2016 Basic Exclusion Amount of $5,450,000. Her executor applied for and received an automatic 6-month extension, making her estate tax return (Form 706) due on July 8, 2017. However, the executor missed this due date and did not file the return until December 2017. The filed return listed the assets of Fay’s estate, but not the fair market value of each asset. Instead, the return reported the estate’s estimated gross value.
Why the Portability Election Failed
Under Rev. Proc. 2017-34, an estate that was otherwise not required to file an estate tax return was allowed to file a late return solely to elect portability and still have the return deemed timely filed. To qualify, the return must have been filed on or before the later of January 2, 2018, or the second anniversary of the decedent’s date of death (April 8, 2018, in Fay’s case), and it must have been a “complete and properly prepared estate tax return.” While the return did meet the two-year filing window, it did not meet the “complete and properly prepared” requirement.
The executor of Fay’s estate had relied on Treas. Reg. § 20.2010-2(a)(7)(ii) in estimating the gross estate rather than providing fair market values for the estate’s assets. However, Treas. Reg. § 20.2010-2(a)(7)(ii)(A)(1) specifies that the relaxed reporting rules for marital and charitable deduction property do not apply in certain situations. One such situation is when the value of marital and/or charitable deduction property must be known to determine the value of nonmarital and/or noncharitable property. The remaining residuary of Fay’s estate passed to trusts for her grandchildren. Other portions went to her spouse and a charitable family foundation. Therefore, the value of the marital and charitable deduction shares needed to be known for her estate in order to determine the value of the shares going into trusts for grandchildren.
The Court’s Decision and Key Takeaways
The Commissioner prevailed in establishing that Billy Rowland’s estate could not claim the $3,712,562 DSUE from Fay Rowland’s estate. The court’s decision was based on Fay’s estate failing to timely file the portability election because it relied on, but failed to meet, the requirements of Rev. Proc. 2017-34 to obtain the two-year filing date from the date of death. The estate failed to meet the requirements of the Rev. Proc. because the estate tax return was not a “complete and properly prepared” return.
The IRS frequently examines estate tax returns, especially those reflecting a tax liability. It is important to have an estate tax return prepared by a professional who specializes in estate taxation and is familiar with the reporting requirements.
Please contact your WG tax advisor if you have any questions.
