In the recent Tax Court Memorandum decision Estate of Spenlinhauer v. Commissioner, T.C. Memo. 2025-134, the Court addressed a complex mix of procedural failures, valuation disputes, and phantom assets. For tax professionals, this case serves as a stark reminder of the cascading consequences of failing to timely file Form 706, the strict substantiation requirements for Section 2053 deductions, and the piercing nature of transferee liability under Section 6901.

Background and Facts

Georgia M. Spenlinhauer died on February 4, 2005. Her son, Robert J. Spenlinhauer, served as the executor and was the residual beneficiary. Although the estate obtained an extension to file Form 706 until May 4, 2006, the return was not filed by that deadline. Robert sought advice from an accountant who "cautioned petitioner that he did not have expertise in estate tax and did not file estate tax returns as part of his practice". Consequently, the return went unfiled for over a decade.

The IRS initiated an examination after discovering the unfiled return during Robert’s personal bankruptcy proceedings in 2013. Robert eventually filed the estate tax return on February 8, 2017—nearly 11 years late—reporting a gross estate of roughly $4.4 million and electing alternate valuation. By this time, Robert had distributed the estate’s assets to himself, leaving the estate with no remaining assets.

The IRS issued a Notice of Deficiency determining an estate tax deficiency of nearly $4 million, along with additions to tax under Section 6651(a)(1) and asserted transferee liability against Robert personally.

Procedural Elections and the Late Return

The first major blow to the taxpayer involved statutory elections that are time-barred. The estate attempted to elect the alternate valuation date under Section 2032 and a qualified conservation easement exclusion under Section 2031(c).

Regarding the alternate valuation, the Court noted that such an election must be made "no later than a year after the time prescribed by law (including extensions) for filing". Because the return was filed in 2017, years past the 2006 deadline, the Court ruled that "no election may be made and the gross estate must be valued at the time of decedent’s death". Similarly, the Section 2031(c) exclusion was denied because the executor failed to make the election "on the estate’s tax return on or before the due date (including extensions) for filing".

Valuation of Real Property and Closely Held Stock

The case featured significant disputes regarding the fair market value (FMV) of the "Hingham Property" and a 1% interest in a family corporation, "Spencer Press."

The Hingham Property The estate relied on local tax assessments to value the Hingham Property at $3.9 million. The Court rejected this approach, citing Regulation § 20.2031-1(b), which states that property "shall not be returned at the value at which it is assessed for local tax purposes unless that value represents the fair market value as of the applicable valuation date". The Court found the IRS expert’s appraisal of $5,815,000 credible, noting that the petitioner’s own appraisal from 2006 valued the property at over $9 million, undermining his reliance on the lower tax assessment.

Spencer Press Interest The estate reported the decedent’s 1% interest in Spencer Press at $377,000 (date of death) and $150,000 (alternate value). However, facts revealed that prior to death, Robert rejected offers of $350,000, $500,000, and $750,000, demanding $3 million instead. The Court observed that "Petitioner’s actions unmistakably show that even he did not believe at the time that the shares were worth as little as he now contends". The Court sustained the IRS’s adjustment, noting Robert eventually received $377,000 for the interest and "presented no evidence indicating that the shares were worth less than what they ultimately sold for".

Section 2036 and Intra-Family Notes

A critical technical issue involved the "Milton Property," which the decedent transferred to Robert in 1998 in exchange for a promissory note. The decedent continued to live in the property until her death.

Under Section 2036(a)(1), transferred property is included in the gross estate if the decedent retains possession or enjoyment, unless the transfer was a bona fide sale for full consideration. The Court found that Robert failed to prove he made payments on the note, testifying only to estimates without documentary evidence.

Crucially, the note was amended shortly before the decedent’s death (at age 95) to include a self-canceling provision. The Court cited Estate of Costanza v. Commissioner, noting that "Self-canceling installment notes made between family members are presumed to be gifts and not bona fide debt". The Court bluntly stated that "the parties could not have reasonably expected the debt would ever be paid in full, given that decedent would have needed to live to the age of 125 for that to happen". Consequently, the full value of the property ($850,000) was included in the gross estate.

Similarly, the estate failed to exclude a note from "Parsonsfield Group, LLC." Robert claimed the note was satisfied, but the Court applied the standard that it is "not bound to accept a taxpayer’s self-serving testimony" absent documentary evidence of discharge.

Substantiation of Administration Expenses

The Court disallowed deductions for executor’s commissions, attorney’s fees, and litigation costs under Section 2053 because the estate failed to meet its burden of proof.

Executor’s Commissions: Disallowed entirely because "Petitioner did not provide any evidence to support a deduction".
Litigation Fees: The estate claimed over $500,000 in fees related to the Spencer Press valuation dispute. The Court ruled these were incurred for the benefit of the beneficiary, not the estate. "Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the beneficiaries, may not be deducted".

Section 6651(a)(1) Addition to Tax

The Court sustained the failure-to-file penalty. Robert attempted to claim reasonable cause based on reliance on his accountant. The Court rejected this defense for two reasons:

The accountant explicitly warned Robert that "he did not have expertise in estate tax and did not file estate tax returns as part of his practice".
Robert failed to provide the accountant with necessary information, specifically the 2006 appraisal of the Hingham Property.

Transferee Liability

Finally, the Court addressed whether Robert was personally liable for the deficiency under Section 6901. Because the transfer of assets occurred in Massachusetts, the Massachusetts Uniform Fraudulent Transfer Act (MUFTA) applied.

The Court found that Robert, as executor, transferred all assets to himself, rendering the estate insolvent. "A debtor is insolvent if the sum of its debts is greater than the fair market value of all of its assets". Since the tax deficiency arises by operation of law on the filing due date, the IRS was a creditor at the time of transfer. The Court concluded the transfer was "fraudulent pursuant to MUFTA" and Robert was liable as a transferee, limited to the value of assets transferred to him.

Conclusion

Estate of Spenlinhauer reinforces the axiom that tax deductions and elections are a "matter of legislative grace". The estate lost valuable valuation elections due to late filing and lost significant deductions due to a lack of substantiation. Furthermore, the decision serves as a warning regarding intra-family notes; without rigid adherence to repayment terms and commercial reasonableness, Section 2036 will likely pull the underlying assets back into the taxable estate.

Prepared with assistance from NotebookLM.