The United States Tax Court’s decision in Estate of Billy S. Rowland, Deceased, James A. Park, Executor v. Commissioner of Internal Revenue, T.C. Memo. 2025-76, provides critical insights for tax professionals concerning the deceased spousal unused exclusion (DSUE) amount and the stringent requirements for electing portability. This case underscores the importance of strict compliance with filing deadlines and return preparation standards, even when attempting to utilize administrative safe harbors.

Factual Background

Billy S. Rowland passed away in January 2018, two years after his wife, Fay Rowland, who died on April 8, 2016. The executor for Fay’s Estate, James A. Park, sought to elect portability of Fay’s DSUE amount for use by Billy’s Estate.

Fay’s executor initially obtained an automatic extension to file her estate tax return (Form 706), shifting the due date from January 9 to July 8, 2017. However, Fay’s Return was not filed by this extended deadline; it was mailed on December 29, 2017, and received by the Internal Revenue Service (IRS) on January 2, 2018.

The header of Fay’s Return explicitly stated "FILED PURSUANT TO REV PROC 2017-34 TO ELECT PORT SEC 2010(c)(5)(A)". The return reflected an estimated gross estate of $3 million and calculated a DSUE amount of $3,712,562 based on a 2016 basic exclusion amount of $5,450,000. Significantly, while Fay’s Return listed various assets, it did not include any information as to their fair market value, instead relying on the estimated gross value of the estate. The return’s schedules included a note regarding potential relaxed reporting for marital or charitable deduction property, but it applied this relaxed treatment across the board, listing "$0" for each property category and a total estimated value of assets subject to the special rule.

Fay Rowland’s Trust Agreement, executed in 1990 and amended in 2002 and 2010, established specific bequests, a distribution of 20% of the trust estate to a charitable family foundation, and an amount to Mr. Rowland equal to one-fourth of her gross estate. The residue was dedicated to fund trusts for various grandchildren.

When Billy’s Estate timely filed its Form 706 on April 22, 2019, it reported the $3,712,562 DSUE amount, adding it to the 2018 basic exclusion amount of $11,180,000 to arrive at an applicable exclusion of $14,892,562.

The IRS selected Billy’s Return for examination and subsequently issued a notice of deficiency, asserting that Billy’s Estate was ineligible to claim the DSUE amount. The IRS concluded that Fay’s Return had not made a "proper, complete, and effective portability election" because it was not filed timely and did not satisfy the requirements of Rev. Proc. 2017-34, specifically noting the absence of complete descriptions or valuation information for the property. The IRS contended that the structure of Fay’s Trust Agreement precluded the estimated reporting approach and required itemization and valuation of all property.

Taxpayer’s Request for Relief

Billy’s Estate sought to oppose the Commissioner’s motion for partial summary judgment, arguing that disputed facts precluded summary judgment. Furthermore, Billy’s Estate contended that any errors in Fay’s Return should be excused on the grounds of regulatory murkiness, substantial compliance, or equitable estoppel.

Court’s Analysis of the Law

The court first outlined the statutory framework for estate tax and the unified credit.

Estate Tax Principles

Section 2001(a) imposes a tax on the transfer of the taxable estate of every U.S. citizen or resident. The taxable estate is derived by reducing the gross estate by permissible deductions, such as those for charitable purposes (I.R.C. § 2055) and property passing to a surviving spouse (I.R.C. § 2056).

Unified Credit and DSUE

Section 2010 provides a unified credit against estate tax, which effectively reduces the gross estate for tax calculation. This credit comprises the basic exclusion amount (e.g., $5,450,000 for 2016) and, for a surviving spouse’s estate, the DSUE amount. The DSUE amount is the lesser of the basic exclusion amount or the excess of the predeceased spouse’s applicable exclusion amount over their taxable estate. This structure allows a marital unit to benefit from both spouses’ basic exclusion amounts.

Portability Election Requirements

For a DSUE amount to be claimed by a surviving spouse’s estate, I.R.C. § 2010(c)(5)(A) mandates three conditions:

The executor of the deceased spouse’s estate must file an estate tax return computing the DSUE amount.
The executor must make an election on that return.
Such return must be timely filed.

Generally, an estate tax return electing portability is due nine months after the decedent’s date of death or the last day of an extended period.

Rev. Proc. 2017-34 Safe Harbor

Recognizing potential filing challenges, the IRS offered an additional safe harbor under Rev. Proc. 2017-34, providing that a "complete and properly prepared" estate tax return would 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". A return is deemed "complete and properly prepared" if it adheres to the instructions for Form 706 and other specific Treasury Regulations.

Form 706 schedules require detailed listing and fair market valuation of various property types. A "special rule" in Treasury Regulation § 20.2010-2(a)(7)(ii) relaxes these reporting requirements for marital or charitable deduction property, where an estate is not otherwise required to file a return under section 6018(a). In such cases, only description, ownership, and beneficiary information, along with other data needed to establish the deduction, are required, not the property’s value.

However, this relaxed reporting does not apply if the value of the marital or charitable deduction 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". An example provided in the regulations clarifies this: if a will dictates percentages of property to a marital trust and a non-marital trust, the full value of the property is needed to verify the amount passing to the non-marital trust, thus precluding relaxed reporting.

Application of the Law to the Facts and Court’s Analysis

The court systematically addressed each of Billy’s Estate’s arguments.

Improper Election

The court found that Fay’s Return failed to make a proper portability election. Fay died on April 8, 2016, and her extended filing deadline was July 8, 2017. Since Fay’s Return was filed on January 2, 2018, it was untimely under the general rules of I.R.C. § 2010(c)(5)(A) and Treas. Reg. § 20.2010-2(a)(1).

The critical question then became whether Fay’s Return qualified for the Rev. Proc. 2017-34 safe harbor. While Fay’s Return was filed by January 2, 2018, meeting the first condition of the safe harbor, it failed the second, more substantial requirement: being "complete and properly prepared". The court noted that Fay’s Return did not provide valuation information for each property interest listed on its schedules, which contravenes the Form 706 instructions required by Treasury Regulation § 20.2010-2(a)(7)(i).

Furthermore, Fay’s Estate incorrectly applied the special rule from Treasury Regulation § 20.2010-2(a)(7)(ii) across all assets, rather than only to eligible marital and charitable deduction property. The court highlighted that Fay’s Return estimated the gross estate and listed "$0" for each property category, despite the instructions reserving such treatment only for "the estimated value of the assets subject to the special rule". As Fay’s Estate clearly contained property not passing to Mr. Rowland or charity, this misapplication rendered the return incomplete.

Crucially, even for the marital and charitable deduction property, the relaxed reporting standard did not apply due to the structure of Fay’s Trust Agreement. The Trust Agreement provided for percentage distributions to a charitable foundation and Mr. Rowland, with the residue going to trusts for grandchildren. The court concluded that the value of property passing to the family charitable foundation and Mr. Rowland "relates to, affects, or is needed to determine" the value passing to the grandchildren’s trusts. Therefore, under Treasury Regulation § 20.2010-2(a)(7)(ii)(A)(1), full itemization and valuation were required for all property, not just estimation.

Substantial Compliance

Billy’s Estate argued that Fay’s Return substantially complied because it reported information sufficient for the IRS to verify the DSUE amount. The court acknowledged that the doctrine of substantial compliance can apply to regulatory requirements but cautioned against liberal application, especially when dealing with administrative discretion like the safe harbor in Rev. Proc. 2017-34. The court explained that the safe harbor represents a discretionary administrative relief, and taxpayers typically cannot gain its benefit without adhering to the conditions imposed.

Even assuming arguendo the doctrine’s applicability, the court found that Fay’s Return did not substantially comply. The return failed to provide the requisite fair market value for any listed item of property, instead relying on an estimated gross estate. This omission was not a mere "foot-fault"; it frustrated the IRS’s ability to efficiently identify questionable DSUE elections and verify the amount, a function explicitly envisioned by Congress through I.R.C. § 2010(c)(5)(B). Information provided during the examination phase could not cure the initial noncompliance on the face of the return.

Equitable Estoppel

Billy’s Estate further asserted that the IRS should be equitably estopped from disallowing the DSUE claim due to its "misleading silence" in not alerting the estate to problems with Fay’s Return, thus depriving it of an opportunity to correct errors. The court reiterated that equitable estoppel against the Commissioner is applied with "utmost caution and restraint" and requires several elements, including a false representation or wrongful misleading silence related to a statement of fact, ignorance of true facts by the claimant, and adverse effect. The U.S. Court of Appeals for the Sixth Circuit, to which an appeal would lie, also requires a showing of "affirmative misconduct" by the government, which is more than mere negligence and involves intentionally or recklessly misleading conduct.

The court found no evidence of affirmative misconduct by the IRS examining officer. The officer identified the DSUE issue, requested information, and later informed the estate of the conclusion. Not providing "updates and opportunities to respond in medias res" did not constitute affirmative misconduct. Additionally, the purported misleading silence related to the IRS’s legal position (noncompliance with regulations), not a statement of fact. Finally, the court saw no demonstrable detriment, as an extension request under Treasury Regulation § 301.9100-3 filed after the IRS discovered the issue would likely receive the same treatment regardless of when precisely the estate was informed of the problem.

Conclusion

The Tax Court granted the Commissioner’s motion for partial summary judgment, concluding that Fay’s Return failed to make a timely DSUE election under Rev. Proc. 2017-34. Consequently, Billy’s Estate was ineligible to port the DSUE amount to reduce its taxable estate. This case serves as a stark reminder that even when administrative relief is available, strict adherence to the specified requirements for return completeness and valuation is paramount for a valid portability election. Tax professionals must ensure that Form 706 is meticulously prepared, providing all required itemization and valuation details, particularly when fractional or residuary bequests are involved that could affect the applicability of relaxed reporting rules.

Prepared with assistance from NotebookLM.