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Proceed with Care with Portability Elections – Don’t Give the IRS the opportunity at a Second Bite at the Proverbial Apple

Written by The Fein Print Category:

By: Steven A. Loeb

In a recent Tax Court case entitled, Estate of Minnie Lynn Sower, Deceased, Frank W. Sower, and John R. Sower, Co-Executors, Petitioner v. Commissioner of Internal Revenue, Respondent (2017) 149 TC No. 11, the IRS was NOT precluded from auditing the estate tax return of the first spouse to pass away for purposes of determining the estate tax liability of the second spouse. The crux of the issue relates to the first spouse making an estate tax portability election.

Internal Revenue Code Section 2010 provides an “unified credit against estate tax.” In the case of a surviving spouse, it includes the deceased spouse’s unused exclusion amount (DSUE) as referenced under Internal Revenue Code Section 2010(c)(2). Internal Revenue Code Section 2010(c)(5)(B) allows the IRS to review the DSUE amount, irrespective of whether the period of limitations has expired for the predeceased spouse’s estate tax return (Form 706).

In this situation, Frank and Minnie Sower were married. Mr. Frank Sower died in 2012 and his estate made a portability election. Upon review of the estate tax return (Form 706), the IRS issued Letter 627 which showed no estate tax liability for Mr. Sower’s estate. Mrs. Minnie Sower passed away in 2013 and the IRS audited her estate tax return. The IRS also reviewed Mr. Frank Sower’s previously filed estate tax return and determined that the DSUE amount was overstated and that therefore a deficiency existed on Mrs. Sower’s estate tax return.

The Tax Court held that in previous cases, the IRS had been bound to an agreement for improperly executed IRS Forms 866 and 906 (however, these forms were not at issue in this matter). The court found it important that no negotiations took place between the IRS and the initial estate tax closing document (Letter 627) of Mr. Sower’s. Therefore, the court held that there was no evidence of a closing agreement, just merely that the Executor of Mr. Sower’s estate received an IRS Letter 627. What was clear from the court’s holding was that a letter stating that the estate tax returns of a predeceased spouse that had been accepted as filed is NOT a closing agreement under Internal Revenue Code Section 7121. Furthermore, such an IRS 627 letter does not prevent the IRS from examining the estate tax return of the predeceased spouse.

Mrs. Sower’s estate tried to prove that the Tax Court has found in other cases that the examined party is protected from a second examination. However, the court stated that Minnie Sower’s estate was not the party that underwent a second examination (if anything, it was Frank’s estate). There were many other technical arguments made that pertain to Section 2010, 7605(b), and 7121; however, the court sided with the IRS.

A key takeaway from this case should be to ensure that upon a first spouse’s passing, the deceased spouse’s unused exemption amount should be carefully reviewed prior to filing. There may be times when a second examination is not available to the IRS; however, under many circumstances, the IRS will have a second bite at the apple to review both the first spouse’s estate tax return and the second spouse’s estate tax return to ensure that the DSUE amount is not overstated.

For more information please contact via email Steven A. Loeb, Esq. or by phone at 973-538-4700 ext. 229.

Fein, Such, Kahn & Shepard, P.C. is general practice law firm of more than 50+ attorneys serving clients in New Jersey and New York. For over 25 years the firm has offered innovative solutions to businesses and individuals in the areas of asset protection business planning, civil litigation, creditor representation in the areas of foreclosure, bankruptcy and collections, elder law, family law, personal injury, tax, and trusts and estates. For more information, go to http://www.feinsuch.com/

This Article does not constitute legal advice nor create an attorney-client relationship.

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