Examination of Deceased Spouse’s Estate Tax Return Was Proper (Sower Est., TC)

The amount of deceased spousal unused exclusion (DSUE) amount available to a decedent was reduced following an examination of her deceased spouse’s estate tax return. In 2003 and 2005, the decedent and her spouse made taxable gifts, which were reported on federal gift tax returns. The spouse died in 2012. The spouse’s estate reported a DSUE amount of around $1.2 million and elected portability of that amount to the decedent. The IRS issued Letter 627, Estate Tax Closing Document, to the estate, stating that the return was accepted as filed. The decedent died in 2013. The estate, similar to the spouse’s estate, did not report the decedent’s taxable gifts on the estate tax return. The decedent’s return was examined and, in connection, the spouse’s return was examined for the purpose of determining the proper DSUE amount. The decedent’s taxable estate was increased by the amount of her taxable gifts and the DSUE amount available to the decedent was reduced on account of the spouse’s taxable gifts, resulting in an estate tax deficiency.

The IRS was within its authority under Code Secs. 2010(c)(5)(B) and 7602 to examine the spouse’s estate tax return. The estate argued that the examination of the spouse’s estate was not within the IRS’s scope of power because the DSUE amount was not applied to a “taxable gift transfer” and the effective date of Code Sec. 2010 precluded the adjustment of the taxable estate as the result of pre-2010 gifts. The IRS has the authority to examine a deceased spouse’s return with respect to each transfer made by the surviving spouse to which a DSUE amount is or has been applied. The argument that the DSUE amount was not applied to a “taxable gift transfer” was irrelevant because there was a transfer to which the DSUE amount had been applied. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312 ) made the amendments to Code Secs. 2010 and 2505 “apply to estates of decedents dying and gifts made after December 31, 2010.” The effective date for the gift tax provision was irrelevant because both of the decedents died after December 31, 2010.

The language of Code Sec. 2010(c)(5)(B) explicitly gave the IRS the authority to examine a deceased spouse’s return and adjust the DSUE amount regardless of the statute of limitations period on assessments. Thus, there was not a violation of the Congressional intent of portability. There was no due process concern relating to a subversion of the statute of limitations because the IRS did not have the power to assess estate tax against the predeceased spouse’s estate outside the period of limitations. An adjustment of the DSUE amount of a predeceased spouse was not an assessment of tax against the predeceased spouse’s estate, even though it might result in an increase in estate tax owed by a subsequent estate.

The estate argued that the Letter 627 was a closing agreement that barred the IRS examination of the spouse’s return. Only two prescribed forms qualify as closing agreements, and Letter 627 was not one of those forms. There was no evidence of a closing agreement between the IRS and spouse’s estate. Further, the decedent’s estate could not establish the essential elements to prevail on a claim of equitable estoppel against the government. There was no second examination of the spouse’s estate because the IRS did not obtain any new information. The IRS examined the return already in its possession and did not request any additional information from the estate.

M.L. Sower Est., 149 TC —, No. 11, Dec. 61,010

Other References:

Code Sec. 2010

CCH Reference – FINH ¶1450.80

Code Sec. 6501

CCH Reference – FINH ¶21,365.13

Code Sec. 7121

CCH Reference – FINH ¶22,095.26

Code Sec. 7602

CCH Reference – FINH ¶22,560.60

Code Sec. 7605

CCH Reference – FINH ¶22,690.80

Tax Research Consultant

CCH Reference – TRC ESTGIFT: 51,060

CCH Reference – TRC IRS: 15,152

CCH Reference – TRC IRS: 39,054

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AUTHOR

CCHTaxGroup

All stories by: CCHTaxGroup