November 20, 2017

IRS Can Reopen Estate Tax Return to Determine Available DSUE Upon Death of Second Spouse

by Margot Edwards

In Estate of Minnie Lynn Sower, 149 T.C. No. 11 (Sept. 11, 2017), the Tax Court held that the IRS can reopen the portability return filed for a predeceased spouse as part of its examination of the estate tax return filed for the second spouse to die.

In this case, Frank Sower passed away in 2012 and his estate filed an estate tax return electing portability of deceased spousal unused exclusion (DSUE). Frank’s estate received a letter from the IRS stating that it had accepted his return as filed. Minnie Sower later passed away and her estate filed an estate tax return claiming the DSUE reported by Frank’s estate. As part of its examination of Minnie’s return, the IRS reopened Frank’s return and reduced the DSUE.

The IRS is authorized under Section 2010(c)(5)(B) of the Internal Revenue Code to examine the estate tax return of a predeceased spouse to determine the DSUE amount available for use on the return filed by the later spouse to die. The IRS may do so even if the statute of limitations has run for the deceased spouse’s estate.

Among other arguments, Minnie’s estate asserted that the letter received by Frank’s estate was a closing agreement, and/or that the IRS should be estopped from reopening Frank’s estate tax return based on that letter. The letter provided that the Commissioner would not reopen Frank’s return unless there was evidence of fraud or significant errors. However, the Tax Court held that this was not sufficient to prevent the IRS from reopening Frank’s return for the purpose of determining the DSUE available for use on Minnie’s estate tax return.