The concept of portability, permanently enacted as part of the amendments to the estate tax law under the American Taxpayer Relief Act of 2012,1 allows the deceased spousal unused exclusion amount (DSUEA) of a decedent to be available to the decedent’s surviving spouse, if an election is made on the decedent’s timely filed estate tax return. The surviving spouse can use the DSUEA amount to shelter taxable gifts from gift tax or to shelter the surviving spouse’s estate from estate taxes. Portability has fundamentally changed estate planning for wealthy families. In 2017, the following important developments emerged relating to portability.

Duty to File Estate Tax ReturnIn re Matter of the Estate of Anne S. Vose v. Lee,2 the Oklahoma Supreme Court considered whether the administrator of a predeceased spouse’s estate can be compelled to file a federal estate tax return to transmit the DSUEA to the surviving spouse. The spouses had entered into an antenuptial agreement under which each spouse waived all rights in the property and estate of the other. The administrator, son of the predeceased spouse (Anne) (but not of the surviving spouse (C.A.)), refused to transmit DSUEA to C.A. despite the fact that no one other than C.A. could derive any benefit from the DSUEA.

As a matter of first impression, the Oklahoma Supreme Court affirmed the district court’s ruling that the administrator could be compelled to file the return and elect portability of the DSUEA, but that C.A. had to pay for the preparation of the federal estate tax return. The Court stated that C.A. had not waived, in the antenuptial agreement, any right to benefit from the DSUEA because portability didn’t exist when the antenuptial agreement was consummated. The Court also concluded that C.A., who had no beneficial interest in the assets of the estate, had standing to maintain the action against Anne’s estate, stating that C.A. “may have a pecuniary interest…in the portability of the DSUE…” (Emphasis added). Clearly, the Court had difficulty reaching the conclusion that C.A. had standing. It appears the Court was mightily offended by Anne’s son’s attitude toward his stepfather and was determined not to sanction such obviously vindictive behavior.

Extending the Deadline to Elect Portability Revenue Procedure 2017-343 greatly simplified the procedure for obtaining an extension of time for electing portability. The general rule is that a portability election must be made on a timely filed estate tax return.4 Previously, the only method for extending the filing deadline to elect portability was by requesting a private letter ruling, an expensive and time-consuming process whose outcome is not guaranteed.

Under the Rev. Proc., if its requirements are satisfied, the time for filing is extended to the later of the second anniversary of the decedent’s death or January 2, 2018. The requirements include, most notably, the following: (1) the decedent must have died after Dec. 31, 2010, and (2) the value of the estate assets must not have been large enough to require the filing of Form 706, meaning that the estate is seeking to file the return only to make the portability election.

Investigating the DSUEA CalculationIn Estate of Sower v. Commissioner,5 the Tax Court addressed the extent of Treasury’s authority to examine a predeceased spouse’s estate tax return, to determine whether the DSUEA was calculated correctly, after the statute of limitations for assessing additional tax has expired. The executor of the predeceased spouse’s (Frank’s) estate had elected portability and had calculated the DSUEA as $1,256,033. While examining the estate tax return of the surviving spouse (Minnie), the IRS discovered that the preparer of Frank’s estate tax return had omitted adjusted taxable gifts. Had adjusted taxable gifts been included, the DSUEA would have been about $283,000.

Minnie’s estate argued the IRS lacked authority to recalculate Frank’s DSUEA. First, the estate maintained the DSUEA calculation did not have to account for Frank’s lifetime taxable gifts because all such gifts were made before the introduction of portability. The Tax Court discarded this point as irrelevant. Second, the estate stated the IRS waived any right to recalculate the DSUEA because Frank’s estate received a closing letter, and that should be considered a closing agreement as authorized in IRC Section 7121. The Tax Court refused to equate a closing letter with a closing agreement under IRC Section 7121 and concluded that Frank’s DSUEA should be reduced by the aggregate amount of his lifetime taxable gifts.