Rowland: Tax Court Confirms a Simple DSUE Portability Mistake Can Cost a Family Millions

The taxable estate, however, is calculated making certain deductions—including for amounts passing to a surviving spouse. Thus, it’s often the case that a second-to-die spouse’s estate is much larger than the first-to-die spouse’s estate (assuming the surviving spouse inherited the bulk of the deceased spouse’s assets).

The first-to-die spouse may, therefore, not always “use up” their entire estate tax exemption amount. This unused portion is referred to as the deceased spouse unused exclusion (DSUE).

In 2010, tax reform made the DSUE portable between spouses. Essentially, if one spouse failed to use up their entire transfer tax exemption amount, the surviving spouse's estate can use the unused portion. For the surviving spouse to claim the DSUE, three basic requirements exist: (1) the executor of the deceased spouse’s estate must file an estate tax return that computes the DSUE amount, (2) the executor must elect portability on that return and (3) the return must be filed on time.

The estate tax return electing portability is due within nine months of the death or the last day of any extension period. A 2017 safe harbor exists so that a return is deemed “timely” if filed before the later of (1) January 2, 2018 or (2) the two-year anniversary of the decedent’s death. (Notably, the IRS extended the deadline to five years after death starting in 2022, years after the taxpayers in the Rowland case had died).

An estate tax return requires an itemization and valuation of the assets included in the decedent’s estate. Relaxed reporting allows the return to be considered “complete” while omitting detailed valuation assessments if the property is passing to a surviving spouse or charity.

Estate of Rowland: Tax Court Serves a Warning 

The case, Estate of Billy Rowland, TC Memo 2025-76, dealt with a taxpayer who had passed away in 2018, two years after the death of his wife. His estate tried to claim his predeceased wife's remaining DSUE amount of roughly $3 million.

However, while the first-to-die spouse filed their required Form 706 with the specific heading "FILED PURSUANT TO REV PROC 2017-34 TO ELECT PORT SEC 2010(c)(5)(A)", it was not filed on time. Her return also failed to contain certain valuation details with respect to her assets, instead relying on estimates.

The IRS found that this made the return incomplete, so the second-to-die spouse's estate was unable to use her remaining exemption. The IRS further contended that the structure of the first-to-die spouse’s trust agreement precluded use of estimated valuations and instead required itemization and valuation of all assets.

The Tax Court agreed, rejecting the estate's argument that they substantially complied with the rules that they found confusing. Because the estate did not precisely comply with the IRS reporting rules, it lost the ability to claim the DSUE. The court also rejected the plaintiff’s claim that relaxed reporting rules should apply, agreeing with the IRS that the relaxed reporting standard was not applicable because a percentage of the first-to-die spouse’s assets was directed into various trusts for grandchildren.

The court also rejected the estate’s argument that the “substantial compliance” doctrine should apply—in fact, it found that even if it did, the return here did not substantially require with the legal requirements because it did not provide the required fair market value of the decedent’s assets.

Conclusion

The moral of this story is that tax professionals should exercise extreme caution when preparing an estate tax return-as mistakes can cost a family millions in estate taxes.

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