## Facts

- Frank Sower died in 2012.
- Frank’s estate filed Form 706 showing no estate-tax liability, elected portability under I.R.C. § 2010(c), and reported a deceased spousal unused exclusion (DSUE) amount of $1,256,033 for his surviving spouse, Minnie Sower.
- Frank’s estate tax return reported no taxable gifts, but the worksheet used to compute adjusted taxable gifts reflected $945,420 of taxable gifts.
- The IRS sent Frank’s estate a letter stating the return was “accepted as filed.” No closing agreement under I.R.C. § 7121 was executed.
- Minnie died in 2013.
- Minnie’s estate filed Form 706 reporting estate tax liability of $369,036 and claimed Frank’s reported DSUE of $1,256,033.
- Frank and Minnie had each made nearly $1 million in taxable lifetime gifts.
- During examination of Minnie’s estate tax return, the Commissioner opened an examination of Frank’s estate tax return to determine the correct DSUE amount available to Minnie.
- The Commissioner concluded Frank’s available DSUE was $282,690 (not $1,256,033) and also recomputed Minnie’s transfer-tax amounts by taking her lifetime taxable gifts into account.
- The Commissioner issued Minnie’s estate a notice of deficiency asserting an estate-tax deficiency of $788,165.
- Minnie’s estate petitioned the Tax Court, arguing the Commissioner lacked authority to reexamine Frank’s return for DSUE purposes (even though regulations permit examination), that the result conflicted with Congress’s purpose in creating portability, and that it effectively bypassed the limitations period applicable to Frank’s estate.

## Issues

1. Whether I.R.C. § 2010(c)(5)(B) permits the Commissioner, when determining a surviving spouse’s estate tax liability, to examine a predeceased spouse’s estate tax return and adjust the DSUE amount to the correct figure.
2. Whether an IRS letter stating that the predeceased spouse’s return was “accepted as filed” is a closing agreement under I.R.C. § 7121 or otherwise prevents the Commissioner from later adjusting DSUE.
3. Whether the “accepted as filed” letter estops the Commissioner from examining the predeceased spouse’s return to recompute DSUE.
4. Whether the Commissioner’s review of the predeceased spouse’s return is barred by I.R.C. § 7605(b) as an impermissible second examination, and whether the surviving spouse’s estate may raise that objection.
5. Whether § 2010 regulations or the effective-date provisions of § 2010(c)(5)(B) prevent DSUE recomputation by taking into account taxable gifts made before December 31, 2010.
6. Whether the expiration of the assessment limitations period for the predeceased spouse’s estate bars DSUE recomputation for purposes of the surviving spouse’s estate (including any due process objection framed around that limitation).

## Decision

- The Tax Court held the Commissioner acted within the authority granted by I.R.C. § 2010(c)(5)(B) in examining the predeceased spouse’s estate tax return to determine the correct DSUE available to the surviving spouse’s estate.
- The court held the “accepted as filed” letter was not a closing agreement under I.R.C. § 7121 and did not bar later DSUE adjustment.
- The court held the “accepted as filed” letter did not estop the Commissioner from examining the predeceased spouse’s return for DSUE purposes.
- The court held that reviewing the predeceased spouse’s return and records already in the IRS’s possession, without asserting additional tax against that earlier estate, was not a prohibited second examination under I.R.C. § 7605(b) on these facts.
- The court further held the surviving spouse’s estate could not invoke § 7605(b) to challenge an examination of the predeceased spouse’s return.
- The court held the § 2010 regulations did not prevent the Commissioner from examining the predeceased spouse’s return to determine DSUE.
- The court held the effective-date language of § 2010(c)(5)(B) did not bar the Commissioner from adjusting DSUE by taking into account gifts made before December 31, 2010, when DSUE affects a return for a decedent dying after that date.
- The court held the limitations period for assessing tax against the predeceased spouse’s estate was not implicated because the Commissioner did not determine an estate-tax deficiency against that estate; the recomputation was used only to determine the surviving spouse’s estate tax.

## Legal Principles

- I.R.C. § 2010(c)(5)(B) authorizes the IRS to examine a predeceased spouse’s estate tax return and make adjustments needed to determine the correct DSUE amount claimed by a surviving spouse’s estate.
- A letter stating that a return was “accepted as filed” is not a closing agreement and is not binding absent compliance with I.R.C. § 7121 requirements.
- Estoppel against the United States is not established by routine IRS correspondence accepting a return as filed.
- I.R.C. § 7605(b) does not bar the IRS from reviewing an earlier return in its files to compute an amount relevant to another taxpayer where the IRS asserts no additional tax against the earlier filer.
- Only the taxpayer subject to the claimed second examination generally may seek § 7605(b) protection; a different taxpayer (including a later estate) cannot use § 7605(b) to block review of the earlier return.
- DSUE computation may require consideration of the predeceased spouse’s taxable gifts, including gifts made before December 31, 2010, when DSUE is claimed on an estate tax return for a decedent dying after December 31, 2010.
- The expiration of the assessment limitations period for the predeceased spouse’s estate does not prevent DSUE recomputation when the IRS does not assess additional tax against that earlier estate.

## Conclusion

The Tax Court ruled that portability does not fix DSUE at the amount shown on the first spouse’s Form 706; when the surviving spouse’s estate claims DSUE, the IRS may review and adjust the predeceased spouse’s return to determine the correct DSUE, despite an “accepted as filed” letter and regardless of whether the assessment period for the first estate has expired, so long as no additional tax is assessed against that earlier estate.


Estate of Sower v. Commissioner, 149 T.C. 279 (2013)