Sower v. Comm'r

• Decision Date: 11 September 2017
• Docket Number: Docket No. 32361-15.,149 T.C. No. 11
• Parties: ESTATE OF MINNIE LYNN SOWER, DECEASED, FRANK W. SOWER, JR. AND JOHN R. SOWER, CO-EXECUTORS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

ESTATE OF MINNIE LYNN SOWER, DECEASED, FRANK W. SOWER, JR.

AND JOHN R. SOWER, CO-EXECUTORS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

149 T.C. No. 11

Docket No. 32361-15.

UNITED STATES TAX COURT

September 11, 2017

H died in 2012, and H's estate reported a deceased spousal unused exclusion (DSUE) and elected portability of the DSUE. In 2013 R sent H's estate a letter reporting that the return had been accepted as filed. W died in 2013. W's estate claimed the DSUE reported by H's estate. As a part of an examination of the estate tax return filed by W's estate, R also examined the estate tax return filed by H's estate. R reduced the amount of the DSUE by the amount of taxable gifts given by H but did not determine or assess a deficiency against H's estate. But R determined an estate tax deficiency against W's estate. W's estate filed a petition in which it made several arguments regarding why R should not be allowed to examine the estate tax return filed by H's estate to determine the proper DSUE amount allowable to W's estate.

Held: R acted within the authority granted by I.R.C. sec. 2010(c)(5)(B) when he examined the estate tax return of a predeceased spouse to determine the correct DSUE amount.

Held, further, a letter stating that the estate tax return of a predeceased spouse has been accepted as filed is not a closing agreement under I.R.C. sec. 7121.

Held, further, a letter stating that the estate tax return of a predeceased spouse has been accepted as filed does not estop R from examining the return of the predeceased spouse.

Held, further, an examination of the estate tax return of a predeceased spouse in which R reviews the records in his possession and asserts no additional tax is not a second examination within the meaning of I.R.C. sec. 7605(b).

Held, further, the estate of a later deceased spouse cannot challenge whether an examination of the estate tax return of a predeceased spouse is an improper second examination within the meaning of I.R.C. sec. 7605(b) because only the examined party can seek protection from a second examination under I.R.C. sec. 7605(b).

Held, further, the applicable regulations relating to I.R.C. sec. 2010 do not prohibit R from examining the predeceased spouse's return.

Held, further, the effective date of I.R.C. sec. 2010(c)(5)(B) does not preclude R from adjusting the DSUE amount by gifts given before Dec. 31, 2010, when the DSUE amount affects an estate tax return for a decedent dying after Dec. 31, 2010.

Held, further, R's application of I.R.C. sec. 2010(c)(5)(B) did not frustrate congressional intent with respect to portability.

Held, further, the period of limitations on assessment of tax for the estate of the predeceased spouse is not implicated if R does not determine an estate tax deficiency for the estate of the predeceased spouse. Phyllis A. Sower, for petitioner.

John S. Hitt and Denise A. Diloreto, for respondent.

OPINION

BUCH, Judge: This is an estate tax deficiency case involving the Estate of Minnie Lynn Sower. Minnie was the surviving spouse of her late husband Frank W. Sower.¹ When Frank's estate filed its estate tax return, the estate did not use all of the basic exclusion amount allowed under section 2010(c)(3).² The Commissioner sent a letter to Frank's estate informing it that its return had been accepted as filed. After Minnie passed away, her estate sought to use the deceased spousal unused exclusion (DSUE) as allowed by section 2010(c)(2)(B). As part of examining the return for Minnie's estate, the Commissioner reviewed Frank's estate's tax return and reduced the amount of the DSUE. Minnie's estate raises various arguments as to why the Commissioner should be prohibited fromconsidering the estate tax return of the predeceased spouse for the limited purpose of adjusting the amount of the DSUE allowable to the estate of the surviving spouse. In determining the correct amount of the DSUE allowable to the estate of a surviving spouse, the Commissioner may consider the estate tax return of a predeceased spouse. The period of limitations on assessment for the estate of the predeceased spouse is not implicated because no tax is being assessed against the estate of the predeceased spouse. And a letter informing an estate that its return has been accepted as filed is not a closing agreement and does not otherwise preclude the Commissioner from considering the amount of the DSUE left from that estate to a surviving spouse's estate.

Background

This case was submitted under Rule 122.

At the time of Frank's death, Frank and Minnie were married. During their lifetimes, Frank and Minnie gave $997,920 and $997,921 in taxable gifts, respectively. All of the gifts were given between 2003 and 2005. The Sowers filed a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for each year in which they gave taxable gifts.

Frank died on February 23, 2012. His estate filed a timely return reporting that it had no estate tax liability. The estate also reported zero in taxable gifts but included $945,420 in taxable gifts on the worksheet provided to calculate taxable gifts to be reported on the return. Frank's estate reported a DSUE of $1,256,033 and elected portability of the DSUE to allow the surviving spouse to use it.³

On November 1, 2013, the Commissioner issued an initial Letter 627, Estate Tax Closing Document, to Frank's estate. The Letter 627 showed no estate tax liability for Frank's estate. The Letter 627 also stated that the return had been accepted as filed and further stated:

[The Commissioner] will not reopen or examine this return unless * * * [notified] of changes to the return or there is: (1) evidence of fraud, malfeasance, collusion, concealment or misrepresentation of a material fact; (2) a clearly defined substantial error based upon established Internal Revenue Service position; or (3) a serious administrative error.

Minnie died on August 7, 2013. Her estate filed a timely return claiming a DSUE of $1,256,033 from Frank's estate. Initially, her estate reported and paid an overall estate tax liability of $369,036. Three months later the estate paid an additional $386,424 in tax and interest to correct a mathematical error on the original return. Like Frank's estate, Minnie's estate did not include the lifetimetaxable gifts on the return, though rather than reporting zero in gifts as on Frank's estate tax return, it left the entry blank on Minnie's estate's tax return.

In February 2015 the Commissioner began an examination of the return filed by Minnie's estate. In connection with that examination, the Commissioner also opened an examination of the return filed by Frank's estate to determine the proper DSUE amount available to Minnie's estate. On March 25, 2015, an attorney assigned to examine the return filed by Frank's estate sent the executors a letter and a draft revised report showing an adjustment to the amount of Frank's lifetime taxable gifts. On July 20, 2015, the Commissioner issued a second Estate Tax Closing Document to Frank's estate. The body of the second letter is identical to that of the first Estate Tax Closing Document. Nothing in the record suggests that the Commissioner requested any additional information from or determined any additional liability for Frank's estate.

As a result of the examination of the return filed by Frank's estate, the Commissioner reduced the DSUE available to Minnie's estate from $1,256,033 to $282,690. The Commissioner also adjusted Minnie's taxable estate by the amount of her lifetime taxable gifts. Finally, the Commissioner reduced Minnie's taxable estate by $850 to account for funeral costs. Together these adjustments increased the estate tax liability for Minnie's estate by $788,165. On December 2, 2015, the Commissioner sent Minnie's estate a notice of deficiency determining a $788,165 estate tax deficiency.

Minnie's estate filed a timely petition for redetermination of that deficiency. The estate disputes the full $788,165 in additional estate tax. At the time of Minnie's death she was a resident of Kentucky, and at the time of the petition the executors were residents of Kentucky.

Discussion

In its briefs Minnie's estate advances several arguments. It argues that the first Estate Tax Closing Document should be treated as a closing agreement under section 7121 and that the Commissioner should be estopped from reopening the estate by the text of the document. Minnie's estate also argues that the examination that took place after the Commissioner had sent the first Estate Tax Closing Document was an improper second examination. The estate further argues that the effective date of section 2010(c)(5)(B) and the text of the regulations preclude the Commissioner from adjusting the DSUE amount of the predeceased spouse for gifts made before 2010. Finally, the estate argues that section 2010(c)(5)(B) as applied by the Commissioner in this case is contrary to the congressional intent to permit portability and is "unconstitutional for lack of due process" because it overrides the statute of limitations on assessment established in section 6501.

In its reply brief Minnie's estate argues that the taxable gifts given by Minnie should not be included in the taxable estate for the purpose of determining the estate tax liability. This argument was not properly raised in the petition or the amended petition, and so it has been conceded.⁴ See Rule 34(b)(4); see also Swain v. Commissioner, 118 T.C. 358, 362 (2002); Kay v. Commissioner, T.C. Memo. 2011-159, 102 T.C.M. (CCH) 19, 22 (2011). Even if it had been properly raised, under section 2001(b)(1) the taxable gifts given by Minnie are included in the value of the taxable estate for the purpose of determining the estate tax due.

I. The Estate Tax, the DSUE, and Applicable Regulations

Section 2001 imposes a tax on the transfer of the taxable estates of U.S. citizens and residents. The tax is based on the sum of the taxable value of the...