A recent Tax Court case, Estate of Minnie Lynn Sower, http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11392, illustrates that, even though there is no estate due and a 706 return is filed to claim a deceased spouse’s unused exemption amount (“DSUE”) to preserve portability, care must still be exercised in preparing that return.
In Sower, the Tax Court re-examined the estate of the first spouse to verify that the DSUE claimed by the second spouse on her estate tax return was correct. As it turned out, the first spouse failed to report some lifetime gifts. The result, with penalties assessed, was that virtually all of the DSUE was lost. This was the case even though the executor of the first spouse had obtained a closing letter.
The Tax Court rejected the argument that the IRS was conducting a second examination of the first spouse’s return. Instead the Court said the IRS was examining the first spouse’s return only to properly evaluate the second spouse’s DSUE for her return. The Court further rejected the estate’s argument that looking at the first return violated the statute of limitation because the portability provision has no statute of limitation. As Stephen King once wrote “eternity is a long time.”