The Disutility of the Portability "Estimation of Value" Special Rule
Examining Estate of Rowland v. Commissioner
Table of Contents
Background
Until OBBBA’s recent elimination of the potential “sunset” of the estate and gift tax basic exclusion amount, a common question for surviving spouses was whether a deceased spouse’s unused exclusion (DSUE) amount should be preserved through a portability election. As noted in IRC Section 2010(c)(5)(A), this election must be made on an estate tax return. This requirement is expanded upon in Treas. Reg. Section 2010-2(a)(2), which notes that the estate tax return upon which the portability election is made must be (1) timely, (2) complete, and (3) properly prepared.
Typically, a complete and properly prepared return requires full disclosure of assets by description, and value, on the various Schedules of IRS Form 706. This can be a tedious process, especially where hard-to-value assets (such as closely-held business interests, collectibles, etc.) are included in the deceased spouse’s gross estate. However, where portability is being elected, it is often the case that the deceased spouse’s gross estate did not meet the filing thresholds under IRC Section 6018. Since an estate tax return would not otherwise be required under that Code Section but for the choice to make the portability election, it can seem burdensome to report full values – especially for property qualifying for the marital or charitable deductions. Accordingly, “relief” can be found in Treas. Reg. 20.2010-2(a)(7)(ii).
I say “relief,” because its utility – both under the plain text of the rule, and its interaction with other elections on Form 706 and funding formulas relating thereto – can make it impractical at best. In short, this rule allows for the value of certain assets (but not all assets) on a portability return to be estimated, so long as (1) the entire value of the asset constitutes marital deduction property or charitable deduction property, (2) a complete description of each asset is provided, and (3) the value of the asset is not required to determine the value passing to another (non-marital or non-charitable) recipient, or to determine another related estate or GST tax election. Instructions for Form 706 clarify that this estimate is in increments of $250,000, rounded up. For more details on this special valuation rule, please see this article I put together on the particulars.
Timeliness generally relies upon the typical 9-month deadline, with extensions (if received). In situations where Form 706 wasn’t required to be filed under IRC Section 6018, Rev. Proc. 2017-34 originally set forth a procedure by which the deadline for making a portability election on a qualifying estate tax return could be extended to 2 years from the deceased spouse’s date of death. This procedure was later updated to create a 5-year deadline under Rev. Proc. 2022-32. However, in situations where these deadlines are missed, relief must be sought under Treas. Reg. 301.9100-3. In fact, a weekly examination of IRS written determinations (released each Friday) can sometimes reveal one, or multiple, PLRs addressing late filing relief for a portability election.
A recent Tax Court Memorandum Opinion in Estate of Rowland v. Commissioner, T.C. Memo 2025-76, highlighted the shortcomings and common misapplication of this special valuation election. This article discusses the Rowland holding, along with some issues with “late” returns in general.
The Case
Billy and Fay Rowland were a married couple. Fay died first on April 8, 2016, and her estate filed for the 6-month extension of time to file Form 706. Billy later died on January 24, 2018.
Fay did not have a taxable estate, nor was her estate required to file Form 706 under IRC Section 6018. However, Billy’s estate was required to file under IRC Section 6018 (note that as discussed in this article, the DSUE does not raise the filing threshold under IRC Section 6018). On December 29, 2017 – 26 days prior to Billy’s death, but after the original 706 deadline with extensions – Fay’s estate filed a portability return, pursuant to Rev. Proc. 2017-34, preserving DSUE for Billy’s estate of $3,712,562. However, the Service determined a deficiency in Billy’s estate tax, denying the use of Fay’s DSUE based on the failure of Fay’s estate to make a timely or “proper, complete, and effective portability election.”
The Tax Court granted partial summary judgment to the Service. In so holding, the Tax Court recognized that Fay’s estate had applied the special valuation rule to all assets on the return. This, however, was improper under the express requirements of Treas. Reg. 20.2010-2(a)(7)(ii). As noted above, only non-fractional interests in marital deduction property and charitable deduction property qualify for the special valuation rule. Further, this property was distributed based on a percent of the value of other property – in particular, 20% of the trust estate was to pass to a charitable foundation, and 1/4th of Fay’s gross estate was to pass to Billy. The Tax Court noted that calculation of these charitable and marital amounts by necessity was contingent on complete valuation of all assets in the gross estate. So, the special valuation rule could not have been used in any case.
[As a technical sidebar, the question of a “timely” return interestingly came into play. The portability return itself was late according to the Code and Regulations, but met the extended filing deadline of Rev. Proc. 2017-34. Nonetheless, the failure to meet the other requirements of Rev. Proc. 2017-34 – namely a “complete and properly prepared return” – caused a failure of the timeliness safe harbor itself. And as will be noted by Paul Hood in an upcoming LISI article, there is a question as to whether the Service truly has the authority to relax the requirement of a timely return to begin with.]
Billy’s estate argued for substantial compliance, but the Tax Court determined that Fay’s portability return did not even meet the standard of substantial compliance. In other words, substantial compliance would have required doing everything reasonably possible to comply with Treas. Reg. 20.2010-2(a)(7). This standard was not met, because Fay’s return “[did] not include the fair market value at date of death of any such item” in her gross estate. Especially since there were specific bequests that did not constitute marital or charitable deduction property, Fay’s return did not permit the Service to do its job of verifying the accuracy of the DSUE after taking into account the specific gifts (which would have required valuation anyway). Thus, in the eyes of the Tax Court, the value omissions could not be considered “a mere foot-fault.” An argument for equitable estoppel by Billy’s estate was also rejected for failure to meet the requirements for such estoppel.
Key Implications of the Decision
While given only a cursory citation in the opinion, it is important to note that Treas. Reg. Sections 20.2010-2(d) and -3(d) permit the Service to examine a portability return to determine the accuracy of the DSUE amount, even if the limitations period has passed. Many practitioners overlook this possibility, but it was on display here. So, even if a surviving spouse dies 15+ years after the first spouse, the first spouse’s Form 706 can be examined for purposes of determining the DSUE available to the surviving spouse. (I use 14+ years, as this is the longest under current law that DSUE could have existed as of the time of publishing this article - portability was first available for spouses dying on or after January 1, 2011.)
That being said, the opinion raises an even bigger issue about the compatibility of an estate plan itself (and related formulas) with the portability election. This could also include, for example, a partial disclaimer after death. The Service argued, and the Tax Court agreed, that certain valuation formulas expressed as a percent or fraction of the gross estate or even the residuary would necessarily require full valuation of all assets in the base upon which the percent or fraction is calculated. This generally aligns with Treas. Reg. Section 20.2010-2(a)(7)(ii)(A)(1), which denies the special valuation rule if:
The value of such property relates to, affects, or is needed to determine, the value passing from the decedent to a recipient other than the recipient of the marital or charitable deduction property.
That being said, I’m not so sure that a fraction or formula would always be disqualified from this rule per se. For example, if all assets were held in a family entity that was 100% owned by the deceased spouse, a fraction or percent interest in that entity (assuming no discounts) could be computed independent of the value of the entity or its underlying assets. But this is only part of the story, as it runs headlong into the fact that any fraction of the entity that is not marital deduction or charitable deduction property could invoke a requirement to value the entire entity anyway.
This also raises the question of how Treas. Reg. Section 20.2010-2(a)(7)(ii)(A)(3) might be interpreted or applied, which provides that the special valuation rule cannot be used if:
Less than the entire value of an interest in property includible in the decedent's gross estate is marital deduction property or charitable deduction property.
Could this mean, for example, that an entity that is split between marital deduction and charitable deduction property, or between charitable recipients, would not qualify for the special valuation rule? On one hand, if 100% of the entity interests qualified as such property, it would stand to reason that DSUE would be generated dollar-for-dollar by the deduction and would not be affected by the value of the entity itself. On the other hand, however, we see situations such as that set forth in Estate of Warne v. Commissioner, T.C. Memo 2021-17, in which an LLC that was split 75%-25% between two charities resulted in a reduction in the charitable deduction for the discounted value of the interests going to each respective charity. In such a case, it would stand to reason that such interests – although all charitable deduction property – would not qualify for the special valuation rule because the forced discounts would reduce the DSUE (by virtue of the reduction of the charitable deduction).
In other words, at its most simplified principle, the special valuation rule cannot apply to any asset that actually uses the applicable exclusion of the deceased spouse, or reduces the DSUE.
It is also important to note that Treas. Reg. Sections 20.2010-2(a)(7)(ii)(A)(2) and -2(a)(7)(ii)(A)(4) deny the special valuation rule if there is a GST exemption allocation, or partial QTIP election, respectively. But even with a full QTIP election, the making of the reverse QTIP election means the special valuation rule cannot be used since the reverse QTIP election results in allocation of GST exemption. This is important, because it marks perhaps the only effective way to preserve a deceased spouse’s unused GST exemption since it cannot be preserved through a portability election. But this raises a bigger question – can a late reverse QTIP election even be made? Or might a portability return filed after the 706 due date solely in reliance upon Rev. Procs. 2017-34 or 2022-32 be forced to rely upon automatic allocation of GST exemption?
Finally, we would be remiss if we did not discuss basis. In Treas. Reg. Section 20.2010-2(a)(7)(ii)(A)(2), the determination of basis under IRC Section 1014 is expressly excluded as a disqualifier from the special valuation rule. But, the estimated values under this rule cannot establish basis as they do not represent the “fair market value of the property at the date of the decedent’s death” as required by IRC Section 1014(a)(1). At the same time, even for a return required under IRC Section 6018, property subject to the special valuation rule would not be subject to the basis consistency rules under IRC Section 1014(f) as these rules only apply to property that increases the potential liability (before credits, but not before deductions) for estate tax in the deceased spouse’s estate.
This raises a question of whether an executor, or trustee of a revocable trust, might have a fiduciary duty to accurately determine basis. I would argue that they do. Might this mean that the filing of a portability return using the special valuation rule is a violation of fiduciary duty? That might be a stretch in and of itself, but I will leave you with the language of Treas. Reg. Sections 20.2010-2(a)(7)(ii)(B) which suggests perhaps this duty is not fully relaxed. Based on the foregoing not to mention the Regulation text below, would you (as an executor) ever feel comfortable estimating values on the portability return?
Paragraph (a)(7)(ii)(A) of this section applies only if the executor exercises due diligence to estimate the fair market value of the gross estate, including the property described in paragraph (a)(7)(ii)(A) of this section. Using the executor's best estimate of the value of properties to which paragraph (a)(7)(ii)(A) of this section applies, the executor must report on the estate tax return, under penalties of perjury, the amount corresponding to the particular range within which falls the executor's best estimate of the total gross estate, in accordance with the Instructions for Form 706.
Late Reverse QTIP Elections – A Preview
In an upcoming article, I will discuss how the rules of Rev. Proc. 2022-32 do not apply to reverse QTIP elections and GST tax exemption allocations. If there is any plan to affirmatively allocate GST exemption on Form 706, it should be timely filed. This includes the reverse QTIP election, without which no automatic or affirmative allocation of GST exemption can be made to a QTIP trust. The good news is that there is a separate Revenue Procedure – 2004-47 – permitting a late reverse QTIP election. The bad news is that its requirements are a bit more stringent than for a portability-only return filed after the due date for Form 706. Stay tuned for more.