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Every Estate That Elects Portability Needs a Closing Letter After Decision in Estate of Sower

September 28, 2017 | Brian L. Shetler
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A new Tax Court decision reveals the reason behind the apparent madness in the IRS announcing several years ago that it would not issue closing letters for estate tax returns unless a request is made.

In Estate of Sower, 149 T.C. No. 11, issued September 11, 2017, the Tax Court ruled the IRS can go back and re-examine years later how much estate tax exemption was portable from the estate of a deceased spouse for use in the estate of a surviving spouse (called,  Deceased Spousal Unused Exemption amount or DSUE).  A key factor in the case was that no closing letter was given at the close of the examination of the estate tax return of the first spouse to die.[1]

When the IRS audits a return, it often will issue a closing letter at the conclusion.  With a closing letter in hand, taxpayers can proceed with confidence that the IRS will not re-examine the tax return and change its mind about the tax treatment of items on it unless fraud is later discovered.

This explains why a couple of years ago, the IRS quietly announced on its web page labelled “Frequently Asked Question on Estate Taxes” that for all federal estate tax returns filed on or after June 1, 2015, it would no longer issue closing letters without a request to do so by the taxpayer.  At the time, tax practitioners were puzzled.  The IRS contended that the number of estate tax returns being filed had dramatically increased as many estates began filing estate tax returns solely to make “portability” elections in which the estate of the first spouse to die elected to make the DSUE available to the surviving spouse.

In light of the arguments by the IRS in Estate of Sower, it would appear the undisclosed reason that the IRS did not wish to provide closing letters any longer without a specific request was tactical.  The IRS did not want to have automatically issued closing letters standing in the way of its re-examining how much DSUE really should have been available to the estate of a surviving spouse.  With closing letters issued only upon request, there would be fewer estates of surviving spouses with closing letters standing in the way of revisiting the DSUE available.  Many fiduciaries would wait for the closing letter before distributing an estate.  With the IRS announcement that no closing letter would be automatically issued, the fiduciaries for an estate would be pressured to make distributions with acceptance letters from the IRS without a formal closing letter.

In any case, it has become even more important than ever for a closing letter to be requested on the death of a first spouse if there is any DSUE made available to a surviving spouse via a portability election.

Under Estate of Sower, without a closing letter relating to an estate tax return that makes a portability election for surviving spouse to benefit from the DSUEA, the IRS could still make adjustments at the death of the surviving spouse and impose estate tax deficiencies.


[1] The surviving spouse also died before the statute of limitations on the examination of the first spouse to die’s estate tax return, but the language of the decision does not make it clear whether the closing of the limitations period on the first spouse to die’s estate tax return would have resulted in a different outcome.

 

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Brian Shetler, partner, focuses his practice on trusts and estates, tax and other estate administration issues. He works with corporate fiduciaries as well as families and individuals in establishing and carrying out plans to preserve and build legacies for generations.  For more information, please contact Brian Shetler at brian.shetler@berliner.com or 408.286.5800.

Berliner Cohen is one of the largest and oldest law firms in San Jose serving the business and regulatory needs of private business and public agencies.  Berliner Cohen also meets the growing demands of the Northern San Joaquin Valley with its expanding offices in Modesto and Merced.  For over 40 years, the Firm has developed the special expertise required by a diverse client base consisting of nationally recognized business interests and a number of Silicon Valley’s largest national and multinational corporations, new ventures, leading real estate developers and brokerages, cutting-edge technology companies, agribusiness, healthcare and other service providers, banking and financial institutions, employers, municipalities, public agencies, and individuals.

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