One of the key estate planning concepts that enables married taxpayers to reduce their joint Federal estate tax liabilities is portability.

Deceased Spousal Unused Exclusion (DSUE)

Based on Internal Revenue Code Section 2010(c)(4), the concept of portability is generally that if a spouse (the “first-to-die” spouse) does not fully utilize such spouse’s Federal estate tax exemption, such spouse’s “unused” Federal estate tax exemption, known as the “deceased spousal unused exclusion” (the “DSUE”), is “portable”, and can be utilized by the other spouse (the “second-to-die” spouse).

For example, assuming the $15 million Federal estate tax exemption that will be in effect in year 2026, if a “first-to-die” spouse utilized only $5 million of such “first-to-die” spouse’s Federal estate tax exemption, there would be a DSUE of $10 million that would be “portable”, and could be utilized by the “second-to-die” spouse; the “second-to-die” spouse would then in effect be able to exclude $25 million of assets from Federal estate tax liability (based on the “aggregate DSUE/exemption” sum of the DSUE of $10 million, plus the “second-to-die” spouse’s own Federal estate tax exemption of $15 million).

Given that asset values tend to increase over time, and Federal estate tax liability tends to arise more on the death of a “second-to die” spouse than on the death of a “first-to-die” spouse, portability can be a critical concept to minimize Federal estate tax liability. However, a recent case raises various issues concerning the use of portability. This case, Estate of Rowland v. Commissioner, T.C. Memo 2025-76 (2025), and its implications, are discussed in this article.

The important facts in the Estate of Rowland case are as follows:

1. Fay Rowland died on April 8, 2016. With an extension, the due date to file Mrs. Rowland’s Federal estate tax return was July 8, 2017. However, the executor of Mrs. Rowland’s estate did not mail Mrs. Rowland’s Federal estate tax return until December 29, 2017, and it was not received by the Internal Revenue Service until January 2, 2018.
2. The header of the first page of Mrs. Rowland’s Federal estate tax return stated, “FILED PURSUANT TO REV PROC 2017-34 TO ELECT PORT SEC 2010(c)(5)(A)”. Mrs. Rowland’s Federal estate tax return calculated a DSUE of $3,712,562.
3. Mrs. Rowland’s Federal estate tax return listed assets, including real property, shares of Rowland Motors, Inc., shares of Rowland Marietta, Inc., a note receivable of Rowland Enterprises, and various bank accounts. However, Mrs. Rowland’s Federal estate tax return did not include any information as to the fair market value of these assets; instead, it only estimated the gross value of the estate (at $3 million).
4. Mrs. Rowland’s spouse, Billy Rowland, died on January 24, 2018. Mr. Rowland’s Federal estate tax return was timely filed on April 22, 2019.
5. Mr. Rowland’s Federal estate tax return included the DSUE of $3,712,562 from Mrs. Rowland’s Federal estate tax return. This DSUE was added to Mr. Rowland’s applicable Federal estate tax exemption of $11,180,000 (the basic Federal estate tax exemption in Mr. Rowland’s year of death of 2018) to result in an “aggregate DSUE/exemption” sum of $14,892,562. Mr. Rowland’s Federal estate tax return reported a net estate tax of $4,477,555 and claimed a refund of $22,445 based on a prior payment of $4,500,000.
6. The Internal Revenue Service examined Mr. Rowland’s Federal estate tax return and issued a notice of deficiency that determined that Mr. Rowland’s estate was ineligible to claim the DSUE. The notice of deficiency stated that “upon review of [Fay’s Return], a proper, complete, and effective portability election was not made to port such predeceased spouse’s unused applicable exclusion amount to her surviving spouse . . . and, accordingly, no DSUE amount was available for [Billy’s Estate]”.

The United States Tax Court, in its opinion in the Estate of Rowland case (issued on July 15, 2025), agreed with the Internal Revenue Service. The Estate of Rowland court decision can be divided into three parts.

First, the Estate of Rowland opinion analyzed the application of Internal Revenue Code Section 2010(c)(5)(A). The court stated, “According to that provision, ‘[n]o election may be made . . . if [the relevant] return is filed after the time prescribed by law (including extensions) for filing such return.’ See also Treas. Reg. § 20.2010-2(a)(1) (‘[T]he due date of an estate tax return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained).’). In this case, Mrs. Rowland died on April 8, 2016, and it is undisputed that her executor did not file Fay’s Return by the extended deadline of July 8, 2017. Thus, Fay’s Return was ineligible for the election under section 2010(c)(5)(A)”.

Second, the Estate of Rowland opinion analyzed the general application of a “safe harbor” issued by the Internal Revenue Service in Revenue Procedure 2017-34 that extended the permitted time to file an estate tax return to elect portability. Under Revenue Procedure 2017-34, a “complete and properly prepared” estate tax return would be considered timely filed to elect portability if filed “on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death”. The court stated, “As an initial matter, the filing of Fay’s Return on January 2, 2018, complies with the requirement that the return be filed ‘on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death.’ See Rev. Proc. 2017 34, § 4.01(1)”.

Third, the Estate of Rowland opinion analyzed the specific application of the “complete and properly prepared” requirement for an estate tax return under Revenue Procedure 2017-34. The court stated, “Although Fay’s Return clears the first hurdle for relief, it crashes into the next, i.e., a ‘complete and properly prepared’ return prepared in accordance with Treasury Regulation § 20.2010-2(a)(7).  See Rev. Proc. 2017-34, § 4.01(1). Fay’s Return did not provide valuation information regarding each of the interests in property reported on the various schedules. These omissions contravene the Form 706 instructions, which Treasury Regulation § 20.2010-2(a)(7)(i) treats as necessary for a complete and properly prepared return. . . . In summary, Fay’s Return was not entitled to estimate the gross value of Fay’s Estate but instead was required to provide specific valuation information for each property interest listed in the schedules. Fay’s Return thus did not constitute a complete and properly prepared return eligible for the Rev. Proc. 2017-34 safe harbor”. As a result, the court concluded, “As a matter of law, Fay’s Return failed to make a timely DSUE election under Rev. Proc. 2017-34, and Billy’s Estate therefore cannot port the DSUE amount to reduce its taxable estate”.

Proper Portability & DSUE Claim

The most obvious implications from the Estate of Rowland decision concern how to make a proper portability election and claim a DSUE. One issue is that the estate tax return of the “first-to-die” spouse needs to be timely filed. If otherwise there is no requirement to file an estate tax return, Revenue Procedure 2022-32 has superseded Revenue Procedure 2017-34, and there is now a deadline of five years after the death of the “first-to-die” spouse to file the estate tax return of the “first-to-die” spouse for portability purposes (and it must be stated at the top of the estate tax return, “Filed Pursuant to Rev. Proc. 2022-32 to Elect Portability under § 2010(c)(5)(A)”). A second issue is that a “complete and properly prepared” estate tax return of the “first-to die” spouse must be filed. While there is a tendency to “just file something” (perhaps to save costs) to preserve the portability election, if the estate tax return of the “first-to-die” spouse is not “complete and properly prepared”, in accordance with applicable regulations, a portability election cannot be made. This point can relate to the specific problem with the estate tax return in the Estate of Rowland case, or any other problem that can cause an estate tax return to be not “complete and properly prepared”.

Consequences For Improper DSUE

The other implication from the Estate of Rowland decision is that portability can have significant consequences. The failure to make a proper portability election in the Estate of Rowland case resulted in additional estate tax liability for the Estate of Billy Rowland. With the increase in the Federal estate tax exemption in recent years, it may be thought that estate taxation is no longer to be considered. However, it is important to recognize the context in which a portability election can arise. Portability is used to reduce estate tax liability on the death of the “second-to-die” spouse. The death of the “second-to-die” spouse can happen many years from now. Can one predict with certainty what will be the Federal estate exemption many years from now? Even more applicable, can one predict with certainty what will be the taxable estate of the “second-to-die” spouse many years from now (especially given that most assets tend to increase in value over time)? The point is that unless one has complete certainty (possibly only if the potential taxable estate of the “second-to-die” spouse is very low and not expected to increase) that a portability election will not be helpful on the death of the “second-to-die” spouse, it would appear beneficial to timely file a “complete and properly prepared” estate tax return for the “first-to-die” spouse so that a DSUE can be claimed on the death of the “second-to-die” spouse. The negative is that some cost will be incurred to prepare a “complete and properly prepared” estate tax return, but this cost can easily be justified if it enables a portability election to be made, a DSUE to be claimed, and estate tax liability on the death of the “second-to-die” spouse to be reduced.

If you have any questions concerning the Estate of Rowland case, or the general subject of portability, please discuss these issues with your advisers.

Note – Revenue Procedure 2025-28 and “Domestic Research or Experimental Expenditures”

Whenever new tax legislation is enacted, the Internal Revenue Service often follows the legislation with Revenue Procedures that explain the application of the legislation. Such is the case with Revenue Procedure 2025-28 (issued on August 28, 2025), which provides taxpayers with important guidance on the new provisions concerning “domestic research or experimental expenditures” (commonly referred to as “U.S. R&D costs”) that were part of the new tax legislation enacted over the summer. Revenue Procedure 2025-28 is relevant for taxpayers seeking to amend their tax returns for taxable years 2022 through 2024 and claim a 100% full deduction of their “domestic research or experimental expenditures” in those taxable years. In addition, Revenue Procedure 2025-28 is instructive for taxpayers who want to elect to amortize and capitalize their “domestic research or experimental expenditures” in taxable years beginning after December 31, 2024. Revenue Procedure 2025-28 covers various other issues for taxpayers who have “domestic research or experimental expenditures”, including concerning changes of accounting methods and tax return deadlines. If you have claimed or will be claiming “domestic research or experimental expenditures” on your tax return, you should review Revenue Procedure 2025-28.

If you have any questions concerning the tax treatment of “domestic research or experimental expenditures”, or Revenue Procedure 2025-28, please discuss these issues with your advisers.

If you wish to discuss any of the above, find Pen Pal Gary’s contact info here.

Disclaimer: please note that nothing in this article is intended to be, or should be relied on as, legal advice of any kind. Neither LHBR Consulting, LLC nor Gary Stern provides legal services of any kind.