Statute of limitations argument sours in Sower

The U.S. Tax Court rejected a statute of limitations argument raised by an estate in the recently decided case, Sower v. Commissioner[1]. In this case, the husband died first without having a taxable estate. Nevertheless, an estate tax return was prepared and filed for portability purposes. In addition to the surviving spouse’s estate tax exemption amount, she can also use the deceased spousal unused exclusion (DSUE) – the amount of estate tax exemption not used by the husband – reducing her estate tax liability.

After the wife’s death some years later, her estate claimed her husband’s DSUE. During the audit of the wife’s estate tax return, the IRS examined the husband’s estate tax return and reduced the DSUE which generated an estate tax liability for the wife. The wife’s estate argued that the DSUE was off-limits to the IRS because the statute of limitations expired as to the husband’s estate. But this argument was rejected because the IRS agreed that the husband’s estate owed no tax. Rather, the IRS has statutory authority to determine the correctness of any return and determined that the DSUE was overstated.

A similar rule setting aside the statute of limitation exists in determining income tax liability. The IRS generally has three years to audit an income tax return. However, if a return claims a net operating loss deduction, just like reviewing the correctness of a DSUE, the IRS can go beyond the usual statute of limitation to determine whether the return that generated the net operating loss (NOL) was correct.

While a statute of limitations can be a valid defense against the IRS, it is not effective where the IRS needs to determine the correctness of carryforward tax attributes, such as DSUE or NOLs.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: David B. Shiner, Principal

This alert originally appeared in the October 2017 Shiner's Dollars with Sense newsletter.