The U.S. Tax Court on July 15, 2025, released Estate of Billy S. Rowland v. Commissioner, T.C. Memo. 2025-76, holding that an estate tax return filed to elect portability was invalid because it was late and incomplete. The result: Billy Rowland's estate could not use about $3.7 million of exclusion left unused by his late wife. With a $15 million exemption arriving in 2026, the cost of a flawed first-spouse return is rising, a point the ACTEC Foundation emphasized in its review of the case.
What happened
Fay Rowland died in April 2016, when the exemption was $5.45 million. Her trust directed 20% of her estate to a charitable foundation, one-quarter of the gross estate to her husband and the rest to trusts for grandchildren. Her estate, valued at an estimated $3 million, owed no estate tax, so a return was needed only to elect portability.
The return was filed in December 2017, roughly six months after the extended due date. The estate relied on Rev. Proc. 2017-34, which then allowed late portability elections within two years of death. Rather than itemizing assets, the return listed an estimated total value and claimed the relaxed reporting rule that applies to property passing to a spouse or charity, even though a large part of the estate consisted of hard-to-value closely held business interests.
Billy Rowland died in January 2018, shortly after the return was filed. His estate claimed his own $11.18 million exclusion plus his wife's unused amount, nearly $15 million in all. The IRS challenged the portability election and asked the court for summary judgment.
Why the election failed
Treasury regulations let an estate that files only to elect portability estimate the value of property passing to a surviving spouse or charity. That shortcut does not apply when those values are needed to determine what passes to other beneficiaries. In Rowland, the marital and charitable shares determined the value of the grandchildren's remainder, so actual values were required, and the return provided none. The revenue procedure also required a complete and properly prepared return, so it offered no cure for the late filing. The court rejected the estate's substantial compliance argument, finding the return would fall short even if that doctrine could apply.
The after-tax math
At the 40% federal estate tax rate, $3.7 million of lost exclusion can mean up to $1.48 million of additional tax for an estate large enough to need it. Under current law, the exposure is far larger.
| First spouse's death | Unused exclusion at stake | Potential federal tax at 40% |
|---|---|---|
| 2016 (Rowland) | $3.7 million | Up to $1.48 million |
| 2026, everything left to the surviving spouse | Up to $15 million | Up to $6 million |
Example: a husband dies in 2026 leaving his entire estate to his wife, so none of his $15 million exemption is used. A timely, complete Form 706 electing portability lets her carry that amount forward alongside her own exemption. If the election fails, and her estate is large enough to use it, her heirs could owe as much as $6 million more.
Moves to discuss with your advisor
- File on time even when no tax is due. To elect portability, the return generally must be filed within nine months of death, as Haynes Boone notes. Rev. Proc. 2022-32, which replaced the 2017 procedure, now allows a late election up to the fifth anniversary of death for estates not otherwise required to file, but it still demands a complete and properly prepared return.
- Avoid estimates when bequests use formulas. Where charitable or marital shares affect what children or grandchildren receive, itemized values for each asset may be required.
- Weigh a credit shelter trust. ACTEC's discussion presented the case as an example of the risks of relying on portability instead of funding a trust at the first death.
- Expect no early confirmation. The IRS generally will not rule on a portability election's validity before the surviving spouse dies, so defects tend to surface when they can no longer be fixed.
What to watch
The new law keeps portability intact alongside the higher exemption, according to Goodwin, which may lead more couples to rely on it rather than on trusts. Watch whether the IRS scrutinizes estimated-value returns more closely as DSUE amounts grow, and how courts treat substantial compliance arguments in future portability disputes.
Sources
- First reported Loss of the Portability Election: Estate of Rowland v. Commissioner — ACTEC Foundation
- Rev. Proc. 2022-32 — IRS
- Federal Estate, Gift and GST Tax Highlights from the One Big Beautiful Bill Act — Haynes Boone
- OBBBA Solidifies High Estate Tax Exemptions and Charitable Giving Changes — Goodwin
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
