Tax Court Highlights Severe Consequences of Late Estate Tax Filings and Inadequate Substantiation

In Estate of Spenlinhauer v. Commissioner, the U.S. Tax Court addressed several estate tax issues arising from an extraordinarily late-filed estate tax return, ultimately sustaining a substantial deficiency, penalties, and transferee liability against the executor. The decision underscores the importance of statutory filing deadlines, the rigorous substantiation standards governing estate tax deductions, and the personal exposure executors face when estate assets are distributed before tax liabilities are resolved.

Georgia M. Spenlinhauer died in February 2005, leaving her son, Robert J. Spenlinhauer, as executor and residuary beneficiary. Although the estate obtained an extension to file Form 706 until May 2006, no return was filed by that deadline. Despite consulting an accountant who expressly advised that estate tax compliance was outside his expertise, the executor failed to engage qualified estate tax counsel or file the required return. The omission persisted for more than a decade.

The IRS became aware of the unfiled return during Robert Spenlinhauer’s personal bankruptcy proceedings in 2013. The estate tax return was not ultimately filed until February 2017, nearly eleven years late, by which time the estate’s assets had been fully distributed to the executor. The IRS issued a notice of deficiency asserting nearly $4 million in estate tax, additions to tax for failure to file, and transferee liability against the executor personally.

A central issue in the case was the estate’s attempt to claim elections that are expressly conditioned on timely filing. The estate sought to use the alternate valuation date under Section 2032 and a qualified conservation easement exclusion under Section 2031(c). The Court held that both elections were irrevocably lost because Form 706 was not filed by the statutory deadline, including extensions.

The Court emphasized that Congress imposed strict time limitations on these elections, and once those deadlines lapse, the estate is barred from invoking them. As a result, the gross estate was required to be valued as of the decedent’s date of death, with no conservation easement exclusion available.

The case also involved substantial valuation disputes concerning real estate and a minority interest in a closely held family business. With respect to the decedent’s residence, the estate relied on local property tax assessments to support a significantly reduced value. The Court rejected that approach, reiterating that assessed values are not controlled for federal estate tax purposes unless they reflect fair market value. The Court credited the IRS’s expert appraisal and noted that the executor’s own prior appraisal undermined his valuation position.

Similarly, the Court sustained the IRS’s valuation of a one percent interest in a family printing company. Evidence showed that the executor had rejected purchase offers far in excess of the value later reported on the estate tax return. The Court found that these actions contradicted the estate’s claimed valuation and demonstrated that even the executor did not believe the reported figures were accurate at the time.

The Court also addressed whether property transferred during the decedent’s lifetime should be included in the gross estate under Section 2036. One property had been transferred to the executor in exchange for a promissory note, but the decedent continued to reside in the property until death. The estate failed to substantiate that payments were actually made on the note, relying instead on estimates and testimony unsupported by documentation.

The Court found that the transaction did not constitute a bona fide sale for adequate consideration. That conclusion was reinforced by a late amendment to the note adding a self-canceling feature shortly before the decedent’s death. The Court observed that intra-family self-canceling notes are presumptively suspect and concluded that the parties could not reasonably have expected repayment in full. Accordingly, the full value of the property was included in the taxable estate.

The estate also failed to substantiate claimed deductions for executor’s commissions, legal fees, and litigation expenses under Section 2053. The Court disallowed executor commissions outright due to the absence of supporting evidence. It further denied deductions for litigation costs incurred in disputes over corporate valuation, concluding that those expenses primarily benefited the beneficiary rather than the estate and were therefore nondeductible.

The Court sustained additions to tax for failure to timely file the estate tax return. The executor’s reliance on an accountant did not constitute reasonable cause, particularly where the accountant had expressly disclaimed estate tax expertise and the executor failed to provide critical valuation information. The Court reaffirmed that reliance defenses fail when the taxpayer does not exercise ordinary business care or seek advice from a competent professional.

Finally, the Court held the executor personally liable as a transferee under Section 6901. Applying Massachusetts fraudulent transfer law, the Court found that the executor had distributed all estate assets to himself while an unpaid estate tax liability existed, rendering the estate insolvent. Because the government’s claim arose by operation of law on the estate tax filing deadline, the IRS was a creditor at the time of the transfers. The executor was therefore liable up to the value of the assets he received.

Estate of Spenlinhauer illustrates how procedural failures can lead to severe adverse tax consequences. Late filing foreclosed valuable elections, unsupported valuations and deductions were rejected, and informal intra-family transactions failed to withstand scrutiny. Most notably, the case serves as a cautionary reminder that executors who distribute estate assets before resolving tax obligations risk personal liability. Estate administration demands timely compliance, careful documentation, and professional guidance, and failing to comply with any of these requirements can prove extraordinarily costly.

For more information, contact Liskow attorneys Leon Rittenberg III, John Rouchell, Caroline Lafourcade, and Kevin Nacarri Jr., and visit Liskow's Tax Disputes page.