Proposed Rule2022-13706
Guidance Under Section 2053 Regarding Deduction for Interest Expense and Amounts Paid Under a Personal Guarantee, Certain Substantiation Requirements, and Applicability of Present Value Concepts
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Published
June 28, 2022
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document proposes to amend existing regulations issued under section 2053 of the Internal Revenue Code (Code). The proposed regulations provide guidance on the proper use of present-value principles in determining the amount deductible by an estate for funeral expenses, administration expenses, and certain claims against the estate. In addition, the proposed regulations provide guidance on the deductibility of interest expense accruing on tax and penalties owed by an estate, and interest expense accruing on certain loan obligations incurred by an estate. The proposed regulations also amend and clarify the requirements for substantiating the value of a claim against an estate that is deductible in certain cases. Finally, the proposed regulations provide guidance on the deductibility of amounts paid under a decedent's personal guarantee. The proposed regulations will affect estates of decedents seeking to deduct funeral expenses, administration expenses, and/or certain claims against the estate under section 2053. This document also provides a notice of a public hearing on these proposed regulations.
Full Text
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<title>Federal Register, Volume 87 Issue 123 (Tuesday, June 28, 2022)</title>
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[Federal Register Volume 87, Number 123 (Tuesday, June 28, 2022)]
[Proposed Rules]
[Pages 38331-38343]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-13706]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
[REG-130975-08]
RIN 1545-BI11
Guidance Under Section 2053 Regarding Deduction for Interest
Expense and Amounts Paid Under a Personal Guarantee, Certain
Substantiation Requirements, and Applicability of Present Value
Concepts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document proposes to amend existing regulations issued
under section 2053 of the Internal Revenue Code (Code). The proposed
regulations provide guidance on the proper use of present-value
principles in determining the amount deductible by an estate for
funeral expenses, administration expenses, and certain claims against
the estate. In addition, the proposed regulations provide guidance on
the deductibility of interest expense accruing on tax and penalties
owed by an estate, and interest expense accruing on certain loan
obligations incurred by an estate. The proposed regulations also amend
and clarify the requirements for substantiating the value of a claim
against an estate that is deductible in certain cases. Finally, the
proposed regulations provide guidance on the deductibility of amounts
paid under a decedent's personal guarantee. The proposed regulations
will affect estates of decedents seeking to deduct funeral expenses,
administration expenses, and/or certain claims against the estate under
section 2053. This document also provides a notice of a public hearing
on these proposed regulations.
DATES: Electronic or written comments must be received by September 26,
2022. The public hearing is being held by teleconference on October 12,
2022, at 10 a.m. EST. Requests to speak and outlines of topics to be
discussed at the public hearing must be received by September 26, 2022.
If no outlines are received by September 26, 2022, the public hearing
will be cancelled. Requests to attend the public hearing must be
received by 5:00 p.m. EST on October 7, 2022. The telephonic hearing
will be made accessible to people with disabilities. Requests for
special assistance during the telephonic hearing must be received by
October 6, 2022.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-130975-
08). Once submitted to the Federal eRulemaking Portal, comments cannot
be edited or withdrawn. The IRS expects to have limited personnel
available to process comments that are submitted on paper through the
mail. The IRS will publish any comments submitted electronically, and
to the extent practicable, comments submitted on paper to the public
docket. Send paper submissions to CC:PA:LPD:PR (REG-130975-08), Room
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
For those requesting to speak during the hearing, send an outline
of topic submissions electronically via the Federal eRulemaking Portal
at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-130975-08).
Individuals who want to testify (by telephone) at the public
hearing must send an email to <a href="/cdn-cgi/l/email-protection#770702151b1e141f1216051e191004371e050459101801"><span class="__cf_email__" data-cfemail="d9a9acbbb5b0bab1bcb8abb0b7beaa99b0abaaf7beb6af">[email protected]</span></a> to receive the
telephone number and access code for the hearing. The subject line of
the email must contain the regulation number REG-130975-08 and the word
TESTIFY. For example, the subject line may say: Request to TESTIFY at
Hearing for REG-130975-08. The email should include a copy of the
speaker's public comments and outline of topics. Individuals who want
to attend (by telephone) the public hearing must also send an email to
<a href="/cdn-cgi/l/email-protection#bcccc9ded0d5dfd4d9ddced5d2dbcffcd5cecf92dbd3ca"><span class="__cf_email__" data-cfemail="96e6e3f4fafff5fef3f7e4fff8f1e5d6ffe4e5b8f1f9e0">[email protected]</span></a> to receive the telephone number and access code
for the hearing. The subject line of the email must contain the
regulation number REG-130975-08 and the word ATTEND. For example, the
subject line may say: Request to ATTEND Hearing for REG-130975-08. To
request special assistance during the telephonic hearing, contact the
Publications and Regulations Branch of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#304045525c595358555142595e5743705942431e575f46"><span class="__cf_email__" data-cfemail="304045525c595358555142595e5743705942431e575f46">[email protected]</span></a> (preferred) or by telephone at (202) 317-5177
(not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Karlene Lesho or Melissa Liquerman at (202) 317-6859; concerning the
submission of comments, the hearing, or to be placed on the building
access list to attend the hearing, Regina Johnson at (202) 317-6901
(not toll-free numbers) or by sending an email to
<a href="/cdn-cgi/l/email-protection#deaeabbcb2b7bdb6bbbfacb7b0b9ad9eb7acadf0b9b1a8"><span class="__cf_email__" data-cfemail="1b6b6e79777278737e7a6972757c685b726968357c746d">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
I. Overview
This document contains proposed amendments to the Estate Tax
Regulations (26 CFR part 20) under section 2053.
Section 2001(a) imposes a tax on the transfer of the taxable estate
of every decedent who was at death a citizen or resident of the United
States. Section 2051 defines the taxable estate as the value of the
gross estate less the deductions provided for in sections 2053 through
2058. Section 2031(a) describes the value of the gross estate of the
decedent as including the value at the time of the decedent's death of
all property, real or personal, tangible or intangible, wherever
situated.
Under section 2053(a), for Federal estate tax purposes, the value
of the
[[Page 38332]]
taxable estate is determined by deducting from the value of the gross
estate the following amounts that are allowable by the laws of the
jurisdiction, whether within or without the United States, under which
the estate is being administered: (1) funeral expenses, (2)
administration expenses, (3) claims against the estate, and (4) unpaid
mortgages on, or any indebtedness in respect of, property where the
value of the decedent's interest therein, undiminished by such mortgage
or indebtedness, is included in the value of the gross estate.
Final regulations amending the regulations under section 2053 (TD
9468) were published in the Federal Register (74 FR 53652) on October
20, 2009 (2009 Final Regulations). The 2009 Final Regulations generally
limit the deduction for claims and expenses to the amount actually paid
in settlement or satisfaction of that item, with exceptions for certain
ascertainable amounts, claims against the estate, and indebtedness. See
Sec. 20.2053-1(d)(1) and (4); Sec. 20.2053-4(b) and (c); and Sec.
20.2053-7. The 2009 Final Regulations also reserve Sec. 20.2053-
1(d)(6) to provide future guidance on the issue of the appropriate
application of present-value principles in determining the amount
deductible under section 2053. These proposed regulations address this
issue. In addition, these proposed regulations provide or clarify rules
under section 2053 addressing the deductibility of interest expense
accruing on tax and penalties owed by an estate, the deductibility of
interest expense accruing on certain loan obligations incurred by an
estate, requirements for substantiating the value of a claim against an
estate that is deductible under Sec. 20.2053-4(b) or (c), and the
deductibility of amounts paid under a decedent's personal guarantee.
II. Application of Present-Value Principles to Amount Deductible Under
Section 2053
A. Issue Background
``Present value'' is a widely accepted principle of accounting for
the time value of money. If a payor can defer paying a dollar until a
later time, the payor can earn income on that dollar until the date of
payment. The longer a payor can defer payment, the more income the
payor potentially can earn. Taxpayers, the IRS, and courts regularly
employ present-value principles for valuation and for other income tax
and transfer tax purposes. See, e.g., section 1274(b), Sec. Sec.
1.642(c)-6, 20.7520-1, and 25.2512-5; Simpson et al. v. United States,
252 U.S. 547 (1920); Commissioner v. Estate of Sternberger, 348 U.S.
187 (1955).
The deduction allowable under section 2053 eliminates from taxation
under section 2001 that portion of the gross estate that the estate
expends or necessarily will expend in paying certain expenses and
liabilities of the estate and certain claims against the estate. The
expended portions of the gross estate do not pass to the decedent's
legatees, beneficiaries, or heirs and, therefore, are not subject to
the estate tax. The 2009 Final Regulations implement these principles
in determining the amount an estate may deduct for certain claims and
expenses. Section 20.2053-1(d)(1) generally limits the deduction under
section 2053 for certain claims and expenses to the total amount
actually paid in settlement or satisfaction of that item. Section
20.2053-1(d)(2) clarifies that events occurring after the date of a
decedent's death will be taken into consideration in determining the
allowable deduction under section 2053.
Applying present-value principles to determine the allowable
deduction under section 2053 for payments made or to be made after an
extended period following a decedent's death is consistent with the
principles underlying section 2053 and the approach of the 2009 Final
Regulations. By limiting the deduction to the discounted amount of a
payment or payments made or to be made after an extended period
following the decedent's death, the gross estate is reduced by a more
accurate measure of the amounts not passing to the heirs and legatees.
Accordingly, the Department of the Treasury (Treasury Department) and
the IRS have determined that limiting the amount deductible to the
present value of the amounts paid after an extended post-death period
will more accurately reflect the economic realities of the transaction,
the true economic cost of that expense or claim, and the amount not
passing to the beneficiaries of the estate. Moreover, consistent with
the 2009 Final Regulations, this approach treats the date of payment of
the otherwise deductible expense or claim as a post-death event
properly taken into account under section 2053.
Rules applying present-value principles to certain long-term
obligations were provided in proposed regulations (REG-143316-03)
published in the Federal Register (72 FR 20080) on April 23, 2007 (2007
Proposed Regulations), which preceded the issuance of the 2009 Final
Regulations. Specifically, the 2007 Proposed Regulations required the
computation of the present value of future payments for a decedent's
noncontingent recurring obligation, such as a noncontingent recurring
obligation to pay an annuity amount under a property settlement
agreement. See Sec. 20.2053-4(b)(7)(i) of the 2007 Proposed
Regulations. However, that rule did not apply to contingent recurring
obligations. Rather, amounts payable for a decedent's contingent
recurring obligation became deductible only as amounts were paid by the
estate in satisfaction of the claim and the amount deductible equaled
the dollar amount actually paid. No computation of present value
factored into the amount deductible for such obligations. See Sec.
20.2053-4(b)(7)(ii) of the 2007 Proposed Regulations.
The preamble to the 2009 Final Regulations indicated that the
Treasury Department and the IRS found persuasive criticism of those
proposed rules by commenters suggesting they produced an inconsistent
and inequitable result. The 2009 Final Regulations clarified that the
amount payable pursuant to a decedent's noncontingent recurring
obligation is deemed ascertainable with reasonable certainty and,
hence, deductible in advance of payment under the rule in Sec.
20.2053-1(d)(4), while the amount payable pursuant to a decedent's
contingent recurring obligation is not ascertainable with reasonable
certainty and, hence, the amount deductible is limited to amounts
actually paid by the estate in satisfaction of the claim. See Sec.
20.2053-4(d)(6). However, the 2009 Final Regulations removed the
present-value limitation applicable only to noncontingent recurring
obligations and reserved Sec. 20.2053-1(d)(6) to provide future
guidance on the issue.
With regard to a decedent's obligations that satisfy the
requirements for deductibility as described in the preceding paragraph,
whether such obligations are recurring or nonrecurring, there is no
persuasive technical or policy basis for limiting the application of
present-value principles to payments made or to be made only under
noncontingent obligations. Because discounting the amounts actually
paid or to be paid in the future to determine the present value of the
payments is consistent with the purpose of section 2053 of reducing the
gross estate only by the amounts not passing to the heirs and legatees,
these proposed regulations propose to incorporate present-value
principles in determining the amount deductible under section 2053. The
proposed regulations will apply present-value principles consistently
to expenses and claims (whether contingent or noncontingent)
[[Page 38333]]
that are deductible under section 2053. The mechanics of applying
present-value principles to expenses and claims, including expenses and
claims that are deductible in advance of payment, are described in
section II.B of this Background and Explanation of Provisions.
B. Explanation of Provision
The Treasury Department and the IRS propose to amend the
regulations under section 2053 to incorporate present-value principles
in determining the amount deductible under section 2053 for claims and
expenses (excluding unpaid mortgages and indebtedness deductible under
Sec. 20.2053-7). The Treasury Department and the IRS recognize,
however, that estates often cannot pay every deductible claim and
expense within a short time after the decedent's death and that sound
tax administration should balance the benefit of more accurately
determining the amounts not passing to the beneficiaries of an estate
garnered from applying present-value principles with the administrative
burden of applying those principles to deductible claims and expenses
that occur during a reasonable period of administration of the estate.
The Treasury Department and the IRS understand that a significant
percentage of estates pay most, if not all, of their ordinary estate
administration expenses during the three-year period following the
decedent's date of death. This three-year period takes into account a
reasonable time for administering and closing the estate. The Treasury
Department and the IRS note that a reasonably short period of time
between the decedent's death and the payment of a claim prevents the
lack of a present-value discount from significantly distorting the
value of the net (distributable) estate. Applying present-value
principles in computing the deductible amount of those claims and
expenses paid more than three years after the decedent's death strikes
an appropriate balance between benefits and burdens.
Accordingly, the Treasury Department and the IRS propose to amend
the regulations under section 2053 to require the discounting to
present value of certain amounts paid or to be paid in settlement or
satisfaction of certain claims and expenses in determining the amount
deductible under section 2053. Specifically, the rule in these proposed
regulations requires calculating the present value of the amount of a
deductible claim or expense described in section 2053(a) and Sec.
20.2053-1(a) that is not paid or to be paid on or before the third
anniversary of the decedent's date of death, which three-year period
the proposed regulations define as the ``grace period.'' The proposed
regulations provide the general formula for calculating the present
value of such amounts and state that the discount rate to be used in
the calculation is the applicable Federal rate determined under section
1274(d) for the month in which the decedent's date of death occurs,
compounded annually. The length of time from the decedent's death to
the date of payment or expected date of payment will determine whether
the Federal rate applicable to that amount is the Federal mid-term rate
or the Federal long-term rate. The proposed regulations provide that
any reasonable assumptions or methodology in regard to time period
measurements may be used in calculating the present value. In addition,
the proposed regulations require a supporting statement to be filed
with the Form 706 showing any calculations of present value.
The proposed regulations explain how to calculate present value
when the amount of a claim or expense is deductible in advance of the
payment of such amount, as under Sec. Sec. 20.2053-1(d)(4) and
20.2053-4(b) and (c). The proposed regulations provide that the
expected date or dates of payment will be used in computing present
value and that the expected date or dates of payment will be determined
by making a fair and reasonable estimate using all information
reasonably available to the taxpayer. For amounts deductible under
Sec. 20.2053-4(b) and (c), the proposed regulations provide that the
expected date or dates of payment must be identified in a written
appraisal document. Consistent with the rule in Sec. 20.2053-1(d)(2),
which takes into consideration events occurring during the post-death
period described in that section, the proposed regulations also provide
that the computation of present value is subject to adjustment if the
actual date of payment differs from the estimate used.
III. Deductibility of Interest Expense as Administration Expense
A. Issue Background
Section 2053(a)(2) allows an estate to deduct from the value of the
gross estate the amount of administration expenses that are allowable
by the law of the jurisdiction in which the estate is being
administered. In some cases, interest expense incurred by an estate may
be a deductible administration expense under section 2053(a)(2) if the
facts support a finding that the expense satisfies the requirements of
section 2053 and the regulations thereunder. Several statutory and
regulatory provisions are relevant to the deductibility of interest as
an administration expense under section 2053(a)(2).
First, effective for decedents dying after December 31, 1997,
section 2053(c)(1)(D) provides that, ``no deduction shall be allowed
under [section 2053] for any interest payable under section 6601 on any
unpaid portion of the [Federal estate tax] for the period during which
an extension of time for payment of such tax is in effect under section
6166.''
Second, Sec. 20.2053-3(a) provides that the amounts deductible
from a decedent's gross estate as administration expenses under section
2053(a)(2) are limited to such expenses that actually and necessarily
are incurred in the administration of the decedent's estate. The
expenses contemplated in the law are those that are associated with the
settlement of an estate and the transfer of the property of the estate
to individual beneficiaries or to a trustee. Expenditures not essential
to the proper settlement of the estate, but incurred for the individual
benefit of the heirs, legatees, or devisees, may not be taken as
deductions.
Third, Sec. 20.2053-1(b)(2) provides that only expenses that are
bona fide in nature are deductible under section 2053. Section 20.2053-
1(b)(2) applies to any amounts deductible under section 2053(a) and
(b), including deductible administration expenses.
The issue of the extent to which and the circumstances under which
interest expense satisfies the requirements for a deductible
administration expense under section 2053(a)(2) and the regulations
thereunder is longstanding. Over the past half century, a number of
litigated cases and sub-regulatory published guidance items have
provided some clarity on the legal issues surrounding the ability to
deduct, as an administration expense under section 2053(a)(2), interest
accruing on deferred tax and penalties and on loan obligations incurred
by an estate. Litigation on this fact-driven issue continues in regard
to interest accruing on loan obligations incurred by an estate.
The Treasury Department and the IRS consider it appropriate to
amend the regulations under section 2053 to address specifically the
issue of interest expense as a deductible administration expense under
section 2053(a)(2). In particular, the Treasury Department and the IRS
propose to address interest expense accruing after the death of the
decedent on any unpaid portion of tax
[[Page 38334]]
or penalties and on a loan obligation incurred by the estate to pay
estate taxes or other estate expenses.
B. Explanation of Provisions
1. Interest Accruing on Unpaid Tax and Penalties
In general, interest is payable at the underpayment rate in section
6621 on (i) any amount of unpaid Federal tax, and (ii) any unpaid
additions to tax, additional taxes, and penalties (such interest
referred to in this preamble as ``section 6601 interest'' and such
additions to tax, additional taxes, and penalties collectively referred
to in this preamble as ``penalties''). See section 6601(a) and (e)(2).
However, interest payable under section 6601 on unpaid estate tax
deferred under section 6166 (which includes interest accruing on any
such deferred payment during any period when an extension of time for
payment is in effect under section 6161(a)(2)(B) with respect to that
payment) (referred to in this preamble as ``section 6166 interest'') is
subject to a more favorable interest rate under section 6601(j), and
section 2053(c)(1)(D) provides that such interest is not deductible.
The statutory prohibition of a deduction for section 6166 interest does
not apply to ``non-section 6166 interest,'' defined for purposes of
this preamble as any section 6601 interest other than section 6166
interest and interest payable on any unpaid portion of state tax and
penalties pursuant to state law. Thus, non-section 6166 interest that
accrues on and after the decedent's date of death may qualify as a
deductible administration expense under section 2053(a)(2).
To determine the deductibility of non-section 6166 interest
accruing on and after the decedent's date of death, the existing
regulatory requirements in Sec. Sec. 20.2053-1(b)(2) and 20.2053-3(a)
apply. Non-section 6166 interest satisfies the ``bona fide''
requirement in Sec. 20.2053-1(b)(2) because such interest accrues
pursuant to either Federal or state law. Non-section 6166 interest may
satisfy the ``actually and necessarily incurred'' requirement in Sec.
20.2053-3(a), but such determination depends on the facts and
circumstances.
Non-section 6166 interest may accrue on and after the date of a
decedent's death on unpaid estate tax in connection with an extension
granted under section 6161 (but not under section 6161(a)(2)(B)) or a
deferral elected under section 6163. A section 6161 extension is
granted upon a showing of reasonable cause for extending the time for
payment. A section 6163 deferral is appropriate when the value of a
reversionary or remainder interest is includible in the gross estate,
but such value is not immediately available for payment of the estate
tax. The nature of both section 6161 extensions and section 6163
deferrals indicates they are based on a demonstrable need to defer
payment. Accordingly, the Treasury Department and the IRS have
determined that interest payable under section 6601 on unpaid estate
tax in connection with an extension under section 6161 or a deferral
under section 6163 is necessarily incurred in the administration of the
estate.
Non-section 6166 interest may accrue on and after the date of a
decedent's death on unpaid tax and penalties in connection with an
underpayment of tax or a deficiency (as that term is defined in section
6211). In many cases, such interest and the underlying underpayment of
tax or deficiency is attributable to the reasonable exercise of an
executor's fiduciary duties in administering the estate, as may occur
in cases involving legitimate disagreements with the IRS, inadvertent
errors, or reasonable reliance on a qualified professional. The
Treasury Department and the IRS have determined that, generally, such
interest is actually and necessarily incurred in the administration of
the estate. However, the Treasury Department and the IRS are concerned
that there are some circumstances in which such interest expense would
not satisfy the ``actually and necessarily incurred'' requirement in
Sec. 20.2053-3(a). For instance, when non-section 6166 interest
accrues on unpaid tax and penalties in connection with an underpayment
of tax or deficiency and the underlying underpayment or deficiency is
attributable to an executor's negligence, disregard of the rules or
regulations (including careless, reckless, or intentional disregard of
rules or regulations) as defined in Sec. 1.6662-3(b)(2), or fraud with
intent to evade tax, the interest expense is not an expense actually
and necessarily incurred in the administration of the estate.
Accordingly, the Treasury Department and the IRS have determined that,
when interest accrues on any unpaid tax or penalty and the interest
expense is attributable to an executor's negligence, disregard of the
rules or regulations, or fraud with intent to evade tax, the interest
expense is neither actually and necessarily incurred in the
administration of the estate nor essential to the proper settlement of
the estate. Further, the Treasury Department and the IRS have
determined that the rationale underlying this determination applies to
all non-section 6166 interest, whether the interest accrues in
connection with a deferral, underpayment, or deficiency.
The proposed regulations amend the regulations under section 2053
to confirm that section 6166 interest on estate tax deferred under
section 6166, including interest accruing on an installment under
section 6166 during the period of an extension of time for payment
under section 6161(a)(2)(B), is not a deductible administration expense
under section 2053. The proposed regulations also provide that non-
section 6166 interest that accrues on or after the decedent's date of
death on any unpaid tax or penalties may be deductible to the extent
permitted by Sec. Sec. 20.2053-1 and 20.2053-3(a). The proposed
regulations further provide that non-section 6166 interest on estate
tax deferred under section 6161 or section 6163 is actually and
necessarily incurred in the administration of the estate because the
grant of the extension was based on a demonstrated need to defer
payment. Finally, the proposed regulations provide that, in general,
non-section 6166 interest accruing post-death on any unpaid tax or
penalties in connection with an underpayment of tax or a deficiency is
actually and necessarily incurred in the administration of the estate.
However, the proposed regulations provide that, notwithstanding these
rules, non-section 6166 interest accruing on unpaid tax and penalties
on and after the decedent's date of death, whether in connection with a
deferral, underpayment, or deficiency, is not actually and necessarily
incurred in the administration of the estate and is not deductible to
the extent the interest expense is attributable to an executor's
negligence, disregard of applicable rules or regulations (including
careless, reckless, or intentional disregard of rules or regulations)
as defined in Sec. 1.6662-3(b)(2), or fraud with intent to evade tax.
Interest expense is attributable to an executor's negligence, disregard
of applicable rules or regulations, or fraud with intent to evade tax
to the extent that the underlying underpayment, deficiency, or penalty
is attributable to such conduct by the executor. Similarly, even when
the underlying underpayment, deficiency, or penalty is not attributable
to such conduct by the executor, interest expense is attributable to an
executor's negligence, disregard of applicable rules or regulations, or
fraud with intent to evade tax to the extent the subsequent
[[Page 38335]]
accrual of interest is attributable to such conduct by the executor.
The rules in the proposed regulations pertaining to whether non-
section 6166 interest satisfies the requirement in Sec. 20.2053-3(a)
supplant the rule reflected in Rev. Rul. 79-252, 1979-2 C.B. 333, and
in the second holding of Rev. Rul. 81-154, 1981-1 C.B. 470. (See Sec.
601.601(d)(2)(ii)(b).) Together, these two holdings create an implicit
presumption that interest accruing on any unpaid portion of tax or
penalties in all cases satisfies the requirements for a deductible
administration expense, which is inconsistent with the requirement in
Sec. 20.2053-3(a) that the expense be actually and necessarily
incurred in the administration of the estate.
2. Interest Accruing on Certain Loan Obligations Incurred by an Estate
The same requirements that apply for deductible interest accruing
on unpaid tax and penalties also apply for deductible interest accruing
on loan obligations incurred by an estate. Interest accruing on a loan
obligation incurred by an estate satisfies the ``bona fide''
requirement in Sec. 20.2053-1(b)(2) when both the interest expense and
the loan underlying the interest expense are bona fide in nature and do
not constitute a transfer that is essentially donative in character.
Such interest satisfies the ``actually and necessarily incurred''
requirement in Sec. 20.2053-3(a) when the loan on which the interest
expense accrues and its terms are necessary to the administration of
the decedent's estate and are essential to the proper settlement of the
decedent's estate.
Among the reasons an estate might enter into a loan arrangement is
to facilitate the payment of the estate's taxes and other liabilities
or the administration of the estate. Some estates face genuine
liquidity issues that make it necessary to find a means to satisfy
their liabilities, and incurring a loan obligation on which interest
accrues may be the only or best way to obtain the necessary liquid
funds. However, if illiquidity has been created intentionally (whether
in the estate planning, or by the estate with knowledge or reason to
know of the estate tax liability) prior to the creation of the loan
obligation to pay estate expenses and liabilities, the underlying loan
may be bona fide in nature but most likely will not be found to be
actually and necessarily incurred in the administration of the estate.
The issue of the deductibility of interest expense accruing on a
loan obligation incurred by an estate has been litigated often, with
varying results. See, e.g., Estate of Black v. Commissioner, 133 T.C.
340 (2009); Estate of Graegin v. Commissioner, T.C. Memo. 1988-477. In
order to provide guidance on the deductibility of interest accruing on
a loan obligation entered into by the decedent's estate to facilitate
the payment of the estate's taxes and other liabilities or the
administration of the estate, the Treasury Department and the IRS
propose to amend the regulations under section 2053. The proposed
regulations provide that interest expense is deductible only if: (i)
the interest accrues pursuant to an instrument or contractual
arrangement that constitutes indebtedness under applicable income tax
regulations and general principles of Federal tax law; (ii) both the
interest expense and the loan on which interest expense accrues satisfy
the requirement of Sec. 20.2053-1(b)(2) that they are bona fide in
nature; and (iii) the loan on which interest accrues and the loan's
terms are actually and necessarily incurred in the administration of
the decedent's estate and are essential to the proper settlement of the
decedent's estate (within the meaning of Sec. 20.2053-3(a)).
Finally, the proposed regulations include a nonexclusive list of
factors to consider in determining whether interest expense payable
pursuant to such a loan obligation of an estate satisfies the
requirements of Sec. Sec. 20.2053-1(b)(2) and 20.2053-3(a). In
general, the factors suggest that interest accruing on a loan
obligation may satisfy these requirements when the loan and its
underlying terms are reasonable and comparable to an arms-length loan
transaction and correspond to the estate's ability to satisfy the loan,
and the loan obligation is entered into by the executor with a lender
who is not a substantial beneficiary of the decedent's estate (or an
entity controlled by such a beneficiary) at a time when there is no
viable alternative to obtain the necessary liquid funds to satisfy
estate liabilities. In addition to providing guidance on when interest
accruing on a loan obligation may satisfy the requirements of
Sec. Sec. 20.2053-1(b)(2) and 20.2053-3(a), the list of factors may
suggest when the opposite is true and interest accruing on a loan
obligation does not satisfy these requirements. For instance, if, taken
in their entirety, the facts and circumstances indicate that either the
need for the loan or any of the loan terms are contrived to generate,
or increase the amount of, a deduction for the interest expense, the
interest is not deductible. Thus, if the lender is a primary
beneficiary of the estate (or an entity controlled by such beneficiary)
who may have liability for payment of the estate tax or whose share of
the estate may bear the burden of estate taxes and other liabilities,
the facts indicate the loan is not necessarily incurred in the
administration of the estate and, therefore, indicate that any interest
accruing on the loan is not necessarily incurred in the administration
of the estate. Further, if the loan obligation carries an extended loan
term with a single balloon payment that does not correspond with the
estate's ability to satisfy the loan, the facts indicate that the
interest accruing on the loan is not necessarily incurred in the
administration of the estate.
IV. Substantiation Requirements for Valuations Performed Pursuant to
Sec. 20.2053-4(b) and (c)
A. Issue Background
Section 20.2053-4(b) and (c) provides exceptions to the general
rule in Sec. 20.2053-4(a) that an estate may deduct only amounts that
actually are paid by the estate in satisfaction of a claim. Section
20.2053-4(b) generally allows a deduction for the value of claims and
counterclaims in a related matter, and Sec. 20.2053-4(c) allows a
deduction for the value of unpaid claims totaling not more than
$500,000. In each case, certain requirements must be satisfied to
enable the estate to use these exceptions.
One such requirement is that the value of a claim against the
estate that may be deducted under either Sec. 20.2053-4(b) or (c) must
be determined from a ``qualified appraisal'' performed by a ``qualified
appraiser'' within the meaning of section 170 and the regulations
thereunder. The Treasury Department and the IRS have reconsidered this
requirement. The definition of ``qualified appraiser'' and ``qualified
appraisal'' in the regulations under section 170 were drafted in the
context of appraising an asset being donated, and not a liability such
as a claim against an estate. Certain of the elements of a qualified
appraisal, including references to the ``date of contribution,'' and
the requirements necessary to meet the definition of a ``qualified
appraiser,'' do not apply in the context of valuing a claim against an
estate for purposes of determining the value to be deducted from the
gross estate under section 2053.
The Treasury Department and the IRS have determined that the rule
in Sec. 20.2053-4(b) and (c) should be amended to remove the
requirement that the value be determined by a ``qualified appraisal''
performed by a
[[Page 38336]]
``qualified appraiser'' within the meaning of section 170 and the
regulations thereunder. Instead, the Treasury Department and the IRS
propose to amend the regulations under section 2053 to provide revised
rules for valuing claims for purposes of Sec. 20.2053-4(b) and (c).
B. Explanation of Provision
The Treasury Department and the IRS propose to amend the
regulations under section 2053 to remove the requirement in Sec.
20.2053-4(b)(1)(iv) and (c)(1)(iv) that valuations of the claims
deductible under Sec. 20.2053-4(b) and (c) must be supported by a
``qualified appraisal'' performed by a ``qualified appraiser.'' For
purposes of determining the allowable deduction under Sec. 20.2053-
4(b) and (c), these proposed regulations instead provide new
requirements intended to facilitate the appropriate valuation of these
claims.
Specifically, to determine the current value of a claim deductible
under Sec. 20.2053-4(b) or (c), the proposed regulations require a
written appraisal that adequately reflects the current value of the
claim when the Form 706 is being completed. The current value of the
claim should take into account post-death events occurring prior to the
time a deduction is claimed as well as those events reasonably
anticipated to occur. In addition, the proposed regulations require the
written appraisal to consider all relevant facts and elements of value
that are known or that can be reasonably anticipated at the time of the
appraisal. The written appraisal must be prepared, signed, and dated by
a person who is qualified to appraise the claim being valued, but who
is not (i) a family member of the decedent, a related entity as to the
decedent, or a beneficiary of the decedent's estate or revocable trust
(as those terms are defined in Sec. 20.2053-1(b)(2)(iii)), (ii) a
family member of a beneficiary or a related entity as to a beneficiary
(as those terms would be defined in Sec. 20.2053-1(b)(2)(iii) if
references therein to the decedent were replaced with a reference to
such beneficiary, and without the limitations based on the decedent's
date of death), or (iii) an employee or other owner of any of them. The
appraisal also must include a statement describing the basis for the
person's qualification to appraise the claim being valued.
V. Deductibility of Amounts Paid Pursuant to Decedent's Personal
Guarantee
A. Issue Background
A commenter responding to the 2007 Proposed Regulations suggested
that the final regulations confirm that payments made pursuant to a
decedent's personal guarantee existing at the decedent's death are
deductible in the same manner as payments made in satisfaction of any
other deductible claim against a decedent's estate.
For payments made pursuant to a decedent's obligation as a
guarantor of indebtedness to be deductible, the claim must represent a
personal obligation of the decedent existing at the time of the
decedent's death, and the claim must be enforceable against the
decedent's estate. See Sec. 20.2053-4(a)(1). However, not all
enforceable debts are deductible under section 2053. A claim founded
upon a decedent's guarantee is considered a claim founded upon a
promise or agreement. Accordingly, the deduction for such a claim is
limited to the extent that the guarantee was contracted bona fide and
in exchange ``for an adequate and full consideration in money or
money's worth.'' See section 2053(c)(1)(A) and Sec. 20.2053-4(d)(5).
For a claim founded upon a decedent's guarantee to satisfy the
``adequate and full consideration in money or money's worth''
requirement and, therefore, be deductible under section 2053, the
decedent must have received a benefit reducible to money value in
exchange for the decedent's guarantee. See United States v. Stapf, 375
U.S. 118, 131 (1963) (``Absent such an . . . augmentation of the
estate, a testator could disguise transfers as payments in settlement
of debts and claims and thus obtain deductions for transmitting
gifts.''); Commissioner v. Wemyss, 324 U.S. 303 (1945) (construing the
requirement of ``adequate and full consideration in money or money's
worth'' in the gift tax context to require a benefit to the donor
reducible to money value ``to relieve a transfer by him from being a
gift.''); Estate of Theis v. Commissioner, 81 T.C. 741, 745, 748 (1983)
(noting the amounts at issue must have been contracted bona fide and
for full and adequate consideration), aff'd 770 F.2d 981 (11th Cir.
1985).
Guarantor agreements often are required in the context of a loan to
the guarantor's closely-held business. In these cases, the guarantor
may be motivated to enter into the guarantee agreement to preserve the
value of the guarantor's interest in the business. The Treasury
Department and the IRS have determined that it is appropriate to
provide guidance on whether, for purposes of section 2053, a guarantor
agreement is contracted for an adequate and full consideration in money
or money's worth in such a situation for purposes of section 2053.
When payments pursuant to a decedent's guarantee satisfy the
requirements for a deductible claim, the amount deductible is limited
to the portion of the total claim due from and actually paid by the
estate, but reduced by the amount recovered, or the amount that could
have been recovered, from another party, insurance, or otherwise. See
Sec. Sec. 20.2053-1(d)(1) and (3) and 20.2053-4(d)(3). Further, to
avoid the double-counting of a debt that occurs when the debt both is
taken into account in computing the gross estate and is taken as a
section 2053 deduction, payments made pursuant to the decedent's
guarantee are deductible only to the extent that the debt for which the
guarantee is given has not been taken into account in computing the
value of an asset includible in the decedent's gross estate.
A regulatory provision specifically addressing the deductibility of
claims founded upon a decedent's guarantee will assist taxpayers in
understanding and meeting their tax responsibilities and will result in
consistent treatment for similarly situated taxpayers.
B. Explanation of Provision
The proposed regulations provide that a claim founded upon the
decedent's agreement to personally guarantee a debt of another is a
claim founded on a promise and, accordingly, must satisfy the
applicable requirements in section 2053(c)(1)(A) and Sec. 20.2053-
4(d)(5). Specifically, the guarantee must have been bona fide and in
exchange for adequate and full consideration in money or money's worth.
The proposed regulations confirm that the bona fide nature of a claim
related to the guarantee of a debt of a family member, a related
entity, or a beneficiary will be determined with reference to Sec.
20.2053-1(b)(2)(ii). The proposed regulations provide a bright line
rule that a decedent's agreement to guarantee a bona fide debt of an
entity in which the decedent had control (within the meaning of section
2701(b)(2)) at the time of the guarantee satisfies the requirement that
the agreement be in exchange for adequate and full consideration in
money or money's worth. Alternatively, the proposed regulations provide
that this requirement also is satisfied if, at the time the guarantee
is given, the maximum liability of the decedent under the guarantee did
not exceed the fair market value of the decedent's interest in the
entity. Finally, the proposed regulations provide that the estate's
right of contribution or reimbursement will reduce the amount
[[Page 38337]]
deductible in accordance with Sec. 20.2053-1(d)(3).
Proposed Applicability Date
The regulations are proposed to apply to the estate of each
decedent dying on or after the date of publication in the Federal
Register of a Treasury decision adopting these rules as final
regulations.
Effect on Other Documents
Rev. Rul. 79-252 (1979-2 C.B. 333) states that interest on a
Federal estate tax deficiency is a necessary administration expense
under section 2053(a)(2) and is deductible to the extent allowable
under local law. Rev. Rul. 81-154 (1981-1 C.B. 470) states, in the
second holding, that interest incurred because of a late payment of tax
is deductible under section 2053(a)(2) to the extent it is allowable
under local law. Rev. Rul. 79-252 will be obsoleted and Rev. Rul. 81-
154 will be modified, effective as of the date that a Treasury decision
adopting these rules as final regulations is published in the Federal
Register.
Statement of Availability of IRS Documents
IRS revenue procedures, revenue rulings, notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Special Analyses
Regulatory Planning and Review
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations. Therefore, a regulatory
impact assessment is not required.
Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these regulations will not have a significant
economic impact on a substantial number of small entities. This
certification is based on the fact that these regulations primarily
affect estates of a decedent which generally are not small entities
under the Act. Accordingly, these regulations are not expected to have
a significant economic impact on a substantial number of small
entities, and a regulatory flexibility analysis is not required.
Pursuant to section 7805(f) of the Code, these proposed regulations
will be submitted to the Chief Counsel for the Office of Advocacy of
the Small Business Administration for comment on their impact on small
businesses.
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), under Form 706, United States Estate (and Generation-
Skipping Transfer) Tax Return, and assigned control number 1545-0015.
Comments on the collection of information should be sent to the Office
of Management and Budget, Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC
20503, and to Clearance Officer, SE:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of information should be received by
August 29, 2022. Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for
the proper performance of the functions of the IRS, including whether
the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs of operation, maintenance,
and purchase of services to provide information.
The collections of information in these proposed regulations are in
proposed Sec. Sec. 20.2053-1(d)(6)(iv) and 20.2053-4(b)(1)(iv) and
(c)(1)(iv). The information requested in Sec. 20.2053-1(d)(6)(iv) is
necessary in order to evaluate whether an estate is entitled to a
deduction in the amount claimed on Form 706. The collection of
information is mandatory to obtain a benefit. The information requested
in Sec. 20.2053-4(b)(1)(iv) and (c)(1)(iv) is necessary in order to
evaluate whether an estate is entitled to a deduction claimed on Form
706 and, if so, the amount of the deduction. The collection of
information is mandatory to obtain a benefit. The likely respondents
are estates of decedents seeking to deduct on Form 706 funeral
expenses, administration expenses, and/or certain claims against the
estate under section 2053.
Estimated total annual reporting burden: 23,661 hours.
Estimated average annual burden per respondent: 3 hours.
Estimated number of respondents: 7,887.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office of
Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). This proposed
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
Executive Order 13132: Federalism
E.O. 13132, titled ``Federalism,'' prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the E.O. This proposed rule does not have federalism
implications and does not impose substantial direct compliance costs on
state and local governments or preempt state law within the meaning of
the E.O.
Drafting Information
The principal authors of these regulations are Karlene Lesho and
Melissa Liquerman, Office of the Associate Chief Counsel (Passthroughs
and Special Industries). However, other personnel from the Treasury
Department and the IRS participated in their development.
[[Page 38338]]
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES section.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations.
Any electronic comments submitted, and to the extent practicable,
any paper comments submitted, will be made available at
<a href="http://www.regulations.gov">www.regulations.gov</a> or upon request.
A public hearing is being held by teleconference on October 12,
2022, at 10:00 a.m. EST unless no outlines are received by September
26, 2022.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to comment by telephone at the hearing must submit electronic or
written comments and an outline of the topics to be discussed and the
time to be devoted to each topic by September 26, 2022 as prescribed in
the preamble under the ADDRESSES section. A period of ten minutes will
be allotted to each person for making comments (although this rule may
be waived in unusual circumstances or for good cause shown). After the
deadline for receiving outlines has passed, the IRS will prepare an
agenda containing the schedule of speakers. Copies of the agenda will
be made available at <a href="http://www.regulations.gov">www.regulations.gov</a>, search IRS and REG-130975-08.
Copies of the agenda will also be available by emailing a request to
<a href="/cdn-cgi/l/email-protection#b3c3c6d1dfdad0dbd6d2c1daddd4c0f3dac1c09dd4dcc5"><span class="__cf_email__" data-cfemail="afdfdacdc3c6ccc7caceddc6c1c8dcefc6dddc81c8c0d9">[email protected]</span></a>. Please put ``REG-130975-08 Agenda Request'' in
the subject line of the email.
Announcement 2020-4, 2020-17 IRB 667 (April 20, 2020), provides
that until further notice, public hearings conducted by the IRS will be
held telephonically. Any telephonic hearing will be made accessible to
people with disabilities.
List of Subjects in 26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the IRS proposes to amend 26 CFR part 20 as follows:
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
0
Paragraph 1. The authority citation for part 20 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
0
Par. 2. Section 20.2053-1 is amended by:
0
1. Adding paragraph (d)(6).
0
2. Revising the introductory text of paragraph (d)(7).
0
3. In paragraph (d)(7), Examples 1 through 3 are designated as
paragraphs (d)(7)(i) through (iii), respectively.
0
4. In newly designated paragraphs (d)(7)(i) and (ii):
0
i. Removing ``ascertainable,'' and adding ``ascertainable.'' in its
place.
0
ii. Adding a sentence to the end of the paragraphs.
0
5. In newly designated paragraph (d)(7)(iii):
0
i. Removing ``deduction,'' and ``Example 2'' and adding ``deduction.''
and ``paragraph (d)(7)(ii) of this section (Example 2)'' in their
places, respectively.
0
ii. Revising the last sentence of the paragraph.
0
6. Adding paragraphs (d)(7)(iv) through (vi).
0
7. Revising paragraph (f).
The additions and revisions read as follows:
Sec. 20.2053-1 Deductions for expenses, indebtedness, and taxes; in
general.
* * * * *
(d) * * *
(6) Limitation on amount deductible--(i) Claims and expenses paid
after the grace period--(A) Definitions. The following definitions
apply for purposes of this paragraph (d):
(1) Grace period. The grace period is the period beginning on the
date of the decedent's death and extending through the third
anniversary of that date.
(2) Post-grace-period payment. A post-grace-period payment is the
amount of a claim or expense described in paragraph (a) of this section
not paid or to be paid before the end of the grace period.
(B) General rule. To the extent that a post-grace-period payment
otherwise meets the requirements for deductibility of a claim or
expense under section 2053 and the regulations in this part thereunder,
the amount deductible under section 2053 is limited to the present
value, as of the decedent's date of death, of that amount. The present
value of each post-grace-period payment is calculated by discounting it
from the payment date or expected date of payment to the decedent's
date of death. The applicable discount rate is the applicable Federal
rate determined under section 1274(d) for the month in which the
decedent's death occurs, compounded annually. The length of time from
the decedent's date of death to the date of payment or expected date of
payment will determine whether the Federal rate applicable to that
payment is the Federal mid-term rate or the Federal long-term rate. The
Internal Revenue Service publishes the applicable Federal rates for
each month in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii) of this chapter). Any reasonable assumptions and
methodology in regard to time period measurements may be used to
calculate, in accordance with paragraph (d)(6)(ii) of this section, the
present value of the post-grace-period payment(s).
(ii) Calculating present value of amounts paid or payable--(A)
Single post-grace-period payment. The amount deductible under section
2053 for a single post-grace-period payment is computed by calculating
the present value of such payment as follows:
Amount of future payment x [1 / (1 + i)]t
Where:
t is the amount of time (expressed in years and fractions of years)
from the day after the decedent's date of death to the payment date
or expected date of payment; and
i is the applicable discount rate.
(B) Multiple post-grace-period payments. The amount deductible
under section 2053 for multiple post-grace-period payments is computed
by calculating the present value of each such payment using the formula
in paragraph (d)(6)(ii)(A) of this section; the sum of the discounted
amounts of the post-grace-period payments is the amount that is
deductible for such payments.
(C) Multiple payment dates occurring during and after the grace
period. A claim or expense described in paragraph (a) of this section
may have at least one payment date or expected date of payment during
the grace period and at least one payment date or expected date of
payment after the grace period. For such a claim or expense, the amount
deductible under section 2053 is computed by calculating the present
value of each separate post-grace-period payment using the formula in
paragraph (d)(6)(ii)(A) of this section, and adding the total of these
discounted amounts to any amount of the claim or expense having a
payment date or expected date of payment during the grace period. Any
amount having a payment date or expected date of payment during the
grace period is not discounted in arriving at the amount deductible.
(iii) Discounting when actual date of payment is unknown. With
regard to a post-grace-period payment that may be deducted in advance
of payment under paragraph (d)(4) of this section or Sec. 20.2053-4(b)
or (c), the amount
[[Page 38339]]
deductible must be determined by computing the present value of the
amount of that post-grace-period payment as if that amount will be paid
on the expected date of payment. The expected date of payment in
settlement or satisfaction of a claim or expense must be determined
using all information reasonably available to the taxpayer to make a
fair and reasonable estimate of the expected date or dates of payment.
For amounts deductible under Sec. 20.2053-4(b) or (c), the expected
date or dates of payment must be identified in a written appraisal
document of a person that is qualified by knowledge and experience to
appraise the claim being valued. See Sec. 20.2053-4(b)(1)(iv) and
(c)(1)(iv). However, the computation of present value is subject to
adjustment if, within the period described in paragraph (d)(2) of this
section, the actual date or dates of payment become known and differ
from the estimated date or dates of payment. See paragraph (d)(6)(vi)
of this section.
(iv) Statement supporting present value computation required. A
deduction under section 2053 for a claim or expense that is required to
be discounted to present value under paragraph (d)(6)(i) of this
section must be supported by a statement to be filed with the Form 706
showing the computation of the present value of that item, including,
if applicable, the basis for the determination of the expected date(s)
of payment.
(v) Ordering rule. In computing the amount deductible for a claim
or expense under paragraph (d) of this section, the amount deductible
for a claim or expense (otherwise determined under paragraphs (d)(1)
through (4) of this section) is discounted to present value under
paragraph (d)(6) of this section before applying the limits in Sec.
20.2053-4(b)(2) and (c).
(vi) Effect of post-death events. If a deduction is claimed for the
present value of a post-grace-period payment, the claimed deduction is
subject to adjustment to reflect any post-death events affecting the
amount of such post-grace-period payment and any change in the expected
or actual date of payment. See paragraph (d)(2) of this section for the
period during which post-death events are taken into account.
(vii) Exceptions. The rule in paragraph (d)(6)(i) of this section
does not apply to unpaid principal of mortgages and other indebtedness
deductible under Sec. 20.2053-7.
(7) Examples. Assume that the amounts described in section 2053(a)
are payable out of property subject to claims and are allowable by the
law of the jurisdiction governing the administration of the estate,
whether the applicable jurisdiction is within or outside of the United
States. Assume that, unless otherwise provided, the claims against the
estate are not deductible under Sec. 20.2053-4(b) or (c) and all
amounts are paid during the grace period. The following examples
illustrate the application of this paragraph (d):
(i) * * * However, any amounts that will not be paid on or before
the third anniversary of the date of D's death (that is, are not paid
during the grace period) are subject to the present value limitation in
paragraph (d)(6) of this section.
(ii) * * * If the amount of the claim will not be paid on or before
the third anniversary of the date of D's death (that is, the amount is
not paid during the grace period), the amount deductible is subject to
the present value limitation in paragraph (d)(6) of this section.
(iii) * * * At that time, a deduction will be allowed for the
amount that is either paid or meets the requirements of paragraph
(d)(4) of this section for deducting certain ascertainable amounts,
subject to the present value limitation in paragraph (d)(6) of this
section, if applicable.
(iv) Example 4: Discounting amount paid more than three years after
decedent's date of death. The facts are the same as in paragraph
(d)(7)(ii) of this section (Example 2) except that E files a timely
protective claim for refund in accordance with paragraph (d)(5) of this
section to preserve the estate's right to claim a refund, a final
judgment in the amount of $100x is entered against and paid by the
estate precisely five years after D's date of death, and the applicable
Federal (mid-term) rate determined under section 1274(d) for the month
in which D's date of death occurs, compounded annually, is 2.00%.
Within a reasonable period of time after the final judgment is entered,
E notifies the Commissioner that the contingency has been resolved. E
may claim a deduction for the present value of the amount paid in
satisfaction of the claim as of D's date of death. Under the facts in
this paragraph (d)(7)(iv), the present value of the amount paid in five
years equals $100x/(1 + .0200)\5\ or $100x/1.104081 or $90.57x.
(v) Example 5: Discounting amount to be paid when actual date of
payment not known. The facts are the same as in paragraph (d)(7)(ii) of
this section (Example 2) except that the claim is deductible under
Sec. 20.2053-4(c) because all amounts deducted by the estate under
that paragraph do not exceed $500,000. E obtains a written appraisal
document meeting the requirements of Sec. 20.2053-4(c)(iv) and
reasonably determines that the future value of the claim is $300,000
(that is, before discounting the claim to its present value). E
determines, after considering all available information and making
reasonable assumptions, that the expected date of payment of the claim
is Date X, which is reflected in the appraisal. Date X is a date after
the third anniversary of D's date of death. E may claim a deduction for
the present value of the claim as of D's date of death, determined by
discounting $300,000 for the period from the date of death to Date X,
using the applicable Federal rate determined under section 1274(d) for
the month in which D's death occurs, compounded annually.
(vi) Example 6: Discounting amount to be paid for series of
payments payable over a period that does not end on or before the third
anniversary of the decedent's death. Pursuant to the terms of a divorce
and separation agreement entered on June 1 of Year 1, Decedent (D) is
obligated to make annual payments of $100x to Claimant (C) on September
1 of year 1 and each September 1st thereafter until D has made a total
of 10 such payments. D dies on December 1 of Year 5 after having made
the first five annual payments required under the agreement. The
applicable Federal (mid-term) rate determined under section 1274(d) for
the month in which D's death occurs, compounded annually, is 2.00%. The
executor of D's estate (E) may claim a deduction with respect to C's
claim on D's Form 706 under the special rule contained in paragraph
(d)(4) of this section because the deductible amount can be ascertained
with reasonable certainty. E computes the discounted deductible amount
of the claim by adding the undiscounted amount of the three payments
that will be made before the third anniversary of D's death ($300x) to
the discounted amounts of the two payments that will be made after the
third anniversary of D's death. Accordingly, the amount deductible for
the claim equals $483.866x ($300x + $92.843x + $91.023x). The
individual calculations for the present values of the payments in the
last two years of the payment obligation are shown in table 1 to this
paragraph (d)(7)(vi).
[[Page 38340]]
Table 1 to Paragraph (d)(7)(vi)
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
-----------------------------------------------------------------------------------
[1/(1 + i)]\t\ x
t 1 + i 1/(1 + i) [1/(1 + i)]\t\ 100x
----------------------------------------------------------------------------------------------------------------
Year 9...................... 3.75 1.0200 0.980392 0.928430 92.843x
Year 10..................... 4.75 1.0200 0.980392 0.910226 91.023x
----------------------------------------------------------------------------------------------------------------
* * * * *
(f) Applicability date. The rules of this section apply to the
estates of decedents dying on or after [date of publication of the
final rule in the Federal Register].
0
Par. 3. Section 20.2053-3 is amended by:
0
1. Redesignating paragraphs (d) and (e) as paragraphs (e) and (f),
respectively.
0
2. Adding a new paragraph (d).
0
3. Revising newly redesignated paragraph (f).
The addition and revision read as follows:
Sec. 20.2053-3 Deduction for expenses of administering estate.
* * * * *
(d) Interest expense incurred in administering the estate--(1)
Interest payable under section 6601 on unpaid tax--(i) Section 6166
interest. As used in paragraph (d)(1) of this section, the phrase
``section 6166 interest'' means interest payable under section 6601 on
unpaid estate tax deferred under section 6166. This includes interest
accruing on an installment or other payment under section 6166 during
the period of an extension of time for making that payment under
section 6161(a)(2)(B). Section 6166 interest is not deductible pursuant
to section 2053(c)(1)(D).
(ii) Non-section 6166 interest. As used in paragraph (d)(1) of this
section, the phrase ``non-section 6166 interest'' means interest
payable under section 6601 or under state or local law other than
section 6166 interest. Non-section 6166 interest that accrues on or
after the decedent's date of death on any unpaid tax or penalties may
be deductible to the extent permitted by Sec. 20.2053-1 and this
section. For purposes of paragraph (d)(1) of this section, penalties
include any unpaid additions to tax, additional taxes, and penalties.
When non-section 6166 interest accrues on unpaid estate tax deferred
under section 6161 or section 6163, the interest expense is actually
and necessarily incurred in the administration of the estate for
purposes of paragraph (a) of this section because the extension was
based on a demonstrated need to defer payment. When non-section 6166
interest accrues on and after the date of a decedent's death on any
unpaid tax or penalties in connection with an underpayment of tax or a
deficiency, the interest expense generally is actually and necessarily
incurred in the administration of the estate for purposes of paragraph
(a) of this section.
(iii) Exception. Notwithstanding paragraph (d)(1)(ii) of this
section, non-section 6166 interest accruing on unpaid tax and penalties
on and after the decedent's date of death, whether in connection with a
deferral, underpayment, or deficiency, is not actually and necessarily
incurred in the administration of the estate for purposes of paragraph
(a) of this section and is not deductible to the extent the interest
expense is attributable to an executor's negligence, disregard of
applicable rules or regulations (including careless, reckless, or
intentional disregard of rules or regulations) as defined in Sec.
1.6662-3(b)(2) of this chapter, or fraud with intent to evade tax.
Interest expense is attributable to an executor's negligence, disregard
of applicable rules or regulations, or fraud with intent to evade tax
to the extent that the underlying deferral, underpayment, or
deficiency, is attributable to such conduct by the executor. Similarly,
even when the underlying deferral, underpayment, or deficiency is not
attributable to such conduct by the executor, the interest expense is
attributable to an executor's negligence, disregard of the rules or
regulations, or fraud with intent to evade tax to the extent the
subsequent accrual of interest is attributable to such conduct by the
executor.
(iv) Examples. The following examples illustrate the application of
this paragraph (d)(1). In each example, the decedent (D) dies on
October 1, Year 1, and the estate tax return is due July 1 of the
following calendar year, Year 2. In each example, except as expressly
stated, there is no negligence, disregard of applicable rules or
regulations, or fraud on the part of the executor.
(A) Example 1. On July 1, Year 2, the executor of D's estate (E)
timely files the estate tax return based on values determined in good
faith and pays $500,000, which is the estate tax shown on the return.
Upon examination, the Internal Revenue Service (IRS) makes an
adjustment to the value of an asset includible in the gross estate,
resulting in a $25,000 increase in estate tax due. E initially contests
the adjustment, but eventually agrees to the assessment of the
deficiency in the amount of $25,000. Interest on the deficiency is
payable under section 6601 in the amount of $X. E makes a payment in
satisfaction of the assessed deficiency and interest. For purposes of
paragraph (a) of this section, the interest expense in the amount of $X
is considered actually and necessarily incurred in the administration
of D's estate, and its deduction reduces the amount of the deficiency.
(B) Example 2. The executor of D's estate (E) files the estate tax
return and pays the estate tax shown on the return ($500,000) on July 1
of Year 3, one year after the due date. On August 1, Year 3, the IRS
assesses interest on the unpaid tax under section 6601 in the amount of
$X, assesses late filing and late payment penalties in accordance with
section 6651 in the amount of $Y, and issues a notice and demand for
payment of $X and $Y. On August 1, Year 4, E makes payment to the IRS
of $Z, which is the total amount due for $X and $Y, as well as interest
that accrued on these amounts from August 1, Year 3, to August 1, Year
4, payable under section 6601. The facts establish that E's failure to
timely file the return and timely pay the tax and failure to pay the
assessed interest and penalties within the period provided in the
notice and demand is a result of E's disregard of the rules for filing
the return and paying the tax and any assessed penalties. Under the
facts in this paragraph (d)(1)(iv)(B), neither the interest payable
under section 6601 that accrued on the unpaid tax before notice and
demand nor the interest that accrued on the unpaid tax and penalties
after notice and demand is an expense that is actually and necessarily
incurred in the administration of D's estate for purposes of paragraph
(a) of this section.
(C) Example 3. Prior to D's death, the IRS had assessed an income
tax deficiency against D for the 2009 tax period in the amount of
$75,000, and penalties in the amount of $X. The assessed tax and
penalties remained unpaid on D's date of death. On July 1, Year 2, the
executor of D's estate (E) timely files the estate tax return and
timely pays the estate tax shown on the
[[Page 38341]]
return to be due. On the same date, E also pays all claims against and
liabilities of the estate, except for the assessed income tax
deficiency and penalties for the 2009 tax period. Despite E's awareness
that the estate had sufficient liquidity and funds to satisfy all
estate liabilities, including the 2009 income tax deficiency and
penalties, E does not pay the assessed income tax deficiency,
penalties, and accrued interest until July 1, Year 4. E's failure to
pay the assessed income tax deficiency and penalties for the 2009 tax
period is a result of E's disregard of applicable rules or regulations.
Even though the underlying income tax deficiency is not attributable to
E's negligence, disregard of applicable rules, or fraud with intent to
evade tax, the interest that accrued after July 1, Year 2, on the
assessed deficiency and penalties is attributable to E's disregard of
applicable rules or regulations. Accordingly, the post-July 1, Year 2,
interest is not an expense that is actually and necessarily incurred in
the administration of D's estate.
(2) Interest expense on certain loan obligations of the estate.
Interest on a loan entered into by the estate to facilitate the payment
of the estate's tax and other liabilities or the administration of the
estate may be deductible depending on all the facts and circumstances.
To be a deductible administration expense, interest expense must arise
from an instrument or contractual arrangement that constitutes
indebtedness under applicable income tax regulations and general
principles of Federal tax law. In addition, the interest expense and
the loan to which interest expense relates must satisfy the requirement
of Sec. 20.2053-1(b)(2) that they are bona fide in nature based on all
the facts and circumstances. Further, both the loan to which the
interest expense relates and the loan terms must be actually and
necessarily incurred in the administration of the decedent's estate and
must be essential to the proper settlement of the decedent's estate.
See paragraph (a) of this section. If the facts and circumstances
establish that the interest expense arises from an instrument or
contractual arrangement that constitutes indebtedness under general
principles of Federal tax law, factors that collectively may support a
finding that the interest expense also satisfies the additional
requirements under Sec. 20.2053-1(b)(2) and paragraph (a) of this
section include, but are not limited to, the following:
(i) The interest rate on and the terms of the underlying loan
(whether between related or unrelated parties), including any
prepayment penalty, are reasonable given all the facts and
circumstances and comparable to an arms-length loan transaction;
(ii) The underlying loan is entered into by an executor of the
decedent's estate acting in the capacity of executor or, if no executor
is appointed and acting, the person accountable for satisfying the
liabilities of the estate;
(iii) The lender properly includes amounts of paid and/or accrued
interest (including original issue discount as determined under
sections 1271 through 1275 and the regulations in this part under those
sections, such as original issue discount attributable to stated
interest that is treated as part of the stated redemption price at
maturity because it is not payable at least annually) in gross income
for Federal income tax purposes, particularly if the lender is a family
member of the decedent, a related entity, or a beneficiary of the
decedent's estate or trust (as defined in Sec. 20.2053-1(b)(2)(iii));
(iv) The loan proceeds are used to satisfy estate liabilities that
are essential to the proper settlement of the estate, including, but
not limited to, the Federal estate tax liability;
(v) The loan term and payment schedule correspond to the estate's
anticipated ability to make the payments under, and to satisfy, the
loan, and the loan term does not extend beyond what is reasonably
necessary;
(vi) The only practical alternatives to the loan are the sale of
estate assets at prices that are significantly below-market, the forced
liquidation of an entity that conducts an active trade or business, or
some similar financially undesirable course of action;
(vii) The underlying loan is entered into when the estate's liquid
assets are insufficient to satisfy estate liabilities, the estate does
not have control (within the meaning of section 2701(b)(2)) of an
entity that has liquid assets sufficient to satisfy estate liabilities,
the estate has no power to direct or compel an entity in which it has
an interest to sell liquid assets to enable the estate to satisfy its
liabilities, and the estate's assets are expected to generate
sufficient cash flow or liquidity to make the payments required under
the loan;
(viii) The estate's illiquidity does not occur after the decedent's
death as a result of the decedent's testamentary estate plan to create
illiquidity; similarly, the illiquidity does not occur post-death as a
deliberate result of the action or inaction of the executor who then
had both knowledge or reason to know of the estate tax liability and a
reasonable alternative to that action or inaction that could have
avoided or mitigated the illiquidity;
(ix) The lender is not a beneficiary of a substantial portion of
the value of the estate, and is not an entity over which such a
beneficiary has control (within the meaning of section 2701(b)(2)) or
the right to compel or direct the making of the loan;
(x) The lender or lenders are not beneficiaries of the estate whose
individual share of liability under the loan is substantially similar
to his or her share of the estate; and
(xi) The decedent's estate has no right of recovery of estate tax
against, or of contribution from, the person loaning the funds.
* * * * *
(f) Applicability date. The rules of this section apply to the
estates of decedents dying on or after [date of publication of the
final rule in the Federal Register].
0
Par. 4. Section 20.2053-4 is amended by:
0
1. Revising paragraphs (b)(1)(iv), (b)(2), and (c)(1)(iv) and (v), the
second sentence of paragraph (c)(3), paragraph (d)(5), and paragraph
(d)(7)(iii) introductory text.
0
2. In paragraph (d)(7)(iii), Examples 1 through 9 are designated as
paragraphs (d)(7)(iii)(A) through (I), respectively.
0
3. In newly designated paragraph (d)(7)(iii)(A), removing ``decision,''
and ``Sec. 20.2053-3(c) or Sec. 20.2053-3(d)(3)'' adding
``decision.'' and ``Sec. 20.2053-3(c) or (d)(3)'' in their places,
respectively.
0
4. In newly designated paragraphs (d)(7)(iii)(B) and (C), removing
``payment,'', ``Example 1'', and ``Sec. 20.2053-3(c) or Sec. 20.2053-
3(d)(3)'' and adding ``payment.'', ``paragraph (d)(7)(iii)(A) of this
section (Example 1)'', and ``Sec. 20.2053-3(c) or (d)(3)'' in their
places, respectively.
0
5. In newly designated paragraph (d)(7)(iii)(D), removing
``defendants,'', ``Example 1'', and ``Sec. 20.2053-3(c) or Sec.
20.2053-3(d)(3)'' and adding ``defendants.'', ``paragraph
(d)(7)(iii)(A) of this section (Example 1)'', and ``Sec. 20.2053-3(c)
or (d)(3)'' in their places, respectively.
0
6. In newly designated paragraph (d)(7)(iii)(E), removing ``payment,'',
``Example 1'', and ``Sec. 20.2053-3(c) or Sec. 20.2053-3(d)(3)'' and
adding ``payment.'', ``paragraph (d)(7)(iii)(A) of this section
(Example 1)'', and ``Sec. 20.2053-3(c) or (d)(3)'' in their places,
respectively.
0
7. In newly designated paragraph (d)(7)(iii)(F), removing ``claims,''
and ``Sec. 20.2053-3(c) or Sec. 20.2053-3(d)(3)'' and adding
``claims.'' and ``Sec. 20.2053-3(c) or (d)(3)'' in their places,
respectively.
[[Page 38342]]
0
8. In newly designated paragraph (d)(7)(iii)(G), removing
``enforceability,'' and adding ``enforceability.'' in its place.
0
9. In newly designated paragraph (d)(7)(iii)(H), removing ``estate,''
and adding ``estate.'' in its place.
0
10. In newly designated paragraph (d)(7)(iii)(I), removing
``satisfaction,'' and adding ``satisfaction.'' in its place.
0
11. Adding paragraph (d)(7)(iii)(J).
0
12. Revising paragraph (f).
The revisions and addition read as follows:
Sec. 20.2053-4 Deduction for claims against the estate.
* * * * *
(b) * * *
(1) * * *
(iv) The value of each such claim against the estate is supported
by a written appraisal document to be filed with the Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return, or
successor form, and the written appraisal document--
(A) Adequately reflects post-death events that have occurred prior
to the date on which a deduction is claimed on an estate's Form 706;
(B) Reports, considers, and appropriately weighs all relevant facts
and elements of value as are known or are reasonably determinable at
the time of the appraisal, including the underlying facts of the claim
against the estate, potential litigating risks, and the current status
of the claim and procedural history;
(C) Takes into account post-death events reasonably anticipated to
occur;
(D) Identifies an expected date or dates of payment (for purposes
of determining the applicability of the present value limitation in
Sec. 20.2053-1(d)(6));
(E) Explains in detail the methods and analysis that support the
appraisal's conclusions;
(F) Is prepared, signed under penalties of perjury, and dated by a
person who is qualified by knowledge and experience to appraise the
claim being valued and is not a family member of the decedent, a
related entity, or a beneficiary of the decedent's estate or revocable
trust (as those terms are defined in Sec. 20.2053-1(b)(2)(iii)), a
family member of a beneficiary or a related entity as to a beneficiary
(as those terms would be defined in Sec. 20.2053-1(b)(2)(iii) if
references therein to the decedent were replaced with a reference to
such beneficiary, and without regard to the limitations in Sec.
20.2053-1(b)(2)(iii) based on the decedent's date of death), or an
employee or other owner of any of them; and
(G) Includes a statement providing the basis for the person's
qualifications to appraise the claim being valued;
* * * * *
(2) Limitation on deduction. The deduction under this paragraph (b)
is limited to the value of the related claims or particular assets
included in decedent's gross estate. See Sec. 20.2053-1(d)(6)(v) for
the impact of the present value limitation.
* * * * *
(c) * * *
(1) * * *
(iv) The value of each such claim against the estate is supported
by a written appraisal document to be filed with the Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return, or
successor form, and the written appraisal document--
(A) Adequately reflects post-death events that have occurred prior
to the date on which a deduction is claimed on an estate's Form 706;
(B) Reports, considers and appropriately weighs all relevant facts
and elements of value as are known or reasonably determinable at the
time of the appraisal, including the underlying facts of the claim
against the estate, potential litigating risks, and the current status
of the claim and procedural history;
(C) Takes into account post-death events reasonably anticipated to
occur;
(D) Identifies an expected date or dates of payment (for purposes
of determining the applicability of the present value limitation in
Sec. 20.2053-1(d)(6));
(E) Explains in detail the methods and analysis that support the
appraisal's conclusions;
(F) Is prepared, signed under penalties of perjury, and dated by a
person who is qualified by knowledge and experience to appraise the
claim being valued, and is not a family member of the decedent, a
related entity, or a beneficiary of the decedent's estate or revocable
trust (as those terms are defined in Sec. 20.2053-1(b)(2)(iii)), a
family member of a beneficiary or a related entity as to a beneficiary
(as those terms would be defined in Sec. 20.2053-1(b)(2)(iii) if
references therein to the decedent were replaced with a reference to
such beneficiary, and without regard to the limitations in Sec.
20.2053-1(b)(2)(iii) based on the decedent's date of death), or an
employee or other owner of any of them; and
(G) Includes a statement providing the basis for the person's
qualifications to appraise the claim being valued;
(v) The total amount deducted by the estate under paragraph (c) of
this section does not exceed $500,000 (see Sec. 20.2053-1(d)(6)(v) for
the impact of the present value limitation);
* * * * *
(3) * * * Assume that each claim is paid within three years after
the decedent's death, and that the value of each claim is determined
from a written appraisal document that meets the requirements of
paragraph (c)(1)(iv) of this section. * * *
(d) * * *
(5) Claims founded upon a promise--(i) In general. To be
deductible, a claim founded on a promise must represent a personal
obligation of the decedent existing at the time of the decedent's
death, and the claim must be enforceable against the decedent's estate.
In addition, except with regard to pledges or subscriptions (see Sec.
20.2053-5), the deduction for a claim founded upon a promise or
agreement is limited to the extent that the promise or agreement was
bona fide and in exchange for adequate and full consideration in money
or money's worth; that is, the promise or agreement must have been
bargained for at arm's length and the price must have been an adequate
and full equivalent reducible to money value.
(ii) Decedent's promise to guarantee a debt. A deduction for a
claim founded upon a decedent's agreement to guarantee a debt of
another is a claim founded on a promise and is subject to the
limitation in paragraph (d)(5)(i) of this section. For purposes of
section 2053, a decedent's agreement to guarantee a debt of an entity
in which the decedent had an interest at the time the guarantee was
given satisfies the requirement that the agreement be in exchange for
adequate and full consideration in money or money's worth if, at the
time the guarantee was given, the decedent had control (within the
meaning of section 2701(b)(2)) of the entity. Alternatively, this
requirement is satisfied to the extent the maximum liability of the
decedent under the guarantee did not exceed, at the time the guarantee
was given, the fair market value of the decedent's interest in the
entity. The bona fide nature of the decedent's agreement to guarantee a
debt of a family member, a related entity, or a beneficiary (as defined
in Sec. 20.2053-1(b)(2)(iii)) is determined in accordance with Sec.
20.2053-1(b)(2)(ii). For a claim otherwise deductible under this
paragraph (d)(5)(ii), the estate's right of contribution or
reimbursement will reduce the amount deductible in accordance with
Sec. 20.2053-1(d)(3). Payments made pursuant to the decedent's
guarantee of a debt are
[[Page 38343]]
deductible only to the extent that the debt for which the guarantee is
given has not been taken into account in computing the value of the
gross estate under Sec. 20.2053-7 or otherwise.
* * * * *
(7) * * *
(iii) The claimant (C) is not a family member, related entity, or
beneficiary of the estate of decedent (D), unless otherwise provided,
and is not the executor (E).
* * * * *
(J) Example 10: Guarantee. On Date 1, D entered into a guarantee
agreement with Bank (C) to secure financing for a closely-held business
(LLC) in which D had a controlling interest. LLC was solvent at the
time LLC executed a promissory note in the amount of $100x in favor of
C. Prior to D's death, LLC became insolvent and stopped making payments
on the note. After D's death, C filed a claim against D's estate for
payment of the remaining balance due under the note and E paid the full
amount due. Although E had a right of contribution against LLC for
primary payment of the indebtedness, LLC was insolvent and no part of
the debt was collectible at the time E deducted the payment. D's estate
may deduct the amount paid to C in satisfaction of D's liability under
the guarantee agreement. The guarantee agreement is considered to have
been contracted for an adequate and full consideration in money or
money's worth. The result would be the same if D did not have control
of LLC as long as the fair market value of D's interest in the LLC on
Date 1 was at least $100x.
* * * * *
(f) Applicability date. The rules of this section apply to the
estates of decedents dying on or after [date of publication of the
final rule in the Federal Register].
Paul J. Mamo,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2022-13706 Filed 6-24-22; 4:15 pm]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on June 28, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.