August 8, 2007
Mr. Kevin Brown
Acting Commissioner
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C.20224
Mr. Donald Korb
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C.20224
Mr. William P. O’Shea
Associate Chief Counsel for Passthroughs and Special Industries
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C.20224
HAND DELIVERED: Courier’s Desk, CC:PA:LPD:PR (REG-143316-03)
RE: Proposed Regulations ( REG-143316-03, 2007-2 IRB 1292) R egarding How Post-Death Events May Be Considered in Determining the Value of a Taxable Estate
Dear Mr. Brown, Mr. Korb, and Mr. O’Shea:
The American Institute of Certified Public Accountants (AICPA) is submitting comments on proposed regulations relating to the amount deductible from a decedent’s gross estate for claims against the estate under Internal Revenue Code (IRC) section 2053(a)(3). The proposed regulations will affect estates of decedents against whom there are claims outstanding at the time of their deaths.
We are concerned that the proposed regulations will not accomplish their goal of reducing costs for both the estate and the IRS in administering IRC section 2053. Instead, this approach would: (1) create a series of traps for unwary executors and tax preparers; and (2) lead to the equally inefficient situation where an estate must be held open for a number of years to determine the amount of the deduction for a contingent obligation. Heirs and executors need closure and would possibly incur many additional costs and burdens in filing annual refund claims every year for 25 or more years under certain circumstances. Additionally, the potential proliferation of petitions under IRC section 2204 certainly could increase the administrative burden for the government, as well.
The AICPA is the national professional organization of certified public accountants comprised of approximately 330,000 members. Our members advise clients on federal, state and international tax matters, and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized business, as well as America’s largest businesses.
* * * * *
We thank you for the opportunity to present our comments and welcome the opportunity to discuss our comments further with you or others at the IRS. Please feel free to contact me at ; Steven A. Thorne, Chair of the AICPA Trust, Estate, and Gift Tax Technical Resource Panel, at ; or Eileen R. Sherr, AICPA Technical Manager, at to discuss the above comments or if you require any additional information.
Sincerely,
Jeffrey R. Hoops
Chair, AICPA Tax Executive Committee
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Section 2053 Proposed Regulations(REG-143316-03)
Regarding How Post-Death Events May Be Considered
in Determining the Value of a Taxable Estate
Developed by:
Trust, Estate, and Gift Tax Technical Resource Panel
Section 2053 Task Force
F. Gordon Spoor, Chair
Cordell L. Almond
Joseph L. Fischer
Justin P. Ransome, Vice Chair, Trust, Estate, and Gift Tax Technical Resource Panel
Frances Schafer
Steven A. Thorne, Chair, Trust, Estate, and Gift Tax Technical Resource Panel
Richard P. Weber
Eileen R. Sherr, AICPA Technical Manager
Approved by:
Trust, Estate, and Gift Tax Technical Resource Panel
and
Tax Executive Committee
Submitted to:
Internal Revenue Service
August 8, 2007
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Proposed Regulations (REG-143316-03) Regarding How Post-Death Events May Be Considered in Determining the Value of a Taxable Estate
August 8, 2007
BACKGROUND
Internal Revenue Code (IRC) section 2053(a) provides that for purposes of the federal estate tax, the value of the taxable estate is determined by deducting from the value of the gross estate amounts:
(1)for funeral expenses,
(2)for administration expenses,
(3)for claims against the estate, and
(4)for 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,
as are allowable by the laws of the jurisdiction under which the estate is being administered.
The Treasury Department and the Internal Revenue Service (IRS or Service) have proposed amending the existing regulations under IRC section 2053 to prohibit using the date-of-death value as the amount of the deductionfora claim against the estate or debt of a decedent if there are any existing contingencies with regard to either claim or debt. The Treasury Department and the IRS reached the conclusion that valuation of claims against the decedent’s estate at the date of the decedent’s death is not the proper way to value these claims because, as stated in the preamble to the proposed regulations:
… this date-of-death valuation approach, when applied, has required an inefficient use of resources for taxpayers, the IRS, and the courts. Determining a date-of-death value requires the taxpayer and the IRS to retry the substantive issues underlying the claims against the estate in a tax controversy setting. In most cases, the tax controversy is addressed after the issue either has been settled by or has been argued by parties with adverse interests in a court of competent jurisdiction that is more familiar with the nuances of the underlying applicable law. Furthermore, this approach has proven to be expensive, both in terms of appraisal and litigation costs. In addition, this approach generally results in a deduction that is different from the amount actually paid on disputed claims. Finally, the date-of-death valuation approach often forces the taxpayer involved in actively defending against a claim to take contradictory positions on the estate tax return and in the substantive court pleadings, and may actually increase the taxpayer’s potential liability.
As a result, the Treasury Department and the IRS concluded that:
[T]o further the goal of the effective and fair administration of the tax laws, the proposed regulations adopt rules based on the premise that an estate may deduct under section 2053(a)(3) only amounts actually paid in settlement of claims against the estate. If the resolution of a contested or contingent claim cannot be reached prior to the expiration of the period of limitations for claims for refund, the estate may file a protective claim for refund to preserve its right to claim a deduction under sections 2053(a) and 6511.
The circuit courts have grappled with the issue of whether and, if so, to what extent post-death events should be considered in determining the value of claims against a decedent’s estate for purposes of IRC section 2053. One court proclaimed that the matter obviously needs “legislative clarification” (by Congress).[1] It is noteworthy that IRC section 2053 is silent as to the “date” for valuing such claims against a decedent’s estate.
COMMENTS
In the AICPA’s opinion, the problems with the proposed regulations are multiple. They will: (1) not accomplish the implied goal of the Treasury Department of reducing costs for both the estate and the IRS in administering IRC section 2053;(2) create a series of traps for unwary executors and tax preparers; and(3)create situationswhere an estate must be held open for decades until final determination of the allowable amount of the deduction for a contingent obligation. Heirs and executors need closure and would possibly incur many additional costs and burdens in filing annual refund claims every year for 25 or more years under certain circumstances. Additionally, the potential proliferation of petitions under IRC section 2204 certainly could increase the administrative burden for the government, as well.
Valuing a Contingent Stream of Payments Obligation
Examples 8, 9, and 10 of prop. reg.section20.2053-4(d) illustrate the best and worst situations that can arise under the proposed regulations.
Example 8 starts off reasonably with a decedent owing a series of payments over a fixed period, which is essentially an annuity. It allowsthe estate a deduction for the present value of the stream of payments as determined under the methods used to value annuities, using the currently effective rate under IRC section 7520. As a result the estate receives a deduction for the present value of the annuity payable. The amount of the deduction can be determined easily as of the date of death without causing any delay in the filing andclosing of the estate tax return and the administration of the estate. The certainty presented in Example 8 is slightly illusory in thatExample 10 offers an alternate, and presumably different, solution. If the same annuityobligation is funded by purchasing a commercial annuity, the cost of the annuity will be deemed to be the amount of the deduction. In either case, the results are reasonable because the estate is not taxed on money that goes to the creditor-annuitant rather than the heirs, and the deduction amount can easily be determined in a timely manner.
However, in Example 9, the annuity-obligation owed by the decedent ceases with the death or remarriage of the recipient. The example concludes that the only deduction allowed equals the actual payments made by the time the estate tax return is filed. To deduct any future payments, the estate must file a protective claim for refund to keep the statute of limitations for the return open for the duration of the annuity. With a young annuitant, this could go on for decades.
It is not completely clear what contingency is driving the conclusion in Example 9. An annuity based on a remarriage contingency only would certainly be covered by this example because the contingency cannot be evaluated actuarially. It does not seem that an annuity with a death contingency only should be covered by this example, because life annuities receivable are readily valued under the actuarial tables in a variety of contexts for federal gift, estate, and income tax purposes. The same procedures could easily be followed to determine the deductible amount for a life annuity. In fact, the IRS has consistently taken the position that the actuarial tables must be used to value a stream of future payments. [2]
The amendments under prop. reg. section 20.2053-4(b)(7)(i) and (ii) appear to contradict the Service’s position in all other cases, by treating an obligation susceptible to actuarial valuation – like a life annuity owed by the decedent at death– as“contingent” and subject to the same rules as an annuity with a remarriage contingency.
Inefficiencies Created by Delaying Determination of the Date-of-Death Valuation for Contingent Obligations
When a stream of payments owed by the decedent is treated as contingent under the proposed regulations, the estate is forced to over-pay the estate tax when the return is initially filed, then collect a series of refunds over the years as the annuity is paid. The stream of actual annuity payments could ultimatelybe large enough that the entire estate tax could be recovered along with statutory interest.
Purchasing a commercial annuity appears to be the only way to presumptively establish a deductible liability under the life annuity scenario; thereby subjecting the estate to an additional – and we feel unnecessary – expense to achieve the same result that applying the actuarial tables achieves under other circumstances in the IRC. As written, the proposed regulations can forcean estate to remain open for possibly decades to determine the estate tax properly due. We do not think it is equitable to force the heirs and the executor of an estate into a position where they are not able to determine the estate tax due and thus the amount of the estate available to the heirs until decades have passed after the testator’s death.
Lack of Underlying Statutory Authority
The Treasury Department and the IRS note the IRC section 2031(a) requirement forvaluing at the date of death a decedent’s assets and the absence of such an instruction for valuing claims against the estate. The proposed regulations then cite deductible estate expensesthat can be determined only by considering post-death events – for example, funeral and administrative expenses. The proposed regulations then conclude that allestate contingent liabilities can only be valued at the dollar amount actually paid to satisfy them, rather than at the value of the claim at the date of the decedent’s death. However, the statute grants a “deduction from the value of the gross estate such amounts . . . for claims against the estate,” not for amounts paid by the estate with respect to those claims.
The lack of a statutory requirement to value claims against the estate as of the date of the decedent’s death may well be a result of the structure of IRC section 2053(a), rather than some specific Congressional intent that date of death values should not be used. IRC section 2053(a) allows deductions for four categories of items. Stating by statute that all these items should be valued at the time of the decedent’s death as required under IRC section 2031(a) for assets owned by the decedent would not have been possible. Clearly, funeral expenses in IRC section 2053(a)(1) and administration expenses in IRC section 2053(a)(2) could not be valued at the date of death because they arise after a decedent’s death but presumably within the short period of time following death that it normally takes to complete the administration of the estate.
Other claims against the estate are obligations that arose before the death of the decedent and therefore had a value at the date of death. Any claim owed to the decedent would be an asset includible in the decedent’s estate at its date-of-death value. For estate tax purposes, claims by and against the decedent’s estate should be treated consistently and valued at the date-of-death whether included as an asset of the gross estate or deductible as a claim in determining the taxable estate.
The proposed regulations include an inconsistency which would require deducting the discounted value of a term-of-years obligation, but allow for the full, undiscounted deduction of payments made on a claim subject to a contingency. For example, if an estate is obligated to make continuing annuity payments for a period of 10 years after the decedent’s death, the estate is allowed a deduction for the present value of the future payments. However, if this same series of payments for the 10-year obligation continues to the earlier of the 10-year term or the death of the payee, the estate would need to remain open for 10 years, but could then deduct the full amount of the payments made, not the discounted amount.
Thus, under the regime in the proposed regulations, the same payment stream would result in a lesser estate tax for the estate making payments subject to a contingency, and result in higher administration costs for both the IRS and the estate, thereby yielding even less revenue to the Treasury Department. Again, the results of the application of the proposed regulations are in stark contrast to the stated goal of “effective and fair” estate tax administration.
A life annuity payable is readily valued and should not be a cause for keeping an estate open for an extended period. Valuing a claim that is contingent on remarriage or another contingency not easily valued by actuarial science is more difficult, but these valuations can be done. In fact, if the contingent claim was owed to the estate, section 2031 requires such a timely valuation and inclusion in the gross estate.
Reasonable Estimates AreCommonly Used in Valuing Estates
The estate tax regime is filled with examplesusing estimates in arriving at date-of-death values for assets. For example, in valuing a closely held business or family limited partnership, many of these same contingencies will arise. Contingencies may be present when valuing amounts due under non-competition or royalty agreements as well as accounts receivable and payable.
Proposedreg. section 20.2053-1(b)(4) would allow a deduction “for a claim that satisfies all applicable requirements even though its exact amount is not then known, provided that the amount is ascertainable with reasonable certainty, and will be paid.” The proposed regulations offer no guidance as to what is a “reasonable certainty,” and even if they did, they negate the purpose of the use of estimates by only allowing a deduction of the amount that will be paid.
The proposed regulations refer to the use of “vague or uncertain” estimates. Vagueness and uncertainty are subjective standards and subject to a wide range of interpretation. While the use of such terms may be seen as a blessing to the trial attorney, it is a nightmare for the practitioners who are making sincere efforts to comply with what they understand the applicable statutory law to be as interpreted by regulations and case law.
The changes proposed in prop. reg. section 20.2053-1(b)(4) in “estimated amounts” may seem reassuring, but the usefulness of the provisions as written, is quite limited because this section only applies when there is certainty that the claim or expenses will be paid.
“Protective Claims” Are Not an Efficient Means of Addressing Overpayments Related to Contingent Obligations