Part IV

Notice of Proposed Rulemaking

Mortality Tables for Determining Present Value under Defined Benefit Pension Plans

REG-106384-20

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document sets forth proposed regulations prescribing mortality tables to be used for most defined benefit pension plans. The tables specify the probability of survival year-by-year for an individual based on age, gender, and other factors. The tables are used (together with other actuarial assumptions) to calculate the present value of a stream of expected future benefit payments for purposes of determining the minimum funding requirements for the plan. These mortality tables are also relevant for determining the minimum required amount of a lumpsum distribution from such a plan. These regulations affect participants in, beneficiaries of, employers maintaining, and administrators of certain defined benefit pension plans.

DATES : Written or electronic comments must be received by June 9, 2022. A public hearing on these proposed regulations has been scheduled for June 28, 2022 at 10 a.m. EST. Requests to speak and outlines of topics to be discussed at the public hearing must be received by June 9, 2022. If no outlines are received by June 9, 2022, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. EST on June 24, 2022.

The telephonic hearing will be made accessible to people with disabilities. Requests for special assistance during the telephonic hearing must be received by June 23, 2022. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-106384-20) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (the Treasury Department) and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR (REG-106384-20), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. For those requesting to speak during the hearing, send an outline of topic submissions electronically via the Federal eRulemaking Portal at www.regulations. gov (indicate IRS and REG-106384-20).

Individuals who want to testify (by telephone) at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-106384-20 and the word TESTIFY. For example, the subject line may say: Request to TESTIFY at Hearing for REG-106384-20. 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 publichearings@irs.gov to receive

the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-106384-20 and the word ATTEND. For example, the subject line may say: Request to ATTEND Hearing for REG106384-20. 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 publichearings@irs.gov (preferred) or by telephone at (202) 3175177 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Arslan Malik or Linda Marshall at (202) 317-6700; concerning submission of comments and outlines of topics for the public hearing, call Regina Johnson at (202) 317-6901 (not toll-free numbers) or email publichearings@irs.gov.

SUPPLEMENTARY INFORMATION:

Background

Section 412 of the Internal Revenue Code (Code) prescribes minimum funding requirements for defined benefit pension plans, and section 430 specifies the minimum funding requirements that apply generally to defined benefit plans that are not multiemployer plans. ¹ Section 430(a) defines the minimum required contribution by reference to the plan’s funding target for the plan year. Under section 430(d) (1), a plan’s funding target for a plan year generally is the present value of all benefits accrued or earned under the plan as of the first day of that plan year.

Section 430(h)(3) provides rules regarding the mortality tables to be used under section 430. Under section 430(h)(3) (A), except as provided in section 430(h) (3)(C) or (D), the Secretary is to prescribe by regulation mortality tables to be used in determining any present value or making any computation under section 430.

1 Section 302 of the Employee Retirement Income Security Act of 1974, Public Law No. 93-406, as amended (ERISA) sets forth funding rules that are parallel to those in section 412 of the Code, and section 303 of ERISA sets forth additional funding rules for defined benefit plans (other than multiemployer plans) that are parallel to those in section 430 of the Code. Pursuant to section 101 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App., as amended, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these proposed regulations for purposes of ERISA, as well as the Code. Thus, these proposed Treasury regulations issued under section 430 of the Code also apply for purposes of section 303 of ERISA.

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Those mortality tables are to be based on the actual mortality experience of pension plan participants and projected trends in that experience. In prescribing those mortality tables, the Secretary is required to take into account results of available independent studies of mortality of individuals covered by pension plans. Under section 430(h)(3)(B), the Secretary is required to revise any mortality table in effect under section 430(h)(3)(A) at least every 10 years to reflect actual mortality experience of pension plan participants and projected trends in that experience. Under section 430(h)(3)(C), a plan sponsor is permitted to request the Secretary’s approval to use plan-specific substitute mortality tables that meet requirements specified in the statute rather than the generally applicable mortality tables. If approved, these substitute mortality tables are used to determine present values and make computations under section 430 during the period of consecutive plan years (not to exceed 10) specified in the request.

Section 430(h)(3)(D) provides for the use of separate mortality tables with respect to certain individuals who are entitled to benefits on account of disability. These separate mortality tables are permitted to be used with respect to disabled individuals in lieu of the generally applicable mortality tables provided pursuant to section 430(h)(3)(A) or the substitute mortality tables under section 430(h)(3) (C). The Secretary is to establish separate tables for individuals with disabilities occurring in plan years beginning before January 1, 1995, and for individuals with disabilities occurring in later plan years, with the mortality tables for individuals with disabilities occurring in those later plan years applying only to individuals who are disabled within the meaning of Title II of the Social Security Act.

Section 417(e)(3) generally provides that the present value of certain benefits under a qualified pension plan (including single-sum distributions) must not be less than the present value of the accrued benefit using applicable interest rates and the

applicable mortality table. Section 417(e) (3)(B) defines the term “applicable mortality table” as the mortality table specified for the plan year for minimum funding purposes under section 430(h)(3)(A) (without regard to the rules for substitute mortality tables under section 430(h)(3) (C) or mortality tables for disabled individuals under section 430(h)(3)(D)), modified as appropriate by the Secretary. The modifications made by the Secretary to the section 430(h)(3)(A) mortality table to determine the section 417(e)(3)(B) applicable mortality table are not addressed in these proposed regulations. Revenue Ruling 2007-67, 2007-2 CB 1047, describes the modifications that are currently applied to determine the section 417(e)(3) (B) applicable mortality table.

Final regulations under section 430(h) (3) were published in the Federal Reg- ister on October 5, 2017 in TD 9826, 82 FR 46388 (the 2017 regulations). Section 1.430(h)(3)-1 prescribes base mortality tables and a set of mortality improvement rates, which may be reflected through the use of either generational mortality tables or static mortality tables. The generational mortality tables are a series of mortality tables, one for each year of birth, each of which fully reflects projected trends in mortality rates. The static mortality tables (which are updated annually ² ) use a single mortality table for all years of birth to approximate the present value that would be determined using the generational mortality tables.

The mortality tables included in the 2017 regulations are based on the mortality tables included in the RP-2014 Mortality Tables Report ² (referred to in this preamble as the RP-2014 mortality tables), which was released by the Retirement Plan Experience Committee (RPEC) of the Society of Actuaries (SOA) in October 2014 (as revised in November 2014), and a set of mortality improvement rates (the Scale MP-2016 rates) as released by RPEC. ⁴ In 2016, RPEC initiated a study of private-sector retirement plans in the U.S. in order to provide an update to RP-2014,

and in 2019, RPEC issued the Pri-2012 Private Retirement Plans Mortality Tables Report (Pri-2012 Report). ⁵

In Notice 2019-67 (which provides mortality improvement rates and static mortality tables for 2021), the Treasury Department and the IRS asked for comments regarding future mortality tables under section 430(h)(3)(A). The notice identified the mortality tables in the Pri2012 Report as a potential source for developing updated mortality tables under section 430(h)(3)(A) and requested comments regarding (1) whether there are other studies of actual mortality experience of individuals covered by pension plans and projected trends in that experience that should be considered for use in developing updated mortality tables under section 430(h)(3)(A), such as studies that examine the mortality experience of individuals covered by large public-sector pension plans, and (2) if the mortality tables in the Pri-2012 Report were to be used to develop updated mortality tables under section 430(h)(3)(A), which of the tables in that report should be used. In October 2021, RPEC published the Mortality Improvement Scale MP-2021 Report (MP2021 Report), which is the latest update to its study on mortality improvement. ⁶ In response to the request for comments in Notice 2019-67, the Treasury Department and the IRS received seven comments. The comments are discussed in the Explanation of Provisions.

The standards prescribed for developing the mortality tables under 430(h) (3)(A) are the same as the standards that are prescribed for developing mortality tables for multiemployer plans under section 431(c)(6)(D)(iv)(II) (which are used to determine current liability in order to determine the minimum full funding limitation under section 431(c)(6) (B)). See § 1.431(c)(6)-1 (providing that the same mortality assumptions that apply for purposes of section 430(h)(3)(A) and § 1.430(h)(3)-1(a) are used to determine a multiemployer plan’s current liability). These standards also apply for CSEC

2 Static mortality tables were published in Notice 2017-60, 2017-43 IRB 365, Notice 2018-02, 2018-2 IRB 281, Notice 2019-26, 2019-15 IRB 943, Notice 2019-67, 2019-52 IRB 1510, and Notice 2020-85, 2020-51 IRB 1645.

3 This report is available at https://www.soa.org/globalassets/assets/files/research/exp-study/research-2014-rp-report.pdf.

4 This report is available at https://www.soa.org/globalassets/assets/Files/Research/Exp-Study/mortality-improvement-scale-mp-2016.pdf.

5 This report is available at https://www.soa.org/globalassets/assets/files/resources/experience-studies/2019/pri-2012-mortality-tables-report.pdf.

6 This report is available at https://www.soa.org/globalassets/assets/files/resources/experience-studies/2021/2021-mp-scale-report.pdf.

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plans described in section 414(y) for purposes of developing mortality tables that are used for purposes of section 433(h) (3)(B)(i) (to determine current liability in order to determine the minimum full funding limitation under section 433(c)(2)(C) and the funded current liability percentage under section 433(i)). See § 1.433(h) (3)-1 (providing that the same mortality assumptions that apply for purposes of section 430(h)(3)(A) and § 1.430(h)(3)1(a) are used to determine a CSEC plan’s current liability).

Explanation of Provisions

These proposed regulations set forth the methodology that the Treasury Department and the IRS intend to use to update the generally applicable mortality tables that are used to determine present value or make any computation under section 430. Pursuant to section 417(e) (3)(B), a modified version of these updated tables would be used for purposes of determining the amount of a single-sum distribution (or another accelerated form of distribution). In addition, these tables would be used to determine current liability for multiemployer plans under section 431(c)(6) and CSEC plans under section 433(h).

The methodology for developing updated tables under section 430(h)(3)(A) is being proposed pursuant to the requirement under section 430(h)(3)(B) to revise the mortality tables used under section 430 to reflect the actual mortality experience of pension plan participants and projected trends in that experience. As under the 2017 regulations, the methodology involves the separate determination of base mortality tables and the projection of mortality improvement.

A. Base Mortality Tables

The base mortality tables proposed for use under section 430(h)(3)(A) are derived from the tables set forth in the Pri-2012 Report. After reviewing the Pri2012 Report and comments received in response to Notice 2019-67, the Treasury Department and the IRS have determined that the experience study used to develop the Pri-2012 Report is the best available study of the actual mortality experience

of pension plan participants (other than disabled individuals). Accordingly, the mortality tables in the Pri-2012 Report are the foundation for the base mortality tables used to project the mortality of pension plan participants under these proposed regulations. Like the mortality tables provided in the 2017 regulations, the mortality tables set forth in these proposed regulations are gender-distinct and provide separate non-annuitant and annuitant mortality rates.

Unlike the Pri-2012 Report, these proposed regulations do not provide separate tables for annuitants who are retirees and annuitants who are contingent beneficiaries. In response to the request for comments in Notice 2019-67, most commenters recommended against the use of separate mortality tables for retirees and contingent beneficiaries because: (1) those separate mortality tables are complex to apply on an exact basis; (2) applying those mortality tables would require actuaries to use historical data that may be difficult to obtain; and (3) the use of those separate mortality tables would not have a significant effect in measuring a plan’s liabilities. After reviewing the comments, the Treasury Department and the IRS concluded that the regulations should not provide separate mortality tables for annuitants who are retirees and annuitant who are contingent beneficiaries. Accordingly, these proposed regulations provide annuitant mortality tables that combine the mortality experience of retirees and contingent beneficiaries.

As under the 2017 regulations, these proposed regulations provide that the annuitant mortality tables are applied to determine the present value of benefits for an annuitant. For a non-annuitant, the non-annuitant mortality tables are applied for the periods before the participant is projected to commence receiving benefits, and the annuitant mortality tables are used for later periods. With respect to a beneficiary of a participant, the annuitant mortality tables apply for the period beginning with each assumed commencement of benefits for the participant. If the participant has died (or to the extent the participant is assumed to die before commencing benefits), the annuitant mortality tables apply with respect to the beneficiary for the period beginning with each

assumed commencement of benefits for the beneficiary.

These proposed regulations set forth base tables that are to be used to develop the mortality tables for future years. These base tables have a base year of 2012 (the central year of the experience study used to develop the mortality tables in the Pri‑2012 Report). These base tables generally have the same mortality rates as the employee and non-disabled annuitant mortality rates that were released by RPEC in connection with the Pri-2012 Report. However, these base tables also include non-annuitant mortality rates for ages below age 18 and above age 80 and annuitant mortality rates for ages below age 50. This generally is the same approach that was used to develop the base mortality tables in the 2017 regulations.

The non-annuitant mortality rates for ages above age 80 were developed by (1) using the annuitant rates from the base mortality tables for ages 90 and older, and (2) interpolating between the rates for age 80 and age 90 in order to produce a smooth transition between the age 80 rates from the non-annuitant tables to the age 90 rates from the annuitant tables. The interpolation uses increasing fractions with a denominator of 55 to allocate the total difference between the rates at ages 80 and 90 over those 10 years. Thus, the rate at age 81 is set equal to the rate at age 80 plus 1/55 of the total difference, the age 82 rate is equal to the rate at age 81 plus 2/55 of the total difference (so that the age 82 rate is equal to the rate at age 80 plus 3/55 of the total difference), and so on for other ages.

A similar approach was used to develop annuitant rates for ages below age 50 for males and 52 for females. The annuitant rates for ages under age 50 for males and 52 for females were determined by (1) using the non-annuitant rates from the base mortality tables for ages 18 to 40, and (2) interpolating between the rates for age 40 and a later age, using the same methodology described in the preceding paragraph. The later age for males was 50 and for females was 52 (requiring that a denominator of 78 be substituted for 55 when that methodology was applied for females). This method produces a smooth transition between the age 40 rates from the non-annuitant tables and the age 50

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rates for males, and age 52 rates for females, from the annuitant tables. In addition, some anomalous rates for female annuitants at ages 55 and 56 in the Pri‑2012 Report were smoothed by using a straight linear interpolation between the age 54 rates and the age 57 rates from the female annuitant table. For ages below age 18, both the non-annuitant and annuitant rates incorporate the juvenile rates from the Pri2012 Report.

B. Mortality Improvement

These proposed regulations use the Scale MP-2021 Rates (the mortality improvement scale in the MP-2021 Report) for valuation dates in the 2023 calendar year. This mortality improvement scale was developed using the same underlying methodology used to develop earlier mortality improvement scales but reflects historical population data through 2019 and the change to the RPEC-selected assumptions for the long-term rate of mortality improvement that was first incorporated in the Mortality Improvement Scale MP2020 Report. ⁷ The Treasury Department and the IRS understand that RPEC expects to issue updated mortality improvement rates that reflect new data for mortality improvement trends for the general population on an annual basis. The Treasury Department and the IRS expect to take those updates into account in determining the mortality rates to be used under section 430(h)(3) for valuation dates in years after 2023. Those rates will be specified in guidance to be published in the Internal Revenue Bulletin. See § 601.601(d).

C. Use of Static Tables for Small Plans

The 2017 regulations provide for the use of separate generational non-annuitant and annuitant mortality tables and separate static non-annuitant and annuitant mortality tables. The preamble to those regulations explains that static mortality tables are permitted to be used (notwithstanding that generational mortality tables yield more accurate results) because of the limitations of some current actuarial software

that is not designed to use generational tables. Since the issuance of the 2017 regulations, the software needed to use generational mortality tables has become widely used and is often used for other business needs such as financial accounting. There is no longer a need to allow the use of static mortality tables for most plans because most actuarial firms have the capability to use generational mortality tables. Requiring most employers to use generational mortality tables also minimizes anti-selection by plan sponsors who determine that the use of static mortality tables results in lower minimum funding requirements. Accordingly, these proposed regulations eliminate the use of separate static non-annuitant and annuitant mortality tables and require the use of generational mortality tables for plans that are not considered small plans.

These proposed regulations continue to allow the use of static mortality tables for small plans (defined as plans with 500 or fewer participants), as well as for multiemployer and CSEC plans. However, the static mortality tables that may be used for these plans are combined tables reflecting non-annuitant and annuitant mortality rates. These tables are constructed from a blend of non-annuitant and annuitant mortality rates based on the underlying data used in developing the Pri-2012 Report.

Applicability Date

These regulations are proposed to apply to plan years beginning on or after January 1, 2023.

Other Matters

A. Effect of Regulations on Previously Approved Substitute Mortality Tables

The 2017 regulations also included rules regarding the use of plan-specific mortality tables under section 430(h) (3)(C), which are set forth in § 1.430(h) (3)‑2. ⁸ Section 1.430(h)(3)-2(c)(6)(ii) provides for the early termination of the use of substitute mortality tables in certain

circumstances, including pursuant to a replacement of the mortality tables specified in § 1.430(h)(3)-1. Under § 1.430(h) (3)-2(c)(6)(ii)(E), the early termination pursuant to such a replacement must be effective as of a date specified in guidance published in the Internal Revenue Bulletin. Except as described in the next paragraph, the Treasury Department and the IRS do not intend to require the early termination of previously approved substitute mortality tables in connection with the proposed replacement of the generally applicable mortality tables.

Under § 1.430(h)(3)-2(c)(6)(ii)(C), the use of substitute mortality tables is terminated early if there is a significant change in the individuals covered by the plan. As defined in § 1.430(h)(3)-2(c)(6)(iii)(A), a significant change is either an increase or decrease in the number of individuals covered by the substitute mortality table for the plan year of more than 20 percent of the average number of individuals in that population over the years covered by the experience study on which the substitute mortality tables are based. However, under § 1.430(h)(3)-2(c)(6)(iii)(A), a change in coverage is not treated as significant if the plan’s actuary certifies in writing to the satisfaction of the Commissioner that the substitute mortality tables used for the plan population continue to be accurately predictive of future mortality of that population (taking into account the effect of the change in the population).

When final regulations providing for the replacement of mortality tables under section 430 are issued, the Treasury Department and the IRS anticipate issuing guidance in the Internal Revenue Bulletin pursuant to § 1.430(h)(3)-2(c)(6)(ii)(E) that will require the early termination of a plan’s previously approved substitute mortality table only if the plan has experienced a significant change in coverage under § 1.430(h)(3)-2(c)(6)(iii). The early termination would apply without regard to any plan actuary certification that the substitute mortality tables used for the plan population continue to be accurately predictive of future mortality of that population.

7 This report is available at https://www.soa.org/globalassets/assets/files/resources/experience-studies/2020/mortality-improvement-scale-mp-2020.pdf.

8 Rev. Proc. 2017-55, 2017-43 IRB 373, sets forth the procedure by which a plan sponsor of a defined benefit plan may request and obtain approval for the use of plan-specific substitute mortality tables in accordance with section 430(h)(3)(C).

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B. Impact of COVID-19 on Mortality Rates

The mortality improvement rates in these proposed regulations are based on the MP-2021 Report, which was prepared in 2021 based on the most recent data available at that time (estimated 2019 calendar year data). Accordingly, the MP-2021 mortality improvement scale does not take into account any mortality experience in calendar years 2020 and 2021, which are the first years affected by the COVID-19 pandemic. In selecting their assumed long-term improvement rates, RPEC did not make any adjustments to take into account any effects of COVID-19 on mortality rates in the long term because there was no consensus on COVID-19’s effect on expected future mortality experience. ⁹ Accordingly, the mortality improvement rates in these regulations do not take into account the impact of the COVID-19 pandemic.

The MP-2021 Report includes a review of actual mortality data from 2020 and a portion of 2021. For the 40-week period starting March 22, 2020, the review indicated that the number of deaths was approximately 120 percent of the expected number. For 2021, that ratio dropped to 110 percent in the spring, before increasing in the summer. The number of deaths attributable to the COVID-19 pandemic has remained high during the early part of 2022. These higher mortality rates do not indicate that the MP-2021 mortality improvement scale is flawed, but merely reflect that the model did not anticipate COVID-19 in projecting the mortality rates for these years.

The mortality rates provided in these proposed regulations would apply starting in 2023. If the impact of COVID-19 on mortality experience is viewed as only a short-term phenomenon, the mere fact that the model in the MP-2021 Report (upon which these proposed regulations are based) did not reflect the actual mortality experience for 2020 through 2022 does not mean that the mortality rates in these proposed regulations are inappropriate because it is not clear to what extent the increased mortality associated with

COVID-19 will continue for 2023 and later years. However, to the extent there is a long-term higher mortality rate from COVID-19, the Treasury Department and the IRS expect that RPEC will reflect the long-term impact of COVID-19 in future mortality improvement scales, which could be specified for use in future guidance. The Treasury Department and the IRS request comments about how the data for periods in which mortality experience for plan participants has been significantly affected by the COVID-19 pandemic should be taken into account in future mortality improvement rates under these regulations and future base mortality tables.

These proposed regulations do not change any of the rules or procedures required for employers to request substitute mortality tables. The Treasury Department and the IRS request comments about whether the rules and procedures relating to development of substitute mortality tables should be modified to recognize the potential that the mortality experience for the period of the COVID-19 pandemic is not accurately predictive of the future mortality experience for participants of a plan for which substitute mortality tables are requested.

Incorporation by Reference

Section 1.430(h)(3)-1(b)(1)(iii) of the proposed regulations provides that the mortality improvement rates used to construct generational tables to be used for valuation dates occurring during 2023 are the Scale MP-2021 Rates, which are included in the Mortality Improvement Scale MP-2021 Report. The Office of the Federal Register (OFR) has regulations concerning incorporation by reference. 1 CFR part 51. These regulations require that agencies must discuss in the preamble to a rule or proposed rule the way in which materials that the agency incorporates by reference are reasonably available to interested persons, and how interested parties can obtain the materials. 1 CFR 51.5(b). The Scale MP-2021 Rates and the Mortality Improvement Scale MP-2021

Report are described in this preamble under the heading “B. Mortality Improvement” in the Explanation of Pro- visions section of this preamble. The Mortality Improvement Scale MP-2021 Report was issued by the Retirement Plans Experience Committee of the Society of Actuaries on October 27, 2021, and is available at https://www.soa. org/resources/experience-studies/2021/ mortality-improvement-scale-mp-2021.

Statement of Availability of IRS Documents

IRS Revenue Rulings, Revenue Procedures, and Notices 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 Printing Office, Washington, DC 20402, or by visiting the IRS website at www. irs.gov.

Special Analyses

These regulations are 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.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that the regulations will not have a significant economic impact on a substantial number of small entities. The only provision that increases regulatory burden is § 1.430(h)(3)-1(b), which generally requires the use of generational mortality tables. However, under § 1.430(h)(3)-1(c), small entities are not required to use generational mortality tables. Therefore, the proposed rule would not have a significant economic impact on a substantial number of small entities.

Pursuant to section 7805(f) of the Code, these proposed regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

9 RPEC cited uncertainty relating to the effectiveness of vaccines and treatments, severity of future variants, and the long-term effect of having recovered from COVID-19 on an employee’s health.

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Comments and Public Hearing

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the “ ADDRESSES ” section. The Treasury Department and the IRS request comments on all aspects of these proposed regulations.

A public hearing is being held by teleconference on June 28, 2022, beginning at 10 a.m. EST. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments by telephone at the hearing must submit electronic or written comments and an outline of the topics to be addressed and the time to be devoted to each topic by June 9, 2022, as prescribed in the preamble under the “ADDRESSES” section.

A period of 10 minutes will be allocated to each person for making comments. 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 www.regulations.gov, search IRS and REG-106384-20. Copies of the agenda will also be available by emailing a request to publichearings@irs.gov. Please put “REG-106384-20 Agenda Request” in the subject line of the email.

Drafting Information

The principal authors of these regulations are Arslan Malik and Linda S. F. Marshall of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.430(h)(3)-1 is revised to read as follows:

§ 1.430(h)(3)-1 Mortality tables used to determine present value.

(a) Overview —(1) Standard mortality tables . This section sets forth rules for the mortality tables to be used in determining present value or making any computation under section 430. These mortality tables include—

(i) Generational mortality tables described in paragraph (b) of this section; and

(ii) Static mortality tables for small plans described in paragraph (c) of this section.

(2) Alternative tables —(i) Plan-spe- cific mortality tables . In lieu of using the mortality tables provided under this section, plan-specific substitute mortality tables are permitted to be used for purposes of section 430 pursuant to section 430(h) (3)(C), provided that the requirements of § 1.430(h)(3)-2 are satisfied. (ii) Disabled individuals . In lieu of using the mortality tables provided under this section, mortality tables for disabled individuals are permitted to be used pursuant to section 430(h)(3)(D). These tables are provided in guidance published in the Internal Revenue Bulletin. See § 601.601(d) of this chapter. (b) Generational mortality tables —(1) In general —(i) Construction of genera- tional mortality tables . The generational mortality tables that are permitted to be used under section 430(h)(3)(A) and paragraph (a)(1)(i) of this section are constructed from the base mortality tables described in paragraph (b)(1)(ii) of this section and the mortality improvement rates described in paragraph (b)(1)(iii) of this section.

(ii) Base mortality tables . The base mortality tables are set forth in paragraph (d) of this section. The base year for those tables is 2012.

(iii) Mortality improvement rates . The mortality improvement rates for valuation dates occurring during 2023 are the Scale MP-2021 Rates.

Note 1 to paragraph (b)(1)(iii): For later years, updated mortality improvement rates that take into account new data for mortality improvement trends of the general population will also be incorporated by reference.

(iv) Incorporation by reference. The material listed in this paragraph (b)(1) (iv) is incorporated by reference into this section with the approval of the Director of the Federal Register under 5 U.S.C. 552(a) and 1 CFR part 51. This material is available for inspection at the IRS and at the National Archives and Records Administration (NARA). Contact IRS at: Qualified Plans Branch 1, CC:EEE:QP1, 1111 Constitution Avenue NW, Washington, DC 20224; (202) 317-6700; www.irs. gov/retirement-plans/interest-rates-tables. For information on the availability of this material at NARA, email: fr.inspection@ nara.gov, or go to: www.archives.gov/federal-register/cfr/ibr-locations.html. The material is available from the Society of Actuaries at: Society of Actuaries, 475 N. Martingale Rd., Suite 600, Schaumburg, IL 60173; (847) 706-3500; https://www.soa. org/resources/experience-studies/2021/ mortality-improvement-scale-mp-2021/.

(A) The Scale MP-2021 Rates. (B) [Reserved] (2) Application of mortality improve- ment rates —(i) In general . Under the generational mortality tables described in this paragraph (b), the probability of an individual’s death at a particular age in the future is determined as the individual’s base mortality rate that applies at that age (that is, the applicable mortality rate from the tables set forth in paragraph (d) of this section for that age, gender, and status as an annuitant or a non-annuitant) multiplied by the cumulative mortality improvement factor for the individual’s gender and for that age for the period from 2012 through the calendar year in which the individual is projected to reach the particular age. Paragraph (b)(3) of this section shows how the base mortality tables in paragraph (d) of this section and the mortality improvement rates for valuation dates occurring during 2023 are combined to determine projected mortality rates.

(ii) Cumulative mortality improvement factor . The cumulative mortality improvement factor for an age and gender for a period is the product of the annual mortality

Bulletin No. 2022–20 1081 May 16, 2022

improvement factors for that age and gender for each year within that period.

(iii) Annual mortality improvement factor . The annual mortality improvement factor for an age and gender for a year is 1 minus the mortality improvement rate that applies for that age and gender for that year. If that annual mortality improvement

rate is greater than 1 (corresponding to a negative mortality improvement rate), then the projected mortality rate for that age and gender for that year is greater than the projected mortality rate for the same age and gender for the preceding year.

(3) Example of calculation —(i) Calculation of mortality rate . The mortality rate for 2023 that is

Table 1 to Paragraph (b)(3)(i)

applied to male annuitants who are age 67 in 2023 is equal to the product of the mortality rate for 2012 that applied to male annuitants who were age 67 in 2012 (0.01288) and the cumulative mortality improvement factor for age 67 males from 2012 to 2023. The cumulative mortality improvement factor for age 67 males for the period from 2012 to 2023 is 0.9919, and the mortality rate for 2023 for male annuitants who are age 67 in that year would be 0.01278, as shown in the following table.

(ii) Probability of survival for an individual. After the projected mortality rates are derived for each age for each year, the rates are used to calculate the present value of a benefit stream that depends on the probability of survival year-by-year. For example, for purposes of calculating the present value (for a 2023 valuation date) of future payments in a benefit stream payable for a male annuitant who is age 67 in 2023, the probability of survival for the annuitant is based on the mortality rate for a male annuitant who is age 67 in 2023 (0.01278), and the projected mortality rate for a male annuitant who will be age 68 in 2024 (0.01378), age 69 in 2025 (0.01489), and so on. (4) Use of the tables —(i) Separate tables for annuitants and non-annuitants . Separate mortality tables are provided for use for annuitants and non-annuitants. The non-annuitant mortality tables are applied to determine the probability of survival for a non-annuitant for the period before the non-annuitant is projected to commence receiving benefits. The annuitant mortality tables are applied to determine the present value of benefits for each annuitant. In addition, the annuitant mortality tables are applied for each non-annuitant with respect to each assumed commencement of benefits for the period beginning with that assumed commencement. For purposes of this section, an annuitant means a plan participant who has commenced receiving benefits and a non-annuitant means a plan participant who has not yet commenced receiving benefits (for example, an active employee or a terminated vested participant). A participant whose benefit has partially commenced

is treated as an annuitant with respect to the portion of the benefit that has commenced and treated as a non-annuitant with respect to the balance of the benefit. In addition, with respect to a beneficiary of a participant, the annuitant mortality tables apply for the period beginning with each assumed commencement of benefits for the participant. If the participant has died (or to the extent the participant is assumed to die before commencing benefits), the annuitant mortality tables apply with respect to the beneficiary for the period beginning with each assumed commencement of benefits for the beneficiary.

(ii) Examples of calculation using separate non-annuitant and annuitant tables . With respect to a 45-year-old active participant who is projected to commence receiving an annuity at age 55, the funding target is determined using the non-annuitant mortality tables for the period before the participant attains age 55 and using the annuitant mortality tables for the period ages 55 and above. Similarly, for a 45-year-old terminated vested participant who is projected to commence an annuity at age 65, the funding target is determined using the non-annuitant mortality tables for the period before the participant attains age 65 and using the annuitant mortality tables for ages 65 and above.

(c) Static mortality tables —(1) Availability of alternative tables for small plans —(i) In general . As an alternative to the generational mortality tables defined in paragraph (b) of this section, static mortality tables may be used for a small plan. The static mortality tables described in this paragraph

(c) are constructed from the separate non-annuitant and annuitant static mortality tables described in paragraph (c)(2)(i) of this section, combined using the procedure described in paragraph (c)(2)(ii) of this section.

(ii) Definition of small plan . For purposes of this paragraph (c), a small plan is defined as a plan with 500 or fewer total participants (including both active and inactive participants and beneficiaries of deceased participants) on the valuation date.

(iii) Use of static mortality tables . The static mortality tables that are used for a valuation date are the static mortality tables for the calendar year that includes the valuation date.

(iv) Publication of mortality tables . The static mortality tables for the 2023 calendar year are set forth in paragraph (e) of this section.

Note 2 to paragraph (c)(1)(iv): The static mortality tables for valuation dates for later calendar years will be published in the Internal Revenue Bulletin. See § 601.601(d) of this chapter.

(2) Development of static mortality tables —(i) Non-annuitant and annuitant mortality tables . The non-annuitant and annuitant static mortality tables are determined using the base mortality tables described in paragraph (b)(1)(ii) of this section. The rates in those base mortality tables are adjusted using the mortality improvement rates described in paragraph (b)(1)(iii) of this section, in accordance with the rules set forth in paragraph (c)(3) of this section.

(ii) Combined static mortality tables . The static mortality tables described in this paragraph (c) are

May 16, 2022 1082 Bulletin No. 2022–20

constructed from the separate non-annuitant and annuitant static mortality tables pursuant to paragraph (c)(2)(i) of this section, blended using the weighting factors in paragraph (d) of this section. The weighting factors are applied to develop these combined static tables using the following equation: Combined mortality rate = [non-annuitant rate

• (1- weighting factor)] + [annuitant rate * weighting factor].

(3) Projection of mortality improvements —(i) General rule . Except as provided in paragraph (c) (3)(iii) of this section, the static mortality tables for a calendar year are determined by multiplying the applicable mortality rate for each age from the base mortality tables by both—

(A) The cumulative mortality improvement factor (determined under paragraph (b)(2)(ii) of this section) for the period from 2012 through that calendar year; and

(B) The cumulative mortality improvement factor (determined under paragraph (b)(2)(ii) of this section) for the period beginning in that calendar year and continuing beyond that calendar year for the

number of years in the projection period described in paragraph (c)(3)(ii) of this section.

(ii) Projection period for static mortality ta- bles —(A) In general . The projection period is 8 years for males and 9 years for females, as adjusted based on age as provided in paragraph (c)(3)(ii)(B) of this section.

(B) Age adjustment . For ages below 80, the projection period is increased by 1 year for each year below age 80. For ages above 80, the projection period is reduced (but not below zero) by ⅓ year for each year above 80.

(iii) Fractional projection periods . If for an age the number of years in the projection period determined under paragraph (c)(3)(ii) of this section is not a whole number, then the mortality rate for that age is determined by using linear interpolation between—

(A) The mortality rate for that age that would be determined under paragraph (c)(3)(i) of this section if the number of years in the projection period were the next lower whole number; and

(B) The mortality rate for that age that would be determined under paragraph (c)(3)(i) of this section

if the number of years in the projection period were the next higher whole number.

(iv) Example . For example, at age 85 the projection period for a male is 6⅓ years (8 years minus ⅓ year for each of the 5 years above age 80). For a valuation date in 2023, the mortality rate in the static mortality table for an 85-year-old male is based on a projection of mortality improvement for 6⅓ years beyond 2023. Under paragraph (c)(3)(iii) of this section, the mortality rate for an 85-year-old male annuitant in the static mortality table for 2023 is ⅔ times the projected mortality rate for a male annuitant that age in 2029 plus ⅓ times the projected mortality rate for a male annuitant that age in 2030. Accordingly, the mortality rate for an 85-year-old male annuitant in the static mortality table for 2023 is 0.07967 (⅔ times the projected mortality rate for an 85‑year-old male annuitant in 2029 (0.07986) plus ⅓ times the projected mortality rate for an 85-year-old male annuitant in 2030 (0.07928)).

(d) Base mortality tables. The following are the base mortality tables. The base year for these tables is 2012.

Table 2 to Paragraph (d)

Bulletin No. 2022–20 1083 May 16, 2022

May 16, 2022 1084 Bulletin No. 2022–20

Bulletin No. 2022–20 1085 May 16, 2022

(e) Static tables for 2023 . The following static mortality tables are used pursuant to paragraph

(a)(1)(ii) of this section for determining present value or making any computation under section

Table 3 to Paragraph (e)

430 with respect to valuation dates occurring during 2023.

May 16, 2022 1086 Bulletin No. 2022–20

Bulletin No. 2022–20 1087 May 16, 2022

(f) Applicability date . This section applies for plan years beginning on or after January 1, 2023.

Par. 3. Section 1.431(c)(6)-1 is revised to read as follows:

§ 1.431(c)(6)-1 Mortality tables used to determine current liability.

(a) Mortality tables used to determine current liability . In accordance with section 431(c)(6)(D), the mortality assumptions that apply to a single-employer defined benefit plan for the plan year pursuant to sections 430(h)(3)(A) and 430(h) (3)(D) and §§ 1.430(h)(3)-1(a)(1) and (a) (2)(ii) are used to determine a multiemployer plan’s current liability for purposes of applying the rules of section 431(c) (6). For purposes of this paragraph (a),

either the generational mortality tables used pursuant to § 1.430(h)(3)-1(b) or the static mortality tables used pursuant to § 1.430(h)(3)-1(c) are permitted to be used without regard to whether the plan is a small plan. However, substitute mortality tables under §§ 1.430(h)(3)-1(a)(2)(i) and 1.430(h)(3)-2 are not permitted to be used for purposes of this paragraph (a).

(b) Applicability date . This section applies for plan years beginning on or after January 1, 2023.

Par. 4. Section 1.433(h)(3)-1 is revised to read as follows:

§1.433(h)(3)-1 Mortality tables used to determine current liability.

(a) Mortality tables used to deter- mine current liability . In accordance with

section 433(h)(3)(B), the mortality assumptions that apply to a single-employer defined benefit plan for the plan year pursuant to sections 430(h)(3)(A) and 430(h) (3)(D) and §§ 1.430(h)(3)-1(a)(1) and (a) (2)(ii) are used to determine a cooperative and small-employer charity (CSEC) plan’s current liability under section 433(h). For purposes of this paragraph (a), either the generational mortality tables used pursuant to §1.430(h)(3)-1(b) or the static mortality tables used pursuant to §1.430(h) (3)-1(c) are permitted to be used without regard to whether the plan is a small plan. However, substitute mortality tables under §§ 1.430(h)(3)-1(a)(2)(i) and 1.430(h)(3)2 are not permitted to be used for purposes of this paragraph (a).

May 16, 2022 1088 Bulletin No. 2022–20

(b) Applicability date . This section applies for plan years beginning on or after January 1, 2023.

Douglas W. O’Donnell, Deputy Commissioner for Services

and Enforcement .

(Filed by the Office of the Federal Register on April 27, 2022, 8:45 a.m., and published in the issue of the Federal Register for April 28, 2022, 87 F.R. 25161)

Notice of Proposed Rulemaking Estate and Gift Taxes; Limitation on the Special Rule Regarding a Difference in the Basic Exclusion Amount

REG-118913-21

AGENCY : Internal Revenue Service (IRS), Treasury.

ACTION : Notice of proposed rulemaking.

SUMMARY : This document contains proposed amendments to the Estate Tax Regulations relating to the basic exclusion amount (BEA) applicable to the computation of Federal estate and gift taxes. The proposed regulations affect the estates of decedents dying after a reduction in the BEA who made certain types of gifts after 2017 and before a reduction in the BEA.

DATES : Written or electronic comments and requests for a public hearing must be received by July 26, 2022. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section.

ADDRESSES : Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-118913-21) by following the online instructions for submitting comments. Once submitted to the Federal

eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through the mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR (REG-118913-21), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044.

FOR FURTHER INFORMATION CONTACT : Concerning the proposed regulations, John D. MacEachen at (202) 317-6859; concerning submissions of comments, the public hearing, and the access code to attend the hearing by telephone, Regina Johnson at (202) 317-5177 (not toll-free numbers) or by sending an email to Publichearings@irs.gov.

SUPPLEMENTARY INFORMATION :

Background

Section 11061 of the Tax Cuts and Jobs Act, Pub. L. 115-97, 131 Stat. 2054, 2091 (2017) (TCJA), amended section 2010(c) (3) of the Internal Revenue Code (Code) to provide that, for decedents dying and gifts made after December 31, 2017, and before January 1, 2026, the BEA is increased by $5 million to $10 million as adjusted for inflation (increased BEA). Under the TCJA, on January 1, 2026, the BEA will revert to $5 million as adjusted for inflation.

Section 11061 of the TCJA also added new section 2001(g)(2) to the general statute of the Code that imposes the Federal estate tax. Section 2001(g)(2) grants the Secretary of the Treasury or her delegate (Secretary) authority to prescribe such regulations as may be necessary or appropriate to carry out section 2001 with respect to any difference between the BEA applicable at the time of a decedent’s death and the BEA applicable with

respect to any gifts made by the decedent. This specific authority is in addition to the Secretary’s preexisting authority under section 2010(c)(6) to prescribe such regulations as may be necessary or appropriate to carry out section 2010(c).

On November 26, 2019, the Treasury Department and the IRS published final regulations under section 2010 (TD 9884) in the Federal Register (84 FR 64995) to address situations described in section 2001(g)(2) (final regulations). The final regulations adopted §20.2010-1(c), a special rule (special rule) applicable in cases where the credit against the estate tax that is attributable to the BEA is less at the date of death than the sum of the credits attributable to the BEA allowable in computing gift tax payable within the meaning of section 2001(b)(2) with regard to the decedent’s lifetime gifts. In such cases, the portion of the credit against the net tentative estate tax that is attributable to the BEA is based on the sum of the credits attributable to the BEA allowable in computing gift tax payable regarding the decedent’s lifetime gifts. The rule ensures that the estate of a donor is not taxed on completed gifts that, as a result of the increased BEA, were free of gift tax when made. The preamble to the final regulations stated that further consideration would be given to the issue of whether gifts that are not true inter vivos transfers, but rather are includible in the gross estate, should be excepted from the special rule, and that any proposal addressing this issue would benefit from notice and comment.

This document contains proposed amendments to the Estate Tax Regulations (26 CFR part 20) relating to the BEA described in section 2010(c)(3) of the Code (proposed regulations), for which purpose the final regulations reserved §20.2010-1(c)(3). The special rule currently does not distinguish between: (i) completed gifts that are treated as adjusted taxable gifts for estate tax purposes and that, by definition, are not included in the donor’s gross estate; and (ii) completed gifts that are treated as testamentary transfers for estate tax purposes and are included in the donor’s gross estate (includible gift). The Code and the regulations, however, do distinguish

Bulletin No. 2022–20 1089 May 16, 2022

between these two types of transfers. Section 2001(b) (flush language) excludes from the term “adjusted taxable gifts” gifts that are includible in the gross estate. Section 2701(e)(6) and §25.27015 similarly remove from adjusted taxable gifts transfers includible in the gross estate that previously were subject to the special valuation rules of section 2701. See also §25.2702-6 (excluding from adjusted taxable gifts certain transfers includible in the gross estate that previously were subject to the special valuation rules of section 2702) and Rev. Rul. 84-25, 1984-1 C.B. 191 (excluding from adjusted taxable gifts completed transfers that will be satisfied with assets includible in the gross estate). In keeping with the statutory distinction between completed gifts that are treated as adjusted taxable gifts and completed gifts that are treated as testamentary transfers, these proposed regulations generally would deny the benefit of the special rule to includible gifts.

Regardless of whether a gift is treated as an adjusted taxable gift or as an includible gift for estate tax purposes, the Code ensures that the gift is treated consistently with respect to the credits allowable in the year in which the gift was made. See discussion of the five statutory steps of the estate tax computation in part III, Federal Estate Tax Computation Generally, in the Background section of the preamble to the notice of proposed rulemaking under section 2010 (REG-106706-18) published in the Federal Register (83 FR 59343) on November 23, 2018. The exclusion from adjusted taxable gifts of transfers includible in the gross estate does not affect the second step of the estate tax computation, the determination of a hypothetical gift tax referred to as the gift tax payable. Gift tax payable is based upon all post-1976 taxable gifts, whether or not included in the gross estate. See sections 2001(b)(2) and (g)(1), requiring the determination of a hypothetical gift tax on all post-1976 taxable gifts, which is a gift tax reduced, but not to below zero, by the credit amounts allowable in the years of the gifts. Both the hypothetical gift tax and the credit amounts are computed using the gift tax rates in effect at the date of death. Thus, for purposes of computing the estate tax, an includible gift receives credit for all

credit amounts, including those attributable to the increased BEA, allowable in the years in which the gift was made.

A commenter recommended consideration of whether the special rule should apply to taxable gifts made during an increased BEA period that are essentially testamentary and thus are included in the gross estate rather than in adjusted taxable gifts. See discussion in part 6, Anti-Abuse Rule, of the Summary of Comments and Explanation of Revisions in the final regulations. If such transfers are subject to the special rule, they can be made in a manner designed to make the increased BEA available against the donor’s estate tax despite the fact that the donor has retained the beneficial use of or the control of the transferred property. Examples of such transfers include gifts subject to a retained life estate or subject to other powers or interests as described in sections 2035 through 2038 and 2042 of the Code, gifts made by enforceable promise as described in Rev. Rul. 84-25, supra, and gifts subject to the special valuation rules of sections 2701 and 2702. In recommending an exception to the special rule, the commenter cautioned that attention should also be given to the potential to work around an exception that relies solely on whether gifts are includible in the gross estate. For example, a donor may attempt to make the increased BEA available against the estate tax under the special rule by the removal shortly before the donor’s death of the donor’s beneficial use of or the control of the transferred property. Examples of these types of transfers include the elimination by a third party, shortly before the donor’s death, of the interests or powers that otherwise would have resulted in the inclusion of the transferred interest or property in the donor’s gross estate; the payment shortly before death of a gift made by enforceable promise as described in Rev. Rul. 84-25, supra ; and the transfer shortly before death of a section 2701 interest within the meaning of §25.2701-5(a)(4) or a section 2702 interest within the meaning of §25.2702-6(a)(1).

The purpose of the special rule is to ensure that bona fide inter vivos transfers of property are consistently treated as a

transfer of property by gift for both gift and estate tax purposes. Bona fide inter vivos gifts are subject to the gift tax based on the values, gift tax rates, and exclusions applicable as of the date of the gift. While such a gift is treated as an adjusted taxable gift for purposes of determining the estate tax rate to be applied to the value of the taxable estate, the gift is not includible in the donor’s gross estate at death and is not subject to the estate tax. The special rule avoids the imposition of the estate tax on the gift by ensuring that the gifted property is treated solely as an adjusted taxable gift and not also as property includible in the gross estate.

Unlike an adjusted taxable gift, however, a gift of property that is includible in the donor’s gross estate is subject to estate tax based on the values, estate tax rates, and exclusions applicable as of the date of death. The Code itself ensures that an includible gift is not treated as both an adjusted taxable gift and an inclusion in the gross estate. See section 2001(b) (flush language), excluding from “adjusted taxable gifts” gifts that are includible in the gross estate. The Code also ensures that an includible gift receives credit for any credit amounts allowable in the years in which the gift was made. See sections 2001(b)(2) and (g)(1). The treatment of an includible gift for estate tax purposes results in the correct outcome without any application of the special rule: the property is included in the gross estate and subject to the BEA in effect at the donor’s death.

There is a subset of includible gifts that the Code treats in a different fashion, but still in a way that results in the correct outcome without the application of the special rule. That subset consists of gifts made during an increased BEA period that are essentially testamentary, but the entire value of which is deductible for gift tax purposes by reason of the charitable or marital deduction (or both). Such transfers are excluded from adjusted taxable gifts because they never were taxable gifts in the first place. See section 2503(a), defining taxable gifts as the total amount of gifts made during the calendar year less the deductions provided in sections 2522 and 2523 for charitable and marital gifts, respectively. As a result of the exclusion of charitable and marital gifts from taxable gifts, and thus from

May 16, 2022 1090 Bulletin No. 2022–20

adjusted taxable gifts, there would be no credits allocable to these gifts attributable to the BEA in computing gift tax payable within the meaning of section 2001(b)(2). Because no BEA is applicable to the deductible gifts, there will be no difference between the BEA applicable to these gifts attributable to the increased BEA and the BEA applicable to the decedent’s estate. As a result, there is no possibility of inconsistent gift and estate taxation of such an includible gift, and thus no need for the application of the special rule.

Without additional rules, however, the application of the special rule to includible gifts results in securing the benefit of the increased BEA in circumstances where the donor continues to have the title, possession, use, benefit, control, or enjoyment of the transferred property during life. In those circumstances, there is no possibility of the inclusion of the gift in adjusted taxable gifts at the death of the donor, and therefore no need for the application of the special rule to transfers of such property. In those circumstances, it is appropriate that the amount includible or treated as includible as part of the gross estate (rather than as an adjusted taxable gift) is subject to estate tax with the benefit of only the BEA available at the date of death. Section 2001(g)(2) directs the Secretary to prescribe such regulations as may be necessary or appropriate to carry out section 2001 with respect to any difference between the BEA applicable at the time of the decedent’s death and the BEA applicable with respect to any gifts made by the decedent. Given the plain language of the Code describing the computation of the estate tax and directing that certain transfers, including transfers made within three years of death that otherwise would have been includible in the gross estate, are treated as testamentary transfers and not as adjusted taxable gifts, it would be inappropriate to apply the special rule to includible gifts. This is particularly true where the inter vivos transfers are not true bona fide transfers in which the decedent “absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property.” Commissioner v. Church’s Es- tate, 335 U.S. 632, 645 (1949). To prevent this inappropriate result, these proposed

regulations would create an exception to the special rule applicable to includible gifts.

The same commenter suggested that any exception to the special rule relating to transfers within the scope of section 2701 be specifically addressed in §25.2701-5. This suggestion is not adopted. Section 25.2701-5(a)(3) provides rules under which the estate of a decedent who made a transfer subject to section 2701 may reduce the decedent’s adjusted taxable gifts in a manner similar to that of section 2001(b) so as to eliminate the amount duplicated in the transfer tax base. The amount of the reduction in adjusted taxable gifts is determined under §25.27015(b). See also §25.2702-6(b), providing a similar rule for certain interests previously subject to section 2702. Both §§25.2701-5 and 25.2702-6 address only the amount of adjusted taxable gifts but, with the exception of §25.2701-5(e)(3), do not address the amount of the credits allowable in the multiple steps necessary to determine the estate tax. As previously discussed, the effect of the estate tax computation is to provide the decedent the benefit of any credit amounts allowable in the years of the gifts, determined at date of death gift tax rates, including the credit amount attributable to a section 2701 or 2702 transfer that was free of gift tax when made as a result of the increased BEA, regardless of whether the amount of adjusted taxable gifts is later reduced for estate tax purposes. Thus, while a reduction in the amount of adjusted taxable gifts eliminates amounts duplicated in the transfer tax base, it neither changes the existence of the transfer nor frees up the credit allocable to that transfer. See, e.g., the Background section of the preamble to Adjustments Under Special Valuation Rules (TD 8536), published in the Federal Register (59 FR 23152) on May 5, 1994, explaining that the §25.2701-5 regulations do not “purge” a section 2701 transfer as if it had not occurred, but rather mitigate the effect of double taxation through a reduction in a decedent’s adjusted taxable gifts.

As noted earlier, §25.2701-5(e)(3) permits an adjustment to both the adjusted taxable gifts and gift tax payable of a consenting spouse. In the case of an election under section 2513 to split a section 2701 transfer with the donor’s spouse, a

later testamentary transfer of the section 2701 interest is treated as made solely by the donor spouse. The consenting spouse’s adjusted taxable gifts and gift tax payable are each reduced to eliminate any remaining effect of the section 2701 interest on the consenting spouse in a manner that is generally consistent with the principles of sections 2001(d) and (e) (pertaining to the treatment of split gifts in the computation of the estate tax). This exception has no application to the donor spouse, who remains subject to the general rule of §25.2701-5(a)(3). Thus, it is not necessary to address differences in the BEA in either §25.2701-5 or §25.2702-6(b).

Explanation of Provisions

Pursuant to sections 2010(c)(6) and 2001(g)(2) of the Code, the proposed regulations would add proposed §20.20101(c)(3) to provide an exception to the special rule for transfers that are includible in the gross estate or are treated as includible in the gross estate for purposes of section 2001(b), including for example gifts subject to a retained life estate or subject to other powers or interests as described in sections 2035 through 2038 and 2042 of the Code regardless of whether the transfer was deductible pursuant to section 2522 or 2523, gifts made by enforceable promise, and other amounts that are duplicated in the transfer tax base, including a section 2701 interest within the meaning of §25.2701-5(a)(4) and a section 2702 interest within the meaning of §25.27026(a)(1). The exception to the special rule also would apply to transfers that would be described in the preceding sentence but for the transfer, elimination, or relinquishment within 18 months of the donor’s date of death of the interest or power that would have caused inclusion in the gross estate, effectively allowing the donor to retain the enjoyment of the property for life. In addition to transfers, eliminations, or relinquishments by the donor, examples include the elimination, by a third party having the power to eliminate or extinguish the interest or power, of the interests or powers that otherwise would have resulted in inclusion of transferred property in the donor’s gross estate; the payment of a gift made by enforceable promise as described in Rev. Rul. 84-25, supra ;

Bulletin No. 2022–20 1091 May 16, 2022

Comments and Request for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written or electronic comments that are submitted timely (in the manner described under the ADDRESSES heading) to the IRS. 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 https:// www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a hearing are strongly encouraged to be submitted electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Regis- ter . Announcement 2020-4, 2020-17 IRB 1, 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.

Statement of Availability of IRS Documents