Part IV

Notice of Proposed Rulemaking

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

REG-130975-08

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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 www.regulations.gov (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 Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.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, PO 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 www.regulations. gov (indicate IRS and REG-130975-08).

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-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 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-130975-08 and the word ATTEND. For example, the subject line may say: Request to ATTEND Hearing for REG130975-08. 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 publichearings@irs.gov (preferred) or by telephone at (202) 3175177 (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 publichearings@ irs.gov .

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 taxable estate is determined by deducting from the value of the gross estate the

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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 §20.2053-1(d)(1) and (4); §20.2053-4(b) and (c); and §20.20537. The 2009 Final Regulations also reserve §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 §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), §§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 20.20531(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 (REG143316-03) 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 §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 §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 §20.20531(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 §20.2053-4(d)(6). However, the 2009 Final Regulations removed the present-value limitation applicable only to noncontingent recurring obligations and reserved §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

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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) 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 §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 §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 §§20.2053-1(d)(4) and 20.20534(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 §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 §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, §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

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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, §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 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 §§20.2053-1(b)(2) and 20.2053-3(a) apply. Non-section 6166 interest satisfies the “bona fide” requirement in §20.20531(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 §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 §20.20533(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 §1.66623(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

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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 §§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 §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 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 §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 §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 §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 §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 §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. Commis- sioner, 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 §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 §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 §§20.2053-1(b)(2) and 20.20533(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 §§20.2053-1(b)(2) and 20.20533(a), the list of factors may suggest when

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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 §20.2053-4(b) and (c)

A. Issue Background

Section 20.2053-4(b) and (c) provides exceptions to the general rule in §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 §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 §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 §20.20534(b) and (c) should be amended to remove the requirement that the value be determined by a “qualified appraisal” performed by a “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 §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 §20.2053-4(b)(1)(iv) and (c)(1)(iv) that valuations of the claims deductible under §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 §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 §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 §20.20531(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 §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 §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 §20.20534(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

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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 §§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 §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 §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 deductible in accordance with §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