The IRS and Treasury issued proposed regulations Friday incorporating present-value principles by which an estate may deduct certain expenses and claims against the estate under Sec. 2053.
The primary issue addressed in the proposed regulations, REG-130975-08, had been left reserved at Regs. Sec. 20.2053-1(d)(6) by final regulations issued in 2009. The preamble for those final regulations (T.D. 9468) explained that, while the regulations generally limited deductions for claims and expenses to the amount actually paid in settlement or satisfaction of those items (with certain exceptions), future guidance would address the appropriate application of present-value principles in determining the amount of future payments that would be deductible.
Rules applying present-value principles to certain long-term obligations of estates were proposed in 2007 in proposed regulations (REG-143316-03). Those proposed rules, which did not apply to contingent recurring obligations, were criticized by commenters, including the AICPA, as likely to produce inconsistent and inequitable results.
The IRS and Treasury found such comments "persuasive," according to the preamble to the 2009 final regulations, and removed a proposed limitation on present-value deductibility of future contingent recurring obligations, pending the guidance issued Friday.
The new proposed regulations apply present-value principles to both contingent and noncontingent expenses and claims. Noting that most ordinary administrative expenses are paid within three years of the decedent's date of death, the proposed regulations would allow a three-year "grace period" from that date before a present-value calculation is required.
For a deductible claim or expense described in Sec. 2053(a) and Regs. Sec. 20.2053-1(a) that will be paid after the third anniversary of the decedent's date of death, estates may discount the deductible amount by the applicable federal rate (midterm or long-term, as applicable) determined under Sec. 1274(d) for the month in which the decedent's death occurs, compounded annually. Any reasonable assumptions or methodology may be used with regard to the time period measurements used in calculating present value. The expected date or dates of payment may be determined by a fair and reasonable estimate using all information reasonably available to the taxpayer.
The proposed regulations also address the deductibility of certain interest expenses as an expense of administering an estate, including (non–Sec. 6166) interest accruing on unpaid tax and penalties.
In addition, the proposed regulations cover substantiation requirements for valuations performed pursuant to Regs. Secs. 20.2053-4(b) and (c) of certain deductible claims against an estate. They also address the deductibility of amounts paid pursuant to a decedent's personal guarantee.
The proposed regulations would apply to the estates of decedents dying on or after the date of their publication as final.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.