Deductions for Transfers for Public, Charitable, and Religious Uses; In General Marital Deduction; Valuation of Interest Passing to Surviving Spouse

Federal RegisterDec 3, 1999

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 20

[TD 8846]

RIN 1545-AV45

Deductions for Transfers for Public, Charitable, and Religious

Uses; In General Marital Deduction; Valuation of Interest Passing to

Surviving Spouse

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the

effect of certain administration expenses on the valuation of property

that qualifies for either the estate tax marital deduction under

section 2056 of the Internal Revenue Code or the estate tax charitable

deduction under section 2055. The regulations distinguish between

estate transmission expenses, which reduce the value of property for

marital and charitable deduction purposes, and estate management

expenses, which generally do not reduce the value of property for these

purposes.

EFFECTIVE DATES: These regulations are effective on December 3, 1999.

FOR FURTHER INFORMATION CONTACT: Deborah Ryan, (202) 622-3090 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On December 16, 1998, the Treasury Department and the IRS published

in the Federal Register (63 FR 69248) a notice of proposed rulemaking

(REG-114663-97) relating to the effect of certain administration

expenses on the valuation of property which qualifies for the estate

tax marital or charitable deduction. The proposed regulations were

issued in response to the decision of the Supreme Court of the United

States in Commissioner v. Estate of Hubert, 520 U.S. 93 (1997) (1997-2

C.B. 231). Written comments responding to the notice of proposed

rulemaking were received, and a public hearing was held on April 21,

1999, at which time oral testimony was presented. This Treasury

decision adopts final regulations with respect to the notice of

proposed rulemaking. A summary of the principal comments received and

revisions made in response to those comments is provided below.

The proposed regulations set forth the substantive provisions as

applied to the estate tax marital deduction in Sec. 20.2056(b)-4(a).

For the estate tax charitable deduction, the proposed regulations

(under Sec. 20.2055-1(d)(6)) merely cross-reference the rules for the

marital deduction.

Several commentators suggested that the regulations under section

2055 should contain specific rules relating to the charitable

deduction, rather than just a cross-reference. The Treasury and the IRS

agree with this suggestion. The final regulations contain rules under

Sec. 20.2055-3 specifically addressing the effect of administration

expenses on the valuation of property when all or a portion of the

interests in property qualify for the estate tax charitable deduction.

Several commentators stated that the distinction between estate

transmission expenses and estate management expenses was not clearly

made in the proposed regulations and requested more concrete

definitions of each type of expense. In response to these comments, the

final regulations characterize estate transmission expenses as those

expenses that would not have been incurred except for the decedent's

death. Although the amount of these expenses cannot be calculated with

any degree of certainty on the date of the decedent's death, they are

expenses that are incurred because of the decedent's death. Estate

management expenses, on the other hand, are characterized in the final

regulations as expenses that would be incurred with respect to the

property even if the decedent had not died; that is, expenses incurred

in investing, maintaining, and preserving the property. These are

expenses that typically would have been incurred with respect to the

property by the decedent before death or by the beneficiaries had they

received the property on the date of death without any intervening

period of administration. In order to be certain that all expenses are

classified as either transmission expenses or management expenses,

transmission expenses are defined to include all expenses that are not

management expenses.

Three commentators stated that the different treatment accorded to

estate transmission expenses and estate management expenses under the

proposed regulations creates a new federal standard for allocating

expenses that may be contrary to the manner in which the expenses must

be charged under state law. However, the Treasury and the IRS believe

that the allocation of administration expenses based on the distinction

between transmission and management expenses provides the most accurate

measure of the value of the property which passes to the surviving

spouse or to the charity at the moment of the decedent's death for

federal estate tax marital and charitable deduction purposes.

Transmission expenses that are charged to the property passing to the

surviving spouse or to the charity reduce the amount of that property

as of the date of the decedent's death because the expenses, as well as

the transfer to the surviving spouse or to charity, are a consequence

of, and arise as a result of, the decedent's death. In contrast,

management expenses do not generally

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reduce the amount of the property passing from the decedent as of the

date of the decedent's death because these expenses are incurred in

producing income and preserving and maintaining the property between

the date of the decedent's death and the date of distribution. These

expenses are the ongoing, year-to-year expenses incurred in the

investment, preservation, and maintenance of property by property

owners.

In response to other comments, the final regulations illustrate the

application of these rules to pecuniary bequests to the surviving

spouse. If, under the terms of the governing instrument or applicable

local law, the recipient of a pecuniary bequest is not entitled to

income earned until distribution, the income is not included in the

definition of the marital or charitable share. Thus, the amount of the

property passing to the surviving spouse or charity for which a marital

or charitable deduction is allowable will not be reduced even if estate

transmission or estate management expenses are paid out of the income

earned by assets that will be used to satisfy the pecuniary bequest.

Two commentators requested guidance in applying the regulations to

estates that are intended to be nontaxable. Accordingly, the final

regulations add two examples, one involving a formula designed to

produce zero estate taxes and the other involving a pecuniary bequest

designed to utilize the applicable exclusion amount under section 2010.

Many of the comments concerned the special rule of Sec. 20.2056(b)-

4(e)(2)(ii) of the proposed regulations. Under the special rule, the

value of the deductible property interest is not increased as a result

of the decrease in the federal estate tax liability that is

attributable to the deduction of estate management expenses as expenses

of administration under section 2053 on the federal estate tax return.

A similar rule would have applied for purposes of the estate tax

charitable deduction.

Several of these commentators argued that the special rule is

inconsistent with sections 2056(a) and 2055(c), because the value of

the property passing to the surviving spouse or charity should be

reduced only by the estate taxes actually paid. Thus, an estate should

be permitted the full benefit of deducting management expenses on the

federal estate tax return, including an increase to the marital or

charitable deduction based on the resultant decrease in tax payable

from the marital or charitable share.

Conversely, other commentators asserted that the special rule does

not conform with section 2056(b)(9). Section 2056(b)(9) provides that

nothing in section 2056 or any other estate tax provision shall allow

the value of any interest in property to be deducted for federal estate

tax purposes more than once with respect to the same decedent. These

commentators pointed out that if estate management expenses paid from

the marital or charitable share are deducted on the federal estate tax

return, and no reduction is made to the allowable amount of the marital

or charitable deduction, then the same property interest is deducted

twice in violation of section 2056(b)(9).

After considering these comments, the Treasury and the IRS have

eliminated the special rule of the proposed regulations. The final

regulations provide that estate management expenses attributable to,

and payable from, the property interest passing to the surviving spouse

or charity do not reduce the value of the property interest. However,

pursuant to section 2056(b)(9), the allowable amount of the marital or

charitable deduction is reduced by the amount of these management

expenses if they are deducted on the Federal estate tax return.

The Treasury and the IRS believe that the principles which apply

for determining the value of the marital and charitable deductions

should also apply for determining the value of property that passes

from one decedent to another when calculating the amount of the credit

for tax on prior transfers under section 2013. Therefore, the final

regulations amend Sec. 20.2013-4(b) by adding a cross reference to

Sec. 20.2056(b)-4(d).

Effective Dates

The regulations under sections 2055 and 2056 are applicable to

estates of decedents dying on or after December 3, 1999. The

regulations under section 2013 are applicable to transfers from estates

of decedents dying on or after December 3, 1999.

Effect on Other Documents

The following publications are obsolete as of December 3, 1999.

Rev. Rul. 66-233 (1996-2 C.B. 428)

Rev. Rul. 73-98 (1973-1 C.B. 407)

Rev. Rul. 80-159 (1980-1 C.B. 206)

Rev. Rul. 93-48 (1993-2 C.B. 270)

Special Analyses

This rule is not a significant regulatory action as defined in

Executive Order 12866. Therefore, a regulatory assessment is not

required. It also has been determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to

these regulations, and, because the regulations do not impose a

collection of information on small entities, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of

the Internal Revenue Code, these regulations were submitted to the

Chief Counsel for Advocacy of the Small Business Administration for

comment on their impact on small business.

Drafting information. The principal author of these regulations is

Deborah Ryan, Office of the Assistant Chief Counsel (Passthroughs and

Special Industries). However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 20

Estate taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR part 20 is amended as follows:

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,

1954

Paragraph 1. The authority citation for part 20 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 20.2013-4 is amended by:

1. Removing ``and'' at the end of paragraph (b)(2).

2. Redesignating paragraph (b)(3) as paragraph (b)(4).

3. Adding a new paragraph (b)(3).

The addition reads as follows:

Sec. 20.2013-4 Valuation of property transferred.

* * * * *

(b) * * *

(3)(i) By the amount of administration expenses in accordance with

the principles of Sec. 20.2056(b)-4(d).

(ii) This paragraph (b)(3) applies to transfers from estates of

decedents dying on or after December 3, 1999; and

* * * * *

Par. 3. Section 20.2055-3 is amended by:

1. Revising the section heading.

2. Adding a paragraph heading for paragraph (a).

3. Redesignating the text of paragraph (a) following the heading

and paragraphs (b) and (c) as paragraph (a)(1) and paragraphs (a)(2)

and (a)(3), respectively.

4. Adding a new paragraph (b).

[[Page 67765]]

The revision and additions read as follows:

Sec. 20.2055-3 Effect of death taxes and administration expenses.

(a) Death taxes. * * *

(b) Administration expenses--(1) Definitions--(i) Management

expenses. Estate management expenses are expenses that are incurred in

connection with the investment of estate assets or with their

preservation or maintenance during a reasonable period of

administration. Examples of these expenses could include investment

advisory fees, stock brokerage commissions, custodial fees, and

interest.

(ii) Transmission expenses. Estate transmission expenses are

expenses that would not have been incurred but for the decedent's death

and the consequent necessity of collecting the decedent's assets,

paying the decedent's debts and death taxes, and distributing the

decedent's property to those who are entitled to receive it. Estate

transmission expenses include any administration expense that is not a

management expense. Examples of these expenses could include executor

commissions and attorney fees (except to the extent of commissions or

fees specifically related to investment, preservation, and maintenance

of the assets), probate fees, expenses incurred in construction

proceedings and defending against will contests, and appraisal fees.

(iii) Charitable share. The charitable share is the property or

interest in property that passed from the decedent for which a

deduction is allowable under section 2055(a) with respect to all or

part of the property interest. The charitable share includes, for

example, bequests to charitable organizations and bequests to a

charitable lead unitrust or annuity trust, a charitable remainder

unitrust or annuity trust, and a pooled income fund, described in

section 2055(e)(2). The charitable share also includes the income

produced by the property or interest in property during the period of

administration if the income, under the terms of the governing

instrument or applicable local law, is payable to the charitable

organization or is to be added to the principal of the property

interest passing in whole or in part to the charitable organization.

(2) Effect of transmission expenses. For purposes of determining

the charitable deduction, the value of the charitable share shall be

reduced by the amount of the estate transmission expenses paid from the

charitable share.

(3) Effect of management expenses attributable to the charitable

share. For purposes of determining the charitable deduction, the value

of the charitable share shall not be reduced by the amount of the

estate management expenses attributable to and paid from the charitable

share. Pursuant to section 2056(b)(9), however, the amount of the

allowable charitable deduction shall be reduced by the amount of any

such management expenses that are deducted under section 2053 on the

decedent's federal estate tax return.

(4) Effect of management expenses not attributable to the

charitable share. For purposes of determining the charitable deduction,

the value of the charitable share shall be reduced by the amount of the

estate management expenses paid from the charitable share but

attributable to a property interest not included in the charitable

share.

(5) Example. The following example illustrates the application of

this paragraph (b):

Example. The decedent, who dies in 2000, leaves his residuary

estate, after the payment of debts, expenses, and estate taxes, to a

charitable remainder unitrust that satisfies the requirements of

section 664(d). During the period of administration, the estate

incurs estate transmission expenses of $400,000. The residue of the

estate (the charitable share) must be reduced by the $400,000 of

transmission expenses and by the Federal and State estate taxes

before the present value of the remainder interest passing to

charity can be determined in accordance with the provisions of

Sec. 1.664-4 of this chapter. Because the estate taxes are payable

out of the residue, the computation of the estate taxes and the

allowable charitable deduction are interrelated. See paragraph

(a)(2) of this section.

(6) Cross reference. See Sec. 20.2056(b)-4(d) for additional

examples applicable to the treatment of administration expenses under

this paragraph (b).

(7) Effective date. The provisions of this paragraph (b) apply to

estates of decedents dying on or after December 3, 1999.

Par. 4. Section 20.2056(b)-4 is amended by:

1. Removing the last two sentences of paragraph (a).

2. Redesignating paragraph (d) as paragraph (e).

3. Adding a new paragraph (d).

The addition reads as follows:

Sec. 20.2056(b)-4 Marital deduction; valuation of interest passing to

surviving spouse.

* * * * *

(d) Effect of administration expenses--(1) Definitions--(i)

Management expenses. Estate management expenses are expenses that are

incurred in connection with the investment of estate assets or with

their preservation or maintenance during a reasonable period of