[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2013 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

       

          Title 26

Internal Revenue


________________________

Parts 2 to 29

                         Revised as of April 1, 2013

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2013
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     803
      Alphabetical List of Agencies Appearing in the CFR......     823
      Table of OMB Control Numbers............................     833
      List of CFR Sections Affected...........................     851

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                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 26 CFR 2.1 refers to 
                       title 26, part 2, section 
                       1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
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Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
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Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
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citations for the regulations are referred to by volume number and page 
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OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
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PAST PROVISIONS OF THE CODE

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``[RESERVED]'' TERMINOLOGY

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INCORPORATION BY REFERENCE

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This material, like any other properly issued regulation, has the force 
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    (a) The incorporation will substantially reduce the volume of 
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    (b) The matter incorporated is in fact available to the extent 
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    (c) The incorporating document is drafted and submitted for 
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alphabetical list of agencies publishing in the CFR are also included in 
this volume.

[[Page vii]]

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    Charles A. Barth,
    Director,
    Office of the Federal Register.
    April 1, 2013.







[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2013. The first thirteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Sec. Sec.  1.0-1.60; 
Sec. Sec.  1.61-1.169; Sec. Sec.  1.170-1.300; Sec. Sec.  1.301-1.400; 
Sec. Sec.  1.401-1.440; Sec. Sec.  1.441-1.500; Sec. Sec.  1.501-1.640; 
Sec. Sec.  1.641-1.850; Sec. Sec.  1.851-1.907; Sec. Sec.  1.908-1.1000; 
Sec. Sec.  1.1001-1.1400; Sec. Sec.  1.1401-1.1550; and Sec.  1.1551 to 
end of part 1. The fourteenth volume containing parts 2-29, includes the 
remainder of subchapter A and all of Subchapter B--Estate and Gift 
Taxes. The last six volumes contain parts 30-39 (Subchapter C--
Employment Taxes and Collection of Income Tax at Source); parts 40-49; 
parts 50-299 (Subchapter D--Miscellaneous Excise Taxes); parts 300-499 
(Subchapter F--Procedure and Administration); parts 500-599 (Subchapter 
G--Regulations under Tax Conventions); and part 600 to end (Subchapter 
H--Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec.  602.101 of this 
chapter. For the convenience of the user, Sec.  602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

    For this volume, Jonn V. Lilyea was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Michael L. White, assisted by Ann Worley.

[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




                   (This book contains parts 2 to 29)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................           2

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    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)




  --------------------------------------------------------------------

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
2               Maritime construction reserve fund..........           5
3               Capital construction fund...................          21
4               Temporary income tax regulations under 
                    section 954 of the Internal Revenue Code          41
5               Temporary income tax regulations under the 
                    Revenue Act of 1978.....................          74
5c              Temporary income tax regulations under the 
                    Economic Recovery Tax Act of 1981.......          77
5e              Temporary income tax regulations, travel 
                    expenses of Members of Congress.........          96
5f              Temporary income tax regulations under the 
                    Tax Equity and Fiscal Responsibility Act 
                    of 1982.................................          98
6a              Temporary regulations under title II of the 
                    Omnibus Reconciliation Act of 1980......         114
7               Temporary income tax regulations under the 
                    Tax Reform Act of 1976..................         138
8               Temporary income tax regulations under 
                    section 3 of the Act of October 26, 1974 
                    (Pub. L. 93-483)........................         156
9               Temporary income tax regulations under the 
                    Tax Reduction Act of 1975...............         157
11              Temporary income tax regulations under the 
                    Employee Retirement Income Security Act 
                    of 1974.................................         158
12              Temporary income tax regulations under the 
                    Revenue Act of 1971.....................         174
13              Temporary income tax regulations under the 
                    Tax Reform Act of 1969..................         184
15              Temporary income tax regulations relating to 
                    exploration expenditures in the case of 
                    mining..................................         190
15a             Temporary income tax regulations under the 
                    Installment Sales Revision Act..........         194
16              Temporary regulations under the Revenue Act 
                    of 1962.................................         213

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16A             Temporary income tax regulations relating to 
                    the partial exclusion for certain 
                    conservation cost-sharing payments......         215
18              Temporary income tax regulations under the 
                    Subchapter S Revision Act of 1982.......         223
19              Temporary regulations under the Revenue Act 
                    of 1964.................................         224
                   SUBCHAPTER B--ESTATE AND GIFT TAXES
20              Estate tax; estates of decedents dying after 
                    August 16, 1954.........................         227
22              Temporary estate tax regulations under the 
                    Economic Recovery Tax Act of 1981.......         551
25              Gift tax; gifts made after December 31, 1954         551
26              Generation-skipping transfer tax regulations 
                    under the Tax Reform Act of 1986........         735
27-29

[Reserved]


Supplementary Publications: Internal Revenue Service Looseleaf 
  Regulations System.

  Additional supplementary publications are issued covering individual 
parts of the Alcohol, Tobacco and Firearms Regulations, and Regulations 
Under Tax Convention.

[[Page 5]]



                   SUBCHAPTER A_INCOME TAX (CONTINUED)





PART 2_MARITIME CONSTRUCTION RESERVE FUND--Table of Contents



Sec.
2.1 Statutory provisions; sections 511 and 905, Merchant Marine Act, 
          1936, and related statutes.
2.1-1 Definitions.
2.1-2 Scope of section 511 of the Act and the regulations in this part.
2.1-3 Requirements as to vessel operations.
2.1-4 Application to establish fund.
2.1-5 Tentative authorization to establish fund.
2.1-6 Establishment of fund.
2.1-7 Circumstances permitting reimbursement from a construction reserve 
          fund.
2.1-8 Investment of funds in securities.
2.1-9 Valuation of securities in fund.
2.1-10 Withdrawals from fund.
2.1-11 Time deposits.
2.1-12 Election as to nonrecognition of gain.
2.1-13 Deposit of proceeds of sales or indemnities.
2.1-14 Deposit of earnings and receipts.
2.1-15 Time for making deposits.
2.1-16 Tax liability as to earnings deposited.
2.1-17 Basis of new vessel.
2.1-18 Allocation of gain for tax purposes.
2.1-19 Requirements as to new vessels.
2.1-20 Obligation of deposits.
2.1-21 Period for construction of certain vessels.
2.1-22 Time extensions for expenditure or obligation.
2.1-23 Noncompliance with requirements.
2.1-24 Extent of tax liability.
2.1-25 Assessment and collection of deficiencies.
2.1-26 Reports by taxpayers.
2.1-27 Controlled corporation.
2.1-28 Administrative jurisdiction.

    Authority: Sec. 511(b), 49 Stat. 1985, as amended, sec. 7805, 68A 
Stat. 917; 26 U.S.C. 7805, 46 U.S.C. 1161(b).

    Source: T.D. 6820, 30 FR 6030, Apr. 29, 1965, unless otherwise 
noted.

    Editorial Note: The regulations contained in this part have been 
recodified in 46 CFR part 287.



Sec. 2.1  Statutory provisions; sections 511 and 905, Merchant Marine
Act, 1936, and related statutes.

    Sec. 511. [Merchant Marine Act, 1936] (a) When used in this section 
the term new vessel means any vessel (1) documented or agreed with the 
Commission to be documented under the laws of the United States; (2) 
constructed in the United States after December 31, 1939, or the 
construction of which has been financed under titles V or VII of this 
Act, as amended, or the construction of which has been aided by a 
mortgage insured under title XI of this Act as amended; and (3) either 
(A) of such type, size, and speed as the Commission shall determine to 
be suitable for use on the high seas or Great Lakes in carrying out the 
purposes of this Act, but not of less than 2,000 gross tons or of less 
speed than twelve knots, unless the Commission shall determine and 
certify in each case that a vessel of a specified lesser tonnage or 
speed is desirable for use by the United States in case of war or 
national emergency, or (B) constructed to replace a vessel or vessels 
requisitioned or purchased by the United States.
    (b) For the purpose of promoting the construction, reconstruction, 
reconditioning, or acquisition of vessels, or for other purposes 
authorized in this section, necessary to carrying out the policy set 
forth in title I of this Act, any citizen of the United States who is 
operating a vessel or vessels in the foreign or domestic commerce of the 
United States or in the fisheries or owns in whole or in part a vessel 
or vessels being so operated, or who, at the time of purchase or 
requisition of the vessel by the Government, was operating a vessel or 
vessels so engaged or owned in whole or in part a vessel or vessels 
being so operated or had acquired or was having constructed a vessel or 
vessels for the purpose of operation in such commerce or in the 
fisheries, may establish a construction reserve fund, for the 
construction, reconstruction, reconditioning, or acquisition of new 
vessels, or for other purposes authorized in this section, to be 
composed of deposits of proceeds from sales of vessels, indemnities on 
account of losses of vessels, earnings from the operation of vessels 
documented under the laws of the United States and from services 
incident thereto, and receipts, in the form of interest or otherwise, 
with respect to amounts previously deposited. Such construction reserve 
fund shall be established, maintained, expended, and used in accordance 
with the provisions of this section and rules or regulations to be 
prescribed jointly by the Commission and the Secretary of the Treasury.
    (c) In the case of the sale or actual or constructive total loss of 
a vessel, if the taxpayer deposits an amount equal to the net proceeds 
of the sale or to the net indemnity with respect to the loss in a 
construction reserve fund established under subsection (b), then--
    (1) If the taxpayer so elects in his income-tax return for the 
taxable year in which the gain was realized, or

[[Page 6]]

    (2) In case a vessel is purchased or requisitioned by the United 
States, or is lost, in any taxable year beginning after December 31, 
1939, and the taxpayer receives payment for the vessel so purchased or 
requisitioned, or receives from the United States indemnity on account 
of such loss, subsequent to the end of such taxable year, if the 
taxpayer so elects prior to the expiration of sixty days after the 
receipt of the payment or indemnity, and in accordance with a form of 
election to be prescribed by the Commissioner of Internal Revenue with 
the approval of the Secretary of the Treasury,

no gain shall be recognized to the taxpayer in respect of such sale or 
indemnification in the computation of net income for the purposes of 
Federal income or excess-profits taxes. If an election is made under 
subdivision (2) and if computation or recomputation in accordance with 
this subsection is otherwise allowable but is prevented, on the date of 
making such election or within six months thereafter, by any statute of 
limitation, such computation or recomputation nevertheless shall be made 
notwithstanding such statute if a claim therefor is filed within six 
months after the date of making such election.
    For the purposes of this subsection no amount shall be considered as 
deposited in a construction reserve fund unless it is deposited within 
sixty days after it is received by the taxpayer.
    As used in this subsection the term net proceeds and the term net 
indemnity mean the sum of (1) the adjusted basis of the vessel and (2) 
the amount of gain which would be recognized to the taxpayer without 
regard to this subsection.
    (d) The basis for determining gain or loss and for depreciation, for 
the purposes of Federal income or excess profits taxes, of any new 
vessel constructed, reconstructed, reconditioned, or acquired by the 
taxpayer, or with respect to which purchase-money indebtedness is 
liquidated as provided in subsection (g), in whole or in part out of the 
construction reserve fund shall be reduced by that portion of the 
deposits in the fund expended in the construction, reconstruction, 
reconditioning, acquisition, or liquidation of purchase-money 
indebtedness of the new vessel which represents gain not recognized for 
tax purposes under subsection (c).
    (e) For the purposes of this section, (1) if the net proceeds of a 
sale or the net indemnity in respect of a loss are deposited in more 
than one deposit, the amount consisting of the gain shall be considered 
as first deposited; (2) amounts expended, obligated, or otherwise 
withdrawn shall be applied against the amounts deposited in the fund in 
the order of deposit; and (3) if any deposit consists in part of gain 
not recognized under subsection (c), any expenditure, obligation, or 
withdrawal applied against such deposit shall be considered to consist 
of gain in the proportion that the part of the deposit consisting of 
gain bears to the total amount of the deposit.
    (f) With respect to any taxable year, amounts on deposit on the last 
day of such year in a construction reserve fund in accordance with this 
section and with respect to which all the requirements of subsection (g) 
have been satisfied, to the extent that such requirements are applicable 
as of the last day of said taxable year, shall not constitute an 
accumulation of earnings or profits within the meaning of section 102 of 
the Internal Revenue Code [Part I (section 531 and following), 
Subchapter A, Chapter 1 of the Internal Revenue Code of 1954].
    (g) The provisions of subsections (c) and (f) shall apply to any 
deposit in the construction reserve fund only to the extent that such 
deposit is expended or obligated for expenditure, in accordance with 
rules and regulations to be prescribed jointly by the Commission and the 
Secretary of the Treasury--
    (1) Under a contract for the construction or acquisition of a new 
vessel or vessels (or in the discretion of the Commission, for a part 
interest therein), or, with the approval of the Commission, for the 
reconstruction or reconditioning of a new vessel or vessels, entered 
into within (i) two years from the date of deposit or the date of any 
extension thereof which may be granted by the Commission pursuant to the 
provisions of section 511(h), in the case of deposits made prior to the 
date [July 17, 1952] on which these amendatory provisions become 
effective, or (ii) three years from the date of such deposit in the case 
of a deposit made after such effective date, only if under such rules 
and regulations--
    (A) Within such period not less than 12\1/2\ per centum of the 
construction or contract price of the vessel or vessels is paid or 
irrevocably committed on account thereof and the plans and 
specifications therefor are approved by the Commission to the extent by 
it deemed necessary; and
    (B) In case of a vessel or vessels not constructed under the 
provisions of this title or not purchased from the Commission, (i) said 
construction is completed, within six months from the date of the 
construction contract, to the extent of not less than 5 per centum 
thereof (or in case the contract covers more than one vessel, the 
construction of the first vessel so contracted for is so completed to 
the extent of not less than 5 per centum) as estimated by the Commission 
and certified by it to the Secretary of the Treasury, and (ii) all 
construction under such contract is completed with reasonable dispatch 
thereafter;
    (2) For the liquidation of existing or subsequently incurred 
purchase-money indebtedness to persons other than a parent company of, 
or a company affiliated or associated

[[Page 7]]

with, the mortgagor on a new vessel or vessels within (i) two years from 
the date of deposit or the date of any extension thereof which may be 
granted by the Commission pursuant to the provisions of section 511(h), 
in the case of deposits made prior to the date [July 17, 1952] on which 
these amendatory provisions become effective, or (ii) three years from 
the date of such deposit in the case of a deposit made after such 
effective date.
    (h) The Commission is authorized under rules and regulations to be 
prescribed jointly by the Secretary of the Treasury and the Commission 
to grant extensions of the period within which the deposits shall be 
expended or obligated or within which construction shall have progressed 
to the extent of 5 per centum of completion as provided herein, but such 
extension shall not be for an aggregate additional period in excess of 
two years with respect to the expenditure or obligation of such deposits 
or more than one year with respect to the progress of such construction: 
Provided, That until January 1, 1965, in addition to the extensions 
hereinbefore permitted, further extensions may be granted ending not 
later than December 31, 1965.
    (i) Any such deposited gain or portion thereof which is not so 
expended or obligated within the period provided, or which is otherwise 
withdrawn before the expiration of such period, or with respect to which 
the construction has not progressed to the extent of 5 per centum of 
completion within the period provided, or with respect to which the 
Commission finds and certifies to the Secretary of the Treasury that, 
for causes within the control of the taxpayer, the entire construction 
is not completed with reasonable dispatch, if otherwise taxable income 
under the law applicable to the taxable year in which such gain was 
realized, shall be included in the gross income for such taxable year, 
except for the purpose of the declared value excess-profits tax and the 
capital stock tax. If any such deposited gain or portion thereof with 
respect to a deposit made in any taxable year ending on or before June 
30, 1945, is so included in gross income for such taxable year, there 
shall (in addition to any other deficiency) be assessed, collected, and 
paid in the same manner as if it were a deficiency, an amount equal to 
1.1 per centum of the amount of gain so included, such amount being in 
lieu of any adjustment with respect to the declared value excess-profits 
tax for such taxable year.
    (j) Notwithstanding any other provision of law, any deficiency in 
tax for any taxable year resulting from the inclusion of any amount in 
gross income as provided by subsection (i), and the amount to be treated 
as a deficiency under such subsection in lieu of any adjustment with 
respect to the declared value excess-profits tax, may be assessed or a 
proceeding in court for the collection thereof may be begun without 
assessment, at any time: Provided, however, That interest on any such 
deficiency or amount to be treated as a deficiency shall not begin until 
the date the deposited gain or portion thereof in question is required 
under subsection (i) to be included in gross income.
    (k) This section shall be applicable to a taxpayer only in respect 
of sales or indemnifications for losses occurring within a taxable year 
beginning after December 31, 1939, and only in respect of earnings 
derived during a taxable year beginning after December 31, 1939.
    (l) For the purposes of this section a vessel shall be considered as 
constructed or acquired by the taxpayer if constructed or acquired by a 
corporation at a time when the taxpayer owns at least 95 per centum of 
the total number of shares of each class of stock of the corporation.
    (m) The terms used in this section shall have the same meaning as in 
chapter 1 of the Internal Revenue Code.
    (n) The terms contract for the construction and construction 
contract, as used in this section, shall include, in the case of a 
taxpayer who constructs a new vessel in a shipyard owned by such 
taxpayer, an agreement between such taxpayer and the Commission with 
respect to such construction and containing provisions deemed necessary 
or advisable by the Commission to carry out the purposes and policy of 
this section.
    (o) The terms reconstruction and reconditioning, as used in this 
section, shall include the reconstruction, reconditioning, or 
modernization of a vessel for exclusive use on the Great Lakes, 
including the St. Lawrence River and Gulf, if the Commission determines 
that the objectives of this Act will be promoted by such reconstruction, 
reconditioning, or modernization, and, notwithstanding any other 
provisions of law, such vessel shall be deemed to be a ``new vessel'' 
within the meaning of this section for such reconstruction, 
reconditioning, or modernization.

[Sec. 511 as added by Act of October 10, 1940 (Pub. L. 840, 76th Cong., 
54 Stat. 1106), as amended by Act of June 17, 1943 (Pub. L. 78, 78th 
Cong., 57 Stat. 157); Act of Dec. 23, 1944 (Pub. L. 552, 78th Cong., 58 
Stat. 920); secs. 9-14, Act of July 17, 1952 (Pub. L. 586, 82d Cong., 66 
Stat. 762); Act of Sept. 12, 1964 (Pub. L. 88-595, 78 Stat. 943)]

    Sec. 905. [Merchant Marine Act, 1936.] When used in this Act--
    (a) The words foreign commerce or foreign trade mean commerce or 
trade between the United States, its Territories or possessions, or the 
District of Columbia, and a foreign country.

                                * * * * *

[[Page 8]]

    (c) The words citizen of the United States include a corporation, 
partnership, or association only if it is a citizen of the United States 
within the meaning of section 2 of the Shipping Act, 1916, as amended 
(U.S.C., title 46, sec. 802), and with respect to a corporation under 
title VI of this Act, all directors of the corporation are citizens of 
the United States, and, in the case of a corporation, partnership, or 
association operating a vessel on the Great Lakes, or on bays, sounds, 
rivers, harbors, or inland lakes of the United States the amount of 
interest required to be owned by a citizen of the United States shall be 
not less than 75 per centum.

                                * * * * *

    (e) The terms United States Maritime Commission and Commission shall 
mean the Secretary of Commerce, the Maritime Administrator, or the * * * 
[Maritime Subsidy Board] as the context may require * * *.

[Sec. 905 (a), (c), and (e) (49 Stat. 2016), amended by sec. 39 (a) and 
(b), Act of June 23, 1938 (Pub. L. 705, 75th Cong., 52 Stat. 964); Act 
of July 17, 1952 (Pub. L. 586, 82d Cong., 66 Stat. 765); sec. 4, Act of 
Sept. 21, 1959 (Pub. L. 86-327, 73 Stat. 597)]

    Sec. 2. [Shipping Act, 1916.] (a) That within the meaning of this 
Act no corporation, partnership, or association shall be deemed a 
citizen of the United States unless the controlling interest therein is 
owned by citizens of the United States, and, in the case of a 
corporation, unless its president or other chief executive officer and 
the chairman of its board of directors are citizens of the United States 
and unless no more of its directors than a minority of the number 
necessary to constitute a quorum are noncitizens and the corporation 
itself is organized under the laws of the United States or of a State, 
Territory, District, or possession thereof, but in the case of a 
corporation, association, or partnership operating any vessel in the 
coastwise trade the amount of interest required to be owned by citizens 
of the United States shall be 75 per centum.
    (b) The controlling interest in a corporation shall not be deemed to 
be owned by citizens of the United States (a) if the title to a majority 
of the stock thereof is not vested in such citizens free from any trust 
or fiduciary obligation in favor of any person not a citizen of the 
United States; or (b) if the majority of the voting power in such 
corporation is not vested in citizens of the United States; or (c) if 
through any contract or understanding it is so arranged that the 
majority of the voting power may be exercised, directly or indirectly, 
in behalf of any person who is not a citizen of the United States; or 
(d) if by any other means whatsoever control of the corporation is 
conferred upon or permitted to be exercised by any person who is not a 
citizen of the United States.
    (c) Seventy-five per centum of the interest in a corporation shall 
not be deemed to be owned by citizens of the United States (a) if the 
title to 75 per centum of its stock is not vested in such citizens free 
from any trust or fiduciary obligation in favor of any person not a 
citizen of the United States; or (b) if 75 per centum of the voting 
power in such corporation is not vested in citizens of the United 
States; or (c) if, through any contract or understanding it is so 
arranged that more than 25 per centum of the voting power in such 
corporation may be exercised, directly or indirectly, in behalf of any 
person who is not a citizen of the United States; or (d) if by any other 
means whatsoever control of any interest in the corporation in excess of 
25 per centum is conferred upon or permitted to be exercised by any 
person who is not a citizen of the United States.
    (d) The provisions of this Act shall apply to receivers and trustees 
of all persons to whom the Act applies, and to the successors or 
assignees of such persons.

[Sec. 2 (39 Stat. 729) as amended by Act of July 15, 1918 (Pub. L. 198, 
65th Cong., 40 Stat. 900); sec. 38, Merchant Marine Act, 1920 (41 Stat. 
1008); sec. 3, Act of Sept. 21, 1959 (Pub. L. 86-327, 73 Stat. 597)]



Sec. 2.1-1  Definitions.

    (a) As used in the regulations in this part, except as otherwise 
expressly provided--
    (1) Act means the Merchant Marine Act, 1936, as amended (46 U.S.C. 
27).
    (2) Section means one of the sections of the regulations in this 
part.
    (3) Administration means the Maritime Administration of the 
Department of Commerce as created by Reorganization Plan No. 21 of 1950 
(46 U.S.C. 1111 note).
    (4) Citizen means a person who, if an individual, was born or 
naturalized as a citizen of the United States or, if other than an 
individual, meets the requirements of section 905(c) of the Act and 
section 2 of the Shipping Act, 1916, as amended (46 U.S.C. 802).
    (5) Taxpayer means a citizen who has established or seeks to 
establish a construction reserve fund under the provisions of section 
511 of the Act and the regulations in this part, and may include a 
partnership.
    (6) Corporation includes associations, joint-stock companies and 
insurance companies.

[[Page 9]]

    (7) Stock includes the shares in an association, joint-stock 
company, or insurance company.
    (8) Affiliate or associate means a person directly or indirectly 
controlling, controlled by, or under common control with, another 
person.
    (9) Control, as used in subparagraph (8) of this paragraph, means 
the possession of the power to direct in any manner the management and 
policies of a person, and the terms ``controlling'' and ``controlled'' 
shall have the meanings correlative to the foregoing.
    (10) Person means an individual, a corporation, a partnership, an 
association, an estate, a trust, or a company.
    (11) Partnership includes a syndicate, group, pool, joint venture, 
or other unincorporated organization.
    (12) Construction, if so determined by the Administration, shall 
include reconstruction and reconditioning.
    (13) Reconstruction and reconditioning shall include the 
reconstruction, reconditioning, or modernization of a vessel for 
exclusive use on the Great Lakes, including the Saint Lawrence River and 
Gulf, if the Administration determines that the objectives of the Act 
will be promoted by such reconstruction, reconditioning, or 
modernization, and, notwithstanding any other provisions of law, such 
vessel shall be deemed to be a ``new vessel'' within the meaning of 
section 511 of the Act for such reconstruction, reconditioning, or 
modernization.
    (14) Purchase-money indebtedness means any indebtedness, or evidence 
thereof, created as the result of the purchase of a vessel by the 
taxpayer.
    (15) Contract, contract for the construction, and construction 
contract shall include, if so determined by the Administration, a 
contract for reconstruction or reconditioning and shall include, in the 
case of a taxpayer who constructs a new vessel in a shipyard owned by 
such taxpayer, an agreement, between such taxpayer and the 
Administration with respect to such construction, and containing 
provisions deemed necessary or advisable by the Administration to carry 
out the purposes and policy of section 511 of the Act.
    (b) Insofar as the computation and collection of taxes are 
concerned, other terms used in the regulations in this part, except as 
otherwise provided, have the same meaning as in the Internal Revenue 
Code and the regulations thereunder.



Sec. 2.1-2  Scope of section 511 of the Act and the regulations in this
part.

    (a) Applicability of regulations. (1) The regulations prescribed in 
this part--
    (i) Apply to gain realized from the sale or loss of vessels, 
earnings from the operation of vessels, and interest (or otherwise) with 
respect to amounts previously deposited in the construction reserve 
fund, for a taxable year beginning after December 31, 1964, and
    (ii) Apply to the expenditure, obligation, or withdrawal, during a 
taxable year beginning after December 31, 1964, of any deposits of gain, 
earnings, and interest (or otherwise) of the character referred to in 
subdivision (i) of this subparagraph without regard to the taxable year 
in which the deposits were made.
    (2) As to gain, earnings, or interest (or otherwise) described in 
subparagraph (1)(i) of this paragraph and as to an expenditure, 
obligation, or withdrawal described in subparagraph (1)(ii) of this 
paragraph, the regulations in this part supersede Treasury Decision 
5330, as amended (26 CFR (1939) part 32).
    (b) Nonrecognition and accumulation. Section 511 of the Act 
provides, under conditions specified, for the nonrecognition, for income 
and excess-profits tax purposes, of the gain realized from the sale or 
indemnification for loss of certain vessels including certain vessels in 
the course of construction, or shares therein. It also permits the 
accumulation of the proceeds of such sales or indemnification and of 
certain earnings without liability under Part I (section 531 and 
following), Subchapter G, Chapter I of the Internal Revenue Code of 
1954, and the regulations thereunder (Sec. Sec. 1.531-1 through 1.537-3 
of this chapter (Income Tax Regulations)).
    (c) Availability of benefits. The benefits of section 511 of the Act 
are available to any citizen as defined in paragraph (a)(4) of Sec. 
2.1-1, who, during any taxable year owns, in whole or in part, a vessel 
or vessels within the scope of Sec. 2.1-3. A citizen operating such a 
vessel or vessels owned by any other person or

[[Page 10]]

persons can derive no benefit from the provisions relating to the 
nonrecognition of gain from the sale or loss of such vessel or vessels 
so owned, but may establish a construction reserve fund in which he may 
deposit earnings from the operation of such vessel or vessels.
    (d) Applicability of section 511. Section 511 of the Act applies 
only with respect to sales or losses of vessels within the scope of 
Sec. 2.1-3 or in respect of earnings derived from the operation of such 
vessels. A loss to be within section 511 of the Act must be an actual or 
constructive total loss. Whether there is a total loss, actual or 
constructive, will be determined by the Administration.



Sec. 2.1-3  Requirements as to vessel operations.

    Section 511 of the Act applies with respect to vessels operated in 
the foreign or domestic commerce of the United States or in the 
fisheries of the United States and vessels acquired or being constructed 
for the purpose of such operation. The foreign commerce of the United 
States includes commerce or trade between the United States (including 
the District of Columbia), the territories and possessions which are 
embraced within the coastwise laws, and a foreign country or other 
territories and possessions of the United States. The domestic commerce 
of the United States includes commerce or trade between ports of the 
United States and its territories and possessions, embraced within the 
coastwise laws and on inland rivers. The fisheries include the fisheries 
of the United States and its territories and possessions. Section 511 of 
the Act does not apply to vessels operated in the foreign commerce or 
fisheries of any country other than the United States.



Sec. 2.1-4  Application to establish fund.

    Any person claiming to be entitled to the benefits of section 511 of 
the Act may make application, in writing, to the Administration for 
permission to establish a construction reserve fund. The application 
shall be in such form and substance as the Administration may prescribe 
and shall designate, among other things, the depository or depositories 
with which the taxpayer proposes to establish the said fund. The 
original application shall be executed and verified by the taxpayer, or 
if the taxpayer is a corporation, by one of its principal officers, in 
triplicate, and shall be accompanied by eight conformed copies when 
filed with the Administration.



Sec. 2.1-5  Tentative authorization to establish fund.

    Where the time between the receipt by the Administration of the 
application for permission to establish a construction reserve fund and 
the date prior to which an amount received from the sale or loss of a 
vessel must be deposited to come within the scope of section 511 of the 
Act is insufficient to permit a determination of the eligibility of the 
applicant, the Administration may tentatively authorize the 
establishment of a construction reserve fund and the deposit of such 
amount therein. Such tentative authorization shall be subject to 
rescission by the Administration if subsequently it is determined that 
the applicant is not entitled to the benefits of section 511 of the Act, 
or has not complied with the statutory requirements. For example, a 
tentative authorization will be rescinded if the Administration 
ascertains that the applicant is not a citizen. Upon such determination, 
the fund shall be closed and all amounts on deposit therein shall be 
withdrawn.



Sec. 2.1-6  Establishment of fund.

    (a) Authorization by the Administration. If the application is 
approved by the Administration, the Administration will adopt Orders 
authorizing the establishment of a construction reserve fund with the 
depository or depositories designated by the taxpayer and approved by 
the Administration. The Orders will provide for joint control by the 
Administration and the taxpayer over such fund, will set forth the 
conditions governing the establishment and maintenance of the fund and 
the making of deposits therein and withdrawals therefrom, and will 
designate the representatives authorized to execute instruments of 
withdrawal on behalf of the Administration.

[[Page 11]]

    (b) Resolution or agreement of the taxpayer. A certified copy of the 
Orders of the Administration will be furnished the taxpayer. If the 
taxpayer is a corporation, it shall promptly adopt, through its board of 
directors, a resolution satisfactory in form and substance to the 
Administration, authorizing the establishment and maintenance of the 
fund in conformity with the action of the Administration. If the 
taxpayer is not a corporation, it shall promptly execute an agreement 
with the depository satisfactory in form and substance to the 
Administration to conform to the action of the Administration as set 
forth in the Orders. Certified copies of the Orders of the 
Administration and of the resolution of the taxpayer (if it is a 
corporation) will be furnished to the depository by the Administration 
and the taxpayer, respectively, for its guidance in maintaining the fund 
and honoring instruments of withdrawal. The taxpayer, if a corporation, 
shall also furnish the Administration with a certified copy of its 
resolution, or if not a corporation, a duplicate original of its 
agreement with the depository.
    (c) Constructive action not recognized. Constructive deposits, 
substitutions or withdrawals will not be recognized by the 
Administration in the establishment and maintenance of the fund.
    (d) Failure to make deposits as basis for termination of fund. In 
the event no deposit is made into the fund for more than five years, any 
amounts remaining in the fund shall be removed from the fund at the 
discretion of the Administration and, if so removed, the fund shall be 
terminated. In the event of such termination, see Sec. 2.1-23 for 
recognition of gain.



Sec. 2.1-7  Circumstances permitting reimbursement from a construction
reserve fund.

    (a) Payments prior to establishment of fund. If, prior to the 
establishment of a construction reserve fund under the regulations in 
this part, a taxpayer has made necessary payments under a contract which 
satisfies the provisions of the regulations in this part and section 511 
of the Act for the construction or acquisition of a new vessel, such 
taxpayer may, if subsequently authorized to establish a construction 
reserve fund under the regulations in this part, draw against such fund 
as reimbursement for the amount, if any, of other funds which, with the 
approval or ratification of the Administration, the taxpayer used for 
making such necessary payments prior to the establishment of the fund.
    (b) Payments subsequent to establishment of fund. If, subsequent to 
the establishment of a construction reserve fund under the regulations 
in this part, the taxpayer has made necessary payments under a contract 
which satisfies the provisions of the regulations in this part and 
section 511 of the Act for the construction or acquisition of a new 
vessel, such taxpayer may draw against such fund as reimbursement for 
the amount, if any, of other funds which, with the approval or 
ratification of the Administration, the taxpayer had used for the 
purpose of making such necessary payments.



Sec. 2.1-8  Investment of funds in securities.

    (a) Obligations of or guaranteed by the United States. Interest-
bearing direct obligations of the United States, or obligations fully 
guaranteed as to principal and interest by the United States, may be 
deposited in the construction reserve fund in lieu of cash, may be 
purchased with cash on deposit in the fund, or may be substituted for 
securities or commitment to finance in the fund, subject to the 
provisions of paragraph (b) of this section.
    (b) Other securities. In cases where the taxpayer desires to deposit 
any securities in the fund in lieu of cash other than those of or 
guarantees by the United States or to purchase such other securities 
with cash on deposit in the fund, or to substitute such other securities 
for securities or commitment to finance in the fund, the taxpayer shall 
make written application to the Administration and shall not consummate 
the transaction until the written consent of the Administration shall 
have been received. The application shall describe the securities fully. 
Every approval by the Administration of such application shall be 
conditioned upon agreement by the taxpayer forthwith to dispose of such 
securities

[[Page 12]]

upon subsequent request by the Administration. Immediately upon the 
purchase of any securities for deposit in the fund, the taxpayer shall 
advise the Administration, giving the date of purchase, a description of 
the securities, and the price paid therefor (net, brokerage and other 
charges, and gross). Ordinarily, the Administration will not approve the 
deposit in the fund in lieu of cash, or the purchase with cash on 
deposit in the fund or the substitution for securities in the fund of 
securities not actively traded in on exchanges registered under the 
Securities Exchange Act of 1934 (15 U.S.C. ch. 2B), or securities which 
are not legal for investment of trust funds. Whenever the Administration 
approves the substitution of other securities for securities in the 
fund, such substitution shall be effected only upon or after the deposit 
of the substituted securities into the fund.
    (c) Cash. Cash may be substituted for amounts which are on deposit 
in the fund in any other form.
    (d) Devalued securities. In the event the Administration determines 
that the market value at any date of any securities in the fund has 
decreased to a figure which is less than 90 percent of the market value 
at the time of deposit into the fund, then within 60 days after the 
taxpayer receives notice of such determination the taxpayer shall 
(except as otherwise provided in this paragraph) deposit into the fund 
cash or securities in an amount equal to the difference between the 
current market value of the devalued securities and the market value of 
such securities at the time of their original deposit. However if any 
securities in the fund are valued at the time of their deposit at less 
than the market value of such securities at the time of their deposit 
the taxpayer shall be required to deposit only an amount equal to that 
portion of the difference between the current market value of the 
devalued securities and the market value of such securities at the time 
of their original deposit which bears the same ratio to such total 
difference as the amount at which the securities were valued at the time 
of their deposit bears to the market value at the time of such deposit.



Sec. 2.1-9  Valuation of securities in fund.

    (a) Equivalent values. In cases where securities are deposited in 
the fund in lieu of cash, or are purchased with cash on deposit in the 
fund, or are substituted for securities in the fund, the value of such 
securities must not be less than the amount of cash in lieu of which 
they are so deposited or with which they are so purchased, or the value 
at the time of deposit of the securities for which they were so 
substituted. If the securities on deposit in the fund are replaced by 
cash from the general funds of the taxpayer, the amount of cash to be 
deposited in the fund in lieu thereof shall be not less than the amount 
at which such securities were valued at the time of their deposit in the 
fund.
    (b) Determination of value. (1) For the purpose of determining the 
amount in the fund, the value of securities shall be their ``market 
value'' (which shall be the basis for determining value, unless 
otherwise agreed to by the administration) and shall be determined in 
the following manner:
    (i) In instances where no actual purchase is involved, such as the 
initial deposit of securities in the fund in lieu of cash, the last 
sales price thereof on the principal exchange on the day the deposit was 
made shall be deemed to be the ``market value'' thereof, or, if no such 
sales were made, the ``market value'' thereof will be determined by the 
Administration on such basis as it may deem to be fair and reasonable in 
each case.
    (ii) In instances where the purchase of securities with cash on 
deposit in the fund is involved, ``market value'' shall be the gross 
price paid (adjusted for accrued interest): Provided, That if such 
securities are purchased otherwise than upon a registered exchange the 
price shall be within the range of transactions on the exchange on the 
date of such purchase, or, if there were no such transactions, then the 
``market value'' thereof will be determined by the Administration on 
such basis as it may deem to be fair and reasonable in each case.
    (2) Purchase-money obligations secured by mortgages on vessels sold 
or irrevocable commitments to finance the construction or acquisition of 
new

[[Page 13]]

vessels which are deposited in the construction reserve fund as provided 
in Sec. 2.1-13 ordinarily will be considered as equivalent to their 
face value.



Sec. 2.1-10  Withdrawals from fund.

    (a) Withdrawals for obligations or liquidation. (1) Checks, drafts, 
or other instruments of withdrawal to meet obligations under a contract 
for the construction or acquisition of a new vessel or vessels or for 
the liquidation of existing or subsequently incurred purchase-money 
indebtedness, after having been executed by the taxpayer, shall be 
forwarded to the Administration in Washington, DC, with appropriate 
explanation of the purpose of the proposed withdrawal, including 
properly certified invoices or other supporting papers. Such instruments 
of withdrawal, if payable to the Administration, will be deposited by 
the Administration for collection, and the proceeds thereof, upon 
collection, will be credited to the appropriate contract with the 
Administration; but if drawn to the order of payees other than the 
Administration, after countersignature on behalf of the Administration, 
will ordinarily be forwarded to the payees.
    (2) An amount obligated under a contract for the construction or 
acquisition of a new vessel or vessels or for the liquidation of 
existing or subsequently incurred purchase-money indebtedness, whether 
the obligor has the entire or a partial interest therein within the 
scope of section 511 of the Act, may not, so long as the contract or 
indebtedness continues in full force and effect, be withdrawn except to 
meet payments due or to become due under such contract or for such 
liquidation.
    (b) Other withdrawals. Checks, drafts, or other instruments of 
withdrawal executed by the taxpayer for purposes other than to meet 
obligations under a contract for the construction or acquisition of a 
new vessel or vessels or for the liquidation of existing or subsequently 
incurred purchase-money indebtedness, whether the taxpayer has the 
entire or a partial interest therein, shall be drawn by the taxpayer to 
its own order and forwarded to the Administration in Washington, DC, 
with appropriate explanation of the purpose of the proposed withdrawal. 
Such withdrawals may occur by reason of a determination by the 
Administration that the taxpayer is not entitled to the benefits of 
section 511 of the Act (see Sec. 2.1-5), or that a particular deposit 
has been improperly made (see Sec. 2.1-13), or by reason of the 
election of the taxpayer to make such withdrawals. Upon receipt of such 
checks, drafts, or other instruments of withdrawal, the Administration 
will give notice thereof to the Commissioner of Internal Revenue. The 
Commissioner will advise the Administration of the receipt of the notice 
and the date it was received. The Administration shall not countersign 
such checks, drafts, or other instruments of withdrawal or transmit them 
to the taxpayer until the expiration of 30 days from the date of receipt 
of the notice by the Commissioner, unless the Commissioner or such 
official of the Internal Revenue Service as he may designate for the 
purpose consents in writing to earlier countersignature by the 
Administration and transmittal to the taxpayer. Upon the expiration of 
such 30-day period, or prior thereto if the aforesaid consent of the 
Commissioner has been obtained, the Administration will countersign the 
check, draft, or other instrument of withdrawal and forward it to the 
taxpayer.
    (c) Inapplicability to certain transactions. The provisions of this 
section shall not be applicable to transactions deemed to be withdrawals 
by reason of the sale of securities held in the fund for an amount less 
than the market value thereof at the time of their deposit (see Sec. 
2.1-23), nor to the cancellation of an irrevocable commitment deposited 
in the fund, upon proof satisfactory to the Administration that the 
terms of such commitment have been fully satisfied.



Sec. 2.1-11  Time deposits.

    Deposits in the construction reserve fund not invested in securities 
may be placed in time deposits when, in the judgment of the taxpayer, it 
is desirable and feasible so to do. The taxpayer shall promptly advise 
the Administration of any time deposit arrangements made with the 
depository. The Administration reserves the right at any time

[[Page 14]]

to require the termination or modification of any such arrangements. 
With prior approval of the Administration a time deposit may be made in 
a depository other than the one with which the construction reserve fund 
is established.



Sec. 2.1-12  Election as to nonrecognition of gain.

    (a) Election requirements. As a prerequisite to the nonrecognition 
of gain on the sale or loss of a vessel (or of a part interest therein) 
for Federal income tax purposes, the taxpayer, after establishing a 
construction reserve fund, must make an election with respect to such 
vessel or interest in the manner set forth in this paragraph.
    (1) In general. Except as provided in subparagraph (2) of this 
paragraph, the election must be made in the taxpayer's Federal income 
tax return (or, in the case of a partnership, in the partnership return 
of income) for the taxable year in which the gain with respect to the 
sale or loss of the vessel is realized. The election as to the 
nonrecognition of gain shall be shown by a statement to that effect, 
submitted as a part of, and attached to, the return. The statement, 
which need not be on any prescribed form, shall set forth a computation 
of the amount of the realized gain, the identity of the vessel, the 
nature and extent of the taxpayer's interest therein, whether such 
vessel was sold or lost and the date of sale or loss, the full sale 
price or full amount of indemnity, and the amount and date of each 
payment thereof, the basis for tax purposes and any other data affecting 
the determination of the realized gain.
    (2) Certain Government payments. In case a vessel is purchased or 
requisitioned by the United States, or is lost, in any taxable year and 
the taxpayer receives payment for the vessel so purchased or 
requisitioned, or receives from the United States indemnity on account 
of such loss, subsequent to the end of such taxable year, the taxpayer 
shall make his election by filing notice thereof with the Commissioner 
of Internal Revenue, Washington, DC, 20224, prior to the expiration of 
60 days after receipt of the payment or indemnity. The taxpayer shall 
file a copy of the notice with the Secretary, Federal Maritime Board, 
Washington, DC, 20573. The form of the notice of election shall be 
prepared by the taxpayer and shall be substantially as follows:

  Election Relative to Nonrecognition of Gain Under Section 511(c)(2), 
                        Merchant Marine Act, 1936

    Pursuant to the provisions of section 511(c)(2) of the Merchant 
Marine Act, 1936, as amended, notice is hereby given that the 
undersigned taxpayer elects that gain in respect of the sale to the 
United States, or indemnification received from the United States on 
account of the loss, of the vessel named below or share therein shall 
not be recognized. The circumstances involved in the computation of such 
gain are as follows:

Name and other identification of vessel_________________________________
Nature and extent of the taxpayer's interest in the vessel______________
Nature of disposition, i.e., sale or loss_______________________________
Date of disposition_____________________________________________________
Full sale price or full amount of indemnity received by taxpayer________
Amount and date of each payment of sale price or indemnity received by 
taxpayer________________________________________________________________
Amount and date of each previous deposit of such payments in 
construction reserve fund_______________________________________________
________________________________________________________________________
Identification of each check or other instrument by which payment made 
to taxpayer_____________________________________________________________
________________________________________________________________________
Tax basis of taxpayer's interest in vessel______________________________
Any other data affecting the determination of the realized gain_________
Amount of gain (submit computation)_____________________________________
________________________________________________________________________
                                                      (Name of taxpayer)
By______________________________________________________________________
________________________________________________________________________
                                                     (Date of execution)
    (b) [Reserved]



Sec. 2.1-13  Deposit of proceeds of sales or indemnities.

    (a) Manner of deposit. The deposit required by section 511 of the 
Act must be made in a construction reserve fund established with a 
depository or depositories approved by the Administration and subject to 
the joint control of the Administration and the taxpayer. It is not 
necessary to establish a separate fund with respect to each vessel or 
share in a vessel sold or lost.
    (b) Amount of deposit. With respect to any vessel sold or lost, or a 
share therein, the deposit must be in an amount equal to the ``net 
proceeds'' of the sale, or the ``net indemnity'' for

[[Page 15]]

the loss. By ``net proceeds'' and ``net indemnity'' is meant (1) the 
depositor's interest in the adjusted basis of the vessel plus (2) the 
amount of gain which would be recognized for tax purposes in the absence 
of section 511 of the Act. In determining ``net proceeds'', the amount 
necessarily paid or incurred for brokers' commissions is to be deducted 
from the gross amount of the sales price. In the event the taxpayer is 
an affiliate or associate of the buyer, the amount of the sales price 
shall not exceed the fair market value of the vessel or vessels sold as 
determined by the Administration. In such case the taxpayer shall 
furnish evidence sufficient, in the opinion of the Administration, to 
establish that the sales price is not in excess of the fair market 
value. In determining ``net indemnity'', the amount necessarily paid or 
incurred purely for collection, or rate of exchange discounts on the 
payment, of the indemnity is to be deducted from the gross amount of 
collectible indemnity. In case of the sale or loss of several vessels or 
share therein, a deposit of the ``net proceeds'' or ``net indemnity'' 
with respect to one or more of the vessels or shares is permissible. 
Where several vessels or shares are sold for a lump sum, the ``net 
proceeds'' allocated to each vessel or share shall be determined in 
accordance with any reasonable rule satisfactory to the Commissioner of 
Internal Revenue. The taxpayer must deposit the full amount of each 
payment (including cash, notes, or other evidences of indebtedness) as a 
single deposit in the construction reserve fund. A payment divided 
between two or more depositories will be regarded as a single deposit. 
Amounts received by the taxpayer prior to the date of consummation of 
the sale of the vessel shall be considered as having been received by 
the taxpayer at the time the sale is consummated.
    (c) Purchase-money obligations. Where the proceeds from the sale of 
a vessel include purchase-money obligations, such obligations together 
with the entire collateral therefor, or, in the case of deposit of the 
proceeds of a share in the vessel, a proportionate part of the 
obligations and collateral as determined by the Administration, shall be 
deposited, with the remainder of the proceeds, in the construction 
reserve fund as a part of the ``net proceeds''. The depository shall 
receive payment of all amounts due on such purchase-money obligations 
and such amounts shall be placed in the fund in substitution for the 
portion of the obligations paid. All installments of purchase-money 
obligations shall be paid directly into the fund by the obligor. In the 
event any such installment is not so deposited, the Administration, at 
any time after the due date, may require the taxpayer to deposit an 
amount equal to such installment. If the taxpayer so desires, he may 
deposit in the construction reserve fund cash or approved securities in 
an amount equal to the face value of any purchase-money obligations in 
lieu of depositing such obligations.
    (d) Vessel subject to mortgage at time of sale or loss. Where a 
vessel is subject to a mortgage or other encumbrance at the time of its 
sale or loss and the taxpayer actually receives only an amount 
representing the equity therein or a share in such equity corresponding 
to his share in the vessel, he shall deposit in the construction reserve 
fund such amount and concurrently therewith other funds in an amount 
equal to the difference between the amount received and the ``net 
proceeds'' or ``net indemnity''. Such other funds may be in the form of 
cash, or, subject to the approval of the Administration, (1) interest-
bearing securities, or (2) an irrevocable and unconditional commitment 
to finance the construction or acquisition of a new vessel in whole or 
in part by an obligor approved by the Administration in an amount equal 
to the amount by which the ``net proceeds'' exceed the cash or 
securities deposited in the fund.
    (e) Unauthorized deposits. A deposit which is not provided for by 
section 511 of the Act shall, without unreasonable delay, be withdrawn 
from the fund and tax liability will be determined as though such 
deposit had not been made. (See Sec. Sec. 2.1-10 and 2.1-24.)



Sec. 2.1-14  Deposit of earnings and receipts.

    (a) Earnings. A citizen may deposit all or any part of earnings 
derived from the operation, within the scope of Sec. 2.1-

[[Page 16]]

3, of a vessel or vessels owned either by himself or any other person, 
if such earnings are intended for construction or acquisition of new 
vessels. Such earnings may include payments received by an owner, as 
compensation for use of his vessel, from other persons by whom it is so 
operated. Earnings from other sources may not be deposited. The earnings 
from operation of vessels which are eligible for deposit are the net 
earnings determined without regard to any deduction for depreciation, 
obsolescence, or amortization with respect to such vessels.
    (b) Receipts. Receipts from deposited funds, in the form of interest 
or otherwise, may be deposited.



Sec. 2.1-15  Time for making deposits.

    (a) Proceeds of sale or indemnification. Deposits of amounts 
representing proceeds of the sale or indemnification for loss of a 
vessel or share therein must be made within 60 days after receipt by the 
taxpayer.
    (b) Earnings and receipts. Earnings and receipts for the taxable 
year may be deposited at any time. (See Sec. 2.1-14.)



Sec. 2.1-16  Tax liability as to earnings deposited.

    Deposit in the construction reserve fund of earnings from the 
operation of a vessel or vessels, or receipts, in the form of interest 
or otherwise, with respect to amounts previously deposited does not 
exempt the taxpayer from tax liability with respect thereto nor postpone 
the time such earnings or receipts are includible in gross income. 
Earnings and receipts deposited in a construction reserve fund 
established in accordance with the provisions of section 511 of the Act 
and the regulations in this part will be deemed to have been accumulated 
for the reasonable needs of the business within the meaning of part 1 
(section 531 and following), Subchapter G, Chapter I of the Internal 
Revenue Code of 1954, so long as the requirements of section 511 of the 
Act and the regulations in this part are satisfied relative to the use 
of the fund in the construction, reconstruction, reconditioning, or 
acquisition of new vessels, or for the liquidation of purchase-money 
indebtedness on such vessels. For incurrence of tax liability due to 
noncompliance with the requirements of section 511 of the Act and the 
regulations in this part with respect to deposits in the construction 
reserve fund, see the provisions of Sec. 2.1-23.



Sec. 2.1-17  Basis of new vessel.

    The basis for determining gain or loss and for depreciation for the 
purpose of the Federal income tax with respect to a new vessel 
constructed, reconstructed, reconditioned, or acquired by the taxpayer, 
or with respect to which purchase-money indebtedness is liquidated as 
provided in section 511(g) of the Act, with funds deposited in the 
construction reserve fund, is reduced by the amount of the unrecognized 
gain represented in the funds allocated under the provisions of the 
regulations in this part to the cost of such vessel. (See Sec. 2.1-18.)



Sec. 2.1-18  Allocation of gain for tax purposes.

    (a) General rules of allocation. As provided in Sec. 2.1-17, if 
amounts on deposit in a construction reserve fund are expended, 
obligated, or withdrawn for construction, reconstruction, 
reconditioning, or acquisition of new vessels, or for the liquidation of 
purchase-money indebtedness of such vessels, the portion thereof which 
represents gain shall be applied in reduction of the basis of such new 
vessels. The rules set forth below in this paragraph shall apply in 
allocating the unrecognized gain to the amounts so expended, obligated, 
or withdrawn:
    (1) If the ``net proceeds'' of a sale or ``net indemnity'' in 
respect of a loss are deposited in more than one deposit, the portion 
thereof representing unrecognized gain shall be considered as having 
been deposited first.
    (2) Amounts expended, obligated, or withdrawn from the construction 
reserve fund shall be applied against amounts deposited in the order of 
deposit.
    (3) If any deposit consists in part of gain not recognized under 
section 511(c) of the Act, then any expenditure, obligation, or 
withdrawal applied against such deposit shall be considered to consist 
of gain in the same proportion that

[[Page 17]]

the part of the deposit which constitutes gain bears to the total amount 
of the deposit.
    (b) Date of obligation. The date funds are obligated under a 
contract for the construction, reconstruction, reconditioning, or 
acquisition of new vessels, or for the liquidation of purchase-money 
indebtedness on such vessels, rather than the date of payment from the 
fund, will determine the order of application against the deposits in 
the fund. When a contract for the construction, reconstruction, 
reconditioning, or acquisition of new vessels, or for the liquidation of 
purchase-money indebtedness on such vessels is entered into, amounts on 
deposit in the construction reserve fund will be deemed to be obligated 
to the extent of the amount of the taxpayer's liability under the 
contract. Deposits will be deemed to be so obligated in the order of 
deposit, each new contract obligating the earliest deposit not 
previously expended, obligated, or withdrawn. If the liability under the 
contract exceeds the amount in the construction reserve fund, the 
contract will be deemed to obligate, to the extent of that part of such 
excess not otherwise satisfied, the earliest deposit or deposits 
thereafter made.
    (c) Illustration. The foregoing rules are illustrated in the 
following example:

    Example. (1) A taxpayer who makes his returns on the calendar year 
basis sells a vessel in 1963 for $1,000,000, realizing a gain of 
$400,000. Payment of $100,000 is received in March 1963 when the 
contract is signed, and the balance of $900,000 is received in June 1963 
on delivery of the vessel. The $1,000,000 is deposited in a construction 
reserve fund in July 1963. In December 1963, the taxpayer also deposits 
$150,000, representing earnings of that year. In 1964, he sells another 
vessel for $1,000,000, realizing a gain of $250,000. The sale price of 
$1,000,000 is received on delivery of the vessel in February 1964, and 
deposited in the construction reserve fund in March 1964. In September 
1964, the taxpayer purchases for cash out of the construction reserve 
fund a new vessel for $1,750,000. To the cost of this vessel must be 
allocated the 1963 deposits of $1,150,000 and $600,000 of the March 1964 
deposit. This leaves in the fund $400,000 of the March 1964 deposit. The 
amount of the unrecognized gain to be applied against the basis of the 
new vessel is $550,000, computed as follows: Gain of $400,000 
represented in the 1963 deposits, plus the same proportion of the 
$250,000 gain represented in the March 1964 deposit ($1,000,000) which 
the amount ($600,000) allocated to the vessel is of the amount of the 
deposit, i.e., $400,000 plus 600,000/1,000,000 of $250,000 or $150,000, 
a total of $550,000. This reduces the basis of the new vessel to 
$1,200,000 ($l,750,000 less $550,000).
    (2) In 1965, the taxpayer sells a third vessel for $3,000,000, 
realizing a gain of $900,000. The $3,000,000 is received and deposited 
in the construction reserve fund in June 1965, making a total in the 
fund of $3,400,000. In December 1965, the taxpayer contracts for the 
construction of a second new vessel to cost a maximum of $3,200,000, 
thereby obligating that amount of the fund, and in June 1966, receives 
permission to withdraw the unobligated balance amounting to $200,000. To 
the cost of the second new vessel must be allocated the $400,000 balance 
of the March 1964 deposit and $2,800,000 of the June 1965 deposit. The 
unrecognized gain to be applied against the basis of such new vessel is 
that proportion of the gain represented in each deposit which the 
portion of the deposit allocated to the vessel bears to the amount of 
such deposit, i.e., 400,000/1,000,000 of $250,000, or $100,000 plus 
2,800,000/3,000,000 of $900,000, or $840,000 making a total of $940,000. 
The $200,000 withdrawal is applied against the June 1965 deposit and the 
portion thereof which represents gain will be recognized as income for 
1965, the year in which realized. The computation of the recognized gain 
is as follows: 200,000/3,000,000 of $900,000, or $60,000.



Sec. 2.1-19  Requirements as to new vessels.

    (a) Requirements. For the purposes of section 511 of the Act and the 
regulations in this part, the new vessel must be--
    (1) Documented under the laws of the United States when it is 
acquired by the taxpayer, or the taxpayer must agree that when acquired 
it will be documented under the laws of the United States;
    (2)(i) Constructed in the United States after December 31, 1939, or 
(ii) its construction has been financed under title V or title VII of 
the Act, or (iii) its construction has been aided by a mortgage insured 
under title XI of the Act; and
    (3) Either (i) of such type, size, and speed as the Administration 
determines to be suitable for use on the high seas or Great Lakes in 
carrying out the purposes of the Act, but of not less than 2,000 gross 
tons or of less speed than 12 knots, except that a particular vessel may 
be of lesser tonnage or

[[Page 18]]

speed if the Administration determines and certifies that the particular 
vessel is desirable for use by the United States in case of war or 
national emergency, or (ii) constructed to replace a vessel or vessels 
requisitioned or purchased by the United States, in which event it must 
be of such type, size, and speed as to constitute a suitable replacement 
for the vessel requisitioned or purchased, but if a vessel already built 
is acquired to replace a vessel or vessels requisitioned or purchased by 
the United States, such vessel must meet the requirements set forth in 
subdivision (i) of this subparagraph. Ordinarily, under subdivision (i) 
of this subparagraph, a vessel constructed more than five years before 
the date on which deposits in a construction reserve fund are to be 
expended or obligated for acquisition of such vessel will not be 
considered suitable for use in carrying out the purpose of the Act, 
except that the five-year age limitation provided above in this sentence 
shall not apply to a vessel to be reconstructed before being placed in 
operation by the taxpayer.
    (b) Time of construction. A vessel will be deemed to be constructed 
after December 31, 1939, only if construction was commenced after that 
date. Subject to the provisions of this section, a new vessel may be 
newly built for the taxpayer, or may be acquired after it is built.
    (c) Replacement of vessels. It is not necessary that vessels shall 
be replaced vessel for vessel. The new vessels may be more or less in 
number than the replaced vessels, provided the other requirements of 
this section are met.



Sec. 2.1-20  Obligation of deposits.

    (a) Time for obligation. Within three years from the date of any 
deposit in a construction reserve fund, unless extension is granted as 
provided in Sec. 2.1-22, such deposit must be obligated under a 
contract for the construction or acquisition of a new vessel or vessels 
(or in the discretion of the Administration for a share therein), with 
not less than 12\1/2\ percent of the construction or contract price of 
the entire vessel or vessels actually paid or irrevocably committed on 
account thereof or must be expended or obligated for the liquidation of 
existing or subsequently incurred purchase-money indebtedness to persons 
other than a parent company of, or a company affiliated or associated 
with, the mortgagor on a new vessel or vessels. Amounts on deposit in a 
construction reserve fund will be deemed to be obligated for expenditure 
when a binding contract of construction or acquisition has been entered 
into or when purchase-money indebtedness has been incurred and, if 
obligated under a contract of construction or acquisition, will be 
deemed to be irrevocably committed when due and payable in accordance 
with the terms of the contract of construction or acquisition.
    (b) Requirements for obligations. Unless otherwise authorized by the 
Administration, contracts for the construction of new vessels must be 
for a fixed price, or provide for a base price that may be adjusted for 
changes in labor and material costs not exceeding 15 percent of the base 
price. The fixed or base price, as the case may be, shall be fair and 
reasonable as determined by the Maritime Administration. Any financial 
or other interests between the taxpayer and the contractor shall be 
disclosed to the Administration by the taxpayer. Plans and 
specifications for the new vessel or vessels must be approved by the 
Administration to the extent it deems necessary. A deposit in a 
construction reserve fund may be expended or obligated for expenditure 
for procurement under an acquisition or construction contract of a part 
interest in a new vessel or vessels only after obtaining the written 
consent of the Administration. The granting of such consent shall be 
entirely in the discretion of the Administration and it may impose such 
conditions with respect thereto as it may deem necessary or advisable 
for the purpose of carrying out the provisions of section 511 of the 
Act. Applications for such consent shall be executed in triplicate, and, 
together with eight conformed copies thereof, filed with the 
Administration.



Sec. 2.1-21  Period for construction of certain vessels.

    A new vessel constructed otherwise than under the provisions of 
title V of the Act, and not purchased from the

[[Page 19]]

Administration must, within six months from the date of the construction 
contract, or within the period of any extension, be completed to the 
extent of not less than 5 percent as estimated by the Administration and 
certified by it to the Secretary of the Treasury. In case of a contract 
covering more than one vessel it will be sufficient if one of the 
vessels is 5 percent completed within the six months' period from the 
date of the contract or within the period of any extension, and so 
certified. All construction must be completed with reasonable dispatch 
as determined by the Administration. If, for causes within the control 
of the taxpayer, the entire construction is not completed with 
reasonable dispatch, the Administration will so certify to the Secretary 
of the Treasury. For the effect of such certification, see Sec. 2.1-23.



Sec. 2.1-22  Time extensions for expenditure or obligation.

    (a) Extensions. The Administration, upon application and a showing 
of proper circumstances, (1) may allow an extension of time within which 
deposits shall be expended or obligated, not to exceed one year, and 
upon a second application received before the expiration of the first 
extension, may allow an additional extension not to exceed one year, and 
(2) may allow an extension or extensions of time within which five 
percent of the construction shall have been completed as provided in 
Sec. 2.1-21 not to exceed one year in the aggregate, and (3) may allow 
any other extensions that may be provided by amendment to the Act.
    (b) Application required. A taxpayer seeking an extension of time 
shall make application therefor, and transmit it with an appropriate 
statement of the circumstances, including the reasons justifying the 
requested extension or extensions, and appropriate documents in 
substantiation of the statement, to the Administration. The 
Administration will notify the Commissioner of Internal Revenue of any 
extension granted. In case an application for extension is denied, the 
taxpayer will be liable for delay as though no application had been 
made.



Sec. 2.1-23  Noncompliance with requirements.

    (a) Noncompliance. The amount of the gain which is that portion of 
the construction reserve fund otherwise constituting taxable income 
under the law applicable to the taxable year in which such gain was 
realized shall be included in the taxpayer's gross income for such 
taxable year for income or excess-profits tax purposes, if--
    (1) A portion of such fund is withdrawn for purposes other than--
    (i) The construction, reconstruction, reconditioning, or acquisition 
of a new vessel; or
    (ii) The liquidation of existing or subsequently incurred purchase-
money indebtedness to persons other than a parent company of, or a 
company affiliated or associated with, the mortgagor on a new vessel or 
vessels; or
    (2) The taxpayer fails to comply with the requirements of section 
511 of the Act or the regulations in this part relating to the 
utilization of construction reserve funds in the construction, 
reconstruction, reconditioning, or acquisition of a new vessel, or the 
liquidation of purchase-money indebtedness on such a vessel.

If securities on deposit in a construction reserve fund are sold and the 
amount placed in the fund in lieu thereof is less than the value of the 
securities at the time of their deposit, the difference between such 
value and the amount placed in the fund in lieu of the securities will 
be deemed to have been withdrawn. With respect to the substitution of 
new financing in the case of an irrevocable commitment, see paragraph 
(d) of Sec. 2.1-13.
    (b) Amount recognized. In the event of noncompliance with the 
prescribed conditions relative to any contract for construction, 
reconstruction, reconditioning, or acquisition of new vessels, or for 
the liquidation of purchase-money indebtedness on such vessels, 
recognition will extend to the entire amount of the gain represented in 
that portion of the construction reserve fund obligated under such 
contract. Thus, if the Administration determines and certifies to the 
Secretary of the Treasury that for causes within the control of the 
taxpayer construction under a contract is not completed with

[[Page 20]]

reasonable dispatch, the entire amount of the gain represented in the 
portion of the construction reserve fund obligated under the contract 
will be recognized even though all other conditions have been satisfied. 
In case of noncompliance with the requirements of section 511 of the Act 
or the regulations in this part, see the provisions of Sec. 2.1-18 as 
to the allocation of gain.
    (c) Unreasonable accumulation. Noncompliance with the provisions of 
section 511 of the Act or the regulations in this part relative to the 
utilization of the deposited amounts may also, inasmuch as the provision 
of section 511(f) of the Act is then inapplicable, warrant an 
examination to ascertain whether such amounts constitute an unreasonable 
accumulation of earnings and profits within the meaning of Part I 
(section 531 and following), Subchapter G, Chapter I of the Internal 
Revenue Code of 1954, or corresponding provisions of prior law. If 
amounts are deposited and the fund maintained in good faith for the 
purpose of construction, reconstruction, reconditioning, and acquisition 
of new vessels, or for the liquidation of purchase-money indebtedness on 
such vessels, such amounts will be deemed to have been accumulated for 
the reasonable needs of the business.



Sec. 2.1-24  Extent of tax liability.

    (a) Declared value excess-profits tax. Gain which is includible in 
gross income under Sec. 2.1-23 shall be included in gross income for 
all income and excess-profits tax purposes, but not for the purposes of 
the declared value excess-profits tax and the capital stock tax as 
provided in section 511(i) of the Act. In lieu of any adjustment with 
respect to such declared value excess-profits tax, there is imposed for 
any taxable year ending on or before June 30, 1945, in which the gain is 
realized an additional tax of 1.1 percent of the amount of the gain. No 
additional capital stock tax liability is incurred.
    (b) Improper deposits. In the case of deposits in the construction 
reserve fund of amounts derived from sources other than those specified 
in section 511 of the Act, or in the case of failure to deposit an 
amount equal to the ``net proceeds'' or ``net indemnity'' within the 
period prescribed in section 511(c) of the Act and Sec. 2.1-15, the 
taxpayer obtains no suspension or postponement of any tax liability and 
the tax is collectible without regard to the provisions of section 
511(c) of the Act.
    (c) Time for filing claim subsequent to election under section 
511(c)(2). If an election is made under section 511(c)(2) of the Act and 
paragraph (a)(2) of Sec. 2.1-12, and if computation or recomputation in 
accordance therewith is otherwise allowable but is prevented, on the 
date of filing of notice of such election, or within six months 
thereafter, by any statute of limitation; such computation or 
recomputation nevertheless shall be made notwithstanding such statute if 
a claim therefor is filed within six months after the date of making 
such election. If as the result of such computation or recomputation an 
overpayment is disclosed a claim for refund should be made in accordance 
with Sec. 301.6402-3 within such six months' period. For other rules 
applicable to the filing of claims for credit or refund of an 
overpayment of tax, see Sec. 301.6402-2 of this chapter (Regulations on 
Procedure and Administration), relating to claims for credit or refund.

[T.D. 6820, 30 FR 6030, Apr. 29, 1965, as amended by T.D. 7410, 41 FR 
11020, Mar. 16, 1976]



Sec. 2.1-25  Assessment and collection of deficiencies.

    Any additional tax, including the 1.1 percent amount imposed by 
section 511(i) of the Act, due on account of withdrawal from a 
construction reserve fund, or failure to comply with section 511 of the 
Act or the regulations in this part, is collectible as a deficiency. 
Interest upon such deficiency will run from the date the withdrawal or 
noncompliance occurs. The amount of any deficiency, including interest 
and additions to the tax, determined as a result of such withdrawal or 
noncompliance, may be assessed, or a proceeding in court for the 
collection thereof may be begun without assessment, at any time and 
without regard to any period of limitations or any other provisions of 
law or rule of law, including the doctrine of res judicata.

[[Page 21]]



Sec. 2.1-26  Reports by taxpayers.

    (a) Information required. With each income tax return filed for a 
taxable year during any part of which a construction reserve fund is in 
existence the taxpayer shall submit a statement setting forth a detailed 
analysis of such fund. The statement, which need not be on any 
prescribed form, shall include the following information with respect to 
the construction reserve fund:
    (1) The actual balance in the fund at the beginning and end of the 
taxable year;
    (2) The date, amount, and source of each deposit during the taxable 
year;
    (3) If any deposit referred to in subparagraph (2) of this paragraph 
consists of proceeds from the sale, or indemnification of loss, of a 
vessel or share thereof, the amounts of the unrecognized gain;
    (4) The date, amount, and purpose of each expenditure or withdrawal 
from the fund; and
    (5) The date and amount of each contract, under which deposited 
funds are deemed to be obligated during the taxable year, for the 
construction, reconstruction, reconditioning, or acquisition of new 
vessels, or for the liquidation of purchase-money indebtedness on such 
vessels, and the identification of such vessels.
    (b) Records required. Taxpayers shall keep such records and make 
such additional reports as the Commissioner of Internal Revenue or the 
Administration may require.



Sec. 2.1-27  Controlled corporation.

    For the purpose of section 511 of the Act and the regulations in 
this part a new vessel is considered as constructed, reconstructed, 
reconditioned, or acquired by the taxpayer if constructed, 
reconstructed, reconditioned, or acquired by a corporation at a time 
when the taxpayer owns not less than 95 percent of the total number of 
shares of each class of stock of the corporation.



Sec. 2.1-28  Administrative jurisdiction.

    Sections 2.1-3 to 2.1-11, inclusive, Sec. Sec. 2.1-13 to 2.1-15, 
inclusive, and Sec. Sec. 2.1-19 to 2.1-22, inclusive, deal primarily 
with matters under the jurisdiction of the Administration. Sections 2.1-
12, 2.1-16 to 2.1-18, inclusive, and Sec. Sec. 2.1-23 to 2.1-27, 
inclusive, deal primarily with matters under the jurisdiction of the 
Commissioner of Internal Revenue. Generally, matters relating to the 
establishment, maintenance, expenditure, and use of construction reserve 
funds and the construction, reconstruction, reconditioning, or 
acquisition of new vessels are under the jurisdiction of the 
Administration; and matters relating to the determination, assessment, 
and collection of taxes are under the jurisdiction of the Commissioner 
of Internal Revenue. Correspondence should be addressed to the 
particular authority having jurisdiction in the matter.



PART 3_CAPITAL CONSTRUCTION FUND--Table of Contents



Sec.
3.0 Statutory provisions; section 607, Merchant Marine Act, 1936, as 
          amended.
3.1 Scope of section 607 of the Act and the regulations in this part.
3.2 Ceiling on deposits.
3.3 Nontaxability of deposits.
3.4 Establishment of accounts.
3.5 Qualified withdrawals.
3.6 Tax treatment of qualified withdrawals.
3.7 Tax treatment of nonqualified withdrawals.
3.8 Certain corporate reorganizations and changes in partnerships, and 
          certain transfers on death. [Reserved]
3.9 Consolidated returns. [Reserved]
3.10 Transitional rules for existing funds.
3.11 Definitions.

    Authority: Sec. 21(a) of the Merchant Marine Act of 1970 (84 Stat. 
1026); sec. 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 26 
U.S.C. 7805).

    Source: T.D. 7398, 41 FR 5812, Feb. 10, 1976, unless otherwise 
noted.



Sec. 3.0  Statutory provisions; section 607, Merchant Marine Act, 1936,
as amended.

    Sec. 607 (a) Agreement Rules.
    Any citizen of the United States owning or leasing one or more 
eligible vessels (as defined in subsection (k)(1)) may enter into an 
agreement with the Secretary of Commerce under, and as provided in, this 
section to establish a capital construction fund (hereinafter in this 
section referred to as the ``fund'') with respect to any or all of such 
vessels. Any agreement entered into under this section shall be for the 
purpose of providing replacement vessels, additional vessels, or 
reconstructed vessels, built in the

[[Page 22]]

United States and documented under the laws of the United States for 
operation in the United States, foreign, Great Lakes, or noncontiguous 
domestic trade or in the fisheries of the United States and shall 
provide for the deposit in the fund of the amounts agreed upon as 
necessary or appropriate to provide for qualified withdrawals under 
subsection (f). The deposits in the fund, and all withdrawals from the 
fund, whether qualified or nonqualified, shall be subject to such 
conditions and requirements as the Secretary of Commerce may by 
regulations prescribe or are set forth in such agreement; except that 
the Secretary of Commerce may not require any person to deposit in the 
fund for any taxable year more than 50 percent of that portion of such 
person's taxable income for such year (computed in the manner provided 
in subsection (b)(1)(A)) which is attributable to the operation of the 
agreement vessels.
    (b) Ceiling on Deposits.
    (1) The amount deposited under subsection (a) in the fund for any 
taxable year shall not exceed the sum of:
    (A) That portion of the taxable income of the owner or lessee for 
such year (computed as provided in chapter 1 of the Internal Revenue 
Code of 1954 but without regard to the carryback of any net operating 
loss or net capital loss and without regard to this section) which is 
attributable to the operation of the agreement vessels in the foreign or 
domestic commerce of the United States or in the fisheries of the United 
States,
    (B) The amount allowable as a deduction under section 167 of the 
Internal Revenue Code of 1954 for such year with respect to the 
agreement vessels,
    (C) If the transaction is not taken into account for purposes of 
subparagraph (A), the net proceeds (as defined in joint regulations) 
from (i) the sale or other disposition of any agreement vessel, or (ii) 
insurance or indemnity attributable to any agreement vessel, and
    (D) The receipts from the investment or reinvestment of amounts held 
in such fund.
    (2) In the case of a lessee, the maximum amount which may be 
deposited with respect to an agreement vessel by reason of paragraph 
(1)(B) for any period shall be reduced by any amount which, under an 
agreement entered into under this section, the owner is required or 
permitted to deposit for such period with respect to such vessel by 
reason of paragraph (1)(B).
    (3) For purposes of paragraph (1), the term ``agreement vessel'' 
includes barges and containers which are part of the complement of such 
vessel and which are provided for in the agreement.
    (c) Requirements as to Investments.
    Amounts in any fund established under this section shall be kept in 
the depository or depositories specified in the agreement and shall be 
subject to such trustee and other fiduciary requirements as may be 
specified by the Secretary of Commerce. They may be invested only in 
interest-bearing securities approved by the Secretary of Commerce; 
except that, if the Secretary of Commerce consents thereto, an agreed 
percentage (not in excess of 60 percent) of the assets of the fund may 
be invested in the stock of domestic corporations. Such stock must be 
currently fully listed and registered on an exchange registered with the 
Securities and Exchange Commission as a national securities exchange, 
and must be stock which would be acquired by prudent men of discretion 
and intelligence in such matters who are seeking a reasonable income and 
the preservation of their capital. If at any time the fair market value 
of the stock in the fund is more than the agreed percentage of the 
assets in the fund, any subsequent investment of amounts deposited in 
the fund, and any subsequent withdrawal from the fund, shall be made in 
such a way as to tend to restore the fund to a situation in which the 
fair market value of the stock does not exceed such agreed percentage. 
For purposes of this subsection, if the common stock of a corporation 
meets the requirements of this subsection and if the preferred stock of 
such corporation would meet such requirements but for the fact that it 
cannot be listed and registered as required because it is nonvoting 
stock, such preferred stock shall be treated as meeting the requirements 
of this subsection.
    (d) Nontaxability for Deposits.
    (1) For purposes of the Internal Revenue Code of 1954--
    (A) Taxable income (determined without regard to this section) for 
the taxable year shall be reduced by an amount equal to the amount 
deposited for the taxable year out of amounts referred to in subsection 
(b)(1)(A),
    (B) Gain from a transaction referred to in subsection (b)(1)(C) 
shall not be taken into account if an amount equal to the net proceeds 
(as defined in joint regulations) from such transaction is deposited in 
the fund,
    (C) The earnings (including gains and losses) from the investment 
and reinvestment of amounts held in the fund shall not be taken into 
account,
    (D) The earnings and profits of any corporation (within the meaning 
of section 316 of such Code) shall be determined without regard to this 
section, and
    (E) In applying the tax imposed by section 531 of such Code 
(relating to the accumulated earnings tax), amounts while held in the 
fund shall not be taken into account.
    (2) Paragraph (1) shall apply with respect to any amount only if 
such amount is deposited in the fund pursuant to the agreement and not 
later than the time provided in joint regulations.
    (e) Establishment of Accounts.
    For purposes of this section--

[[Page 23]]

    (1) Within the fund established pursuant to this section three 
accounts shall be maintained:
    (A) The capital account,
    (B) The capital gain account, and
    (C) The ordinary income account.
    (2) The capital account shall consist of--
    (A) Amounts referred to in subsection (b)(1)(B),
    (B) Amounts referred to in subsection (b)(1)(C) other than that 
portion thereof which represents gain not taken into account by reason 
of subsection (d)(1)(B),
    (C) 85 percent of any dividend received by the fund with respect to 
which the person maintaining the fund would (but for subsection 
(d)(1)(C)) be allowed a deduction under section 243 of the Internal 
Revenue Code of 1954, and
    (D) Interest income exempt from taxation under section 103 of such 
Code.
    (3) The capital gain account shall consist of--
    (A) Amounts representing capital gains on assets held for more than 
6 months and referred to in subsection (b)(1)(C) or (b)(1)(D), reduced 
by--
    (B) Amounts representing capital losses on assets held in the fund 
for more than 6 months.
    (4) The ordinary income account shall consist of--
    (A) Amounts referred to in subsection (b)(1)(A),
    (B)(i) Amounts representing capital gains on assets held for 6 
months or less and referred to in subsection (b)(1)(C) or (b)(1)(D), 
reduced by--
    (ii) Amounts representing capital losses on assets held in the fund 
for 6 months or less,
    (C) Interest (not including any tax-exempt interest referred to in 
paragraph (2)(D)) and other ordinary income (not including any dividend 
referred to in subparagraph (E)) received on assets held in the fund,
    (D) Ordinary income from a transaction described in subsection 
(b)(1)(C), and
    (E) 15 percent of any dividend referred to in paragraph (2)(C).
    (5) Except on termination of a fund, capital losses referred to in 
paragraph (3)(B) or in paragraph (4)(B)(ii) shall be allowed only as an 
offset to gains referred to in paragraph (3)(A) or (4)(B)(i), 
respectively.
    (f) Purposes of Qualified Withdrawals.
    (1) A qualified withdrawal from the fund is one made in accordance 
with the terms of the agreement but only if it is for:
    (A) The acquisition, construction, or reconstruction of a qualified 
vessel,
    (B) The acquisition, construction, or reconstruction of barges and 
containers which are part of the complement of a qualified vessel, or
    (C) The payment of the principal on indebtedness incurred in 
connection with the acquisition, construction, or reconstruction of a 
qualified vessel or a barge or container which is part of the complement 
of a qualified vessel.

Except to the extent provided in regulations prescribed by the Secretary 
of Commerce, subparagraph (B), and so much of subparagraph (C) as 
relates only to barges and containers, shall apply only with respect to 
barges and containers constructed in the United States.
    (2) Under joint regulations, if the Secretary of Commerce determines 
that any substantial obligation under any agreement is not being 
fulfilled, he may, after notice and opportunity for hearing to the 
person maintaining the fund, treat the entire fund or any portion 
thereof as an amount withdrawn from the fund in a nonqualified 
withdrawal.
    (g) Tax Treatment of Qualified Withdrawals.
    (1) Any qualified withdrawal from a fund shall be treated--
    (A) First as made out of the capital account,
    (B) Second as made out of the capital gain account, and
    (C) Third as made out of the ordinary income account.
    (2) If any portion of a qualified withdrawal for a vessel, barge, or 
container is made out of the ordinary income account, the basis of such 
vessel, barge, or container shall be reduced by an amount equal to such 
portion.
    (3) If any portion of a qualified withdrawal for a vessel, barge, or 
container is made out of the capital gain account, the basis of such 
vessel, barge, or container shall be reduced by an amount equal to--
    (A) Five-eighths of such portion, in the case of a corporation 
(other than an electing small business corporation, as defined in 
section 1371 of the Internal Revenue Code of 1954), or
    (B) One-half of such portion, in the case of any other person.
    (4) If any portion of a qualified withdrawal to pay the principal on 
any indebtedness is made out of the ordinary income account or the 
capital gain account, then an amount equal to the aggregate reduction 
which would be required by paragraphs (2) and (3) if this were a 
qualified withdrawal for a purpose described in such paragraphs shall be 
applied, in the order provided in joint regulations, to reduce the basis 
of vessels, barges, and containers owned by the person maintaining the 
fund. Any amount of a withdrawal remaining after the application of the 
preceding sentence shall be treated as a nonqualified withdrawal.
    (5) If any property the basis of which was reduced under paragraph 
(2), (3), or (4) is disposed of, any gain realized on such disposition, 
to the extent it does not exceed the aggregate reduction in the basis of 
such property under such paragraphs, shall be treated

[[Page 24]]

as an amount referred to in subsection (h)(3)(A) which was withdrawn on 
the date of such disposition. Subject to such conditions and 
requirements as may be provided in joint regulations, the preceding 
sentence shall not apply to a disposition where there is a redeposit in 
an amount determined under joint regulations which will, insofar as 
practicable, restore the fund to the position it was in before the 
withdrawal.
    (h) Tax Treatment of Nonqualified Withdrawals.
    (1) Except as provided in subsection (i), any withdrawal from a fund 
which is not a qualified withdrawal shall be treated as a nonqualified 
withdrawal.
    (2) Any nonqualified withdrawal from a fund shall be treated--
    (A) First as made out of the ordinary income account,
    (B) Second as made out of the capital gain account, and
    (C) Third as made out of the capital account.

For purposes of this section, items withdrawn from any account shall be 
treated as withdrawn on a first-in-first-out basis; except that (i) any 
nonqualified withdrawal for research, development, and design expenses 
incident to new and advanced ship design, machinery and equipment, and 
(ii) any amount treated as a nonqualified withdrawal under the second 
sentence of subsection (g)(4), shall be treated as withdrawn on a last-
in-first-out basis.
    (3) For purposes of the Internal Revenue Code of 1954--
    (A) Any amount referred to in paragraph (2)(A) shall be included in 
income as an item of ordinary income for the taxable year in which the 
withdrawal is made.
    (B) Any amount referred to in paragraph (2)(B) shall be included in 
income for the taxable year in which the withdrawal is made as an item 
of gain realized during such year from the disposition of an asset held 
for more than 6 months, and
    (C) For the period on or before the last date prescribed for payment 
of tax for the taxable year in which this withdrawal is made--
    (i) No interest shall be payable under section 6601 of such Code and 
no addition to the tax shall be payable under section 6651 of such Code,
    (ii) Interest on the amount of the additional tax attributable to 
any item referred to in subparagraph (A) or (B) shall be paid at the 
applicable rate (as defined in paragraph (4)) from the last date 
prescribed for payment of the tax for the taxable year for which such 
item was deposited in the fund, and
    (iii) No interest shall be payable on amounts referred to in clauses 
(i) and (ii) of paragraph (2) or in the case of any nonqualified 
withdrawal arising from the application of the recapture provision of 
section 606(5) of the Merchant Marine Act of 1936 as in effect on 
December 31, 1969.
    (4) For purposes of paragraph (3)(C)(ii), the applicable rate of 
interest for any nonqualified withdrawal--
    (A) Made in a taxable year beginning in 1970 or 1971 is 8 percent, 
or
    (B) Made in a taxable year beginning after 1971, shall be determined 
and published jointly by the Secretary of the Treasury and the Secretary 
of Commerce and shall bear a relationship to 8 percent which the 
Secretaries determine under joint regulations to be comparable to the 
relationship which the money rates and investment yields for the 
calendar year immediately preceding the beginning of the taxable year 
bear to the money rates and investment yields for the calendar year 
1970.
    (i) Certain Corporate Reorganizations and Changes in Partnerships.
    Under joint regulations--
    (1) A transfer of a fund from one person to another person in a 
transaction to which section 381 of the Internal Revenue Code of 1954 
applies may be treated as if such transaction did not constitute a 
nonqualified withdrawal, and
    (2) A similar rule shall be applied in the case of a continuation of 
a partnership (within the meaning of subchapter K of such Code).
    (j) Treatment of Existing Funds.
    (1) Any person who was maintaining a fund or funds (hereinafter in 
this subsection referred to as ``old fund'') under this section (as in 
effect before the enactment of this subsection) may elect to continue 
such old fund but--
    (A) May not hold moneys in the old fund beyond the expiration date 
provided in the agreement under which such old fund is maintained 
(determined without regard to any extension or renewal entered into 
after April 14, 1970),
    (B) May not simultaneously maintain such old fund and a new fund 
established under this section, and
    (C) If he enters into an agreement under this section to establish a 
new fund, may agree to the extension of such agreement to some or all of 
the amounts in the old fund.
    (2) In the case of any extension of an agreement pursuant to 
paragraph (1)(C), each item in the old fund to be transferred shall be 
transferred in a nontaxable transaction to the appropriate account in 
the new fund established under this section. For purposes of subsection 
(h)(3)(C), the date of the deposit of any item so transferred shall be 
July 1, 1971, or the date of the deposit in the old fund, whichever is 
the later.
    (k) Definitions.
    For purposes of this section--
    (1) The term ``eligible vessel'' means any vessel--

[[Page 25]]

    (A) Constructed in the United States and, if reconstructed, 
reconstructed in the United States,
    (B) Documented under the laws of the United States, and
    (C) Operated in the foreign or domestic commerce of the United 
States or in the fisheries of the United States.

Any vessel which (i) was constructed outside of the United States but 
documented under the laws of the United States on April 15, 1970, or 
(ii) constructed outside the United States for use in the United States 
foreign trade pursuant to a contract entered into before April 15, 1970, 
shall be treated as satisfying the requirements of subparagraph (A) of 
this paragraph and the requirements of subparagraph (A) of paragraph 
(2).
    (2) The term ``qualified vessel'' means any vessel--
    (A) Constructed in the United States and, if reconstructed, 
reconstructed in the United States,
    (B) Documented under the laws of the United States, and
    (C) Which the person maintaining the fund agrees with the Secretary 
of Commerce will be operated in the United States foreign, Great Lakes, 
or noncontiguous domestic trade or in the fisheries of the United 
States.
    (3) The term ``agreement vessel'' means any eligible vessel or 
qualified vessel which is subject to an agreement entered into under 
this section.
    (4) The term ``United States,'' when used in a geographical sense, 
means the continental United States including Alaska, Hawaii, and Puerto 
Rico.
    (5) The term ``United States foreign trade'' includes (but is not 
limited to) those areas in domestic trade in which a vessel built with 
construction-differential subsidy is permitted to operate under the 
first sentence of section 506 of this Act.
    (6) The term ``joint regulations'' means regulations prescribed 
under subsection (1).
    (7) The term ``vessel'' includes cargo handling equipment which the 
Secretary of Commerce determines is intended for use primarily on the 
vessel. The term ``vessel'' also includes an ocean-going towing vessel 
or an ocean-going barge or comparable towing vessel or barge operated on 
the Great Lakes.
    (8) The term ``noncontiguous trade'' means (i) trade between the 
contiguous forty-eight States on the one hand and Alaska, Hawaii, Puerto 
Rico, and the insular territories and possessions of the United States 
on the other hand, and (ii) trade from any point in Alaska, Hawaii, 
Puerto Rico, and such territories and possessions to any other point in 
Alaska, Hawaii, Puerto Rico, and such territories and possessions.
    (l) Records; Reports; Changes in Regulations.
    Each person maintaining a fund under this section shall keep such 
records and shall make such reports as the Secretary of Commerce or the 
Secretary of the Treasury shall require. The Secretary of the Treasury 
and the Secretary of Commerce shall jointly prescribe all rules and 
regulations, not inconsistent with the foregoing provisions of this 
section, as may be necessary or appropriate to the determination of tax 
liability under this section. If, after an agreement has been entered 
into under this section, a change is made either in the joint 
regulations or in the regulations prescribed by the Secretary of 
Commerce under this section which could have a substantial effect on the 
rights or obligations of any person maintaining a fund under this 
section, such person may terminate such agreement.



Sec. 3.1  Scope of section 607 of the Act and the regulations in this
part.

    (a) In general. The regulations prescribed in this part provide 
rules for determining the income tax liability of any person a party to 
an agreement with the Secretary of Commerce establishing a capital 
construction fund (for purposes of this part referred to as the 
``fund'') authorized by section 607 of the Merchant Marine Act, 1936, as 
amended (for purposes of this part referred to as the ``Act''). With 
respect to such parties, section 607 of the Act in general provides for 
the nontaxability of certain deposits of money or other property into 
the fund out of earnings or gains realized from the operation of vessels 
covered in an agreement, gains realized from the sale or other 
disposition of agreement vessels or proceeds from insurance for 
indemnification for loss of agreement vessels, earnings from the 
investment or reinvestment of amounts held in a fund, and gains with 
respect to amounts or deposits in the fund. Transitional rules are also 
provided for the treatment of ``old funds'' existing on or before the 
effective date of the Merchant Marine Act of 1970 (see Sec. 3.10).
    (b) Cross references. For rules relating to eligibility for a fund, 
deposits, and withdrawals and other aspects, see the regulations 
prescribed by the Secretary of Commerce in titles 46 (Merchant Marine) 
and 50 (Fisheries) of the Code of Federal Regulations.
    (c) Code. For purposes of this part, the term ``Code'' means the 
Internal Revenue Code of 1954, as amended.

[[Page 26]]



Sec. 3.2  Ceiling on deposits.

    (a) In general--(1) Total ceiling. Section 607(b) of the Act 
provides a ceiling on the amount which may be deposited by a party for a 
taxable year pursuant to an agreement. The amount which a party may 
deposit into a fund may not exceed the sum of the following subceilings:
    (i) The lower of (a) the taxable income (if any) of the party for 
such year (computed as provided in Chapter I of the Code but without 
regard to the carryback of any net operating loss or net capital loss 
and without regard to section 607 of the Act) or (b) taxable income (if 
any) of such party for such year attributable under paragraph (b) of 
this section to the operation of agreement vessels (as defined in 
paragraph (f) of this section) in the foreign or domestic commerce of 
the United States or in the fisheries of the United States (see section 
607(b)(1)(A) of the Act).
    (ii) Amounts allowable as a deduction under section 167 of the Code 
for such year with respect to the agreement vessels (see section 
607(b)(1)(B) of the Act),
    (iii) The net proceeds (if not included in subdivision (i) of this 
paragraph) from (a) the sale or other disposition of any agreement 
vessels or (b) insurance or indemnity attributable to any agreement 
vessels (see section 607(b)(1)(C) of the Act and paragraph (c) of this 
section), and
    (iv) Earnings and gains from the investment or reinvestment of 
amounts held in such fund (see section 607(b)(1)(D) of the Act and 
paragraphs (d) and (g) of this section).
    (2) Overdeposits. (i) If for any taxable year an amount is deposited 
into the fund under a subceiling computed under subparagraph (1) of this 
paragraph which is in excess of the amount of such subceiling for such 
year, then at the party's option such excess (or any portion thereof) 
may--
    (a) Be treated as a deposit into the fund for that taxable year 
under another available subceiling, or
    (b) Be treated as not having been deposited for the taxable year and 
thus, at the party's option, may be disposed of either by it being--
    (1) Treated as a deposit into the fund under any subceiling 
available in the first subsequent taxable year in which a subceiling is 
available, in which case such amount shall be deemed to have been 
deposited on the first day of such subsequent taxable year, or
    (2) Repaid to the party from the fund.
    (ii)(a) When a correction is made for an overdeposit, proper 
adjustment shall be made with respect to all items for all taxable years 
affected by the overdeposit, such as, for example, amounts in each 
account described in Sec. 3.4, treatment of nonqualified withdrawals, 
the consequences of qualified withdrawals and the treatment of losses 
realized or treated as realized by the fund. Thus, for example, if the 
party chooses to have the fund repay to him the amount of an 
overdeposit, amounts in each account, basis of assets, and any affected 
item will be determined as though no deposit and repayment had been 
made. Accordingly, in such a case, if there are insufficient amounts in 
an account to cover a repayment of an overdeposit (as determined before 
correcting the overdeposit), and the party had applied the proceeds of a 
qualified withdrawal from such account towards the purchase of a 
qualified vessel (within the meaning of Sec. 3.11(a)(2)), then such 
account and the basis of the vessel shall be adjusted as of the time 
such withdrawal was made and proceeds were applied, and repayment shall 
be made from such account as adjusted. If a party chooses to treat the 
amount of an overdeposit as a deposit under a subceiling for a 
subsequent year, similar adjustments to affected items shall be made. If 
the amount of a withdrawal would have exceeded the amount in the fund 
(determined after adjusting all affected amounts by reason of correcting 
the overdeposit), the withdrawal to the extent of such excess shall be 
treated as a repayment made at the time the withdrawal was made.
    (b) If the accounts (as defined in Sec. 3.4) that were increased by 
reason of excessive deposits contain sufficient amounts at the time the 
overdeposit is discovered to repay the party, the party may, at his 
option, demand repayment of such excessive deposits from such accounts 
in lieu of making

[[Page 27]]

the adjustments required by (a) of this subdivision (ii).
    (iii) During the period beginning with the day after the date an 
overdeposit was actually made and ending with the date it was disposed 
of in accordance with subdivision (i)(b) of this subparagraph, there 
shall be included in the party's gross income for each taxable year the 
earnings attributed to any amount of overdeposit on hand during such a 
year. The earnings attributable to any amount of overdeposit on hand 
during a taxable year shall be an amount equal to the product of--
    (a) The average daily earnings for each one dollar in the fund (as 
determined in subdivision (iv) of this subparagraph),
    (b) The amount of overdeposit (as determined in subdivision (vi) of 
this subparagraph), and
    (c) The number of days during the taxable year the overdeposit 
existed.
    (iv) For purposes of subdivision (iii)(a) of this subparagraph, the 
average daily earnings for each dollar in the fund shall be determined 
by dividing the total earnings of the fund for the taxable year by the 
sum of the products of--
    (a) Any amount on hand during the taxable year (determined under 
subdivision (v) of this subparagraph), and
    (b) The number of days during the taxable year such amount was on 
hand in the fund.
    (v) For purposes of this subparagraph--
    (a) An amount on hand in the fund or an overdeposit shall not be 
treated as on hand on the day deposited but shall be treated as on hand 
on the day withdrawn, and
    (b) The fair market value of such amounts on hand for purposes of 
this subparagraph shall be determined as provided in Sec. 20.2031-2 of 
the Estate Tax Regulations of this chapter but without applying the 
blockage and other special rules contained in paragraph (e) thereof.
    (vi) For purposes of subdivision (iii)(b) of this subparagraph, the 
amount of overdeposit on hand at any time is an amount equal to--
    (a) The amount deposited into the fund under a subceiling computed 
under subparagraph (1) of this paragraph which is in excess of the 
amount of such subceiling, less
    (b) The sum of--
    (1) Amounts described in (a) of this subdivision (vi) treated as a 
deposit under another subceiling for the taxable year pursuant to 
subdivision (i) of this subparagraph,
    (2) Amounts described in (a) of this subdivision (vi) disposed of 
(or treated as disposed of) in accordance with subdivision (i) or (ii) 
of this subparagraph prior to such time.
    (vii) To the extent earnings attributed under subdivision (iii) of 
this subparagraph represent a deposit for any taxable year in excess of 
the subceiling described in subparagraph (1)(iv) of this paragraph for 
receipts from the investment or reinvestment of amounts held in the 
fund, such attributed earnings shall be subject to the rules of this 
subparagraph for overdeposits.
    (3) Underdeposit caused by audit adjustment. [Reserved]
    (4) Requirements for deficiency deposits. [Reserved]
    (b) Taxable income attributable to the operation of an agreement 
vessel--(1) In general. For purposes of this section, taxable income 
attributable to the operation of an agreement vessel means the amount, 
if any, by which the gross income of a party for the taxable year from 
the operation of an agreement vessel (as defined in paragraph (f) of 
this section) exceeds the allowable deductions allocable to such 
operation (as determined under subparagraph (3) of this paragraph). The 
term ``taxable income attributable to the operation of the agreement 
vessels'' means the sum of the amounts described in the preceding 
sentence separately computed with respect to each agreement vessel (or 
share therein) or, at the party's option, computed in the aggregate.
    (2) Gross income. (i) Gross income from the operation of agreement 
vessels means the sum of the revenues which are derived during the 
taxable year from the following:
    (a) Revenues derived from the transportation of passengers, freight, 
or mail in such vessels, including amounts from contracts for the 
charter of such vessels to others, from operating differential 
subsidies, from collections in accordance with pooling

[[Page 28]]

agreements and from insurance or indemnity net proceeds relating to the 
loss of income attributable to such agreement vessels.
    (b) Revenues derived from the operation of agreement vessels 
relating to commercial fishing activities, including the transportation 
of fish, support activities for fishing vessels, charters for commercial 
fishing, and insurance or indemnity net proceeds relating to the loss of 
income attributable to such agreement vessels.
    (c) Revenues from the rental, lease, or use by others of terminal 
facilities, revenues from cargo handling operations and tug and lighter 
operations, and revenues from other services or operations which are 
incidental and directly related to the operation of an agreement vessel. 
Thus, for example, agency fees, commissions, and brokerage fees derived 
by the party at his place of business for effecting transactions for 
services incidental and directly related to shipping for the accounts of 
other persons are includible in gross income from the operation of 
agreement vessels where the transaction is of a kind customarily 
consummated by the party for his own account at such place of business.
    (d) Dividends, interest, and gains derived from assets set aside and 
reasonably retained to meet regularly occurring obligations relating to 
the shipping or fishing business directly connected with the agreement 
vessel which obligations cannot at all times be met from the current 
revenues of the business because of layups or repairs, special surveys, 
fluctuations in the business, and reasonably foreseeable strikes 
(whether or not a strike actually occurs), and security amounts retained 
by reason of participation in conferences, pooling agreements, or 
similar agreements.
    (ii) The items of gross income described in subdivision (i) (c) and 
(d) of this subparagraph shall be considered to be derived from the 
operations of a particular agreement vessel in the same proportion that 
the sum of the items of gross income described in subdivision (i) (a) 
and (b) of this subparagraph which are derived from the operations of 
such agreement vessel bears to the party's total gross income for the 
taxable year from operations described in subdivision (i) (a) and (b) of 
this subparagraph.
    (iii) In the case of a party who uses his own or leased agreement 
vessels to transport his own products, the gross income attributable to 
such vessel operations is an amount determined to be an arm's length 
charge for such transportation. The arm's length charge shall be 
determined by applying the principles of section 482 of the Code and the 
regulations thereunder as if the party transporting the product and the 
owner of the product were not the same person but were controlled 
taxpayers within the meaning of Sec. 1.482-1(a)(4) of the Income Tax 
Regulations of this chapter. Gross income attributable to the operation 
of agreement vessels does not include amounts for which the party is 
allowed a deduction for percentage depletion under sections 611 and 613 
of the Code.
    (3) Deductions. From the gross income attributable to the operation 
of an agreement vessel or vessels as determined under subparagraph (2) 
of this paragraph, there shall be deducted, in accordance with the 
principles of Sec. 1.861-8 of the Income Tax Regulations of this 
chapter, the expenses, losses, and other deductions definitely related 
and therefore allocated and apportioned thereto and a ratable part of 
any expenses, losses, or other deductions which are not definitely 
related to any gross income of the party. Thus, for example, if a party 
has gross income attributable to the operation of an agreement vessel 
and other gross income and has a particular deduction definitely related 
to both types of gross income, such deduction must be apportioned 
between the two types of gross income on a reasonable basis in 
determining the taxable income attributable to the operation of the 
agreement vessel.
    (4) Net operating and capital loss deductions. The taxable income of 
a party attributable to the operation of agreement vessels shall be 
computed without regard to the carryback of any net operating loss 
deduction allowed by section 172 of the Code, the carryback of any net 
capital loss deduction allowed by sections 165(f) of the Code, or

[[Page 29]]

any reduction in taxable income allowed by section 607 of the Act.
    (5) Method of accounting. Taxable income must be computed under the 
method of accounting which the party uses for Federal income tax 
purposes. Such method may include a method of reporting whereby items of 
revenue and expense properly allocable to voyages in progress at the end 
of any accounting period are eliminated from the computation of taxable 
income for such accounting period and taken into account in the 
accounting period in which the voyage is completed.
    (c) Net proceeds from transactions with respect to agreement 
vessels. [Reserved]
    (d) Earnings and gains from the investment or reinvestment of 
amounts held in a fund--(1) In general. (i) Earnings and gains received 
or accrued by a party from the investment or reinvestment of assets in a 
fund is the total amount of any interest or dividends received or 
accrued, and gains realized, by the party with respect to assets 
deposited in, or purchased with amounts deposited in, such fund. Such 
earnings and gains are therefore required to be included in the gross 
income of the party unless such amount, or a portion thereof, is not 
taken into account under section 607(d)(1)(C) of the Act and Sec. 
3.3(b)(2)(ii) by reason of a deposit or deemed deposit into the fund. 
For rules relating to receipts from the sale or other disposition of 
nonmoney deposits into the fund, see paragraph (g) of this section.
    (ii) Earnings received or accrued by a party from investment or 
reinvestment of assets in a fund include the ratable monthly portion of 
original issue discount included in gross income pursuant to section 
1232(a)(3) of the Code. Such ratable monthly portion shall be deemed to 
be deposited into the ordinary income account of the fund, but an actual 
deposit representing such ratable monthly portion shall not be made. For 
basis of bond or other evidence of indebtedness issued at a discount, 
see Sec. 3.3(b)(2)(ii)(b).
    (2) Gain realized. (i) The gain realized with respect to assets in 
the fund is the excess of the amount realized (as defined in section 
1001(b) of the Code and the regulations thereunder) by the fund on the 
sale or other disposition of a fund asset over its adjusted basis (as 
defined in section 1011 of the Code) to the fund. For the adjusted basis 
of nonmoney deposits, see paragraph (g) of this section.
    (ii) Property purchased by the fund (including property considered 
under paragraph (g)(1)(iii) of this section as purchased by the fund) 
which is withdrawn from the fund in a qualified withdrawal (as defined 
in Sec. 3.5) is treated as a disposition to which subdivision (i) of 
this subparagraph applies. For purposes of determining the amount by 
which the balance within a particular account will be reduced in the 
manner provided in Sec. 3.6(b) (relating to order of application of 
qualified withdrawals against accounts) and for purposes of determining 
the reduction in basis of a vessel, barge, or container (or share 
therein) pursuant to Sec. 3.6(c), the value of the property is its fair 
market value on the day of the qualified withdrawal.
    (3) Holding period. Except as provided in paragraph (g) of this 
section, the holding period of fund assets shall be determined under 
section 1223 of the Code.
    (e) Leased vessels. In the case of a party who is a lessee of an 
agreement vessel, the maximum amount which such lessee may deposit with 
respect to any agreement vessel by reason of section 607(b)(1)(B) of the 
Act and paragraph (a)(1)(ii) of this section (relating to depreciation 
allowable) for any period shall be reduced by the amount (if any) which, 
under an agreement entered into under section 607 of the Act, the owner 
is required or permitted to deposit for such period with respect to such 
vessel by reason of section 607(b)(1)(B) of the Act and paragraph 
(a)(1)(ii) of this section. The amount of depreciation depositable by 
the lessee under this paragraph is the amount of depreciation deductible 
by the lessor on its income tax return, reduced by the amount described 
in the preceding sentence or the amount set forth in the agreement, 
whichever is lower.
    (f) Definition of agreement vessel. For purposes of this section, 
the term ``agreement vessel'' (as defined in Sec. 3.11(a)(3) and 46 CFR 
390.6) includes barges and containers which are the complement of an 
agreement vessel and which are provided for in the

[[Page 30]]

agreement, agreement vessels which have been contracted for or are in 
the process of construction, and any shares in an agreement vessel. 
Solely for purposes of this section, a party is considered to have a 
``share'' in an agreement vessel if he has a right to use the vessel to 
generate income from its use whether or not the party would be 
considered as having a proprietary interest in the vessel for purposes 
of State or Federal law. Thus, a partner may enter into an agreement 
with respect to his share of the vessel owned by the partnership and he 
may make deposits of his distributive share of the sum of the four 
subceilings described in paragraph (a)(1) of this section. 
Notwithstanding the provisions of subchapter K of the Code (relating to 
the taxation of partners and partnerships), the Internal Revenue Service 
will recognize, solely for the purposes of applying this part, an 
agreement by an owner of a share in an agreement vessel even though the 
``share'' arrangement is a partnership for purposes of the Code.
    (g) Special rules for nonmoney deposits and withdrawals--(1) In 
general. (i) Deposits may be made in the form of money or property of 
the type permitted to be deposited under the agreement. (For rules 
relating to the types of property which may be deposited into the fund, 
see 46 CFR Sec. 390.7(d), and 50 CFR part 259.) For purposes of this 
paragraph, the term ``property'' does not include money.
    (ii) Whether or not the election provided for in subparagraph (2) of 
this paragraph is made--
    (a) The amount of any property deposit, and the fund's basis for 
property deposited in the fund, is the fair market value of the property 
at the time deposited, and
    (b) The fund's holding period for the property begins on the day 
after the deposit is made.
    (iii) Unless such an election is made, deposits of property into a 
fund are considered to be a sale at fair market value of the property, a 
deposit of cash equal to such fair market value, and a purchase by the 
fund of such property for cash. Thus, in the absence of the election, 
the difference between the fair market value of such property deposited 
and its adjusted basis shall be taken into account as gain or loss for 
purposes of computing the party's income tax liability for the year of 
deposit.
    (iv) For fund's basis and holding period of assets purchased by the 
fund, see paragraph (d) (2) and (3) of this section.
    (2) Election not to treat deposits of property other than money as a 
sale or exchange at the time of deposit. A party may elect to treat a 
deposit of property as if no sale or other taxable event had occurred on 
the date of deposit. If such election is made, in the taxable year the 
fund disposes of the property, the party shall recognize as gain or loss 
the amount he would have recognized on the day the property was 
deposited into the fund had the election not been made. The party's 
holding period with respect to such property shall not include the 
period of time such property was held by the fund. The election shall be 
made by a statement to that effect, attached to the party's Federal 
income tax return for the taxable year to which the deposit relates, or, 
if such return is filed before such deposit is made, attached to the 
party's return for the taxable year during which the deposit is actually 
made.
    (3) Effect of qualified withdrawal of property deposited pursuant to 
election. If property deposited into a fund, with respect to which an 
election under subparagraph (2) of this paragraph is made, is withdrawn 
from the fund in a qualified withdrawal (as defined in Sec. 3.5) such 
withdrawal is treated as a disposition of such property resulting in 
recognition by the party of gain or loss (if any) as provided in 
subparagraph (2) of this paragraph with respect to nonfund property. In 
addition, such withdrawal is treated as a disposition of such property 
by the fund resulting in recognition of gain or loss by the party with 
respect to fund property to the extent the fair market value of the 
property on the date of withdrawal is greater or less (as the case may 
be) than the adjusted basis of the property to the fund on such date. 
For purposes of determining the amount by which the balance within a 
particular account will be reduced in the manner provided in Sec. 
3.6(b) (relating to order of application of qualified withdrawals

[[Page 31]]

against accounts) and for purposes of determining the reduction in basis 
of a vessel, barge, or container (or share therein) pursuant to Sec. 
3.6(c), the value of the property is its fair market value on the day of 
the qualified withdrawal. For rules relating to the effect of a 
qualified withdrawal of property purchased by the fund (including 
deposited property considered under subparagraph (1)(iii) of this 
paragraph as purchased by the fund), see paragraph (d)(2)(ii) of this 
section.
    (4) Effect of nonqualified withdrawal of property deposited pursuant 
to election. If property deposited into a fund with respect to which an 
election under subparagraph (2) of this paragraph is made, is withdrawn 
from the fund in a nonqualified withdrawal (as defined in Sec. 3.7(b)), 
no gain or loss is to be recognized by the party with respect to fund 
property or nonfund property but an amount equal to the adjusted basis 
of the property to the fund is to be treated as a nonqualified 
withdrawal. Thus, such amount is to be applied against the various 
accounts in the manner provided in Sec. 3.7(c), such amount is to be 
taken into account in computing the party's taxable income as provided 
in Sec. 3.7(d), and such amount is to be subject to interest to the 
extent provided for in Sec. 3.7(e). In the case of withdrawals to which 
this subparagraph applies, the adjusted basis of the property in the 
hands of the party is the adjusted basis on the date of deposit, 
increased or decreased by the adjustments made to such property while 
held in the fund, and in determining the period for which the party has 
held the property there shall be included, in addition to the period the 
fund held the property, the period for which the party held the property 
before the date of deposit of the property into the fund. For rules 
relating to the basis and holding period of property purchased by the 
fund (including deposited property considered under subparagraph (1)(ii) 
of this paragraph as purchased by the fund) and withdrawn in a 
nonqualified withdrawal see Sec. 3.7(f).
    (5) Examples. The provisions of this paragraph are illustrated by 
the following examples:

    Example (1). X Corporation, which uses the calendar year as its 
taxable year, maintains a fund described in Sec. 3.1. X's taxable 
income (determined without regard to section 607 of the Act) is 
$100,000, of which $80,000 is taxable income attributable to the 
operation of agreement vessels (as determined under paragraph (b)(1) of 
this section). Under the agreement, X is required to deposit into the 
fund all earnings and gains received from the investment or reinvestment 
of amounts held in the fund, an amount equal to the net proceeds from 
transactions referred to in Sec. 3.2(c), and an amount equal to 50 
percent of its earnings attributable to the operation of agreement 
vessels provided that such 50 percent does not exceed X's taxable income 
from all sources for the year of deposit. The agreement permits X to 
make voluntary deposits of amounts equal to 100 percent of its earnings 
attributable to the operation of agreement vessels, subject to the 
limitation with respect to taxable income from all sources. The 
agreement also provides that deposits attributable to such earnings may 
be in the form of cash or other property. On March 15, 1973, X deposits, 
with respect to its 1972 earnings attributable to the operation of 
agreement vessels, stock with a fair market value at the time of deposit 
of $80,000 and an adjusted basis to X of $10,000. Such deposit 
represents agreement vessel income of $80,000. At the time of deposit, 
such stock had been held by X for a period exceeding 6 months. X does 
not elect under subparagraph (2) of this paragraph to defer recognition 
of the gain. Accordingly, under subparagraph (1)(iii) of this paragraph, 
the deposit is treated as a deposit of $80,000 and X realizes a long-
term capital gain of $70,000 on March 15, 1973.
    Example (2). The facts are the same as in example (1), except that X 
elects in accordance with subparagraph (2) of this paragraph not to 
treat the deposit as a sale or exchange. On July 1, 1974, the fund sells 
the stock for $85,000. The basis to the fund of the stock is $80,000 
(see subparagraph (1)(ii)(a) of this paragraph). With respect to nonfund 
property, X recognizes $70,000 of long-term capital gain on the sale 
includible in its gross income for 1974. With respect to fund property, 
X realizes $5,000 of long-term capital gain (the difference between the 
amount received by the fund on the sale of the stock, $85,000, and the 
basis to the fund of the stock, $80,000), an amount equal to which is 
required to be deposited into the fund with respect to 1974, as a gain 
from the investment or reinvestment of amounts held in the fund. Since 
the fund held the stock for a period exceeding 6 months, the $5,000 is 
allocated to the fund's capital gain account under Sec. 3.4(c).
    Example (3). The facts are the same as in example (2), except that 
the fund sells the stock on July 1, 1974, for $75,000. As the basis to 
the fund of the stock is $80,000, with respect to fund property, X 
realizes a long-

[[Page 32]]

term capital loss on the sale (the difference between the amount 
received by the fund on the sale of the stock, $75,000, and the basis to 
the fund of the stock, $80,000), of $5,000, an amount equal to which is 
required to be charged against the fund's capital gain account under 
Sec. 3.4(e). Under subparagraph (2) of this paragraph, X recognizes 
$70,000 of long-term capital gain with respect to nonfund property on 
the sale which is includible in its gross income for 1974.
    Example (4). The facts are the same as in example (2), except that 
on July 1, 1974, X makes a qualified withdrawal (as defined in Sec. 
3.5(a)) of the stock and uses it to pay indebtedness pursuant to Sec. 
3.5(b). On the disposition by X considered to occur under subparagraph 
(3) of this paragraph on the qualified withdrawal, X recognizes $70,000 
of long-term capital gain with respect to nonfund property, which is 
includible in its gross income for 1974, and a long-term capital gain of 
$5,000 with respect to fund property, an amount equal to which is 
allocated to the fund's capital gain account under Sec. 3.4(c). The 
fund is treated as having a qualified withdrawal of an amount equal to 
the fair market value of the stock on the day of withdrawal, $85,000 
(see subparagraph (3) of this paragraph). In addition, $85,000 is 
applied against the various accounts in the order provided in Sec. 
3.6(b). The basis of the vessel with respect to which the indebtedness 
was incurred is to be reduced as provided in Sec. 3.6(c).
    Example (5). The facts are the same as in example (2), except that X 
withdraws the stock from the fund in a nonqualified withdrawal (as 
defined in Sec. 3.7(b)). Under subparagraph (4) of this paragraph, X 
recognizes no gain or loss with respect to fund or nonfund property on 
such withdrawal. An amount equal to the basis of the stock to the fund 
($80,000) is applied against the various accounts in the order provided 
in Sec. 3.7(c), and is taken into account in computing X's taxable 
income for 1974 as provided in Sec. 3.7(d). In addition, X must pay 
interest on the withdrawal as provided in Sec. 3.7(e). The basis to X 
of the stock is $10,000 notwithstanding the fact that the fair market 
value of such stock was $85,000 on the day of withdrawal (see 
subparagraph (4) of this paragraph).



Sec. 3.3  Nontaxability of deposits.

    (a) In general. Section 607(d) of the Act sets forth the rules 
concerning the income tax effects of deposits made with respect to 
ceilings described in section 607(b) and Sec. 3.2. The specific 
treatment of deposits with respect to each of the subceilings is set 
forth in paragraph (b) of this section.
    (b) Treatment of deposits--(1) Earnings of agreement vessels. 
Section 607(d)(1)(A) of the Act provides that taxable income of the 
party (determined without regard to section 607 of the Act) shall be 
reduced by an amount equal to the amount deposited for the taxable year 
out of amounts referred to in section 607(b)(1)(A) of the Act and Sec. 
3.2(a)(1)(i). For computation of the foreign tax credit, see paragraph 
(i) of this section.
    (2) Net proceeds from agreement vessels and fund earnings. (i)(a) 
Section 607(d)(1)(B) provides that gain from a transaction referred to 
in section 607(b)(1)(C) of the Act and Sec. 3.2(a)(1)(iii) (relating to 
ceilings on deposits of net proceeds from the sale or other disposition 
of agreement vessels) is not to be taken into account for purposes of 
the Code if an amount equal to the net proceeds from transactions 
referred to in such sections is deposited in the fund. Such gain is to 
be excluded from gross income of the party for the taxable year to which 
such deposit relates. Thus, the gain will not be taken into account in 
applying section 1231 of the Code for the year to which the deposit 
relates.
    (b) [Reserved]
    (ii)(a) Section 607(d)(1)(C) of the Act provides that the earnings 
(including gains and losses) from the investment and reinvestment of 
amounts held in the fund and referred to in section 607(b)(1)(D) of the 
Act and Sec. 3.2(a)(1)(iv) shall not be taken into account for purposes 
of the Code if an amount equal to such earnings is deposited into the 
fund. Such earnings are to be excluded from the gross income of the 
party for the taxable year to which such deposit relates.
    (b) However, for purposes of the basis adjustment under section 
1232(a)(3)(E) of the Code, the ratable monthly portion of original issue 
discount included in gross income shall be determined without regard to 
section 607(d)(1)(C) of the Act.
    (iii) In determining the tax liability of a party to whom 
subparagraph (1) of this paragraph applies, taxable income, determined 
after application of subparagraph (1) of this paragraph, is in effect 
reduced by the portion of deposits which represent gain or earnings 
respectively referred to in subdivision (i) or (ii) of this 
subparagraph. The excess,

[[Page 33]]

if any, of such portion over taxable income determined after application 
of subparagraph (1) of this paragraph is taken into account in computing 
the net operating loss (under section 172 of the Code) for the taxable 
year to which such deposits relate.
    (3) Time for making deposits. (i) This section applies with respect 
to an amount only if such amount is deposited in the fund pursuant to 
the agreement and not later than the time provided in subdivision (ii), 
(iii), or (iv) of this subparagraph for the making of such deposit or 
the date the Secretary of Commerce provides, whichever is earlier.
    (ii) Except as provided in subdivision (iii) or (iv) of this 
subparagraph, a deposit may be made not later than the last day 
prescribed by law (including extensions thereof) for filing the party's 
Federal income tax return for the taxable year to which such deposit 
relates.
    (iii) If the party is a subsidized operator under an operating-
differential subsidy contract, and does not receive on or before the 
59th day preceding such last day, payment of all or part of the accrued 
operating-differential subsidy payable for the taxable year, the party 
may deposit an amount equivalent to the unpaid accrued operating-
differential subsidy on or before the 60th day after receipt of payment 
of the accrued operating-differential subsidy.
    (iv) A deposit pursuant to Sec. 3.2(a)(3)(i) (relating to 
underdeposits caused by audit adjustments) must be made on or before the 
date prescribed for such a deposit in Sec. 3.2(a)(4).
    (4) Date of deposits. (i) Except as otherwise provided in 
subdivisions (ii) and (iii) of this subparagraph (with respect to 
taxable years beginning after December 31, 1969, and prior to January 1, 
1972), in Sec. 3.2(a)(2)(i), or in Sec. 3.10(b), deposits made in a 
fund within the time specified in subparagraph (3) of this paragraph are 
deemed to have been made on the date of actual deposit.
    (ii)(a) For taxable years beginning after December 31, 1969, and 
prior to January 1, 1971, where an application for a fund is filed by a 
taxpayer prior to January 1, 1972, and an agreement is executed and 
entered into by the taxpayer prior to March l, 1972,
    (b) For taxable years beginning after December 31, 1970, and prior 
to January 1, 1972, where an application for a fund is filed by a 
taxpayer prior to January 1, 1973, and an agreement is executed and 
entered into by the taxpayer prior to March l, 1973, and
    (c) For taxable years beginning after December 31, 1971, and prior 
to January 1, 1975, where an agreement is executed and entered into by 
the taxpayer on or prior to the due date, with extensions, for the 
filing of his Federal income tax return for such taxable year,


deposits in a fund which are made within 60 days after the date of 
execution of the agreement, or on or before the due date, with 
extensions thereof, for the filing of his Federal income tax return for 
such taxable year or years, whichever date shall be later, shall be 
deemed to have been made on the date of the actual deposit or as of the 
close of business of the last regular business day of each such taxable 
year or years to which such deposits relate, whichever day is earlier.
    (iii) Notwithstanding subdivision (ii) of this subparagraph, for 
taxable years beginning after December 31, 1970, and ending prior to 
January 1, 1972, deposits made later than the last date permitted under 
subdivision (ii) but on or before January 9, 1973, in a fund pursuant to 
an agreement with the Secretary of Commerce, acting by and through the 
Administrator of the National Oceanic and Atmospheric Administration, 
shall be deemed to have been made on the date of the actual deposit or 
as of the close of business of the last regular business day of such 
taxable year, whichever is earlier.
    (c) Determination of earnings and profits. [Reserved]
    (d) Accumulated earnings tax. As provided in section 607(d)(1)(E) of 
the Act amounts, while held in the fund, are not to be taken into 
account in computing the ``accumulated taxable income'' of the party 
within the meaning of section 531 of the Code. Amounts while held in the 
fund are considered held for the purpose of acquiring, constructing, or 
reconstructing a qualified vessel or barges and containers which

[[Page 34]]

are part of the complement of a qualified vessel or the payment of the 
principal on indebtedness incurred in connection with any such 
acquisition, construction, or reconstruction. Thus, for example, if the 
reasonable needs of the business (within the meaning of section 537 of 
the Code) justify a greater amount of accumulation for providing 
replacement vessels than can be satisfied out of the fund, such greater 
amount accumulated outside of the fund shall be considered to be 
accumulated for the reasonable needs of the business. For a further 
example, although amounts in the fund are not taken into account in 
applying the tax imposed by section 531 of the Code, to the extent there 
are amounts in a fund to provide for replacing a vessel, amounts 
accumulated outside of the fund to replace the same vessel are not 
considered to be accumulated for the reasonable needs of the business.
    (e) Nonapplicability of section 1231. If an amount equivalent to 
gain from a transaction referred to in section 607(b)(1)(C) of the Act 
and Sec. 3.2(c) (1) and (5) is deposited into the fund and, therefore, 
such gain is not taken into account in computing gross income under the 
provisions of paragraph (b)(2) of this section, then such gain will not 
be taken into account for purposes of the computations under section 
1231 of the Code.
    (f) Deposits of capital gains. In respect of capital gains which are 
not included in the gross income of the party by virtue of a deposit to 
which section 607(d) of the Act and this section apply, the following 
provisions of the Code do not apply: the minimum tax for tax preferences 
imposed by section 56 of the Code; the alternative tax imposed by 
section 1201 of the Code on the excess of the party's net long-term 
capital gain over his net short-term capital loss; and, in the case of a 
taxpayer other than a corporation, the deduction provided by section 
1202 of the Code of 50% of the amount of such excess. However, section 
56 may apply upon a nonqualified withdrawal with respect to amounts 
treated under Sec. 3.7(d)(2) as being made out of the capital gain 
account.
    (g) Deposits of dividends. The deductions provided by section 243 of 
the Code (relating to the deductions for dividends from a domestic 
corporation received by a corporation) shall not apply in respect of 
dividends (earned on assets held in the fund) which are deposited into a 
fund, and which, by virtue of such deposits and the provisions of 
section 607(d) of the Act and this section, are not included in the 
gross income of the party.
    (h) Presumption of validity of deposit. All amounts deposited in the 
fund shall be presumed to have been deposited pursuant to an agreement 
unless, after an examination of the facts upon the request of the 
Commissioner of Internal Revenue or his delegate, the Secretary of 
Commerce determines otherwise. The Commissioner or his delegate will 
request such a determination where there is a substantial question as to 
whether a deposit is made in accordance with an agreement.
    (i) Special rules for application of the foreign tax credit--(1) In 
general. For purposes of computing the limitation under section 904 of 
the Code on the amount of the credit provided by section 901 of the Code 
(relating to the foreign tax credit), the party's taxable income from 
any source without the United States and the party's entire taxable 
income are to be determined after application of section 607(d) of the 
Act. Thus, amounts deposited for the taxable year with respect to 
amounts referred to in section 607(b)(1)(A) of the Act and Sec. 
3.2(a)(1)(i) (relating to taxable income attributable to the operation 
of agreement vessels) shall be treated as a deduction in arriving at the 
party's taxable income from sources without the United States (subject 
to the apportionment rules and subparagraph (2) of this paragraph) and 
the party's entire taxable income for the taxable year. Amounts 
deposited with respect to gain described in section 607(d)(1)(B) of the 
Act and Sec. 3.2(c) (relating to net proceeds from the sale or other 
disposition of an agreement vessel and net proceeds from insurance or 
indemnity) and amounts deposited with respect to earnings described in 
section 607(d)(1)(C) of the Act and paragraph (b)(2)(ii) (relating to 
earnings from the investment and reinvestment of amounts held in a fund) 
of this section

[[Page 35]]

are not taken into account for purposes of the Code and hence are not 
included in the party's taxable income from sources without the United 
States or in the party's entire taxable income for purposes of this 
paragraph.
    (2) Apportionment of taxable income attributable to agreement 
vessels. For purposes of computing the overall limitation under section 
904(a)(2) of the Code the amount of the deposit made with respect to 
taxable income attributable to agreement vessels pursuant to Sec. 
3.2(a)(1)(i) which is allocable to sources without the United States is 
the total amount of such deposit multiplied by a fraction the numerator 
of which is the gross income from sources without the United States from 
the operation of agreement vessels and the denominator of which is the 
total gross income from the operation of agreement vessels computed as 
provided in Sec. 3.2(b)(2). For purposes of this paragraph, gross 
income from sources without the United States attributable to the 
operation of agreement vessels is to be determined under sections 861 
through 863 of the Code and under the taxpayer's usual method of 
accounting provided such method is reasonable and in keeping with sound 
accounting practice. Any computation under the per-country limitation of 
section 904(a)(1) shall be made in the manner consistent with the 
provisions of the preceding sentences of this subparagraph.



Sec. 3.4  Establishment of accounts.

    (a) In general. Section 607(e)(1) of the Act requires that three 
bookkeeping or memorandum accounts are to be established and maintained 
within the fund: the capital account, the capital gain account, and the 
ordinary income account. Deposits of the amounts under the subceilings 
in section 607(b) of the Act and Sec. 3.2 are allocated among the 
accounts under section 607(e) of the Act and this section.
    (b) Capital account. The capital account shall consist of:
    (1) Amounts referred to in section 607(b)(1)(B) of the Act and Sec. 
3.2(a)(1)(ii) (relating to deposits for depreciation),
    (2) Amounts referred to in section 607(b)(1)(C) of the Act and Sec. 
3.2(a)(1)(iii) (relating to deposits of net proceeds from the sale or 
other disposition of agreement vessels) other than that portion thereof 
which represents gain not taken into account for purposes of computing 
gross income by reason of section 607(d)(1)(B) of the Act and Sec. 
3.3(b)(2) (relating to nontaxability of gain from the sale or other 
disposition of an agreement vessel),
    (3) Amounts representing 85 percent of any dividend received by the 
fund with respect to which the party would, but for section 607(d)(1)(C) 
of the Act and Sec. 3.3(b)(2)(ii) (relating to nontaxability of 
deposits of earnings from investment and reinvestment of amounts held in 
a fund), be allowed a deduction under section 243 of the Code, and
    (4) Amounts received by the fund representing interest income which 
is exempt from taxation under section 103 of the Code.
    (c) Capital gain account. The capital gain account shall consist of 
amounts which represent the excess of (1) deposits of long-term capital 
gains on property referred to in section 607(b)(1) (C) and (D) of the 
Act and Sec. 3.2(a)(1) (iii) and (iv) (relating respectively to certain 
agreement vessels and fund assets), over (2) amounts representing losses 
from the sale or exchange of assets held in the fund for more than 6 
months (for purposes of this section referred to as ``long-term capital 
losses''). For purposes of this paragraph and paragraph (d)(2) of this 
section, an agreement vessel disposed of at a gain shall be treated as a 
capital asset to the extent that gain thereon is not treated as ordinary 
income, including gain which is ordinary income under section 607(g)(5) 
of the Act (relating to treatment of gain on disposition of a vessel 
with a reduced basis) and Sec. 3.6(e) or under section 1245 of the Code 
(relating to gain from disposition of certain depreciable property). For 
provisions relating to the treatment of short-term capital gains on 
certain transactions involving agreement vessels or realized by the 
fund, see paragraph (d) of this section. For rules relating to the 
treatment of capital losses on assets held in the fund, see paragraph 
(e) of this section.
    (d) Ordinary income account. The ordinary income account shall 
consist of:
    (1) Amounts referred to in section 607(b)(1)(A) of the Act and Sec. 
3.2(a)(1)(i)

[[Page 36]]

(relating to taxable income attributable to the operation of an 
agreement vessel),
    (2) Amounts representing (i) deposits of gains from the sale or 
exchange of capital assets held for 6 months or less (for purposes of 
this section referred to as ``short-term capital gains'') referred to in 
section 607(b)(1) (C) or (D) of the Act and Sec. 3.2(a)(1) (iii) and 
(iv) (relating respectively to certain agreement vessels and fund 
assets), reduced by (ii) amounts representing losses from the sale or 
exchange of capital assets held in the fund for 6 months or less (for 
purposes of this section referred to as ``short-term capital losses''). 
For rules relating to the treatment of certain agreement vessels as 
capital assets, see paragraph (c) of this section,
    (3) Amounts representing interest (not including any tax-exempt 
interest referred to in section 607(e)(2)(D) of the Act and paragraph 
(b)(4) of this section) and other ordinary income received on assets 
held in the fund (not including any dividend referred to in section 
607(e)(2)(C) of the Act and subparagraph (5) of this paragraph),
    (4) Amounts representing ordinary income from a transaction 
(involving certain net proceeds with respect to an agreement vessel) 
described in section 607(b)(1)(C) of the Act and Sec. 3.2(a)(1)(iii), 
including gain which is ordinary income under section 607(g)(5) of the 
Act and Sec. 3.6(e) (relating to treatment of gain on the disposition 
of a vessel with a reduced basis) or under section 1245 of the Code 
(relating to gain from disposition of certain depreciable property), and
    (5) Fifteen percent of any dividend referred to in section 
607(e)(2)(C) of the Act and paragraph (b)(3) of this section received on 
any assets held in the fund.
    (e) Limitation on deduction for capital losses on assets held in a 
fund. Except on termination of a fund, long-term (and short-term) 
capital losses on assets held in the fund shall be allowed only as an 
offset to long-term (and short-term) capital gains on assets held in the 
fund, but only if such gains are deposited into the fund, and shall not 
be allowed as an offset to any capital gains on assets not held in the 
fund. The net long-term capital loss of the fund for the taxable year 
shall reduce the earliest long-term capital gains in the capital gain 
account at the beginning of the taxable year and the net short-term 
capital loss for the taxable year shall reduce the earliest short-term 
capital gains remaining in the ordinary income account at the beginning 
of the taxable year. Any such losses that are in excess of the capital 
gains in the respective accounts shall reduce capital gains deposited 
into the respective accounts in subsequent years (without regard to 
section 1212, relating to capital loss carrybacks and carryovers). On 
termination of a fund, any net long-term capital loss in the capital 
gain account and any net short-term capital loss remaining in the 
ordinary income account is to be taken into account for purposes of 
computing the party's taxable income for the year of termination as a 
long-term or short-term (as the case may be) capital loss recognized in 
the year the fund is terminated. With respect to the determination of 
the basis to a fund of assets held in such fund, see Sec. 3.2(g).

[T.D. 7398, 41 FR 5812, Feb. 10, 1976, as amended by T.D. 7831, 47 FR 
39675, Sept. 9, 1982]



Sec. 3.5  Qualified withdrawals.

    (a) In general. (1) A qualified withdrawal is one made from the fund 
during the taxable year which is in accordance with section 607(f)(1) of 
the Act, the agreement, and with regulations prescribed by the Secretary 
of Commerce and which is for the acquisition, construction, or 
reconstruction of a qualified vessel (as defined in Sec. 3.11(a)(2)) or 
barges and containers which are part of the complement of a qualified 
vessel (or shares in such vessels, barges, and containers), or for the 
payment of the principal of indebtedness incurred in connection with the 
acquisition, construction, or reconstruction of such qualified vessel 
(or a barge or container which is part of the complement of a qualified 
vessel).
    (2) For purposes of this section the term share is used to reflect 
an interest in a vessel and means a proprietary interest in a vessel 
such as, for example, that which results from joint ownership. 
Accordingly, a share within the meaning of Sec. 3.2(f) (relating to the 
definition of ``agreement vessel'' for the purpose of making deposits) 
will not

[[Page 37]]

necessarily be sufficient to be treated as a share within the meaning of 
this section.
    (3) For purposes of this section, the term acquisition means any of 
the following:
    (i) Any acquisition, but only to the extent the basis of the 
property acquired in the hands of the transferee is its cost. Thus, for 
example, if a party transfers a vessel and $1 million in an exchange for 
another vessel which qualifies for nonrecognition of gain or loss under 
section 1031 (a) of the Code (relating to like-kind exchange), there is 
an acquisition to the extent of $1 million.
    (ii) With respect to a lessee's interest in a vessel, expenditures 
which result in increasing the amounts with respect to which a deduction 
for depreciation (or amortization in lieu thereof) is allowable.
    (b) Payments on indebtedness. Payments on indebtedness may 
constitute qualified withdrawals only if the party shows to the 
satisfaction of the Secretary of Commerce a direct connection between 
incurring the indebtedness and the acquisition, construction, or 
reconstruction of a qualified vessel or its complement of barges and 
containers whether or not the indebtedness is secured by the vessel or 
its complement of barges and containers. The fact that an indebtedness 
is secured by an interest in a qualified vessel, barge, or container is 
insufficient by itself to demonstrate the necessary connection.
    (c) Payments to related persons. Notwithstanding paragraph (a) of 
this section, payments from a fund to a person owned or controlled 
directly or indirectly by the same interests as the party within the 
meaning of section 482 of the Code and the regulations thereunder are 
not to be treated as qualified withdrawals unless the party demonstrates 
to the satisfaction of the Secretary of Commerce that no part of such 
payment constitutes a dividend, a return of capital, or a contribution 
to capital under the Code.
    (d) Treatment of fund upon failure to fulfill obligations. Section 
607(f)(2) of the Act provides that if the Secretary of Commerce 
determines that any substantial obligation under the agreement is not 
being fulfilled, he may, after notice and opportunity for hearing to the 
party, treat the entire fund, or any portion thereof, as having been 
withdrawn as a nonqualified withdrawal. In determining whether a party 
has breached a substantial obligation under the agreement, the Secretary 
will consider among other things, (1) the effect of the party's action 
or omission upon his ability to carry out the purposes of the fund and 
for which qualified withdrawals are permitted under section 607(f)(1) of 
the Act, and (2) whether the party has made material misrepresentations 
in connection with the agreement or has failed to disclose material 
information. For the income tax treatment of nonqualified withdrawals, 
see Sec. 3.7.



Sec. 3.6  Tax treatment of qualified withdrawals.

    (a) In general. Section 607(g) of the Act and this section provide 
rules for the income tax treatment of qualified withdrawals including 
the income tax treatment on the disposition of assets acquired with fund 
amounts.
    (b) Order of application of qualified withdrawals against accounts. 
A qualified withdrawal from a fund shall be treated as being made: 
First, out of the capital account; second, out of the capital gain 
account; and third, out of the ordinary income account. Such withdrawals 
will reduce the balance within a particular account on a first-in-first-
out basis, the earliest qualified withdrawals reducing the items within 
an account in the order in which they were actually deposited or deemed 
deposited in accordance with this part. The date funds are actually 
withdrawn from the fund determines the time at which withdrawals are 
considered to be made.
    (c) Reduction of basis. (1) If any portion of a qualified withdrawal 
for the acquisition, construction, or reconstruction of a vessel, barge, 
or container (or share therein) is made out of the ordinary income 
account, the basis of such vessel, barge, or container (or share 
therein) shall be reduced by an amount equal to such portion.
    (2) If any portion of a qualified withdrawal for the acquisition, 
construction, or reconstruction of a vessel, barge, or container (or 
share therein) is

[[Page 38]]

made out of the capital gain account, the basis of such vessel, barge, 
or container (or share therein) shall be reduced by an amount equal to--
    (i) Five-eighths of such portion, in the case of a corporation 
(other than an electing small business corporation, as defined in 
section 1371 of the Code), or
    (ii) One-half of such portion, in the case of any other person.
    (3) If any portion of a qualified withdrawal to pay the principal of 
an indebtedness is made out of the ordinary income account or the 
capital gain account, then the basis of the vessel, barge, or container 
(or share therein) with respect to which such indebtedness was incurred 
is reduced in the manner provided by subparagraphs (1) and (2) of this 
paragraph. If the aggregate amount of such withdrawal from the ordinary 
income account and capital gain account would cause a basis reduction in 
excess of the party's basis in such vessel, barge, or container (or 
share therein), the excess is applied against the basis of other 
vessels, barges, or containers (or shares therein) owned by the party at 
the time of withdrawal in the following order: (i) vessels, barges, or 
containers (or shares therein) which were the subject of qualified 
withdrawals in the order in which they were acquired, constructed, or 
reconstructed; (ii) agreement vessels (as defined in section 607(k)(3) 
of the Act and Sec. 3.11(a)(3)) and barges and containers which are 
part of the complement of an agreement vessel (or shares therein) which 
were not the subject of qualified withdrawals, in the order in which 
such vessels, barges, or containers (or shares therein) were acquired by 
the party; and (iii) other vessels, barges, and containers (or shares 
therein), in the order in which they were acquired by the party. Any 
amount of a withdrawal remaining after the application of this 
subparagraph is to be treated as a nonqualified withdrawal. If the 
indebtedness was incurred to acquire two or more vessels, barges, or 
containers (or shares therein), then the basis reduction in such 
vessels, barges, or containers (or shares therein) is to be made pro 
rata in proportion to the adjusted basis of such vessels, barges, or 
containers (or shares therein) computed, however, without regard to this 
section and adjustments under section 1016(a) (2) and (3) of the Code 
for depreciation or amortization.
    (d) Basis for depreciation. For purposes of determining the 
allowance for depreciation under section 167 of the Code in respect of 
any property which has been acquired, constructed, or reconstructed from 
qualified withdrawals, the adjusted basis for determining gain on such 
property is determined after applying paragraph (c) of this section. In 
the case of reductions in the basis of any property resulting from the 
application of paragraph (c)(3) of this section, the party may adopt a 
method of accounting whereby (1) payments shall reduce the basis of the 
property on the day such payments are actually made, or (2) payments 
made at any time during the first half of the party's taxable year shall 
reduce the basis of the property on the first day of the taxable year, 
and payments made at any time during the second half of the party's 
taxable year shall reduce the basis of the property on the first day of 
the succeeding taxable year. For requirements respecting the change of 
methods of accounting, see Sec. 1.446-1(e)(3) of the Income Tax 
Regulations of this chapter.
    (e) Ordinary income treatment of gain from disposition of property 
acquired with qualified withdrawals. [Reserved]



Sec. 3.7  Tax treatment of nonqualified withdrawals.

    (a) In general. Section 607(h) of the Act provides rules for the tax 
treatment of nonqualified withdrawals, including rules for adjustments 
to the various accounts of the fund, the inclusion of amounts in income, 
and the payment of interest with respect to such amounts.
    (b) Nonqualified withdrawals defined. Except as provided in section 
607 of the Act and Sec. 3.8 (relating to certain corporate 
reorganizations, changes in partnerships, and transfers by reason of 
death), any withdrawal from a fund which is not a qualified withdrawal 
shall be treated as a nonqualified withdrawal which is subject to tax in 
accordance with section 607(h) of the Act and the provisions of this 
section. Examples of nonqualified withdrawals are

[[Page 39]]

amounts remaining in a fund upon termination of the fund, and 
withdrawals which are treated as nonqualified withdrawals under section 
607(f)(2) of the Act and Sec. 3.5(d) (relating to failure by a party to 
fulfill substantial obligation under agreement) or under the second 
sentence of section 607(g)(4) of the Act and Sec. 3.6(c)(3) (relating 
to payments against indebtedness in excess of basis).
    (c) Order of application of nonqualified withdrawals against 
deposits. A nonqualified withdrawal from a fund shall be treated as 
being made: first, out of the ordinary income account; second, out of 
the capital gain account; and third, out of the capital account. Such 
withdrawals will reduce the balance within a particular account on a 
first-in-first-out basis, the earliest nonqualified withdrawals reducing 
the items within an account in the order in which they were actually 
deposited or deemed deposited in accordance with this part. Nonqualified 
withdrawals for research, development, and design expenses incident to 
new and advanced ship design, machinery, and equipment, and any amount 
treated as a nonqualified withdrawal under the second sentence of 
section 607(g)(4) of the Act and Sec. 3.6(c)(3), shall be applied 
against the deposits within a particular account on a last-in-first-out 
basis. The date funds are actually withdrawn from the fund determines 
the time at which withdrawals are considered to be made. For special 
rules concerning the withdrawal of contingent deposits of net proceeds 
from the installment sale of an agreement vessel, see Sec. 3.2(c)(6).
    (d) Inclusion in income. (1) Any portion of a nonqualified 
withdrawal which, under paragraph (c) of this section, is treated as 
being made out of the ordinary income account is to be included in gross 
income as an item of ordinary income for the taxable year in which the 
withdrawal is made.
    (2) Any portion of a nonqualified withdrawal which, under paragraph 
(c) of this section, is treated as being made out of the capital gain 
account is to be included in income as an item of long-term capital gain 
recognized during the taxable year in which the withdrawal is made.
    (3) For effect upon a party's taxable income of capital losses 
remaining in a fund upon the termination of a fund (which, under 
paragraph (b) of this section, is treated as a nonqualified withdrawal 
of amounts remaining in the fund), see Sec. 3.4(e).
    (e) Interest. (1) For the period on or before the last date 
prescribed by law, including extensions thereof, for filing the party's 
Federal income tax return for the taxable year during which a 
nonqualified withdrawal is made, no interest shall be payable under 
section 6601 of the Code in respect of the tax on any item which is 
included in gross income under paragraph (d) of this section, and no 
addition to such tax for such period shall be payable under section 6651 
of the Code. In lieu of the interest and additions to tax under such 
sections, simple interest on the amount of the tax attributable to any 
item included in gross income under paragraph (d) of this section is to 
be paid at the rate of interest determined for the year of withdrawal 
under subparagraph (2) of this paragraph. Such interest is to be charged 
for the period from the last date prescribed for payment of tax for the 
taxable year for which such item was deposited in the fund to the last 
date for payment of tax for the taxable year in which the withdrawal is 
made. Both dates are to be determined without regard to any extensions 
of time for payment. Interest determined under this paragraph which is 
paid within the taxable year shall be allowed as a deduction for such 
year under section 163 of the Code. However, such interest is to be 
treated as part of the party's tax for the year of withdrawal for 
purposes of collection and in determining any interest or additions to 
tax for the year of withdrawal under section 6601 or 6651, respectively, 
of the Code.
    (2) For purposes of section 607(h)(3)(C)(ii) of the Act, and for 
purposes of certain dispositions of vessels constructed, reconstructed, 
or acquired with qualified withdrawals described in Sec. 3.6(e), the 
applicable rate of interest for any nonqualified withdrawal--
    (i) Made in a taxable year beginning in 1970 and 1971 is 8 percent.

[[Page 40]]

    (ii) Made in a taxable year beginning after 1971, the rate for such 
year as determined and published jointly by the Secretary of the 
Treasury or his delegate and the Secretary of Commerce. Such rate shall 
bear a relationship to 8 percent which the Secretaries determine to be 
comparable to the relationship which the money rates and investment 
yields for the calendar year immediately preceding the beginning of the 
taxable year bear to the money rates and investment yields for the 
calendar year 1970. The determination of the applicable rate for any 
such taxable year will be computed by multiplying 8 percent by the ratio 
which (a) the average yield on 5-year Treasury securities for the 
calendar year immediately preceding the beginning of such taxable year, 
bears to (b) the average yield on 5-year Treasury securities for the 
calendar year 1970. The applicable rate so determined shall be computed 
to the nearest one-hundredth of 1 percent. If such a determination and 
publication is made, the latest published percentage shall apply for any 
taxable year beginning in the calendar year with respect to which 
publication is made.
    (3) No interest shall be payable in respect of taxes on amounts 
referred to in section 607(h)(2) (i) and (ii) of the Act (relating to 
withdrawals for research and development and payments against 
indebtedness in excess of basis) or in the case of any nonqualified 
withdrawal arising from the application of the recapture provision of 
section 606(5) of the Merchant Marine Act, 1936, as in effect on 
December 31, 1969.
    (f) Basis and holding period in the case of property purchased by 
the fund or considered purchased by the fund. In the case of a 
nonqualified withdrawal of property other than money which was purchased 
by the fund (including deposited property considered under Sec. 
3.2(g)(1)(ii) as purchased by the fund), the adjusted basis of the 
property in the hands of the party is its adjusted basis to the fund on 
the day of the withdrawal. In determining the period for which the 
taxpayer has held the property withdrawn in a nonqualified withdrawal, 
there shall be included only the period beginning with the date on which 
the withdrawal occurred. For basis and holding period in the case of 
nonqualified withdrawals of property other than money deposited into the 
fund, see Sec. 3.2(g)(4).



Sec. 3.8  Certain corporate reorganizations and changes in partnerships,
and certain transfers on death. [Reserved]



Sec. 3.9  Consolidated returns. [Reserved]



Sec. 3.10  Transitional rules for existing funds.

    (a) In general. Section 607(j) of the Act provides that any person 
who was maintaining a fund or funds under section 607 of the Merchant 
Marine Act, 1936, prior to its amendment by the Merchant Marine Act of 
1970 (for purposes of this part referred to as ``old fund'') may 
continue to maintain such old fund in the same manner as under prior law 
subject to the limitations contained in section 607(j) of the Act. Thus, 
a party may not simultaneously maintain such old fund and a new fund 
established under the Act.
    (b) Extension of agreement to new fund. If a person enters into an 
agreement under the Act to establish a new fund, he may agree to the 
extension of such agreement to some or all of the amounts in the old 
fund and transfer the amounts in the old fund to which the agreement is 
to apply from the old fund to the new fund. If an agreement to establish 
a new fund is extended to amounts from an old fund, each item in the old 
fund to which such agreement applies shall be considered to be 
transferred to the appropriate account in the manner provided for in 
Sec. 3.8(d) in the new fund in a nontaxable transaction which is in 
accordance with the provisions of the agreement under which such old 
fund was maintained. For purposes of determining the amount of interest 
under section 607(h)(3)(C) of the Act and Sec. 3.7(e), the date of 
deposit of any item so transferred shall be deemed to be July 1, 1971, 
or the date of the deposit in the old fund, whichever is the later.



Sec. 3.11  Definitions.

    (a) As used in the regulations in this part and as defined in 
section 607(k) of the Act--

[[Page 41]]

    (1) The term eligible vessel means any vessel--
    (i) Constructed in the United States, and if reconstructed, 
reconstructed in the United States,
    (ii) Documented under the laws of the United States, and
    (iii) Operated in the foreign or domestic commerce of the United 
States or in the fisheries of the United States. Any vessel which was 
constructed outside of the United States but documented under the laws 
of the United States on April 15, 1970, or constructed outside the 
United States for use in the U.S. foreign trade pursuant to a contract 
entered into before April 15, 1970, shall be treated as satisfying the 
requirements of subdivision (i) of this subparagraph and the 
requirements of subparagraph (2)(i) of this section.
    (2) The term qualified vessel means any vessel--
    (i) Constructed in the United States and, if reconstructed, 
reconstructed in the United States,
    (ii) Documented under the laws of the United States, and
    (iii) Which the person maintaining the fund agrees with the 
Secretary of Commerce will be operated in the U.S. foreign, Great Lakes, 
or noncontiguous domestic trade or in the fisheries of the United 
States.
    (3) The term agreement vessel means any eligible vessel or qualified 
vessel which is subject to an agreement entered into under section 607 
of the Act.
    (4) The term vessel includes cargo handling equipment which the 
Secretary of Commerce determines is intended for use primarily on the 
vessel. The term ``vessel'' also includes an ocean-going towing vessel 
or an ocean-going barge or comparable towing vessel or barge operated in 
the Great Lakes.
    (b) Insofar as the computation and collection of taxes are 
concerned, other terms used in the regulations in this part, except as 
otherwise provided in the Act or this part, have the same meaning as in 
the Code and the regulations thereunder.



PART 4_TEMPORARY INCOME TAX REGULATIONS UNDER SECTION 954 OF THE 
INTERNAL REVENUE CODE--Table of Contents



Sec.
4.954-0 Introduction.
4.954-1 Foreign base company income; taxable years beginning after 
          December 31, 1986.
4.954-2 Foreign personal holding company income; taxable years beginning 
          after December 31, 1986.

    Authority: 26 U.S.C. 7805.
    Section 4.954-0 also issued under 26 U.S.C. 954 (b) and (c).
    Section 4.954-1 also issued under 26 U.S.C. 954 (b) and (c).
    Section 4.954-2 also issued under 26 U.S.C. 954 (b) and (c).



Sec. 4.954-0  Introduction.

    (a) Effective date. (1) The provisions of Sec. Sec. 4.954-1 and 
4.954-2 apply to taxable years of a controlled foreign corporation 
beginning after December 31, 1986. Consequently, any gain or loss 
(including foreign currency gain or loss as defined in section 988(b)) 
recognized during such taxable years of a controlled foreign corporation 
is subject to these provisions. For further guidance, see Sec. 1.954-
0(a) of this chapter.
    (2) The provisions of Sec. Sec. 1.954A-1 and 1.954A-2 apply to 
taxable years of a controlled foreign corporation beginning before 
January 1, 1987. All references therein to sections of the Code are to 
the Internal Revenue Code of 1954 prior to the amendments made by the 
Tax Reform Act of 1986.
    (b) Outline of regulation provisions for sections 954(b)(3), 
954(b)(4), 954(b)(5) and 954(c) for taxable years of a controlled 
foreign corporation beginning after December 31, 1986.

    (I) Sec. 4.954-0 Introduction.
    (a) Effective dates.
    (b) Outline.
    (II) Sec. 4.954-1 Foreign base company income.
    (a) In general.
    (1) Purpose and scope.
    (2) Definition of gross foreign base company income.
    (3) Definition of adjusted gross foreign base company income.
    (4) Definition of net foreign base company income.
    (5) Definition of adjusted net foreign base company income.
    (6) Insurance income definitions.

[[Page 42]]

    (7) Additional items of adjusted net foreign base company income or 
adjusted net insurance income by reason of section 952(c).
    (8) Illustration.
    (b) Computation of adjusted gross foreign base company income and 
adjusted gross insurance income.
    (1) De minimus rule and full inclusion rule.
    (i) In general.
    (ii) Five percent de minimus test.
    (iii) Seventy percent full inclusion test.
    (2) Character of items of adjusted gross foreign base company 
income.
    (3) Coordination with section 952(c).
    (4) Anti-abuse rule.
    (i) In general.
    (ii) Presumption.
    (iii) Definition of related person.
    (iv) Illustration.
    (5) Illustration.
    (c) Computation of net foreign base company income.
    (d) Computation of adjusted net foreign base company income or 
adjusted net insurance income.
    (1) Application of high tax exception.
    (2) Effective rate at which taxes are imposed.
    (3) Taxes paid or accrued with respect to an item of income.
    (i) Income other than foreign personal holding company income.
    (ii) Foreign personal holding company income.
    (4) Definition of an item of income.
    (i) Income other than foreign personal holding company income.
    (ii) Foreign personal holding company income.
    (A) In general.
    (B) Consistency rule.
    (5) Procedure.
    (6) Illustrations.
    (e) Character of an item of income.
    (1) Substance of the transaction.
    (2) Separable character.
    (3) Predominant character.
    (4) Coordination of categories of gross foreign base company income 
or gross insurance income.
    (III) Sec. 4.954-2 Foreign Personal Holding Company Income.
    (a) Computation of foreign personal holding company income.
    (1) In general.
    (2) Coordination of overlapping definitions.
    (3) Changes in use or purpose with which property is held.
    (i) In general.
    (ii) Illustrations.
    (4) Definitions.
    (i) Interest.
    (ii) Inventory and similar property.
    (iii) Regular dealer.
    (iv) Dealer property.
    (v) Debt instrument.
    (b) Dividends, etc.
    (1) In general.
    (2) Exclusion of certain export financing.
    (i) In general.
    (ii) Conduct of a banking business.
    (iii) Illustration.
    (3) Exclusion of dividends and interest from related persons.
    (i) Excluded dividends and interest.
    (ii) Interest paid out of adjusted foreign base company income or 
insurance income.
    (iii) Dividends paid out of prior years' earnings.
    (iv) Fifty percent substantial assets test.
    (v) Value of assets.
    (vi) Location of tangible property used in a trade or business.
    (A) In general.
    (B) Exception.
    (vii) Location of intangible property used in a trade or business.
    (A) In general.
    (B) Property located in part in the payor's country of incorporation 
and in part in other countries.
    (viii) Location of property held for sale to customers.
    (A) In general.
    (B) Inventory located in part in the payor's country of 
incorporation and in part in other countries.
    (ix) Location of debt instruments.
    (x) Treatment of certain stock interests.
    (xi) Determination of period during which property is used in a 
trade or business.
    (xii) Treatment of banks and insurance companies [Reserved]
    (4) Exclusion of rents and royalties derived from related persons.
    (i) In general.
    (ii) Rents or royalties paid out of adjusted foreign base company 
income or insurance income.
    (5) Exclusion of rents and royalties derived in the active conduct 
of a trade or business.
    (6) Treatment of tax exempt interest.
    (c) Excluded rents.
    (1) Trade or business cases.
    (2) Special rules.
    (i) Adding substantial value.
    (ii) Substantiality of foreign organization.
    (iii) Definition of active leasing expense.
    (iv) Adjusted leasing profits.
    (3) Illustrations.
    (d) Excluded royalties.
    (1) Trade or business cases.
    (2) Special rules.
    (i) Adding substantial value.
    (ii) Substantiality of foreign organization.
    (iii) Definition of active licensing expense.
    (iv) Definition of adjusted licensing profit.
    (3) Illustrations.
    (e) Certain property transactions.
    (1) In general.
    (i) Inclusion of FPHC income.
    (ii) Dual character property.
    (2) Property that gives rise to certain income.

[[Page 43]]

    (i) In general.
    (ii) Exception.
    (3) Property that does not give rise to income.
    (4) Classification of gain or loss from the disposition of a debt 
instrument or on a deferred payment sale.
    (i) Gain.
    (ii) Loss.
    (5) Classification of options and other rights to acquire or 
transfer property.
    (6) Classification of certain interests in pass-through entities.
    [Reserved]
    (f) Commodities transactions.
    (1) In general.
    (2) Definitions.
    (i) Commodity.
    (ii) Commodities transaction.
    (3) Definition of the term ``qualified active sales''.
    (i) In general.
    (ii) Sale of commodities.
    (iii) Active conduct of a commodities business.
    (iv) Definition of the term ``substantially all.''
    (4) Definition of the term ``qualified hedging transaction''.
    (g) Foreign currency gain.
    (1) In general.
    (2) Exceptions.
    (i) Qualified business units using the dollar approximate separate 
transactions method.
    (ii) Tracing to exclude foreign currency gain or loss from qualified 
business and hedging transactions.
    (iii) Election out of tracing.
    (3) Definition of the term ``qualified business transaction''.
    (i) In general.
    (ii) Specific section 988 transactions attributable to the sale of 
goods or services.
    (A) Acquisition of debt instruments.
    (B) Becoming the obligor under debt instruments.
    (C) Accrual of any item of gross income.
    (D) Accrual of any item of expense.
    (E) Entering into forward contracts, futures contracts, options, and 
similar instruments.
    (F) Disposition of nonfunctional currency.
    (4) Definition of the term ``qualified hedging transaction''.
    (i) In general.
    (ii) Change in purpose of hedging transaction.
    (5) Election out of tracing.
    (i) In general.
    (ii) Exception.
    (iii) Procedure.
    (A) In general.
    (B) Time and manner.
    (C) Termination.
    (h) Income equivalent to interest.
    (1) In general.
    (2) Illustrations.
    (3) Income equivalent to interest from factoring.
    (i) General rule.
    (ii) Exceptions.
    (iii) Factored receivable.
    (iv) Illustrations.
    (4) Determination of sales income.
    (5) Receivables arising from performance of services.

[T.D. 8216, 53 FR 27491, July 21, 1988. Redesignated and amended by T.D. 
8618, 60 FR 46530, Sept. 7, 1995]



Sec. 4.954-1  Foreign base company income; taxable years beginning after
December 31, 1986.

    (a) In general--(1) Purpose and scope. Section 954 (b) through (g) 
and Sec. Sec. 1.954-1T and 1.954-2T provide rules for computing the 
foreign base company income of a controlled foreign corporation. Foreign 
base company income is included in the subpart F income of a controlled 
foreign corporation under the rules of section 952 and the regulations 
thereunder. Subpart F income is included in the gross income of a United 
States shareholder of a controlled foreign corporation under the rules 
of section 951 and the regulations thereunder, and thus is subject to 
current taxation under section 1 or 11 of the Code. The determination of 
whether a foreign corporation is a controlled foreign corporation, the 
subpart F income of which is included currently in the gross income of 
its United States shareholders, is made under the rules of section 957 
and the regulations thereunder.
    (2) Gross foreign base company income. For taxable years of a 
controlled foreign corporation beginning after December 31, 1986, the 
gross foreign base company income of a controlled foreign corporation 
consists of the following categories of gross income:
    (i) Its foreign personal holding company income, as defined in 
section 954(c) and Sec. 1.954-2T,
    (ii) Its foreign base company sales income, as defined in section 
954(d) and the regulations thereunder,
    (iii) Its foreign base company services income, as defined in 
section 954(e) and the regulations thereunder,
    (iv) Its foreign base company shipping income, as defined in section 
954(f) and the regulations thereunder, and

[[Page 44]]

    (v) Its foreign base company oil related income, as defined in 
section 954(g) and the regulations thereunder.
    (3) Adjusted gross foreign base company income. The term ``adjusted 
gross foreign base company income'' means the gross foreign base company 
income of a controlled foreign corporation as adjusted by the de minimis 
and full inclusion rules of paragraph (b) of this section.
    (4) Net foreign base company income. The term ``net foreign base 
company income'' means the adjusted gross foreign base company income of 
a controlled foreign corporation reduced so as to take account of 
deductions properly allocable to such income under the rules of section 
954(b)(5) and paragraph (c) of this section. In computing net foreign 
base company income, foreign personal holding company income is reduced 
(but not below zero) by related person interest expense before 
allocating and apportioning other expenses in accordance with the rules 
of paragraph (c) of this section and Sec. 1.904(d)-5(c)(2).
    (5) Adjusted net foreign base company income. The term ``adjusted 
net foreign base company income'' means the net foreign base company 
income of a controlled foreign corporation reduced by any items of net 
foreign base company income for which the high tax exception of 
paragraph (d) of this section is elected. The term ``foreign base 
company income'' as used in the Code and elsewhere in the regulations 
generally means adjusted net foreign base company income.
    (6) Insurance income definitions. The term ``gross insurance 
income'' includes any item of gross income taken into account in 
determining insurance income under section 953 and the regulations 
thereunder. The term ``adjusted gross insurance income'' means gross 
insurance income as adjusted by the de minimis and full inclusion rules 
of paragraph (b) of this section. The term ``net insurance income'' 
means adjusted gross insurance income reduced under section 953 and the 
regulations thereunder so as to take into account deductions properly 
allocable or apportionable to such income. The term ``adjusted net 
insurance income'' means net insurance income reduced by any items of 
net insurance income for which the high tax exception of paragraph (d) 
of this section is elected.
    (7) Additional items of adjusted net foreign base company income or 
adjusted net insurance income by reason of section 952(c). Earnings and 
profits of the controlled foreign corporation that are recharacterized 
as foreign base company income or insurance income under section 952(c) 
are items of adjusted net foreign base company income or adjusted net 
insurance income. Thus, they are not included in the gross foreign base 
company income or gross insurance income of the controlled foreign 
corporation in computing adjusted gross foreign base company income or 
adjusted gross insurance income (for purposes of applying the de minimis 
and full inclusion tests of paragraph (b) of this section).
    (8) Illustration. The order of computation is illustrated by the 
following example. Computations in this paragraph (a)(8) and in 
paragraph (b)(5) of this section involving the operation of section 
952(c) are included for purposes of illustration only and do not provide 
substantive rules concerning the operation of that section.

    Example. (i) Gross income. CFC, a controlled foreign corporation, 
has gross income of $1000 for the current taxable year. Of that $1000 of 
income, $100 is interest income that is included in the definition of 
foreign personal holding company income under section 954(c)(1)(A) and 
Sec. 1.954-2T(b)(1)(ii), is not income from a trade or service 
receivable described in section 864(d)(1) or (6), and is not excluded 
from foreign personal holding company income under any provision of 
section 954(c) and Sec. 1.954-2T. Another $50 is foreign base company 
sales income under section 954(d) and the regulations thereunder. The 
remaining $850 of gross income is not included in the definition of 
foreign base company income or insurance income under sections 954(c), 
(d), (e), (f), (g), or 953 and the regulations thereunder, and is 
foreign source general limitation income described in section 
904(d)(1)(I) and the regulations thereunder.
    (ii) Expenses. CFC has expenses for the current taxable year of 
$500. Of that $500, $8 is from interest paid to a related person and is 
allocable to foreign personal holding company income along with $2 of 
other expense. Another $20 of expense is allocable to foreign base 
company sales. The remaining $470 of expense is allocable to income 
other than

[[Page 45]]

foreign base company income or insurance income.
    (iii) Earnings and deficits. CFC has earnings and profits for the 
current taxable year of $500. In the prior taxable year, CFC had losses 
with respect to income other than gross foreign base company income or 
gross insurance income. By reason of the limitation provided under 
section 952(c)(1)(A) and the regulations thereunder, those losses 
reduced the subpart F income (consisting entirely of foreign source 
general limitation income) of CFC by $600 for the prior taxable year.
    (iv) Taxes. Foreign tax of $30 is considered imposed on the interest 
income under the rules of section 954(b)(4) and paragraph (d) of this 
section. Foreign tax of $14 is considered imposed on the foreign base 
company sales income under the rules of section 954(b)(4) and paragraph 
(d) of this section. Foreign tax of $177 is considered imposed on the 
remaining foreign source general limitation income under the rules of 
section 954(b)(4) and paragraph (d) of this section. For the taxable 
year of the foreign corporation, the maximum U.S. rate of taxation under 
section 11 is 34 percent.
    (v) Conclusion. Based on these facts, if CFC elects to exclude all 
items of income subject to a high foreign tax under section 954(b)(4) 
and paragraph (d), it will have $500 of subpart F income as defined in 
section 952(a) (consisting entirely of foreign source general limitation 
income) determined as follows. The following steps do not illustrate the 
computation of the subpart F income of a controlled foreign corporation 
that has income from a trade or service receivable treated as interest 
under section 864(d)(1) or interest described in section 864(d)(6).

                     Step 1--Determine gross income:

(1) Gross income...................................................$1000

Step 2--Determine gross foreign base company income and gross insurance 
                                 income:

(2) Interest income included in foreign personal holding company income 
under section 954 (c)................................................100
(3) Foreign base company sales income under section 954(d)............50
(4) Total gross foreign base company income gross insurance income as 
defined in sections 954(c), (d), (e), (f) and (g) and 953 and the 
regulations thereunder (line (3) plus line (4))......................150

    Step 3--Determine adjusted gross foreign base company income and 
                    adjusted gross insurance income:

(5) Five percent of gross income (.05 x line (1)).....................50
(6) Seventy percent of gross income (.70 x line (1)).................700
(7) Adjusted gross foreign base company income and adjusted gross 
insurance income after the application of the de minimis test of 
paragraph (b) (line (4), or zero if line (4) is less than the lesser of 
line (5) or $1,000,000)..............................................150
(8) Adjusted gross foreign base company income and adjusted gross 
insurance income after the application of the full inclusion test of 
paragraph (b) (line (4), or line (1) if line (4) is greater than line 
(6)).................................................................150

            Step 4--Compute net foreign base company income:

(9) Related person interest expense and other expense allocable and 
apportionable to foreign personal holding company income..............10
(10) Deductions allocable and apportionable to foreign base company 
sales income..........................................................20
(11) Foreign personal holding company income after allocating deductions 
under section 954(b)(5) and paragraph (c) of this section (the lesser of 
line (2) or line (7), reduced (but not below zero) by line (9)).......90
(12) Foreign base company sales income after allocating deductions under 
section 954(b)(5) and paragraph (c) of this section (the lesser of line 
(3) or line (7), reduced (but not below zero) by line (10))...........30
(13) Total net foreign base company income after allocating deductions 
under section 954(b)(5) and paragraph (c) (line (11) plus line (12)) 
                                                                     120

                  Step 5--Compute net insurance income:

(14) Net insurance income under section 953 and the regulations 
thereunder.............................................................0

        Step 6--Compute adjusted net foreign base company income:

(15) Foreign tax imposed on foreign personal holding company income (as 
determined under paragraph (d)).......................................30
(16) Foreign tax imposed on foreign base company sales income (as 
determined under paragraph (d)).......................................14
(17) Ninety percent of the maximum U.S. corporate tax rate..........30.6
(18) Effective rate of foreign tax imposed on foreign personal holding 
company income (interest) under section 954(b)(4) and paragraph (d) 
(line (15) divided by line (11))......................................33
(19) Effective rate of foreign tax imposed on $40 of foreign base 
company sales income under section 954(b)(4) and paragraph (d) (line

[[Page 46]]

(16) divided by line (12))............................................47
(20) Foreign personal holding company income subject to a high foreign 
tax under section 954(b)(4) and paragraph (d) (zero, or line (11) if 
line (18) is greater than line (17))..................................90
(21) Foreign base company sales income subject to a high foreign tax 
under section 954(b)(4) and paragraph (d) (zero, or line (12) if line 
(19) is greater than line (17)).......................................30
(22) Adjusted net foreign base company income after applying section 
954(b)(4) and paragraph (d) (line (13), reduced by the sum of line (20) 
and line (21)).........................................................0

             Step 7--Compute adjusted net insurance income:

(23) Adjusted net insurance income.....................................0

 Step 8--Additions to or reduction of adjusted net foreign base company 
                   income by reason of section 952(c):

(24) Earnings and profits for the current year.......................500
(25) The excess in earnings and profits over subpart F income subject to 
being recharacterized as adjusted net foreign base company income under 
section 952(c)(2) (excess of line (24) over the sum of lines (22) and 
(23); if there is a deficit, then the limitation of section 952(c)(1) 
may apply for the current year)......................................500
(26) Amount of reduction in subpart F income for prior taxable years by 
reason of the limitation of section 952(c)(1) and the regulations 
thereunder...........................................................600
(27) Subpart F income as defined in section 952(a), assuming section 
952(a) (3), (4), or (5) does not apply (the sum of line (22), line (23), 
and the lesser of line (25) or line (26))............................500

    (b) Computation of adjusted gross foreign base company income and 
adjusted gross insurance income--(1) De minimis rule, etc.--(i) In 
general. If the de minimis rule of paragraph (b)(1)(ii) of this section 
applies, then adjusted gross foreign base company income and adjusted 
gross insurance income are each equal to zero. If the full inclusion 
rule of paragraph (b)(1)(iii) of this section applies, then adjusted 
gross foreign base company income consists of all items of gross income 
of the controlled foreign corporation other than gross insurance income, 
and adjusted gross insurance income consists of all items of gross 
insurance income. Otherwise, the adjusted gross foreign base company 
income of a controlled foreign corporation consists of the gross foreign 
base company income of the controlled foreign corporation, and the 
adjusted gross insurance income of a controlled foreign corporation 
consists of the gross insurance income of the controlled foreign 
corporation.
    (ii) Five percent de minimis test--(A) In general. The de minimis 
rule of this paragraph (b)(1)(ii) applies if the sum of the gross 
foreign base company income and the gross insurance income of a 
controlled foreign corporation is less than the lesser of--
    (1) 5 percent of gross income, or
    (2) $1,000,000.

Controlled foreign corporations having a functional currency other than 
the U.S. dollar shall translate the $1,000,000 threshold using the 
exchange rate provided under section 989(b)(3) and the regulations 
thereunder for amounts included in income under section 951(a).
    (B) Coordination with section 864(d). Gross foreign base company 
income or gross insurance income of a controlled foreign corporation 
always includes items of income from trade or service receivables 
described in section 864(d)(1) or (6), even if the de minimis rule of 
this paragraph (b)(1)(ii) is otherwise applicable. In that case, 
adjusted gross foreign base company income consists only of the items of 
income from trade or service receivables described in section 864(d)(1) 
or (6) that are included in gross foreign base company income, and 
adjusted gross insurance income consists only of the items of income 
from trade or service receivables described in section 864(d)(1) or (6) 
that are included in gross insurance income.
    (iii) Seventy percent full inclusion test. The full inclusion rule 
of this paragraph (b)(1)(iii) applies if the sum of the foreign base 
company income and the gross insurance income for the taxable year 
exceeds 70 percent of gross income.
    (2) Character of items of gross income included in adjusted gross 
foreign base company income. The items of gross income included in the 
adjusted gross foreign base company income of a controlled foreign 
corporation retain their character as foreign personal holding

[[Page 47]]

company income, foreign base company sales income, foreign base company 
services income, foreign base company shipping income, or foreign base 
company oil related income. Items of gross income included in adjusted 
gross income because the full inclusion test of paragraph (b)(1)(iii) of 
this section is met are termed ``full inclusion foreign base company 
income,'' and constitute a separate category of adjusted gross foreign 
base company income for purposes of allocating and apportioning 
deductions under paragraph (c) of this section.
    (3) Coordination with section 952(c). Items of gross foreign base 
company income or gross insurance income that are excluded from adjusted 
foreign base company income or adjusted gross insurance income because 
the de minimis test of paragraph (b)(1)(ii) of this section is met are 
potentially subject to recharacterization as adjusted net foreign base 
company income or adjusted net insurance income (or other categories of 
income included in the computation of subpart F income under section 952 
and the regulations thereunder) for the taxable year under the rules of 
section 952(c). Items of full inclusion foreign base company income that 
are included in adjusted gross foreign base company income because the 
full inclusion test of paragraph (b)(1)(iii) of this section is met, and 
are included in subpart F income under section 952 and the regulations 
thereunder, do not reduce amounts that, under section 952(c), are 
subject to recharacterization in later years on account of deficits in 
prior years.
    (4) Anti-abuse rule--(i) In general. For purposes of applying the de 
minimis and full inclusion tests of paragraph (b)(1) of this section, 
the income of two or more controlled foreign corporations shall be 
aggregated and treated as the income of a single corporation if one 
principal purpose for separately organizing, acquiring, or maintaining 
such multiple corporations is to avoid the application of the de minimis 
or full inclusion requirements of paragraph (b)(1) of this section. For 
purposes of this paragraph (b), a principal purpose need not be the 
purpose of first importance.
    (ii) Presumption. Two or more controlled foreign corporations are 
presumed to have been organized, acquired or maintained to avoid the 
effect of the de minimis and full inclusion requirements of paragraph 
(b)(1) of this section if the corporations are related persons as 
defined in subdivision (iii) of this paragraph (b)(4) and the 
corporations are described in subdivision (A), (B), or (C). This 
presumption may be rebutted by proof to the contrary.
    (A) The activities now carried on by the controlled foreign 
corporations, or the assets used in those activities, are substantially 
the same activities that were carried on, or assets that were previously 
held by a single controlled foreign corporation, and the United States 
shareholders of the controlled foreign corporations or related persons 
(as determined under subdivision (iii) of this paragraph (b)(4)) are 
substantially the same as the United States shareholders of the one 
controlled foreign corporation in that prior taxable year. A presumption 
made in connection with the requirements of this subdivision (A) of 
paragraph (b)(4)(ii) may be rebutted by proof that the activities 
carried on by each controlled foreign corporation would constitute a 
separate branch under the principles of Sec. 1.367(a)-6T(g) if carried 
on directly by a United States person.
    (B) The controlled foreign corporations carry on a business, 
financial operation, or venture as partners directly or indirectly in a 
partnership (as defined in section 7701(a)(2) and Sec. 301.7701-3) that 
is a related person (as defined in subdivision (iii) of this paragraph 
(b)(4)) with respect to each such controlled foreign corporation.
    (C) The activities carried on by the controlled foreign corporations 
would constitute a single branch operation under Sec. 1.367(a)-6T(g)(2) 
if carried on directly by the United States person.
    (iii) Related persons. For purposes of this paragraph (b), two or 
more persons are related persons if they are in a relationship described 
in section 267(b). In determining for purposes of this paragraph (b) 
whether two or more corporations are members of the same controlled 
group under section 267(b)(3), a person is considered to own stock owned 
directly by such person,

[[Page 48]]

stock owned with the application of section 1563(e)(1), and stock owned 
with the application of section 267(c). In determining for purposes of 
this paragraph (b) whether a corporation is related to a partnership 
under section 267(b)(10), a person is considered to own the partnership 
interest owned directly by such person and the partnership interest 
owned with the application of section 267(e)(3).
    (iv) Illustration. The following example illustrates the application 
of this paragraph (b)(4).

    Example. USP is the sole United States shareholder of three 
controlled foreign corporations: CFC1, CFC2 and CFC3. The three 
controlled foreign corporations all have the same taxable year. The 
three controlled foreign corporations are partners in FP, a foreign 
entity classified as a partnership under section 7701(a)(2) and Sec. 
301.7701-3 of the regulations. For their current taxable years, each of 
the controlled foreign corporations derives all of its income other than 
foreign base company income from activities conducted through FP, and 
its foreign base company income from activities conducted both jointly 
through FP and separately without FP. Based on the facts in the table 
below, for their current taxable years, the foreign base company income 
derived by each controlled foreign corporation, including income derived 
from FP, is less than five percent of the gross income of each 
controlled foreign corporation and is less than $1,000,000:

------------------------------------------------------------------------
                                        CFC1        CFC2         CFC3
------------------------------------------------------------------------
Gross income.......................  $4,000,000  $8,000,000  $12,000,000
Five percent of gross income.......     200,000     400,000      600,000
Foreign base company income........     199,000     398,000      597,000
------------------------------------------------------------------------

    Thus, without the application of the anti-abuse rule of this 
subparagraph (5), each controlled foreign corporation would be treated 
as having no foreign base company income after the application of the de 
minimis rule of section 954(b)(3)(A) and Sec. 1.954-1T(b)(1).
    However, under these facts the requirements of subdivision (i) of 
this paragraph (b)(4) are presumed to be met. The sum of the foreign 
base company income of the controlled foreign corporations is 
$1,194,000. Thus, the amount of adjusted gross foreign base company 
income will not be less than the amount of gross foreign base company 
income by reason of the de minimis rule of section 954(b)(3)(A) and this 
paragraph (b).

    (5) Illustration. The following example illustrates computations 
required by sections 952 and 954 and this Sec. 1.954-1T if the full 
inclusion test of paragraph (b)(1)(iii) is met (see paragraph (a)(8) for 
an example illustrating computations required if the de minimis test of 
paragraph (b)(1)(ii) is met):

    Example. (i) Gross Income. CFC, a controlled foreign corporation, 
has gross income of $1,000 for the current taxable year. Of that $1,000 
of income, $720 is interest income that is included in the definition of 
foreign personal holding company income under section 954(c)(1)(A) and 
Sec. 1.954-2T(b)(ii), is not income from trade or service receivables 
described in section 864(d) (1) or (6), and is not excluded from foreign 
personal holding company income under any provisions of section 954(c) 
and Sec. 1.954-2T. The remaining $280 is services income that is not 
included in the definition of foreign base company income or insurance 
income under sections 954(c), (d), (e), (f), (g) or 953 and the 
regulations thereunder, and is foreign source general limitation income 
for purposes of section 904(d)(1)(I).
    (ii) Expenses. CFC has expenses for the current taxable year of 
$650. Of that $650, $350 is from interest paid to related persons that 
is allocable to foreign personal holding company income along with $50 
of other expense. The remaining $250 of expense is allocable to services 
income other than foreign base company income or insurance income.
    (iii) Earnings and deficits. CFC has earnings and profits for the 
current taxable year of $350. In the prior taxable year, CFC had losses 
with respect to income other than foreign base company income or 
insurance income. By reason of the limitation provided under section 
952(c)(1)(A) and the regulations thereunder, those losses reduced the 
subpart F income of CFC (consisting entirely of foreign source general 
limitation income) by $600 for the prior taxable year.
    (iv) Taxes. A foreign tax of $120 is considered imposed on the $720 
of interest income under the rules of section 954(b)(4) and paragraph 
(d) of this section, and a foreign tax of $2 is considered imposed on 
the services income under the rules of section 954(b)(4) and paragraph 
(d) of this section. For the taxable year of the foreign corporation, 
the maximum U.S. rate of taxation under section 11 is 34 percent.
    (v) Conclusion. Based on these facts, if CFC elects to exclude all 
items of income subject to a high foreign tax under section 954(b)(4) 
and paragraph (d), it will have $350 of subpart F income as defined in 
section 952(a) determined as follows:

                     Step 1--Determine gross income:

(1) Gross income...................................................$1000

 Step 2--Compute gross foreign base company income and gross insurance 
                                 income:

(2) Gross foreign base company income

[[Page 49]]

and insurance income as defined in sections 954(c), (d), (e), (f), (g) 
and 953 and the regulations thereunder (interest income).............720

       Step 3--Compute adjusted gross foreign base company income:

(3) Seventy percent of gross income (.70 x line (1)).................700
(4) Adjusted gross foreign base company income or insurance income after 
the application of the full inclusion rule of this paragraph (b)(1) 
(line (2), or line (1) if line (2) is greater than line (3))........1000
(5) Full inclusion foreign base company income under paragraph 
(a)(2)(vi) (line (4) minus line (2)).................................280

            Step 4--Compute net foreign base company income:

(6) Related person interest expense and other deductions allocable and 
apportionable to foreign personal holding company income under section 
954(b)(5) and paragraph (c)..........................................400
(7) Deductions allocable and apportionable to full inclusion foreign 
base company income under section 954(b)(5) and paragraph (c)........250
(8) Foreign personal holding company income after allocating deductions 
under section 954(b)(5) and paragraph (c) of this section (line (2) 
reduced (but not below zero) by line (6))............................320
(9) Full inclusion foreign base company income after allocating 
deductions under section 954(b)(5) paragraph (c) of this section (line 
(5) reduced (but not below zero) by line (7)).........................30
(10) Total gross foreign base company income after allocating deductions 
under section 954(b)(5) and paragraph (c) (line (8) plus line (9))...350

                  Step 5--Compute net insurance income:

(11) Net insurance income under section 953 and the regulations 
thereunder.............................................................0

        Step 6--Compute adjusted net foreign base company income:

(12) Foreign tax imposed on foreign personal holding company income 
(interest)...........................................................120
(13) Foreign tax imposed on full inclusion foreign base company income 
                                                                       2
(14) Ninety percent of the maximum U.S. corporate tax rate..........30.6
(15) Effective rate of foreign tax imposed on $320 of foreign personal 
holding company income under section 954(b)(4) and paragraph (d) (line 
(12) divided by line (8)).............................................38
(16) Effective rate of foreign tax imposed of $30 of full inclusion 
foreign base company income under section 954(b)(4) and paragraph (d) 
(line (13) divided by line (9))........................................7
(17) Foreign personal holding company income subject to a high foreign 
tax under section 954(b)(4) and paragraph (d) (zero, or line (8) if line 
(15) is greater than line (14))......................................320
(18) Full inclusion foreign base company income subject to a high 
foreign tax under section 954(b)(4) and paragraph (d) (zero, or line (9) 
if line (16) is greater than line (14))................................0
(19) Adjusted net foreign base company income after applying section 
954(b)(4) and paragraph (d) (line (10), reduced by the sum of line (17) 
and line (18))........................................................30

             Step 7--Compute adjusted net insurance income:

(20) Adjusted net insurance income.....................................0

 Step 8--Additions to or reduction of adjusted net foreign base company 
                   income by reason of section 952(c):

(21) Earnings and profits for the current year.......................350
(22) The excess in earnings and profits over subpart F income, which is 
subject to being recharacterized as adjusted net foreign base company 
income under section 952(c)(2) (excess of line (21) over the sum of line 
(19) and line (20)); if there is a deficit, then the limitation of 
952(c)(1) may apply for the current year.............................320
(23) Amount of reduction in subpart F income for prior taxable years by 
reason of the limitation of section 952(c)(1) and the regulations 
thereunder...........................................................600
(24) Subpart F income as defined in section 952(a), assuming section 
952(a) (3), (4), or (5) does not apply (the sum of line (19) and line 
(20) plus the lesser of line (22) or line (23))......................350
(25) Amount of prior years' deficit remaining to be recharacterized as 
subpart F income in later years under section 952(c) (excess of line 
(23) over line (22)).................................................280

    (c) Computation of net foreign base company income. The net foreign 
base

[[Page 50]]

company income of a controlled foreign corporation is computed by 
reducing (but not below zero) the amount of gross income in each of the 
categories of adjusted gross foreign base company income described in 
paragraph (b)(2) of this section, so as to take into account deductions 
allocable and apportionable to such income. For purposes of section 954 
and this section, expenses must be allocated and apportioned consistent 
with the allocation and apportionment of expenses for purposes of 
section 904(d). For purposes of this Sec. 1.954-1T, an item of net 
foreign base company income must be categorized according to the 
category of adjusted gross foreign base company income from which it is 
derived. Thus, an item of net foreign base company income must be 
categorized as a net item of--
    (1) Foreign personal holding company income,
    (2) Foreign base company sales income,
    (3) Foreign base company services income,
    (4) Foreign base company shipping income,
    (5) Foreign base company oil related income, or
    (6) Full inclusion foreign base company income.
    (d) Computation of adjusted net foreign base company income or 
adjusted net insurance income--(1) Application of high tax exception. 
Adjusted net foreign base company income (or adjusted net insurance 
income) equals the net foreign base company income (or net insurance 
income) of a controlled foreign corporation, reduced by any item of such 
income (other than foreign base company oil related income as defined in 
section 954(g)) subject to the high tax exception provided by section 
954(b)(4) and this paragraph (d). An item of income is subject to the 
high tax exception only if--
    (i) It is established that the income was subject to creditable 
income taxes imposed by a foreign country or countries at an effective 
rate that is greater than 90 percent of the maximum rate of tax 
specified in section 11 or 15 for the taxable year of the controlled 
foreign corporation; and
    (ii) An election is made under section 954(b)(4) and paragraph 
(d)(5) of this section to exclude the income from the computation of 
subpart F income.

See paragraph (d)(4) of this section for the definition of the term 
``item of income.'' For rules concerning the treatment for foreign tax 
credit purposes of amounts excluded from subpart F under section 
954(b)(4), see Sec. 904-1.4(c)(1).
    (2) Effective rate at which taxes are imposed. For purposes of this 
paragraph (d), the effective rate at which taxes are imposed on an item 
of income is--
    (i) The amount of income taxes paid or accrued (or deemed paid or 
accrued) with respect to the item of income, determined under paragraph 
(d)(3) of this section, divided by
    (ii) The item of net foreign base company income or net insurance 
income, determined under paragraph (d)(4) of this section (including the 
appropriate amount of income taxes referred to in subdivision (i) of 
this paragraph (d)(2), immediately above).
    (3) Taxes paid or accrued with respect to an item of income--(i) 
Income other than passive foreign personal holding company income. The 
amount of income taxes paid or accrued with respect to an item of income 
(other than an item of foreign personal holding company income that is 
passive income) for purposes of section 954(b)(4) and this paragraph (d) 
is the amount of foreign income taxes that would be deemed paid under 
section 960 with respect to that item if that item were included in the 
gross income of a U.S. shareholder under section 951(a)(1)(A). For this 
purpose, the amounts that would be deemed paid under section 960 shall 
be determined separately with respect to each controlled foreign 
corporation and without regard to the limitation applicable under 
section 904(a).
    (ii) Passive foreign personal holding company income. The amount of 
income taxes paid or accrued with respect to an item of foreign personal 
holding company income that is passive income for purposes of section 
954(b)(4) and this paragraph (d) is the amount of foreign income taxes 
paid or accrued or deemed paid by the foreign corporation that would be 
taken into account for purposes of applying the provisions of Sec. 
1.904-4(c) with respect to that item of income.

[[Page 51]]

    (4) Item of income--(i) Income other than passive foreign personal 
holding company income. The high tax exception applies (when elected) to 
all income that constitutes a single item under this paragraph (d)(4). A 
single item of net foreign base company income or net insurance income 
is an amount of net foreign base company income (other than foreign 
personal holding company income that is passive income) or net insurance 
income that:
    (A) Falls within a single category of net foreign base company 
income, as defined in paragraph (c) of this section, or net insurance 
income, and
    (B) Also falls within a single separate limitation category for 
purposes of sections 904(d) and 960 and the regulations thereunder.
    (ii) Passive foreign personal holding company income--(A) In 
general. For purposes of this paragraph (d) a single item of net foreign 
personal holding company income that is passive income is an amount of 
such income that falls within a single group of passive income under the 
grouping rules of Sec. 1.904-4(c) (3), (4), and (5).
    (B) Consistency rule. An election to exclude income from subpart F 
must be consistently made with respect to all items of passive foreign 
personal holding company income eligible to be excluded. Thus, high-
taxed passive foreign personal holding company income of a controlled 
foreign corporation must be excluded in its entirety, or remain subject 
to subpart F.
    (5) Procedure. The election provided by this paragraph (d) must be 
made--
    (i) By controlling United States shareholders, as defined in Sec. 
1.964-1(c)(5), by attaching a statement to such effect with their 
original or amended income tax returns, and including any additional 
information required by subsequent administrative pronouncements, or
    (ii) In such other manner as may be prescribed in subsequent 
administrative pronouncements.

An election made under the procedure provided by this paragraph (d)(5) 
is binding on all United States shareholders of the controlled foreign 
corporation.
    (6) Illustrations. The rules of this paragraph (d) are illustrated 
by the following examples.

    Example 1. (i) Items of income. During its 1987 taxable year, 
controlled foreign corporation CFC receives from outside its country of 
operation portfolio dividend income of $100 and interest income of $100 
(consisting of a gross payment of $150 reduced by a third-country 
withholding tax of $50). For purposes of illustration, assume that the 
CFC incurs no expenses. None of the income is taxed in CFC's country of 
operation. The dividend income was not subject to their-country 
withholding taxes. The interest income was subject to withholding taxes 
equal to $50, and is therefore high withholding tax interest for 
purposes of section 960 (pursuant to the operation of section 904). The 
dividend income is passive income for purposes of section 960. 
Accordingly, pursuant to paragraph (d)(4) of this section, CFC has two 
items of income: (1) $100 of FPHC/passive income (the dividends) and (2) 
$100 of FPHC/high withholding tax income (the interest). The election 
under paragraph (d)(5) of this section to exclude high-taxed income from 
the operation of subpart F is potentially applicable to each such item 
in its entirety.
    (ii) Effective rates of tax. No foreign tax would be deemed paid 
under section 960 with respect to item (1). Therefore, the effective 
rate of foreign tax is 0, and the item may not be excluded from subpart 
F under the rules of this paragraph (d). Foreign tax of $50 would be 
deemed paid under section 960 with respect to item (2). Therefore, the 
effective rate of foreign tax is 33 percent ($50 of creditable taxes 
paid, divided by $150, consisting of the item of net foreign base 
company income ($100) plus creditable taxes paid thereon ($50). The 
highest rate of tax specified in section 11 for the 1987 taxable year is 
34 percent. Accordingly, item (2) may be excluded from subpart F 
pursuant to an election under paragraph (d)(5) of this section, since it 
is subject to foreign tax at an effective rate that is greater than 30.6 
percent (90 percent of 34 percent). However, it remains high withholding 
tax interest when included.
    Example 2. The facts are the same as in Example 1, except that CFC's 
country of operation imposes a tax of $50 with respect to CFC's dividend 
income. The interest income is still high withholding tax interest. The 
dividend income is still passive income (without regard to the possible 
applicability of the high tax exception of section 904(d)(2)). 
Accordingly, CFC has two items of income for purposes of this paragraph 
(d): (1) $100 of FPHC/high withholding tax interest income, and (2) $50 
of FPHC/passive income (net of the $50 foreign tax). Both items are 
taxed at an effective rate greater than 31.6 percent. Item 1: Foreign 
tax ($50) divided by sum ($150) of income item ($100) plus creditable

[[Page 52]]

tax thereon ($50) equals 33 percent. Item 2: Foreign tax ($50) divided 
by sum ($100) of income item ($50) plus creditable tax thereon ($50) 
equals 50 percent. Accordingly, an election may be made under paragraph 
(d)(5) of this section to exclude either, both, or neither of items 1 
and 2 from subpart F.
    Example 3. The facts are the same as in Example 1, except that the 
$100 of portfolio dividend income is subject to a third-country 
withholding tax of $50, and the $150 of interest income is from sources 
within CFC's country of operation, is subject to a $10 income tax 
therein, and is not subject to a withholding tax. Although the interest 
income and the dividend income are both passive income, under paragraph 
(d)(4)(ii)(A) of this section they constitute separate items of income 
pursuant to the application of the grouping rules of Sec. 1.904-4(c). 
Accordingly, CFC has two items of income for purposes of this paragraph 
(d): (1) $50 (net of tax) of FPHC/non-country of operation/greater than 
15 percent withholding tax income; and (2) $140 (net of $10 tax) of 
FPHC/country of operation income. Item 1 is taxed at an effective rate 
greater than 30.6 percent, but Item 2 is not. Item 1: Foreign tax ($50) 
divided by sum ($100) of income item ($50) plus creditable tax thereon 
($50) equals 50 percent. Item 2: Foreign tax ($10) divided by sum ($150) 
of income item ($140) plus creditable tax thereon ($10) equals 6.67 
percent. Therefore, an election may be made under paragraph (d)(5) of 
this section to exclude Item 1 but not Item 2 from subpart F.
    Example 4. The facts are the same as in Example 3, except that the 
$150 of interest income is subject to an income tax of $50 in CFC's 
country of operation. Accordingly, CFC has two items of income, as in 
Example 4, but both items are taxed at an effective rate greater than 
30.6 percent. Item 1: Foreign tax ($50) divided by sum ($100) of income 
item ($50) plus creditable tax thereon ($50) equals 50 percent. Item 2: 
Foreign tax ($50) divided by sum ($150) if income item ($100) plus 
creditable tax thereon ($50) equals 33 percent. Pursuant to the 
consistency rule of paragraph (d)(4)(ii)(B) of this section, CFC's 
shareholders must consistently elect or not elect to exclude from 
subpart F all items of FPHC income that are eligible to be excluded. 
Therefore, an election may be made to exclude both Item 1 and Item 2 
from subpart F, or neither may be excluded.

    (e) Character of an item of income--(1) Substance of the 
transaction. For purposes of section 954 and the regulations thereunder, 
items of income shall be characterized in accordance with the substance 
of the transaction, and not in accordance with the designation applied 
by the parties to the transaction. For example, an amount received as 
``rent'' which actually constitutes income from the sale of property, 
royalties, or income from services shall not be characterized as 
``rent'' but shall be characterized as income from the sale of property, 
royalties or income from services, respectively. Local law shall not be 
controlling in characterizing an item of income.
    (2) Separable character. To the extent one of the definitional 
provisions of section 953 or 954 describes a portion of the income or 
gain derived from a transaction, that portion of income or gain is so 
characterized. Thus, a single transaction may give rise to income in 
more than one category of foreign base company income described in 
paragraph (a)(2) of this section. For example, if a controlled foreign 
corporation, in its business of purchasing and selling personal 
property, receives interest (including imputed interest and market 
discount) on an account receivable arising from a sale, a portion of the 
income derived from the transaction by the controlled foreign 
corporation will be interest, and another portion will be gain (or loss) 
from the sale of personal property. If the sale is denominated in a 
currency other than a functional currency as defined in section 985 and 
the regulations thereunder, the controlled foreign corporation may have 
additional income in the form of foreign currency gain as defined in 
section 988.
    (3) Predominant character. The portion of income derived from a 
transaction that meets the definition of foreign personal holding 
company income is always separately determinable, and thus must always 
be segregated from other income and separately classified under 
paragraph (2) of this paragraph (e). However, the portion of income 
derived from a transaction that would meet a particular definitional 
provision under section 954 or 953 and the regulations thereunder (other 
than the definition of foreign personal holding company income) in 
unusual circumstances may be indeterminable. If such portion is 
indeterminable, it must be classified in accordance with the predominant 
character of the transaction. For example, if a controlled foreign 
corporation engineers, fabricates, and installs a fixed offshore

[[Page 53]]

drilling platform as part of an integrated transaction, and the portion 
of income that relates to services is not accounted for separately from 
the portion that relates to sales, and is otherwise indeterminable, then 
the classification of income from the transaction shall be made in 
accordance with the predominant character of the particular integrated 
arrangement.
    (4) Coordination of categories of gross foreign base company income 
or gross insurance income. The definitions of gross foreign base company 
income and gross insurance income are limited by the following rules (to 
be applied in numerical order):
    (i) If an item of income is included in subpart F income under 
section 952(a)(1) and the regulations thereunder as insurance income, it 
is by definition excluded from any other category of subpart F income.
    (ii) If an item of income is included in the foreign base company 
oil related income of a controlled foreign corporation, it is by 
definition excluded from any other category of foreign base company 
income, other than as provided in subdivision (i) of this paragraph 
(e)(4).
    (iii) If an item of income is included in the foreign base company 
shipping income of a controlled foreign corporation, it is by definition 
excluded from any other category of foreign base company income, other 
than as provided in subdivisions (i) and (ii) of this paragraph (e)(4).
    (iv) If an item of income is included in foreign personal holding 
company income of a controlled foreign corporation, it is by definition 
not included in any other category of foreign base company income, other 
than as provided in subdivisions (i), (ii), and (iii) of this paragraph 
(e)(4).

An item of income shall not be excluded from the definition of a 
category of gross foreign base company income or gross insurance income 
under this paragraph (e)(4) by reason of being included in the general 
definition of another category of gross foreign base company income or 
gross insurance income, if the item of income is excluded from that 
other category by a more specific provision of section 953 or 954 and 
the regulations thereunder. For example, income derived from a commodity 
transaction that is excluded from foreign personal holding company 
income under Sec. 1.954-2T(f) as income from qualified active sales may 
be included in gross foreign base company income if it also meets the 
definition of foreign base company sales income. See Sec. 1.954-
2T(a)(2) for the coordination of overlapping categories within the 
definition of foreign personal holding company income.

[T.D. 8216, 53 FR 27492, July 21, 1988. Redesignated and amended by T.D. 
8618, 60 FR 46530, Sept. 7, 1995]



Sec. 4.954-2  Foreign personal holding company income; taxable years 
beginning after December 31, 1986.

    (a) Computation of foreign personal holding company income--(1) In 
general. Foreign personal holding company income consists of the 
following categories of income:
    (i) Dividends, interest, rents, royalties, and annuities as defined 
in paragraph (b) of this section;
    (ii) Gain from certain property transactions as defined in paragraph 
(e) of this section;
    (iii) Gain from commodities transactions as defined in paragraph (f) 
of this section;
    (iv) Foreign currency gain as defined in paragraph (g) of this 
section; and
    (v) Income equivalent to interest as defined in paragraph (h) of 
this section.

Paragraph (a)(3) of this section provides rules for determining the use 
or purpose for which property is held, if a change in use or purpose 
would affect the computation of foreign personal holding company income 
under paragraphs (e), (f), and (g) of this section. Paragraphs (c) and 
(d) of this section provide rules for determining certain rents and 
royalties that are excluded from foreign personal holding company income 
under paragraph (b) of this section.
    (2) Coordination of overlapping definitions. If a particular portion 
of income from a transaction in substance falls within more than one of 
the definitional rules of section 954(c) and this section, its character 
is determined under the rules of subdivision (i) through (iii) of this 
paragraph (a)(2).

[[Page 54]]

The character of loss from a transaction must be similarly determined 
under the rules of this paragraph (a)(2).
    (i) If a portion of the income from a transaction falls within the 
definition of income equivalent to interest under paragraph (h) of this 
section and the definition of gain from certain property transactions 
under paragraph (e) of this section, gain from a commodities transaction 
under paragraph (f) of this section (whether or not derived from a 
qualified hedging transaction or qualified active sales), or foreign 
currency gain under paragraph (g) of this section (whether or not 
derived from a qualified business transaction or a qualified hedging 
transaction), that portion of income is treated as income equivalent to 
interest for purposes of section 954(c) and this section.
    (ii) If a portion of the income from a transaction falls within the 
definition of foreign currency gain under paragraph (g) of this section 
(whether or not derived from a qualified business transaction or a 
qualified hedging transaction) and the definition of gain from certain 
property transactions under paragraph (e) of this section, or gain from 
a commodities transaction under paragraph (f) of this section (whether 
or not derived from a qualified hedging transaction or qualified active 
sales), that portion of income is treated as foreign currency gain for 
purposes of section 954(c) and this section.
    (iii) If a portion of the income from a transaction falls within the 
definition of gain from a commodities transaction under paragraph (f) of 
this section (whether or not derived from a qualified hedging 
transaction or qualified active sales) and the definition of gain from 
certain property transactions under paragraph (e) of this section, that 
portion of income is treated as gain from a commodities transaction for 
purposes of section 954(c) and this section.
    (3) Changes in the use or purpose with which property is held--(i) 
In general. Under paragraphs (e), (f), and (g) of this section, 
transactions in certain property give rise to gain or loss included in 
the computation of foreign personal holding company income if the 
controlled foreign corporation holds that property for a particular use 
or purpose. For purposes of this section, in determining the purpose or 
use for which property is held, the period shortly before disposition is 
the most significant period. However, if a controlled foreign 
corporation held property with a purpose that would have caused its 
disposition to give rise to gain or loss included in the computation of 
foreign personal holding company income under this section, and prior to 
disposition the controlled foreign corporation changed the purpose or 
use for which it held the property to one that would cause its 
disposition to give rise to gain or loss excluded from the computation 
of foreign personal holding company income, then the later purpose or 
use shall be ignored unless it was continuously present for a 
predominant portion of the period during which the controlled foreign 
corporation held the property. Under paragraph (g)(4)(iii) of this 
section, a currency hedging transaction may be treated as two or more 
separate hedging transactions, such that each portion is separately 
considered in applying this paragraph (a)(3).
    (ii) Illustrations. The following examples illustrate the 
application of this paragraph (a)(3).

    Example 1. At the beginning of taxable year 1, CFC, a controlled 
foreign corporation, purchases a building for investment. During taxable 
years 1 and 2, CFC derives rents from this building that are included in 
the computation of foreign personal holding company income under 
paragraph (b)(1)(iii) of this section. At the beginning of taxable year 
3, CFC changes the use of the building by terminating all leases, and 
using it in an active trade or business. At the beginning of taxable 
year 4, CFC sells the building at a gain. For purposes of paragraph (e) 
of this section (gains from the sale or exchange of certain property) 
the building is considered to be property that gives rise to rents, as 
described in paragraph (e)(2). Because there was a change of use at the 
beginning of year 3 that would cause the disposition of the building to 
give rise to gain or loss excluded from the computation of foreign 
personal holding company income, the characterization of the gain 
derived at the beginning of year 4 is determined according to the 
property's use during the predominant portion of the period from 
purchase to date of sale. Therefore, gain from the sale of that building 
is included in the computation of foreign

[[Page 55]]

personal holding company income under paragraph (e) of this section.
    Example 2. For taxable years 1, 2, and 3, CFC, a controlled foreign 
corporation, is engaged in the active conduct of a commodity business as 
a handler of gold, as defined in paragraph (f)(3)(iii), and 
substantially all of its business is as an active handler of gold, as 
defined in paragraph (f)(3)(iv). At the beginning of taxable year 1, CFC 
purchases 1000 ounces of gold for investment. At the beginning of 
taxable year 3, CFC begins holding that gold in physical form for sale 
to customers. During taxable year 3, CFC sells the entire 1000 ounces of 
gold in transactions described in paragraph (f)(3)(ii) at a gain. For 
purposes of paragraph (f), CFC is considered to hold the gold for 
investment, and not in its capacity as an active handler of gold. Thus, 
under paragraph (f)(3)(i), the gold is not considered to be sold in the 
active trade or business of the CFC as a handler of gold, and gain from 
the sale is included in the computation of foreign personal holding 
company income under paragraph (f) of this section.
    Example 3. CFC, a controlled foreign corporation, is a regular 
dealer in unimproved land. The functional currency (as defined in 
section 985 and the regulations thereunder) of CFC is country X 
currency. On day 1 of its current taxable year, CFC enters into an 
agreement with A to pay $100 for certain real property to be held by CFC 
for investment. On day 10, under its method of accounting, CFC accrues 
the value of $100 in country X currency, but payment will not be made 
until the first day of the next taxable year (day 366). On day 190, CFC 
determines to hold the property for sale to customers in a transaction 
that would be a qualified business transaction under paragraph (g)(3) of 
this section. For purposes of this section, the land is considered to be 
held for investment, and the foreign currency gain attributable to that 
transaction is included in the computation of foreign personal holding 
company income under paragraph (g) of this section.
    Example 4. CFC, a controlled foreign corporation, is a regular 
dealer in widgets. The functional currency (as defined in section 985 
and the regulations thereunder) of CFC is country X currency. On day 1 
of its current taxable year, CFC sells widgets held in inventory to A 
for delivery on day 60. The sales price is denominated in U.S. dollars, 
and payment is to be made by A on the same day the widgets are to be 
delivered to A. The remaining facts and circumstances are such that this 
sale would meet the definition of a qualified business transaction under 
paragraph (g)(4), the foreign currency gain from which would be excluded 
from the computation of foreign personal holding company income under 
paragraph (g). On day 1, CFC sells U.S. dollars forward for delivery in 
60 days in a transaction that would be a qualified hedging transaction 
under paragraph (g)(5). On day 25 the sale of widgets to A is cancelled 
in a transaction that does not result in CFC realizing any foreign 
currency gain or loss with respect to the sale of widgets. However, CFC 
holds the dollar forward contract to maturity. Because the forward 
contract does not hedge a qualified business transaction during the 
period shortly before its maturity, it is not to be considered a 
qualified hedging transaction under paragraph (g), and any foreign 
currency gain or loss recognized therefrom is included in the 
computation of foreign personal holding company income under paragraph 
(g). However, if CFC identifies the portion of the foreign currency gain 
or loss derived from the forward contract that is attributable to days 1 
through 25, and the portion that is attributable to days 25 through 60, 
the forward contract may be considered two separate transactions in 
accordance with the rules provided by paragraph (g)(4)(ii) of this 
section. Thus, the forward sale may be separately considered a qualified 
hedging transaction for day 1 through day 25, and the foreign currency 
gain or loss attributable to day 1 through day 25 may be excluded from 
the computation of foreign personal holding company income under 
paragraph (g) of this section.
    Example 5. CFC, a controlled foreign corporation, has country X 
currency as its functional currency under section 985 and the 
regulations thereunder. On day 1 of the current taxable year, CFC, 
speculating on exchange rates, sells dollars forward for delivery in 120 
days. On day 65, CFC sells widgets held in inventory at a price 
denominated in dollars to be paid on day 120 in a transaction that is a 
qualified business transaction. CFC had not made any other dollar sales 
between day 1 and day 65 and does not anticipate making any other dollar 
sales during the taxable year. On day 65, CFC accrues the value of $100 
in country X currency. On day 120, CFC receives $100 payment for the 
widgets and recognizes foreign currency loss pursuant to that 
transaction. On day 120 CFC also delivers dollars in connection with the 
forward sale, and recognizes foreign currency gain pursuant to the 
delivery. Under this paragraph (a)(3) the currency transaction is 
considered to have been entered into for speculation, and any currency 
gain recognized by CFC on the forward sale of dollars must be included 
in the computation of foreign personal holding company income under 
paragraph (g). However, if CFC identifies the portion of the forward 
sale, and the foreign currency gain or therefrom, that is attributable 
to day 1 through day 64, and the portion that is attributable to day 65 
through day 120, the forward sale may be considered two separate 
transactions in accordance with the rules provided by paragraph

[[Page 56]]

(g)(4)(ii) of this section. Thus, the transaction for day 65 through day 
120 may be considered a separate transaction that is a qualified hedging 
transaction, and the foreign currency gain attributable to day 65 
through day 120 may be excluded from the computation of foreign personal 
holding company income under this paragraph (g) if all the other 
requirements for treatment as a qualified hedging transaction under 
paragraph (g) are met.

    (4) Definitions. The following definitions apply for purposes of 
computing foreign personal holding company income under this section.
    (i) Interest. The term ``interest'' includes amounts that are 
treated as ordinary income, original issue discount or interest income 
(including original issue discount and interest on a tax-exempt 
obligation) by reason of sections 482, 483, 864(d), 1273, 1274, 1276, 
1281, 1286, 1288, 7872 and the regulations thereunder, or as interest or 
original issue discount income by reason of any other provision of law. 
For special rules concerning interest exempt from U.S. tax pursuant to 
section 103, see paragraph (b)(6) of this section.
    (ii) Inventory and similar property. The term ``inventory and 
similar property'' (or ``inventory or similar property'') means property 
that is stock in trade of the controlled foreign corporation or other 
property of a kind which would properly be included in the inventory of 
the controlled corporation if on hand at the close of the taxable year 
(were the controlled foreign corporation a domestic corporation), or 
property held by the controlled foreign corporation primarily for sale 
to customers in the ordinary course of its trade or business. Rights to 
property held in bona fide hedging transactions that reduce the risk of 
price changes in the cost of ``inventory and similar property'' are 
included in the definition of that term if they are an integral part of 
the system by which a controlled foreign corporation purchases such 
property, and they are so identified by the close of the fifth day after 
the day on which the hedging transaction is entered into.
    (iii) Regular dealer. The term ``regular dealer'' means a merchant 
with an established place of business that--
    (A) Regularly and actively engages as a merchant in purchasing 
property and selling it to customers in the ordinary course of business 
with a view to the gains and profits that may be derived therefrom, or
    (B) Makes a market in derivative financial products of property 
(such as forward contracts to buy or sell property, option contracts to 
buy or sell property, interest rate and currency swap contracts or other 
national principal contracts) by regularly and actively offering to 
enter into positions in such products to the public in the ordinary 
course of business.

Purchasing and selling property through a regulated exchange or 
established off-exchange market (for example, engaging in futures 
transactions) is not actively engaging as a merchant for purposes of 
this section.
    (iv) Dealer property. Property held by a controlled foreign 
corporation is ``dealer property'' if--
    (A) The controlled foreign corporation is a regular dealer in 
property of such kind, and
    (B) The property is held by the controlled foreign corporation in 
its capacity as a dealer.

Property which is held by the controlled foreign corporation for 
investment or speculation is not such property.
    (v) Debt instrument. The term ``debt instrument'' includes bonds, 
debentures, notes, certificates, accounts receivable, and other 
evidences of indebtedness.
    (b) Dividends, etc.--(1) In general. Foreign personal holding 
company includes:
    (i) Dividends, except certain dividends from related persons as 
described in paragraph (b)(3) of this section and distributions of 
previously taxed income under section 959(b) and the regulations 
thereunder;
    (ii) Interest, except export financing interest as defined in 
paragraph (b)(2) of this section and certain interest received from 
related persons as described in paragraph (b)(3) of this section;
    (iii) Rents and royalties, except certain rents and royalties 
received from related persons as described in (b)(4) of this section and 
rents and royalties derived in the active conduct of a trade or business 
as defined in paragraph (b)(5); and

[[Page 57]]

    (iv) Annuities.
    (2) Exclusion of certain export financing--(i) In general. Pursuant 
to section 954(c)(2)(B), foreign personal holding company income 
computed under section 954(c)(1)(A) and this paragraph (b) does not 
include interest that is export financing interest. For purposes of 
section 954(c)(2)(B) and this section, the term ``export financing 
interest'' means interest that is derived in the conduct of a banking 
business and is export financing interest as defined in section 
904(d)(2)(G) and the regulations thereunder. Pursuant to section 
864(d)(5)(A)(iii), it does not include income from related party 
factoring that is treated as interest under section 864(d)(1) or 
interest described in section 864(d)(6).
    (ii) Conduct of a banking business. For purposes of this section, 
export financing interest as defined in section 904(d)(2)(G) and the 
regulations thereunder is considered derived in the conduct of a banking 
business if, in connection with the financing from which the interest is 
derived, the corporation, through its own officers or staff of 
employees, engages in all the activities in which banks customarily 
engage in issuing and servicing a loan.
    (iii) Illustration. The following example illustrates the 
application of this provision:

    Example. DS, a domestic corporation, manufactures property in the 
United States. In addition to selling inventory (property described in 
section 1221(1)), DS occasionally sells depreciable equipment it 
manufactures for use in its trade or business, which is property 
described in section 1221(2). Less than 50 percent of the fair market 
value, determined in accordance with section 904(d)(2)(G) and the 
regulations thereunder, of each item of inventory or equipment sold by 
DS is attributable to products imported into the United States. CFC, a 
controlled foreign corporation related (as defined in section 954(d)) to 
DS, provides loans for the purchase of property from DS, if the property 
is purchased exclusively for use of consumption outside the United 
States.
    If, in issuing and servicing loans made with respect to purchases 
from DS of depreciable equipment used in its trade or business, which is 
property described in section 1221(2) in the hands of DS, CFC engages in 
all the activities in which banks customarily engage in issuing and 
servicing loans, the interest accrued from these loans would be export 
financing interest meeting the requirements of paragraph (b)(2) of this 
section, which would not be included in foreign personal holding company 
income under section 954(c) and paragraph (b)(1)(ii) of this section. 
However, interest from the loans made with respect to purchases from DS 
of property which is inventory in the hands of DS cannot be export 
financing interest because it is treated as income from a trade or 
service receivable under section 864(d)(6) and the regulations 
thereunder, and thus is included in foreign personal holding company 
income under paragraph (b)(1)(ii) of this section. See Sec. 1.864-8T(d) 
for rules concerning certain income from trade and service receivables 
qualifying under the same country exception of section 864(d)(7).

    (3) Exclusion of dividends and interest from related persons--(i) 
Excluded dividends and interest. Foreign personal holding company income 
does not include dividends and interest if--
    (A) The payor is a corporation that is a related person as defined 
in section 954(a)(3),
    (B) The payor is created or organized (``incorporated'') under the 
laws of the same foreign country as the controlled foreign corporation, 
and
    (C) A substantial part of the payor's assets are used in a trade or 
business in the payor's country of incorporation as determined under 
subdivision (iv) of this paragraph (b)(3).

Except as otherwise provided under this paragraph (b)(3), the principles 
of section 367(a) and regulations thereunder shall apply in determining 
whether the payor has a trade or business in its country of 
incorporation, and whether its assets are used in that trade or 
business.
    (ii) Interest paid out of adjusted foreign base company income or 
insurance income. Interest may not be excluded from the foreign personal 
holding company income of the recipient under this paragraph (b)(3) to 
the extent that the deduction for the interest is allocated under Sec. 
1.954-1T(c) to the payor's adjusted gross foreign base company income 
(as defined in Sec. 1.954-1T(a)(3)), adjusted gross insurance income 
(as defined in Sec. 1.954-1T(a)(6)), or other categories of income 
included in the computation of subpart F income under section 952(a), 
for purposes of computing the payor's net foreign base company income 
(as defined in Sec. 1.954-

[[Page 58]]

1T(a)(4), net insurance income (as defined in Sec. 1.954-1T(a)(6)), or 
income described in sections 952(a) (3), (4), and (5).
    (iii) Dividends paid out of prior years' earnings. Dividends are 
excluded from foreign personal holding company income under this 
paragraph (b)(3) only to the extent they are paid out of earnings and 
profits which were earned or accumulated during a period in which the 
requirements of subdivision (i) of this paragraph (b)(3) were satisfied 
or, to the extent earned or accumulated during a taxable year of the 
related foreign corporation ending on or before December 31, 1962, 
during a period in which the payor was a related corporation as to be 
controlled foreign corporation and the other requirements of subdivision 
(i) of this paragraph (b)(3) are substantially satisfied.
    (iv) Fifty percent substantial assets test. A substantial part of 
the assets of the payor will be considered used in a trade or business 
located in its country of incorporation only if, for each quarter during 
such taxable year, the average value (as of the beginning and end of the 
quarter) of its assets which are used in the trade or business and are 
located in such country constitutes over 50 percent of the average value 
(as of the beginning and end of the quarter) of all the assets of the 
payor (including assets not used in a trade or business). For such 
purposes the value of assets shall be determined under subdivision (v) 
of this paragraph (b)(3), and the location of assets used in a trade or 
business of the payor shall be determined under subdivisions (vi) 
through (xi) of this paragraph (b)(3).
    (v) Value of assets. For purposes of determining whether a 
substantial part of the assets of the payor are used in a trade or 
business in its country of incorporation, the value of assets shall be 
their actual value (not reduced by liabilities), which, in the absence 
of affirmative evidence to the contrary, shall be deemed to be their 
adjusted basis.
    (vi) Location of tangible property used in a trade or business--(A) 
In general. Tangible property (other than inventory and similar 
property) used in a trade or business is considered located in the 
country in which it is physically located.
    (B) Exception. If tangible personal property used in a trade or 
business is intended for use in the payor's country of incorporation, 
but is temporarily located elsewhere, it will be considered located 
within payor's country of incorporation if the reason for its location 
elsewhere is for inspection or repair, and it is not currently in 
service in a country other than the payor's country of incorporation and 
is not to be placed in service in a country other than the payor's 
country of incorporation following the inspection or repair.
    (vii) Location of intangible property used in a trade or business--
(A) In general. The location of intangible property (other than 
inventory or similar property and debt instruments) used in a trade or 
business is determined based on the site of the activities conducted by 
the payor during the current year in connection with using or exploiting 
that property. An item of intangible property is located in the payor's 
country of incorporation during each quarter of the current taxable year 
if the activities connected with its use or exploitation are conducted 
during the entire current taxable year by the payor in its country of 
incorporation. For this purpose, the determination of the country in 
which services are performed shall be made under the principles of 
section 954(e) and Sec. 1.954-4(c).
    (B) Property located in part in the payor's country of incorporation 
and in part in other countries. If the activities connected with the use 
or exploitation of an item of intangible property are conducted during 
the current taxable year by the payor in the payor's country of 
incorporation and in other countries, then a percentage of the 
intangible (measured by the average value of the item as of the 
beginning and end of the quarter) is considered located in the payor's 
country of incorporation during each quarter. That percentage equals the 
ratio that the expenses of the payor incurred during the entire taxable 
year by reason of such activities that are conducted in the payor's 
country of incorporation bear to the expenses of the payor incurred 
during the entire taxable year by reason of all

[[Page 59]]

such activities worldwide. Expenses incurred in connection with the use 
or exploitation of an item of intangible property are included in the 
computation provided by this paragraph (b)(3) if they are deductible 
under section 162 or includible in inventory costs or the costs of goods 
sold (were the payor a domestic corporation).
    (viii) Location of property held for sale to customers--(A) In 
general. Inventory or similar property is considered located in the 
payor's country of incorporation during each quarter of the taxable year 
if the activities of the payor in connection with the production and 
sale, or purchase and release, of such property and conducted in the 
payor's country of incorporation during the entire taxable year. If the 
payor conducts such activities through an independent contractor, then 
the location of such activities shall be the place in which they are 
conducted by the independent contractor.
    (B) Inventory located in part in the payor's country of 
incorporation and in part in other countries. If the activities 
connected with the production and sales, or purchase and resale, of 
inventory or similar property are conducted by the payor in the payor's 
country of incorporation and other countries, then a percentage of the 
inventory or similar property (measured by the average value of the item 
as of the beginning and end of the quarter) is considered located in the 
payor's country of incorporation each quarter. That percentage equals 
the ratio that the costs of the payor incurred during the entire taxable 
year by reason of such activities that are conducted in the payor's 
country of incorporation bear to all such costs incurred by reason of 
such activities worldwide. A cost incurred in connection with the 
production and sale or purchase and resale of inventory or similar 
property is included in this computation if it--
    (1) Must be included in inventory costs or otherwise capitalized 
with respect to inventory or similar property under section 61, 263A, 
471, or 472 and the regulations thereunder (whichever would be 
applicable were the payor a domestic corporation), or
    (2) Would be deductible under section 162 (were the payor a domestic 
corporation) and is definitely related to gross income derived from such 
property (but not to all classes of gross income derived by the payor) 
under the principles of Sec. 1.861-8.
    (ix) Location of debt instruments. For purposes of this paragraph 
(b)(3), debt instruments are considered to be used in a trade or 
business only if they arise from the sale of inventory or similar 
property by the payor or from the rendition of services by the payor in 
the ordinary course of a trade or business of the payor, but only until 
such time as interest is required to be charged under section 482 and 
the regulations thereunder. Debt instruments that arise from the sale of 
inventory or similar property are treated as having the same location, 
proportionately, as inventory or similar property that is held during 
the same calendar quarter. Debt instruments arising from the rendition 
of services in the ordinary course of a trade or business are considered 
located on a proportionate basis in the countries in which the services 
to which they relate are performed.
    (x) Treatment of certain stock interests. For the purpose of 
determining the value of assets used in a trade or business in the 
country of incorporation, stock directly or indirectly owned by the 
payor within the meaning of section 958(a) in a controlled foreign 
corporation (``lower-tier corporation''), which is incorporated in the 
same country as the payor, shall be considered located in the country of 
incorporation and used in a trade or business of the payor in proportion 
to the value of the assets of the lower-tier corporation that are used 
in a trade or business in the country of incorporation. The location of 
assets used in a trade or business of the lower-tier corporation shall 
be determined under the rules of this paragraph (b)(3).
    (xi) Determination of period during which property is used in a 
trade or business. Property purchased or produced for use in a trade or 
business shall not be considered used in a trade or business until it is 
placed in service, and shall cease to be considered used in a trade or 
business when it is retired from service. The dates during which 
depreciable property is determined to

[[Page 60]]

be in use must be consistent with the determination of depreciation 
under sections 167 and 168 and the regulations thereunder.
    (xii) Treatment of banks and insurance companies. [Reserved.]
    (4) Exclusion of rents and royalties derived from related persons--
(i) In general. Foreign personal holding company income does not include 
rents or royalties if--
    (A) The payor is a corporation that is a related person as defined 
in section 954(d)(3), and
    (B) The rents or royalties are for the use of, or the privilege of 
using, property within the country under the laws of which the recipient 
of the payments is created or organized.

If the property is used both within and without the country under the 
laws of which the controlled foreign corporation is created or 
organized, the part of the rent or royalty attributable to the use of, 
or the privilege of using, the property outside such country of 
incorporation is, unless otherwise provided, foreign personal holding 
company income under this paragraph (b).
    (ii) Rents or royalties paid out of adjusted foreign base company 
income or insurance income. Rents or royalties may not be excluded from 
the foreign personal holding company income of the recipient under this 
paragraph (b)(4) to the extent that deductions for the payments are 
allocated under section 954(b)(5) and Sec. 1.954-1T(a)(4) to the 
payor's adjusted gross foreign base company income (as defined in Sec. 
1.954-1T(a)(3)), adjusted gross insurance income (as defined in Sec. 
1.954-1T(a)(6), or other categories of income included in the 
computation of subpart F income under section 952(a), for purposes of 
computing the payor's net foreign base company income (as defined in 
Sec. 1.954-1T(a)(4)), net insurance income (as defined in Sec. 1.954-
1T(a)(6)), or income described in section 952(a) (3), (4), or (5).
    (5) Exclusion of rents and royalties derived in the active conduct 
of a trade or business. Foreign personal holding company income shall 
not include rents or royalties which are derived in the active conduct 
of a trade or business and which are received from a person other than a 
related person within the meaning of section 954(d)(3). Whether or not 
rents or royalties are derived in the active conduct of a trade or 
business is to be determined from the facts and circumstances of each 
case; but see paragraph (c) or (d) of this section for specific cases in 
which rents or royalties will be considered for purposes of this 
paragraph to be derived in the active conduct of a trade or business. 
The frequency with which a foreign corporation enters into transactions 
from which rents or royalties are derived will not of itself establish 
the fact that such rents or royalties are derived in the active conduct 
of a trade or business.
    (6) Treatment of tax exempt interest. Foreign personal holding 
company income includes all interest income, including interest that is 
exempt from U.S. tax pursuant to section 103 (``tax-exempt interest''). 
However, that net foreign base company income of a controlled foreign 
corporation that is attributable to such tax-exempt interest shall be 
treated as tax-exempt interest in the hands of the U.S. shareholders of 
the foreign corporation. Accordingly, any net foreign base company 
income that is included in the subpart F income of a U.S. shareholder 
and that is attributable to such tax-exempt interest shall remain exempt 
from the regular income tax, but potentially subject to the alternative 
minimum tax, in the hands of the U.S. shareholder.
    (c) Excluded rents--(1) Trade or business cases. Rents will be 
considered for purposes of paragraph (b)(5) of this section to be 
derived in the active conduct of a trade or business if such rents are 
derived by the controlled foreign corporation (``lessor'') from 
leasing--
    (i) Property which the lessor has manufactured or produced, or has 
acquired and added substantial value to, but only if the lessor is 
regularly engaged in the manufacture or production of, or in the 
acquisition and addition of substantial value to, property of such kind,
    (ii) Real property with respect to which the lessor, through its own 
officers or staff of employees, regularly performs active and 
substantial management and operational functions while the property is 
leased,
    (iii) Personal property ordinarily used by the lessor in the active 
conduct

[[Page 61]]

of a trade or business, leased during a temporary period when the 
property would, but for such leasing, be idle, or
    (iv) Property which is leased as a result of the performance of 
marketing functions by such lessor if the lessor, through its own 
officers or staff of employees located in a foreign country, maintains 
and operates an organization in such country which is regularly engaged 
in the business of marketing, or of marketing and servicing, the leased 
property and which is substantial in relation to the amount of rents 
derived from the leasing of such property.
    (2) Special rules--(i) Adding substantial value. For purposes of 
paragraph (c)(1)(i) of this section, the performance of marketing 
functions will not be considered to add substantial value to property.
    (ii) Substantiality of foreign organization. An organization in a 
foreign country will be considered substantial in relation to the amount 
of rents, for purposes of paragraph (c)(1)(iv) of this section, if 
active leasing expenses, as defined in paragraph (c)(2)(iii), equal or 
exceed 25 percent of the adjusted leasing profit, as defined in 
paragraph (c)(2)(iv) of this section.
    (iii) Active leasing expenses The term ``active leasing expenses'' 
means the deductions incurred by an organization of the lessor in a 
foreign country which are properly allocable to rental income and which 
would be allowable under section 162 to the lessor (were the lessor a 
domestic corporation) other than--
    (A) Deductions for compensation for personal services rendered by 
shareholders of, or related persons with respect to, the lessor,
    (B) Deductions for rents paid or accrued,
    (C) Deductions which, although generally allowable under section 
162, would be specifically allowable to the lessor (were the lessor a 
domestic corporation) under sections other than section 162 (such as 
sections 167 and 168), and
    (D) Deductions for payments made to independent contractors with 
respect to the leased property.
    (iv) Adjusted leasing profit. The term ``adjusted leasing profit'' 
means the gross income of the lessor from rents, reduced by the sum of--
    (A) The rents paid or incurred by the controlled foreign corporation 
with respect to such gross rental income,
    (B) The amounts which would be allowable to such lessor (were the 
lessor a domestic corporation) as deductions under section 167 or 168 
with respect to such rental income, and
    (C) The amounts paid to independent contractors with respect to such 
rental income.
    (3) Illustrations. The application of this paragraph (c) is 
illustrated by the following examples.

    Example 1. Controlled foreign corporation A is regularly engaged in 
the production of office machines which it sells or leases to others and 
services. Under paragraph (c)(1)(i) of this section, the rental income 
of A Corporation from the leases is derived in the active conduct of a 
trade or business for purposes of section 954(c)(2)(A).
    Example 2. Controlled foreign corporation D purchases motor vehicles 
which it leases to others. In the conduct of its short-term leasing of 
such vehicles in foreign country X, Corporation D owns a large number of 
motor vehicles in country X which it services and repairs, leases motor 
vehicles to customers on an hourly, daily, or weekly basis, maintains 
offices and service facilities in country X from which to lease and 
service such vehicles, and maintains therein a sizable staff of its own 
administrative, sales, and service personnel. Corporation D also leases 
in country X on a long-term basis, generally for a term of one year, 
motor vehicles which it owns. Under the terms of the long-term leases, 
Corporation D is required to repair and service, during the term of the 
lease, the leased motor vehicles without cost to the lessee. By the 
maintenance in country X of office, sales, and service facilities and 
its complete staff of administrative, sales, and service personnel, 
Corporation D maintains and operates an organization therein which is 
regularly engaged in the business of marketing and servicing the motor 
vehicles which are leased. The deductions incurred by such organization 
satisfy the 25-percent test of paragraph (c)(2)(ii) of this section; 
thus, such organization is substantial in relation to the rents 
Corporation D receives from leasing the motor vehicles. Therefore, under 
paragraph (c)(1)(iv) of this section, such rents are derived in the 
active conduct of a trade or business for purposes of section 
954(c)(2)(A).
    Example 3. [Reserved]
    Example 4. Controlled foreign corporation E owns a complex of 
apartment buildings

[[Page 62]]

which it has acquired by purchase. Corporation E engages a real estate 
management firm to lease the apartments, manage the buildings and pay 
over the net rents to the owner. The rental income of E Corporation from 
such leases is not derived in the active conduct of a trade or business 
for purposes of section 954(c)(2)(A).
    Example 5. Controlled foreign corporation F acquired by purchase a 
twenty-story office building in a foreign country, three floors of which 
it occupies and the rest of which it leases. Corporation F acts as 
rental agent for the leasing of offices in the building and employs a 
substantial staff to perform other management and maintenance functions. 
Under paragraph (c)(1)(ii) of this section, the rents received by 
Corporation F from such leasing operations are derived in the active 
conduct of a trade or business for purposes of section 954(c)(2)(A).
    Example 6. Controlled foreign corporation G owns equipment which it 
ordinarily uses to perform contracts in foreign countries to drill oil 
wells. For occasional brief and irregular periods it is unable to obtain 
contracts requiring immediate performance sufficient to employ all such 
equipment. During such a period it sometimes leases such idle equipment 
temporarily. After the expiration of such temporary leasing of the 
property, Corporation G continues the use of such equipment in the 
performance of its own drilling contracts. Under paragraph (c)(1)(iii) 
of this section, rents G receives from such leasing of idle equipment 
are derived in the active conduct of a trade or business for purposes of 
section 954(c)(2)(A).

    (d) Excluded royalties--(1) Trade or business cases. Royalties will 
be considered for purposes of paragarph (b)(5) of this section to be 
derived in the active conduct of a trade or business if such royalties 
are derived by the controlled foreign corporation (``licensor'') from 
licensing--
    (i) Property which the licensor has developed, created, or produced, 
or has acquired and added substantial value to, but only so long as the 
licensor is regularly engaged in the development, creation, or 
production of, or in the acquisition of and addition of substantial 
value to, property of such kind, or
    (ii) Property which is licensed as a result of the performance of 
marketing functions by such licensor and the licensor, through its own 
staff of employees located in a foreign country, maintains and operates 
an organization in such country which is regularly engaged in the 
business of marketing, or of marketing and servicing, the licensed 
property and which is substantial in relation to the amount of royalties 
derived from the licensing of such property.
    (2) Special rules--(i) Adding substantial value. For purposes of 
paragraph (d)(1)(i), the performance of marketing functions will not be 
considered to add substantial value to property.
    (ii) Substantiality of foreign organization. An organization in a 
foreign country will be considered substantial in relation to the amount 
of royalties, for purposes of paragraph (d)(1)(ii) of this section, if 
the active licensing expenses, as defined in paragraph (d)(2)(iii) of 
this section, equal or exceed 25 percent of the adjusted licensing 
profit, as defined in paragraph (d)(2)(iv) of this section.
    (iii) Active licensing expenses. The term ``active licensing 
expenses'' means the deductions incurred by an organization of the 
licensor which are properly allocable to royalty income and which would 
be allowable under section 162 to the licensor (were the licensor a 
domestic corporation) other than--
    (A) Deductions for compensation for personal services rendered by 
shareholders of, or related persons with respect to, the licensor,
    (B) Deductions for royalties paid or incurred,
    (C) Deductions which, although generally allowable under section 
162, would be specifically allowable to the licensor (were the 
controlled foreign corporation a domestic corporation) under sections 
other than section 162 (such as section 167), and
    (D) Deductions for payments made to independent contractors with 
respect to the licensed property.
    (iv) Adjusted licensing profit. The term ``adjusted licensing 
profit'' means the gross income of the licensor from royalties, reduced 
by the sum of--
    (A) The royalties paid or incurred by the controlled foreign 
corporation with respect to such gross royalty income,
    (B) The amounts which would be allowable to such licensor as 
deductions under section 167 (were the licensor a domestic corporation) 
with respect to such royalty income, and

[[Page 63]]

    (C) The amounts paid to independent contractors with respect to such 
royalty income.
    (3) Illustrations. The application of this paragraph (d) is 
illustrated by the following examples.

    Example 1. Controlled foreign corporation A, through its own staff 
of employees, owns and operates a research facility in foreign country 
X. At the research facility employees of Corporation A who are full time 
scientists, engineers, and technicians regularly perform experiments, 
tests, and other technical activities, which ultimately result in the 
issuance of patents that it sells or licenses. Under paragraph (d)(1)(i) 
of this section, royalties received by Corporation A for the privilege 
of using patented rights which it develops as a result of such research 
activity are derived in the active conduct of a trade or business for 
purposes of section 954(c)(2)(A).
    Example 2. Assume that Corporation A in example 1, in addition to 
receiving royalties for the use of patents which it develops, receives 
royalties for the use of patents which it acquires by purchase and 
licenses to others without adding any value thereto. Corporation A 
generally consummates royalty agreements on such purchased patents as 
the result of inquiries received by it from prospective licensees when 
the fact becomes known in the business community, as a result of the 
filing of a patent, advertisements in trade journals, announcements, and 
contacts by employees of Corporation A, that Corporation A has acquired 
rights under a patent and is interested in licensing its rights. 
Corporation A does not, however, maintain and operate an organization in 
a foreign country which is regularly engaged in the business of 
marketing the purchased patents. The royalties received by Corporation A 
for the use of the purchased patents are not derived in the active 
conduct of a trade or business for purposes of section 954(c)(2)(A).
    Example 3. Controlled foreign corporation B receives royalties for 
the use of patents which it acquires by purchase. The primary business 
of Corporation B, operated on a regular basis, consists of licensing 
patents which it has purchased ``raw'' from inventors and, through the 
efforts of a substantial staff of employees consisting of scientists, 
engineers, and technicians, made susceptible to commercial application. 
For example, Corporation B, after purchasing patent rights covering a 
chemical process, designs specialized production equipment required for 
the commercial adaptation of the process and, by so doing, substantially 
increases the value of the patent. Under paragraph (d)(1)(i) of this 
section, royalties received by Corporation B from the use of such patent 
are derived in the active conduct of a trade or business for purposes of 
section 954(c)(2)(A).
    Example 4. Controlled foreign corporation D finances independent 
persons in the development of patented items in return for an ownership 
interest in such items from which it derives a percentage of royalty 
income, if any, subsequently derived from the use by others of the 
protected right. Corporation D also attempts to increase its royalty 
income from such patents by contacting prospective licensees and 
rendering to licensees advice which is intended to promote the use of 
the patented property. Corporation D does not, however, maintain and 
operate an organization in a foreign country which is regularly engaged 
in the business of marketing the patents. Royalties received by 
Corporation D for the use of such patents are not derived in the active 
conduct of a trade or business for purposes of section 954(c)(2)(A).

    (e) Certain property transactions--(1) In general--(i) Inclusion in 
FPHC income. Foreign personal holding company income includes the excess 
of gains over losses from the sale or exchange of--
    (A) Property which gives rise to dividends, interest, rents, 
royalties or annuities as described in paragraph (e)(2) of this section, 
and
    (B) Property which does not give rise to income, as described in 
paragraph (e)(3) of this section.

If losses from the sale or exchange of such property exceed gains, the 
net loss is not within the definition of foreign personal holding 
company income under this paragraph (e), and may not be allocated to, or 
otherwise reduce, other foreign personal holding company income under 
section 954(b)(5) and Sec. 1.954-1T(c). Gain or loss from a transaction 
that is treated as capital gain or loss under section 988(a)(1)(B) is 
not foreign currency gain or loss as defined in paragraph (g), but is 
gain or loss from the sale or exchange of property which is included in 
the computation of foreign personal holding company income under this 
paragraph (e)(1). Paragraphs (e) (4) and (5) of this section provide 
specific rules for determining whether gain or loss from dispositions of 
debt instruments and dispositions of options or similar property must be 
included in the computation of foreign personal holding company income 
under this paragraph (e)(1). A loss that is deferred or that otherwise 
may not be taken into account under any provision of the Code may not be 
taken

[[Page 64]]

into account for purposes of determining foreign personal holding 
company income under any provision of this paragraph (e).
    (ii) Dual character property. Property may only in part constitute 
property that gives rise to certain income as described in paragraph 
(e)(2) of this section or property that does not give rise to any income 
as described in paragraph (e)(3) of this section. In such cases, the 
property must be treated as two separate properties for purposes of this 
paragraph (e). Accordingly, the sale or exchange of such dual character 
property will give rise to gain or loss that in part must be included in 
the computation of foreign personal holding company income under this 
paragraph (e), and in part is excluded from such computation. Gain or 
loss from the disposition of dual character property must be bifurcated 
for purposes of this paragraph (e)(1)(i) pursuant to the method that 
most reasonably reflects the relative uses of the property. Reasonable 
methods may include comparisons in terms of gross income generated or 
the physical division of the property. In the case of real property, the 
physical division of the property will in most cases be the most 
reasonable method available. For example, if a controlled foreign 
corporation owns an office building, uses 60 percent of the building in 
its business, and rents out the other 40 percent, then 40 percent of the 
gain recognized on the disposition of the property would reasonably be 
treated as gain which is included in the computation of foreign personal 
holding company income under this paragraph (e)(1). This paragraph 
(e)(1)(ii) addresses the contemporaneous use of property for dual 
purposes; for rules concerning changes in the use of property affecting 
its classification for purposes of this paragraph (e), see paragraph 
(a)(3) of this section.
    (2) Property that gives rise to certain income--(i) In general. 
Property the sale or exchange of which gives rise to foreign personal 
holding company income under this paragraph (e)(2) includes property 
that gives rise to dividends, interest, rents, royalties and annuities 
described in paragraph (b) of this section, except for rents and 
royalties derived from unrelated persons in the active conduct of a 
trade or business under paragraph (b)(5) of this section. The property 
described by this paragraph (e)(2) includes property which gives rise to 
export financing interest described in paragraph (b)(2) of this section 
and property which gives rise to income from related persons described 
in paragraphs (b)(3) and (b)(4) of this section.
    (ii) Exception. Property described in this paragraph (e)(2) does not 
include--
    (A) Dealer property (as defined in paragraph (a)(4)(iv) of this 
section), and
    (B) Inventory and similar property (as defined in paragraph 
(a)(4)(ii) of this section) other than securities.
    (3) Property that does not give rise to income. The term ``property 
that does not give rise to income'' for purposes of this section 
includes all rights and interests in property (whether or not a capital 
asset) except--
    (i) Property that gives rise to dividends, interest, rents, 
royalties and annuities described in paragraph (e)(2) of this section 
and property that gives rise to rents and royalties derived in the 
active conduct of a trade or business under paragraph (b)(5) of this 
section;
    (ii) Dealer property (as defined in paragraph (a)(4)(iv) of this 
section);
    (iii) Inventory and similar property (as defined in paragraph 
(a)(4)(ii)) other than securities;
    (iv) Property (other than real property) used in the controlled 
foreign corporation's trade or business that is of a character which 
would be subject to the allowance for depreciation under section 167 or 
168 and the regulations thereunder (including tangible property 
described in Sec. 1.167(a)-2 and intangibles described in Sec. 
1.167(a)-3);
    (v) Real property that does not give rise to rental or similar 
income, to the extent used in the controlled foreign corporation's trade 
or business; and
    (vi) Intangible property as defined in section 936(h)(3)(B) and 
goodwill that is not subject to the allowance for depreciation under 
section 167 and the regulations thereunder to the extent used in the 
controlled foreign corporation's trade or business and disposed of in 
connection with the sale of a trade or

[[Page 65]]

business of the controlled foreign corporation.
    (4) Classification of gain or loss from the disposition of a debt 
instrument or on a deferred payment sale--(i) Gain. Gain from the sale, 
exchange, or retirement of a debt instrument is included in the 
computation of foreign personal holding company income under this 
paragraph (e) unless--
    (A) It is treated as interest income (as defined in paragraph 
(a)(4)(i) of this section); or
    (B) It is treated as income equivalent to interest under paragraph 
(h) of this section.
    (ii) Loss. Loss from the sale, exchange, or retirement of a debt 
instrument is included in the computation of foreign personal holding 
company income under this paragraph (e) unless--
    (A) It is directly allocated to interest income (as defined in 
paragraph (a)(4)(i) of this section) or income equivalent to interest 
(as defined in paragraph (h) of this section) under any provision of the 
Code or regulations thereunder;
    (B) It is required to be apportioned in the same manner as interest 
expense under section 864(e) or any other provision of the Code or 
regulations thereunder; or
    (C) The debt instrument was taken in consideration for the sale or 
exchange of property (or the provision of services) by the controlled 
foreign corporation and gain or loss from that sale or exchange (or 
income from the provision of services) is not includible in foreign base 
company income under this section.
    (5) Classification of options and other rights to acquire or 
transfer property. Subject to the exceptions provided in paragraphs 
(e)(3) (ii) and (iii) of this section (relating to certain dealer 
property and inventory property), rights to acquire or transfer 
property, including property that gives rise to income, are classified 
as property that does not give rise to income under paragraph (e)(3) of 
this section. These rights include options, warrants, futures contracts, 
options on a futures contract, forward contracts, and options on an 
index relating to stocks, securities or interest rates.
    (6) Classification of certain interests in pass through entities. 
[Reserved]
    (f) Commodities transactions--(1) In general. Except as otherwise 
provided in this paragraph (f), foreign personal holding company income 
includes the excess of gains over losses from commodities transactions. 
If losses from commodities transactions exceed gains, the net loss is 
not within the definition of foreign personal holding company income 
under this paragraph (f), and may not be allocated to, or otherwise 
reduce, foreign personal holding company income under section 954(b)(5) 
and Sec. 1.954-1T(a)(4). The terms ``commodity'' and ``commodities 
transactions'' are defined in paragraph (f)(2) of this section. Gains 
and losses from qualified active sales and qualified hedging 
transactions are excluded from the computation of foreign personal 
holding company income under this paragraph (f). The term ``qualified 
active sales'' is defined in paragraph (f)(3). The term ``qualified 
hedging transaction'' is defined in paragraph (f)(4) of this section. An 
election is provided under paragraph (g)(5) of this section to include 
all gains and losses from section 1256 foreign currency transactions, 
which would otherwise be commodities transactions, in the computation of 
foreign personal holding company income under paragraph (g) instead of 
this paragraph (f). A loss that is deferred or that otherwise may not be 
taken into account under any provision of the Code may not be taken into 
account for purposes of determining foreign personal holding company 
income under any provision of this paragraph (f).
    (2) Definitions--(i) Commodity. For purposes of this section, the 
term ``commodity'' means:
    (A) Tangible personal property of a kind which is actively traded or 
with respect to which contractual interests are actively traded, and
    (B) Nonfunctional currency (as defined under section 988 and the 
regulations thereunder).

[[Page 66]]

    (ii) Commodities transaction. A commodities transaction means the 
purchase or sale of a commodity for immediate (spot) delivery, or 
deferred (forward) delivery, or the right to purchase, sell, receive, or 
transfer a commodity, or any other right or obligation with respect to a 
commodity, accomplished through a cash or off-exchange market, an 
interbank market, an organized exchange or board of trade, an over-the-
counter market, or in a transaction effected between private parties 
outside of any market. Commodities transactions include, but are not 
limited to:
    (A) A futures or forward contract in a commodity,
    (B) A leverage contract in a commodity purchased from leverage 
transaction merchants,
    (C) An exchange of futures for physical transaction,
    (D) A transaction in which the income or loss to the parties is 
measured by reference to the price of a commodity, a pool of 
commodities, or an index of commodities,
    (E) The purchase or sale of an option or other right to acquire or 
transfer a commodity, a futures contract in a commodity, or an index of 
commodities, and
    (F) The delivery of one commodity in exchange for the delivery of 
another commodity, the same commodity at another time, cash, or 
nonfunctional currency.
    (3) Definition of the term ``qualified active sales''--(i) In 
general. The term ``qualified active sales'' means the sale of 
commodities in the active conduct of a commodity business as a producer, 
processor, merchant, or handler of commodities if substantially all of 
the controlled foreign corporation's business is as an active producer, 
processor, merchant, or handler of commodities of like kind. The sale of 
commodities held by a controlled foreign corporation other than in its 
capacity as an active producer, processor, merchant or handler of 
commodities of like kind is not a qualified active sale.
    (ii) Sale of commodities. The term ``sale of commodities'' means any 
transaction in which the controlled foreign corporation intends to 
deliver to a purchaser a commodity held by the controlled foreign 
corporation in physical form.
    (iii) Active conduct of a commodities business. For purposes of this 
paragraph, a controlled foreign corporation is engaged in the active 
conduct of a commodities business as a producer, processor, merchant, or 
handler of commodities only if--
    (A) It holds commodities as inventory or similar property (as 
defined in paragraph (a)(4)(ii)); and
    (B) It incurs substantial expenses in the ordinary course of a 
commodities business from engaging in one of the following activities 
directly, and not through an independent contractor:
    (1) Substantial activities in the production of commodities, 
including planting, tending or harvesting crops, raising or slaughtering 
livestock, or extracting minerals.
    (2) Substantial processing activities prior to the sale of 
commodities including concentrating, refining, mixing, crushing, 
aerating, or milling; or
    (3) Significant activities relating to the physical movement, 
handling and storage of commodities including preparation of contracts 
and invoices; arranging freight, insurance and credit; arranging for 
receipt, transfer or negotiation of shipping documents; arranging 
storage or warehousing, and dealing with quality claims; owning and 
operating facilities for storage or warehousing or owning or chartering 
vessels or vehicles for the transportation of commodities.

For purposes of this paragraph (f), a corporation is not engaged in a 
commodities business as a producer, processor, merchant, or handler of 
commodities if its business is primarily financial. In general, the 
business of a controlled foreign corporation is financial if it 
primarily engages in commodities transactions for investment or 
speculation, or if it primarily provides products or services to 
customers for investment or speculation.
    (iv) Substantially all. Substantially all of the controlled foreign 
corporation's business is as an active producer, processor, merchant, or 
handler of commodities if the activities described in paragraph 
(f)(3)(iii) give rise to 85 percent of the taxable income of the 
controlled foreign corporation (computed

[[Page 67]]

as though the corporation were a domestic corporation). For this 
purpose, gains or losses from qualified hedging transactions, as defined 
in paragraph (f)(4), are considered derived from the qualified active 
sales to which they relate or are expected to relate.
    (4) Definition of the term ``qualified hedging transaction.'' The 
term ``qualified hedging transaction'' means a bona fide hedging 
transaction that:
    (i) Is reasonably necessary to the conduct of business as a 
producer, processor, merchant or handler of a commodity in the manner in 
which such business is customarily and usually conducted by others;
    (ii) Is entered into primarily to reduce the risk of price change 
(but not the risk of currency fluctuations) with respect to commodities 
sold or to be sold in qualified active sales described in paragraph 
(f)(3) of this paragraph; and
    (iii) Is clearly identified on the controlled foreign corporation's 
records before the close of the fifth day after the day during which the 
hedging transaction is entered into and at a time when there is a 
reasonable risk of loss; however, if the controlled foreign corporation 
does not at such time specifically and properly identify the qualified 
active sales (or category of such sales) to which a hedging transaction 
relates, the district director in his sole discretion may determine 
which hedging transactions (if any) are related to qualified active 
sales.
    (g) Foreign currency gain--(1) In general. Except as provided in 
paragraph (g)(2), foreign personal holding company income includes the 
excess of foreign currency gains over losses (as defined in section 
988(b)) attributable to any section 988 transactions. If foreign 
currency losses exceed gains, the net loss is not within the definition 
of foreign personal holding company income under this paragraph (g), and 
may not be allocated to, or otherwise reduce, foreign personal holding 
company income under section 954(b)(5) and Sec. 1.954-1T(a)(4). To the 
extent the gain or loss from a transaction is treated as interest income 
or expense under sections 988(a)(2) or 988(d) and the regulations 
thereunder, it is not included in the computation of foreign personal 
holding company income under this paragraph (g). (For other rules 
concerning income described in more than one category of foreign 
personal holding company income, see Sec. 1.954-2(a)(2).) A loss that 
is deferred or that otherwise may not be taken into account under any 
provision of the Code may not be taken into account for purposes of 
determining foreign personal holding company income under any provision 
of this paragraph (g).
    (2) Exceptions--(i) Qualified business units using the dollar 
approximate separate transactions method. Any DASTM gain or loss 
computed under Sec. 1.985-3(d) must be allocated under the rules of 
Sec. 1.985-3 (e)(2)(iv) or (e)(3).
    (ii) Tracing to exclude foreign currency gain or loss from qualified 
business and hedging transactions. A foreign currency gain or loss is 
excluded from the computation of foreign personal holding company income 
under this paragraph (g) if it is clearly identified on the records of 
the controlled foreign corporation as being derived from a qualified 
business transaction or a qualified hedging transaction. The term 
``qualified business transaction'' is defined in paragraph (g)(3) of 
this section. The term ``qualified hedging transaction'' is defined 
paragraph (g)(4) of this section. However, currency gain or loss of a 
qualified business unit included in the computation of currency gain or 
loss under subdivision (i) of this paragraph (g)(2) may not be excluded 
from foreign personal holding company income under the tracing rule of 
this paragraph (g)(2)(ii). Furthermore, the tracing rule of this 
paragraph (g)(2)(ii) will not apply if a controlled foreign corporation 
makes the election provided by paragraph (g)(2)(iii) of this section.
    (iii) Election out of tracing. A controlled foreign corporation may 
elect a method of accounting under which all foreign currency gains or 
losses attributable to section 988 transactions are included in foreign 
personal holding company income. The scope and requirements for this 
election are provided in paragraph (g)(5) of this section. This election 
does not apply to foreign currency gains or losses of a qualified 
business unit included in the

[[Page 68]]

computation of gain or loss under paragraph (g)(2)(i) of this section.
    (3) Definition of the term ``qualified business transaction''--(i) 
In general. The term ``qualified business transaction'' means a 
transaction (other than a ``qualified hedging transaction'' as described 
in paragraph (g)(4) of this section) that:
    (A) Does not have investment or speculation as a significant 
purpose;
    (B) Is not attributable to property or an activity of the kind that 
gives rise to subpart F income (other than foreign currency gain under 
this paragraph (g)), or could reasonably be expected to give rise to 
subpart F income (including upon disposition); for example, the 
transaction may not be attributable to stock or debt of another 
corporation (including related corporations organized and operating in 
the same country), or property likely to give rise to foreign base 
company sales or services income; and
    (C) Is attributable to business transactions described in 
subdivision (ii) of this paragraph (g)(3).

A qualified business transaction includes the disposition of a debt 
instrument that constitutes inventory property under paragraph 
(a)(4)(ii) or dealer property under paragraph (a)(4)(iv) of this 
section. The provisions of this paragraph (g)(3) do not apply to the 
foreign currency gain or loss of a qualified business unit (as 
determined under Sec. 1.985-3T(d)(2)) included in the computation of 
gain or loss under paragraph (g)(2)(i) of this section. The provisions 
of this paragraph (g)(3) do, however, apply to other currency 
transactions of a qualified business unit that elects (or is deemed to 
elect) the U.S. dollar as its functional currency under section 
985(b)(3) and Sec. 1.985-2T. Qualified business transactions and the 
amount of foreign currency gain or loss derived therefrom must be 
clearly identified on its records by the controlled foreign corporation. 
If the controlled foreign corporation is unable to specifically identify 
the qualified business transactions and the foreign currency gain or 
loss derived therefrom, the district director in his sole discretion may 
determine which transactions of the corporation giving rise to the 
foreign currency gains or losses are attributable to qualified business 
transactions.
    (ii) Specific business transactions. A transaction of a controlled 
foreign corporation must meet the requirements of any of subdivisions 
(A) through (F) of this paragraph (g)(3)(ii) to be a qualified business 
transaction under this paragraph (g)(3).
    (A) Acquisition of debt instruments. If the transaction is the 
acquisition of a debt instrument described in section 988(c)(1)(B)(i) 
and the regulations thereunder, the debt must be derived from--
    (1) The sale of inventory and similar property to customers by the 
controlled foreign corporation in the ordinary course of regular 
business operations, or
    (2) The rendition of services by the corporation in the ordinary 
course of regular business operations.

For purposes of this paragraph (g)(3)(ii)(A), a debt instrument will not 
be considered derived in the ordinary course of regular business 
operations unless the instrument matures, and is reasonably expected to 
be satisfied, within the period for which interest need not be charged 
under section 482 and the regulations thereunder.
    (B) Becoming the obligor under debt instruments. If the transaction 
is becoming the obligor under a debt instrument described in section 
988(c)(1)(B)(i) and the regulations thereunder, the debt must be 
incurred for:
    (1) Payment of expenses that are includible by the controlled 
foreign corporation in the cost of goods sold under Sec. 1.61-3 for 
property held primarily for sale to customers in the ordinary course of 
regular business operations, are inventoriable costs under section 471 
and the regulations thereunder, or are allocable or apportionable under 
the rules of Sec. 1.861-8 to gross income derived from inventory and 
similar property,
    (2) Payment of expenses that are allocable or apportionable under 
the rules of Sec. 1.861-8 to gross income derived from services 
provided by the controlled foreign corporation in the ordinary course of 
regular business operations,

[[Page 69]]

    (3) Acquisition of an asset that does not give rise to subpart F 
income during the current taxable year (other than by application of 
section 952(c)) and is not reasonably expected to give rise to subpart F 
income in subsequent taxable years, or
    (4) Acquisition of dealer property as defined in paragraph 
(a)(4)(iv) of this section.

The identification requirements of subdivision (i) of this paragraph 
(g)(3) will not be met with respect to a borrowing if the controlled 
foreign corporation fails to clearly identify the debt and the expenses 
(or categories of expenses) to which it relates before the close of the 
fifth day after the day on which the expenses are incurred.
    (C) Accrual of any item of gross income. If the transaction is the 
accrual (or otherwise taking into account) of any item of gross income 
or receipts as described in section 988(c)(1)(B)(ii) and the regulations 
thereunder, the item of gross income or receipts must be derived from:
    (1) The sale of inventory and similar property in the ordinary 
course of regular business operations, or
    (2) The provision of services by the controlled foreign corporation 
to customers in the ordinary course of regular business operations.
    (D) Accrual of any item of expense. If the transaction is the 
accrual (or otherwise taking into account) of any item of expense as 
described in section 988(c)(1)(B)(ii) and the regulations thereunder, 
the item of expense must be:
    (1) An expense that is includible by the controlled foreign 
corporation in the cost of goods sold under Sec. 1.61-3 for property 
held primarily for sale to customers in the ordinary course of regular 
business operations, is an inventoriable cost under section 471 and the 
regulations thereunder, or is allocable or apportionable under the rules 
of Sec. 1.861-8 to gross income derived from inventory and similar 
property, or
    (2) An expense that is allocable or apportionable under the rules of 
Sec. 1.861-8 to gross income derived from services provided by the 
controlled foreign corporation in the ordinary course of regular 
business operations.
    (E) Entering into forward contracts, futures contracts, options and 
similar instruments. If the transaction is entering into any forward 
contract, futures contract, option or similar financial instrument and 
if such contract or instrument is not marked to market at the close of 
the taxable year under section 1256, as described in section 
988(c)(1)(B)(iii) and the regulations thereunder, then the contract or 
instrument must be property held as dealer property as defined in 
paragraph (a)(4)(ii) of this section.
    (F) Disposition of nonfunctional currency. If the transaction is the 
disposition of nonfunctional currency, as described in section 
988(c)(1)(C) and the regulations thereunder, then the transaction must 
be for a purpose described in paragraph (g)(3)(ii)(B), for the payment 
of taxes not attributable to subpart F income, or must be the 
disposition of property held as dealer property as defined in paragraph 
(a)(4)(iv) of this section.
    (G) Transactions in business assets. The acquisition or disposition 
of an asset that is used or held for use in the active conduct of a 
trade or business.
    (4) Definition of the term ``qualified hedging transaction''--(i) In 
general. The term ``qualified hedging transaction'' means a bona fide 
hedging transaction meeting all the requirements of subdivisions (A) 
through (D) of this paragraph (g)(4)(i):
    (A) The transaction must be reasonably necessary to the conduct of 
regular business operations in the manner in which such business 
operations are customarily and usually conducted by others.
    (B) The transaction must be entered into primarily to reduce the 
risk of currency fluctuations with respect to property or services sold 
or to be sold or expenses incurred or to be incurred in transactions 
that are qualified business transactions under paragraph (g)(3) of this 
section.
    (C) The hedging transaction and the property or expense (or category 
of property or expense) to which it relates must be clearly identified 
on the records of the controlled foreign corporation before the close of 
the fifth day after the day during which the hedging transaction is 
entered into and

[[Page 70]]

at a time during which there is a reasonable risk of currency loss.
    (D) The amount of foreign currency gain or loss that is attributable 
to a specific hedging transaction must be clearly identifiable on the 
records of the controlled foreign corporation or its controlling 
shareholder (as defined in Sec. 1.964-1(c)(5)).

The provisions of this paragraph (g)(4) do not apply to transactions of 
a qualified business unit included in the computation of gain or loss 
under paragraph (g)(2)(i). The provisions of this paragraph (g)(4) do 
apply, however, to other currency transactions of a qualified business 
unit that elects (or is deemed to elect) the U.S. dollar as its 
functional currency under section 985(b)(3) and Sec. 1.985-3T. If the 
controlled foreign corporation does not specifically identify the 
qualified business transactions (or category of qualified business 
transactions) to which a hedging transaction relates or is unable to 
specifically identify the amount of foreign currency gain or loss 
derived from the hedging transactions, the district director in his sole 
discretion may make the identifications required of the controlled 
foreign corporation and determine which hedging transactions (if any) 
are related to qualified business transactions, and the amount of 
foreign currency gain or loss attributable to the qualified hedging 
transactions.
    (ii) Change in purpose of hedging transaction. If a hedging 
transaction is entered into for one purpose, and the purpose for that 
transaction subsequently changes, the transaction may be treated as two 
separate hedging transactions for purposes of this paragraph (g)(4). In 
such a case, the portion of the transaction that relates to a qualified 
business transaction is considered a qualified hedging transaction if it 
separately meets all the other requirements of this paragraph (g)(4) for 
treatment as a qualified hedging transaction. For purposes of paragraph 
(g)(4)(i)(C), the foreign corporation must identify on its records the 
portion of the transaction that relates to a qualified business 
transaction by the close of the fifth day after the day on which the 
hedge becomes so related (i.e., either the day on which the hedge is 
first entered into or on the day on which it first relates to a 
qualified business transaction due to a change in its purpose). The 
foreign corporation must identify on its records the portion of the 
transaction that does not relate to a qualified business transaction by 
the close of the fifth day after the day on which the purpose for the 
hedging transaction changes.
    (5) Election out of tracing--(i) In general. A controlled foreign 
corporation may elect to account for currency gains and losses under 
section 988 and gains and losses from section 1256 currency contracts by 
including in the computation of foreign personal holding company income 
under this paragraph (g) all foreign currency gains or losses 
attributable to section 988 transactions, and all gains or losses from 
section 1256 foreign currency contracts. Separate elections for section 
1256 foreign currency contracts and section 988 transactions are not 
permitted. If a controlled foreign corporation makes the election 
described in this paragraph (g)(5)(i), the election is effective for all 
related persons as defined in section 954(d)(3) and the regulations 
thereunder.
    (ii) Exception. The election provided by this paragraph (g)(5) does 
not apply to foreign currency gain or loss of a qualified business unit 
determined under Sec. 1.985-3T(d)(2). It does, however, apply to other 
foreign currency gains or losses of a qualified business unit that 
elects (or is deemed to elect) the U.S. dollar as its functional 
currency.
    (iii) Procedure--(A) In general. The election provided by this 
paragraph (g)(5) shall be made in the manner prescribed in this 
paragraph and in subsequent administrative pronouncements.
    (B) Time and manner. The controlled foreign corporation may make the 
election by filing a statement with its original or amended information 
return for the taxable year for which the election is made. The 
controlling United States shareholders, as defined in Sec. 1.964-
1(c)(5), may make the election on behalf of the controlled foreign 
corporation and related corporations by filing a statement to such 
effect with their original or amended income tax returns for the taxable 
year during

[[Page 71]]

which the taxable year of the controlled foreign corporation for which 
the election is made ends. The election is effective for the taxable 
year of the controlled foreign corporation for which the election is 
made, for the taxable years of all related controlled foreign 
corporations ending within such taxable year, and for all subsequent 
years of such corporations. The statement shall include the following 
information:
    (1) The name, address, taxpayer identification number, and taxable 
year of each United States shareholder;
    (2) The name, address, and taxable year of each controlled foreign 
corporation for which the election is effective; and
    (3) Any additional information to be required by the Secretary by 
administrative pronouncement.

Each United States shareholder or controlled foreign corporation filing 
the election must provide copies of the election to all controlled 
foreign corporations for which the election is effective, and all United 
States shareholders of such corporations. However, failure to provide 
such copies will not void (or cause to be voidable) an election under 
this paragraph (g)(5).
    (C) Termination. The election provided by this paragraph (g)(5) may 
be terminated only with the consent of the Commissioner: Attn.: CC:INTL.
    (h) Income equivalent to interest--(1) In general. Foreign personal 
holding company income includes income that is equivalent to interest. 
Income equivalent to interest includes, but is not limited to, income 
derived from the following categories of transactions:
    (i) An investment, or series of integrated transactions which 
include an investment, in which the payments, net payments, cash flows, 
or return predominantly reflect the time value of money, and
    (ii) Transactions in which the payments or a predominant portion 
thereof are in substance for the use or forebearance of money, but are 
not generally treated as interest.

However, amounts treated as interest under section 954(c)(1)(A) and 
paragraph (b) of this section are not income equivalent to interest 
under this paragraph (h). Income from the sale of property will not be 
treated as income equivalent to interest for purposes of this paragraph 
(h), subject to the rule of paragraph (h)(4) of this section, unless the 
sale is part of an integrated transaction that gives rise to interest or 
income equivalent to interest. See sections 482, 483 and 1274 for the 
extent to which such income may be characterized as interest income 
subject to paragraph (b) of this section. Income equivalent to interest 
for purposes of this paragraph (h) includes all income attributable to a 
transfer of securities subject to section 1058. Income equivalent to 
interest also includes a portion of certain deferred payments received 
for the purpose of services, in accordance with the provisions of 
paragraph (h)(5) of this section. Income equivalent to interest does not 
include income attributable to notional principal contracts such as 
interest rate swaps, currency swaps, interest rate floor agreements, or 
similar contracts except to the extent that such contracts are part of 
an integrated transaction that gives rise to income equivalent to 
interest. Income derived from notional contracts by a person acting in 
its capacity as a regular dealer in such contracts will be presumed not 
to be integrated with an investment.
    (2) Illustrations. The following examples illustrate the application 
of this paragraph (h):

    Example 1. CFC, a controlled foreign corporation, promises that A, 
an unrelated person, may borrow up to $500 in principal for one year 
beginning at any time during the next three months at an interest rate 
of 10 percent. In exchange, A pays CFC a commitment fee of $2.00. 
Pursuant to this loan commitment, CFC lends $80 to A. As a result, the 
entire $2.00 fee is included in the computation of foreign personal 
holding company income under this paragraph (h)(1)(ii).
    Example 2. (i) At the beginning of its current taxable year, CFC, a 
controlled foreign corporation, purchases at face value a one-year debt 
instrument issued by A having a $100 principal amount and bearing a 
floating rate of interest set at the London Interbank Offered Rate 
(``LIBOR'') plus one percentage point. Contemporaneously, CFC borrows 
$100 from B for one year at a fixed interest rate of 10 percent, using 
the debt instrument as security.
    (ii) During its current taxable year, CFC accrues $11 of interest 
from A on the bond. That interest is foreign personal holding company 
income under section 954(c)(1) and

[[Page 72]]

Sec. 1.954-2T(b), and thus is not income equivalent to interest. During 
its current taxable year, CFC incurs $10 of interest expense with 
respect to the borrowing from B. That expense is allocated and 
apportioned to, and reduces, foreign base company income or insurance 
income to the extent provided in sections 954(b)(5), 863(e), and 864(e) 
and the regulations thereunder.
    Example 3. (i) At the beginning of its 1988 taxable year, CFC, a 
controlled foreign corporation, purchases at face value a one-year debt 
instrument issued by A having a $100 principal amount and bearing a 
floating rate of interest set at the London Interbank Offered Rate 
(``LIBOR'') plus one percentage point payable on the last day of CFC's 
current taxable year. CFC subsequently determines that it would prefer 
receiving interest at a fixed rate, and, on January 1, 1989, enters into 
an agreement with B, an unrelated person, whereby B promises to pay CFC 
on the last day of CFC's 1989 taxable year an amount equal to 10 percent 
on a notional principal amount of $100. In exchange, CFC promises to pay 
B on the last day of CFC's 1989 taxable year an amount equal to LIBOR 
plus one percentage point on the notional principal amount.
    (ii) CFC receives a total of $10 from B, and pays $9 to B. CFC also 
receives $9 from A. The $9 paid to B is directly allocated to, or is 
otherwise an adjustment to, the $10 received from B. The transactions 
are considered an intergrated transaction giving rise to $9 of interest 
income (paid by A) and, under paragraph (h)(1)(i), $1 of income 
equivalent to interest (paid by B).
    Example 4. The facts are the same as in Example 3, except that CFC 
does not hold any debt obligations. Since the transaction with B is not 
integrated with an investment giving rise to interest or income 
equivalent to interest, the net $1 of income realized by CFC does not 
constitute income equivalent to interest.
    Example 5. (i) CFC, a controlled foreign corporation, enters into an 
agreement with A whereby CFC purchases commodity X from A at a price of 
$100, and A contemporaneously repurchases commodity X from CFC for 
payment and delivery in 3 months at a price of $104 set by the forward 
market.
    (ii) The transaction is in substance a loan from CFC to A secured by 
commodity X. Thus, CFC accrues $4 of gross income which is included in 
foreign personal holding company income as interest under section 
954(c)(1)(A) and paragraph (b) of this section.
    Example 6. (i) CFC purchases commodity Y on the spot market for $100 
and contemporaneously, sells commodity Y forward for delivery and 
payment in 3 months at a price of $104 set by the forward market.
    (ii) The $100 paid on the spot purchase of commodity Y offsets any 
market risk on the forward sale so that the $4 of income to be derived 
predominantly reflects time value of money. Thus, under paragraph 
(h)(1)(i), the spot purchase of commodity Y and the offsetting forward 
sale will be treated as an integrated transaction giving rise to $4 of 
income equivalent to interest.

    (3) Income equivalent to interest from factoring--(i) General rule. 
Income equivalent to interest includes factoring income. Except as 
provided in paragraph (h)(3)(ii) of this section, the term ``factoring 
income'' includes any income (including any discount income or service 
fee, but excluding any stated interest) derived from the acquisition and 
collection or disposition of a factored receivable. The rules of this 
paragraph (h)(3) apply only with respect to the tax treatment of 
factoring income derived from the acquisition and collection or 
disposition of a factored receivable and shall not affect the 
characterization of an expense or loss of either the person whose goods 
or services gave rise to a factored receivable or the obligor under a 
receivable. The amount of income equivalent to interest realized with 
respect to a factored receivable is the difference (if a positive 
number) between the amount paid for the receivable by the foreign 
corporation and the amount that it collects on the receivable (or 
realizes upon its sale of the receivable).
    (ii) Exceptions. Factoring income shall not include--
    (A) Income treated as interest under section 864(d)(1) or (6) and 
the regulations thereunder (relating to income derived from trade or 
service receivables of related persons), even if such income is not 
treated as described in section 864(d)(1) by reason of the same-country 
exception of section 864(d)(7);
    (B) Income derived from a factored receivable if payment for the 
acquisition of the receivable is made on or after the date on which 
stated interest begins to accrue, but only if the rate of stated 
interest equals or exceeds 120 percent of the Federal short term rate 
(as defined under section 1274) (or the equivalent rate for a currency 
other than the dollar) as of the date on which the receivable is 
acquired by the foreign corporation; or
    (C) Income derived from a factored receivable if payment for the 
acquisition of the receivable by the foreign

[[Page 73]]

corporation is made only on or after the anticipated date of payment of 
all principal by the obligor (or the anticipated weighted average date 
of payment of a pool of purchased receivables).
    (iii) Factored receivable. For purposes of this paragraph (h)(3), 
the term ``factored receivable'' includes any account receivable or 
other evidence of indebtedness, whether or not issued at a discount and 
whether or not bearing stated interest, arising out of the disposition 
of property or the performance of services by any person, if such 
account receivable or evidence of indebtedness is acquired by a person 
other than the person who disposed of the property or provided the 
services that gave rise to the account receivable or evidence of 
indebtedness. For purposes of this paragraph (h)(3), it is immaterial 
whether the person providing the property or services agrees to transfer 
the receivable at the time of sale (as by accepting a third-party charge 
or credit card) or at a later time.
    (iv) Illustrations. The following examples illustrate the 
application of this paragraph (h)(3).

    Example 1. DP, a domestic corporation, owns all of the outstanding 
stock of FS, a controlled foreign corporation. FS acquires accounts 
receivable arising from the sale of property by unrelated corporation X. 
The receivables have a face amount of $100, and after 30 days bear 
stated interest equal to at least 120 percent of the applicable short 
term Federal rate (determined as of the date the receivable is 
acquired). FS purchases the receivables from X for $95 on Day 1 and 
collects $100 from the obligor under the receivable on Day 40. Income 
(other than stated interest) derived by FS from the factored receivables 
is factoring income within the meaning or paragraph (h)(3)(i) of this 
section and, therefore, is income equivalent to interest.
    Example 2. The facts are the same as in example 1, except that FS 
does not pay X for the receivables until Day 30. Income derived by FS 
from the factored receivables is not factoring income by reason of 
paragraph (h)(3)(ii)(B) of this section.
    Example 3. The facts are the same as in example 2, except that it is 
anticipated that all principal will be paid by the obligor of the 
receivables by Day 30. Income derived by FS from this ``maturity 
factoring'' of the receivables is not factoring income by reason of 
paragraph (h)(3)(ii)(C) of this section, and therefore does not give 
rise to income equivalent to interest.
    Example 4. The facts are the same as in example 1, except that, 
rather than collecting $100 from the obligor under the factored 
receivable on Day 40, FS sells the receivable to controlled foreign 
corporation Y on Day 15 for $97. Both the income derived by FS on the 
factored receivable and the income derived by Y (other than stated 
interest) on the receivable are factoring income within the meaning of 
paragraph (h)(3)(i) of this section, and therefore, constitute income 
equivalent to interest.
    Example 5. The facts are the same as in example 4, except that FS 
sells the factored receivable to Y for $99 on Day 45, at which time 
interest is accruing on the unpaid balance of $100. FS has $4 of net 
factoring income that is income equivalent to interest. Because interest 
was accruing at the time Y acquired the receivable at a rate equal to at 
least 120 percent of the applicable short term Federal rate, income 
derived by Y from the factored receivable is not factoring income by 
reason of pargraph (h)(3)(ii)(B).
    Example 6. DP, a domestic corporation engaged in an integrated 
credit card business, owns all of the outstanding stock of FS, a 
controlled foreign corporation. On Day 1 individual A uses a credit card 
issued by DP to purchase shoes priced at $100 from X, a foreign 
corporation unrelated to DP, FS, or A. By prearrangement with DP, on Day 
7, X transfers the receivable arising from A's purchase to FS in 
exchange for $95. FS collects $100 from A on Day 45. Income derived by 
FS on the factored receivable is factoring income within the meaning of 
paragraph (h)(3)(i) of this section and, therefore, is income equivalent 
to interest.

    (4) Determination of sales income. Income equivalent to interest for 
purposes of this paragraph (h) does not include income from the sale of 
property unless the sale is part of an integrated transaction that gives 
rise to interest or income equivalent to interest. Income derived by a 
controlled foreign corporation will be treated as arising from the sale 
of property only if the corporation in substance carries out sales 
activities. Accordingly, an arrangement that is designed to lend the 
form of a sales transaction to a transaction that in substance 
constitutes and advance of funds will be disregarded. For example, if a 
controlled foreign corporation acquires property on 30-day payment terms 
from one person and sells that property to another person on 90 day 
payment terms and at prearranged prices and terms such that

[[Page 74]]

the foreign corporation bears no substantial economic risk with respect 
to the purchase and sale other than the risk of non-payment, the foreign 
corporation has not in substance derived income from the sale of 
property.
    (5) Receivables arising from performance of services. If payment for 
services performed by a controlled foreign corporation is not made until 
more than 120 days after the date on which such services are performed, 
then the income derived by the foreign corporation constitutes income 
equivalent to interest to the extent that interest income would be 
imputed under the principles of section 483 or the original issue 
discount provisions (section 1271 et seq.), if--
    (A) Such provisions applied to contracts for the performance of 
services,
    (B) The time period referred to in sections 483(c)(1) and 
1274(c)(1)(B) were 120 days rather than six months, and
    (C) The time period referred to in section 483(c)(1)(A) were 120 
days rather than one year.

[T.D. 8216, 53 FR 27498, July 21, 1988; 53 FR 29801, Aug. 8, 1988, as 
amended by T.D. 8556, 59 FR 37672, July 25, 1994. Redesignated and 
amended by T.D. 8618, 60 FR 46530, Sept. 7, 1995]



PART 5_TEMPORARY INCOME TAX REGULATIONS UNDER THE REVENUE ACT OF 
1978--Table of Contents



Sec.
5.856-1 Extensions of the grace period for foreclosure property by a 
          real estate investment trust.
5.1502-45 Limitation on losses to amount at risk.
5.6411-1 Tentative refund under claim of right adjustment.

    Authority: 26 U.S.C. 7805.



Sec. 5.856-1  Extensions of the grace period for foreclosure property 
by a real estate investment trust.

    (a) In general. Under section 856(e), a real estate investment trust 
(``REIT'') may elect to treat as foreclosure property certain real 
property (including interests in real property), and any personal 
property incident to such real property, that the REIT acquires after 
December 31, 1973. In general, the REIT must acquire the property as the 
result of having bid in the property at foreclosure, or having otherwise 
reduced the property to ownership or possession by agreement or process 
of law, after there was default (or default was imminent) on a lease of 
such property (where the REIT was the lessor) or on an indebtedness owed 
to the REIT which such property secured. Property that a REIT elects to 
treat as foreclosure property ceases to be foreclosure property with 
respect to such REIT at the end of a grace period. The grace period ends 
on the date which is 2 years after the date on which the REIT acquired 
the property, unless the REIT has been granted an extension or 
extensions of the grace period. If the grace period is extended, the 
property ceases to be foreclosure property on the day immediately 
following the last day of the grace period, as extended.
    (b) Rules for extensions of the grace period. In general, Sec. 
1.856-6(g) prescribes rules regarding extensions of the grace period. 
However, in order to reflect the amendment of section 856(e)(3) of the 
Code by section 363(c) of the Revenue Act of 1978, the following rules 
also apply:
    (1) In the case of extensions granted after November 6, 1978, with 
respect to extension periods beginning after December 31, 1977, the 
district director may grant one or more extensions of the grace period 
for the property, subject to the limitation that no extension shall 
extend the grace period beyond the date which is 6 years after the date 
the REIT acquired the property. In any other case, an extension shall be 
for a period of not more than 1 year, and not more than two extensions 
can be granted with respect to the property.
    (2) In the case of an extension period beginning after December 31, 
1977, a request for an extension filed on or before March 28, 1980, will 
be considered to be timely if the limitation on the number and length of 
extensions in section 856(e)(3), as in effect before the amendment made 
by section 363(c) of the Revenue Act of 1978, would have barred the 
extension.

[T.D. 7767, 46 FR 11284, Feb. 6, 1981]

[[Page 75]]



Sec. 5.1502-45  Limitation on losses to amount at risk.

    (a) In general--(1) Scope. This section applies to a loss of any 
subsidiary if the common parent's stock meets the stock ownership 
requirement described in section 465(a)(1)(C).
    (2) Limitation on use of losses. Except as provided in paragraph 
(a)(4) of this section, a loss from an activity of a subsidiary during a 
consolidated return year is includible in the computation of 
consolidated taxable income (or consolidated net operating loss) and 
consolidated capital gain net income (or consolidated net capital loss) 
only to the extent the loss does not exceed the amount that the parent 
is at risk in the activity at the close of that subsidiary's taxable 
year. In addition, the sum of a subsidiary's losses from all its 
activities is includible only to the extent that the parent is at risk 
in the subsidiary at the close of that year. Any excess may not be taken 
into account for the consolidated return year but will be treated as a 
deduction allocable to that activity of the subsidiary in the first 
succeeding taxable year.
    (3) Amount parent is at risk in subsidiary's activity. The amount 
the parent is at risk in an activity of a subsidiary is the lesser of 
(i) the amount the parent is at risk in the subsidiary or (ii) the 
amount the subsidiary is at risk in the activity. These amounts are 
determined under paragraph (b) of this section and the principles of 
section 465. See section 465 and the regulations thereunder and the 
examples in paragraph (e) of this section.
    (4) Excluded activities. The limitation on the use of losses in 
paragraph (a)(2) of this section does not apply to a loss attributable 
to an activity described in section 465(c)(3)(D).
    (5) Substance over form. Any transaction or arrangement between 
members (or between a member and a person that is not a member) which 
does not cause the parent to be economically at risk in an activity of a 
subsidiary will be treated in accordance with the substance of the 
transaction or arrangement notwithstanding any other provision of this 
section.
    (b) Rules for determining amount at risk--(1) Excluded amounts. The 
amount a parent is at risk in an activity of a subsidiary at the close 
of the subsidiary's taxable year does not include any amount which would 
not be taken into account under section 465 were the subsidiary not a 
separate corporation. Thus, for example, if the amount a parent is at 
risk in the activity of a subsidiary is attributable to nonrecourse 
financing, the amount at risk is not more than the fair market value of 
the property (other than the subsidiary's stock or debt or assets) 
pledged as security.
    (2) Guarantees. If a parent guarantees a loan by a person other than 
a member to a subsidiary, the loan increases the amount the parent is at 
risk in the activity of the subsidiary.
    (c) Application of section 465. This section applies in a manner 
consistent with the provisions of section 465. Thus, for example, the 
recapture of losses provided in section 465(e) applies if the amount the 
parent is at risk in the activity of a subsidiary is reduced below zero.
    (d) Other consolidated return provisions unaffected. This section 
limits only the extent to which losses of a subsidiary may be used in a 
consolidated return year. This section does not apply for other 
purposes, such as Sec. Sec. 1.1502-32 and 1.1502-19, relating to 
investment in stock of a subsidiary and excess loss accounts, 
repectively. Thus, a loss which reduces a subsidiary's earnings and 
profits in a consolidated return year, but is disallowed as a deduction 
for the year by reason of this section, may nonetheless result in a 
negative adjustment to the basis of an owning member's stock in the 
subsidiary or create (or increase) an excess loss account.
    (e) Examples. The provisions of this section may be illustrated by 
the examples in this paragraph (e). In each example, the stock ownership 
requirement of section 465(a)(1)(C) is met for the stock of the parent 
(P), and each affiliated group files a consolidated return on a calendar 
year basis and comprises only the members described.

    Example (1). In 1979, P forms S with a contribution of $200 in 
exchange for all of S's stock. During the year, S borrows $400 from a 
commercial lender and P guarantees $100 of the loan. S uses $500 of its 
funds to acquire a motion picture film. S incurs a loss of $120

[[Page 76]]

for the year with respect to the film. At the close of 1979, the amount 
P is at risk in S's activity is $300. If S has no gain or loss in 1980, 
and there are no contributions from or distributions to P, at the close 
of 1980 P's amount at risk in S's activity will be $180.
    Example. (2). P forms S-1 with a capital contribution of $1 on 
January 1, 1980. On February 1, 1980. S-1 borrows $100 with full 
recourse and contributes all $101 to its newly formed subsidiary S-2. S-
2 uses the proceeds to explore for natural oil and gas resources. S-2 
incurs neither gain nor loss from its explorations during the taxable 
year. As of December 31, 1980, P is at risk in the exploration activity 
of S-2 only to the extent of $1.

    (f) Effective date. This section applies to consolidated return 
years ending on or after December 31, 1979.

[T.D. 7685, 45 FR 16484, Mar. 14, 1980]



Sec. 5.6411-1  Tentative refund under claim of right adjustment.

    (a) Effective date. This section applies to applications for 
tentative refunds filed after November 5, 1978, under section 6411(d).
    (b) In general. Section 6411(d) allows taxpayers to apply for a 
tentative refund of amounts treated under section 1341(b)(1) as an 
overpayment of tax under a claim of right adjustment. This section 
contains rules for filing an application for this tentative refund. The 
computation of amounts treated as an overpayment must be made in 
accordance with section 1341 and the regulations under that section.
    (c) Method of applying for tentative refund--(1) In general. For a 
corporation, the application is made by filing Form 1139. For taxpayers 
other than corporations, the application is made by filing Form 1045. 
The application must be made by filing those forms even if the taxpayer 
is not applying for a tentative carryback adjustment under section 
6411(a). If the taxpayer files the form to apply for the section 6411(d) 
tentative refund only, it may disregard those lines on the form used to 
compute the section 6411(a) carryback adjustment. If the taxpayer has a 
carryback of a net operating loss, credit, or capital loss for the 
taxable year (determined without the deduction described in section 
1341(a)(2)) and applies for both the section 6411(a) tenative carryback 
adjustment and the section 6411(d) tentative refund, an ordering rule 
applies. The taxpayer must take into account any adjustments made in 
applying for the tentative carryback adjustment under section 6411(a) 
before determining the amount of the overpayment for which an 
application under section 6411(d) is being made. The taxpayer must 
attach to the form a separate schedule containing the information 
required under paragraph (d) of this section.
    (2) Applications made before February 7, 1980. Applications made 
before February 7, 1980 that are made under penalties of perjury will be 
considered meeting the requirements of this section if made by filing a 
separate statement whether or not it is attached to Form 1139 or 1045. 
This application, however, must contain the information required under 
paragraph (d) of this section (other than paragraph (d)(2)).
    (d) Information required--(1) In general. The application must 
contain (i) the taxpayer's name, address, and identification number and 
(ii) the information set forth in paragraph (d) (2) and (3) of this 
section, determined in accordance with section 1341 and the regulations 
under that section. For example, the decrease in tax under paragraph 
(d)(3)(iii) of this section is determined under Sec. 1.1341-1(d)(4).
    (2) Computation under section 1341(a)(4). The application must 
contain the following information related to the computation under 
section 1341(a)(4):
    (i) The amount of income restored by the taxpayer to another during 
the taxable year and the amount of the corresponding deduction described 
in section 1341(a)(2);
    (ii) The tax for the taxable year computed with the deduction 
described in section 1341(a)(2); and
    (iii) The tax for each prior taxable year (determined before 
adjustment under section 1341) to which any net operating loss described 
in section 1341(b)(4)(A) may be carried and the decrease in tax for each 
of those years that results from the carryback of that loss.
    (3) Computation under section 1341(a)(5). The application must 
contain the following information related

[[Page 77]]

to the computation under section 1341(a)(5):
    (i) The tax for the taxable year without the deduction described in 
section 1341(a)(2);
    (ii) The tax for each prior taxable year (determined before 
adjustment under section 1341) for which a decrease in tax is computed 
under section 1341(a)(5)(B);
    (iii) The decrease in tax for each prior taxable year computed under 
section 1341(a)(5)(B), including any decrease resulting from a net 
operating loss or capital loss described in section 1341(b)(4)(B); and
    (iv) The amount treated as an overpayment of tax under section 
1341(b)(1).
    (e) Time and place for filing. The application must be filed no 
earlier than the date of filing the return for the taxable year of 
restoration and no later than the date 12 months from the last day of 
that taxable year. The application must be filed with the Internal 
Revenue Service Center (or other office) where the taxpayer filed its 
return for the taxable year of restoration.
    (f) Not a claim for credit or refund. An application for tentative 
refund under section 6411(d) is not a claim for credit or refund. The 
principles of paragraph (b)(2) of Sec. 1.6411-1 apply in determining 
the effect of an application for a tentative refund. For example, the 
filing of an application for tentative refund under section 6411(d) is 
not a claim for credit or refund in determining whether a claim for 
credit or refund was timely filed.

[T.D. 7672, 45 FR 8295, Feb. 7, 1980; 45 FR 17138, Mar. 18, 1980]



PART 5c_TEMPORARY INCOME TAX REGULATIONS UNDER THE ECONOMIC RECOVERY
TAX ACT OF 1981--Table of Contents



Sec.
5c.44F-1 Leases and qualified research expenses.
5c.103-1 Leases and capital expenditures.
5c.103-2 Leases and industrial development bonds.
5c.103-3 Leases and arbitrage.
5c.168(f)(8)-1 Special rules for leases.
5c.168(f)(8)-2 Election to characterize transaction as a section 
          168(f)(8) lease.
5c.168(f)(8)-3 Requirements for lessor.
5c.168(f)(8)-4 Minimum investment of lessor.
5c.168(f)(8)-5 Term of lease.
5c.168(f)(8)-6 Qualified leased property.
5c.168(f)(8)-7 Reporting of income, deductions and investment tax 
          credit; at risk rules.
5c.168(f)(8)-8 Loss of section 168(f)(8) protection; recapture.
5c.168(f)(8)-9 Pass-through leases--transfer of only the investment tax 
          credit to a party other than the ultimate user of the 
          property. [Reserved]
5c.168(f)(8)-10 Leases between related parties. [Reserved]
5c.168(f)(8)-11 Consolidated returns. [Reserved]
5c.1305-1 Special income averaging rules for taxpayers otherwise 
          required to compute tax in accordance with Sec. 5c.1256-3.

    Authority: 26 U.S.C. 168(f)(8)(G) and 7805.

    Source: T.D. 7791, 46 FR 51907, Oct. 23, 1981, unless otherwise 
noted.



Sec. 5c.44F-1  Leases and qualified research expenses.

    For purposes of section 44F(b)(2)(A)(iii), the determination of 
whether any amount is paid or incurred to another person for the right 
to use personal property in the conduct of qualified research shall be 
made without regard to the characterization of the transaction as a 
lease under section 168(f)(8). See Sec. 5c.168(f)(8)-1(b).



Sec. 5c.103-1  Leases and capital expenditures.

    For purposes of section 103(b)(6)(D) and Sec. 1.103-
10(b)(2)(iv)(b), the determination of whether property is leased and 
whether property is of a type that is ordinarily subject to a lease 
shall be made without regard to the characterization of the transaction 
as a lease under section 168(f)(8).



Sec. 5c.103-2  Leases and industrial development bonds.

    For purposes of section 103(b)(2), the determination of whether an 
obligation constitutes an industrial development bond shall be made 
without regard to the characterization of the transaction as a lease 
under section 168(f)(8).

[T.D. 7800, 46 FR 63257, Dec. 31, 1981]



Sec. 5c.103-3  Leases and arbitrage.

    In the case of a sale and leaseback transaction qualifying under 
section

[[Page 78]]

168(f)(8), where the lessee's rental payments are substantially equal in 
timing and amount to the principal and interest payments on the lessor's 
note, the arbitrage provisions of section 103(c) and Sec. Sec. 1.103-
13, 1.103-14, and 1.103-15 shall apply to any obligations of the lessee 
(or party related to the lessee) without regard to the section 168(f)(8) 
lease transaction.

[T.D. 7800, 46 FR 63257, Dec. 31, 1981]



Sec. 5c.168(f)(8)-1  Special rules for leases.

    (a) In general. Section 168(f)(8) of the Internal Revenue Code of 
1954 provides special rules for characterizing certain agreements as 
leases and characterizing the parties to the agreement as lessors and 
lessees for Federal tax law purposes. These rules apply only with 
respect to qualified leased property. If all the requirements of section 
168(f)(8) and Sec. Sec. 5c.168(f)(8)-2 through 5c.168(f)(8)-11 are met, 
then the agreement shall be treated as a lease, and the party 
characterized as the lessor shall be treated as the owner of the 
property. In such case, the lessor shall be deemed to have entered into 
the lease in the course of carrying on a trade or business and shall be 
allowed accelerated cost recovery system (ACRS) deductions under section 
168 and the investment tax credit under section 38 with respect to the 
leased property.
    (b) Exception for qualified research expenditures. For purposes of 
section 44F(b)(2)(A)(iii), the determination of whether any amount is 
paid or incurred to another person for the right to use personal 
property in the conduct of qualified research shall be made without 
regard to the characterization of the transaction as a lease under 
section 168(f)(8). Thus, if a lessee would be considered the owner of 
the property without regard to section 168(f)(8), any amounts paid by 
the lessee under the lease shall not be considered amounts paid or 
incurred for the right to use the property.
    (c) Other factors disregarded. If an agreement meets the 
requirements of section 168(f)(8) and Sec. Sec. 5c.168(f)(8)-2 through 
5c.168(f)(8)-11, the following factors will not be taken into account in 
determining whether the transaction is a lease:
    (1) Whether the lessor or lessee must take the tax benefits into 
account in order to determine that a profit is made from the 
transaction;
    (2) The fact that the lessee is the nominal owner of the property 
for State or local law purposes (e.g., has legal title to the property) 
and retains the burdens, benefits, and incidents of ownership (such as 
payment of taxes and maintenance charges with respect to the property);
    (3) Whether or not a person other than the lessee may be able to use 
the property after the lease term;
    (4) The fact that the property may (or must) be bought or sold at 
the end of the lease term at a fixed or determinable price that is more 
or less than its fair market value at that time;
    (5) The fact that the lessee or related party has provided financing 
or has guaranteed financing for the transaction (other than for the 
lessor's minimum 10 percent investment); and
    (6) The fact that the obligation of any person is subject to any 
contingency or offset agreement. See, for example, the rent and debt 
service offset in Example (2) of paragraph (e).

An agreement that meets the requirements of section 168(f)(8) and 
Sec. Sec. 5c.168(f)(8)-2 through 5c.168(f)(8)-11 may be treated by the 
parties as a lease for Federal Tax law purposes only. Similarly, a sale 
by the lessee of the leased property to the lessor in a transaction 
where the property is leased back under an agreement that meets the 
requirements of section 168(f)(8) may be treated by the parties as a 
sale for Federal tax law purposes only. The agreements need not comply 
with State law requirements concerning transfer of title, recording, 
etc.
    (d) Ownership in one of the parties. Notwithstanding any other 
section, if neither the lessor nor the lessee would be the owner of the 
property without regard to section 168(f)(8), or, if any party with an 
economic interest in the property (other than the lessor or lessee or 
any subsequent transferee of their interests) claims ACRS deductions or 
any investment tax credit with respect to the leased property, an 
election under section 168(f)(8) with respect to such property shall be 
void as of the

[[Page 79]]

date of the execution of the lease agreement.
    (e) Examples. The application of section 168(f)(8) and Sec. Sec. 
5c.168(f)(8)-2 through 5c.168(f)(8)-11 may be illustrated by the 
following examples:

    Example (1). X Corp. wishes to acquire a $1 million piece of 
equipment which is ``qualified leased property'' as defined in section 
168(f)(8)(D). The equipment has a 10-year economic life and falls within 
the 5-year ACRS class. Y Corp. is a person meeting the qualifications 
set forth in section 168(f)(8)(B)(i) and Sec. 5c.168(f)(8)-3 and wishes 
to be the owner of the property for Federal tax law purposes. Y 
therefore purchases the equipment from the manufacturer for $1 million, 
paying $200,000 in cash and borrowing $800,000 from a bank (payable over 
9 years and requiring nine equal annual payments of principal and 
interest of $168,000). Y then leases the equipment to X under an 
agreement providing for nine annual rental payments of $168,000, and the 
parties elect in accordance with the provisions of Sec. 5c.168(f)(8)-2 
to have the provisions of section 168(f)(8) apply. The timing and amount 
of the rental payments required to be made by X (the ``lessee-user'') 
under the lease will be exactly equal to the timing and amount of the 
principal and interest payments that Y (the ``lessor'') will be required 
to make to the bank under its purchase money note. Under these 
circumstances, Y is treated as the owner and lessor of the property for 
Federal tax law purposes; it therefore is entitled to the investment tax 
credit and the ACRS deductions with respect to the property. Y's basis 
in the property is $1 million. Y must report the rent as income and will 
be entitled to deduct the interest on the purchase money note. The 
aggregate payments required to be made by X under the lease are treated 
as rent in accordance with Sec. 5c.168(f)(8)-7 and are deductible as 
such.
    Example (2). The facts are the same as in example (1) except that X 
purchases the equipment for $1 million and wishes to transfer ownership 
of the property for Federal tax law purposes to Y under a sale and 
leaseback arrangement. Accordingly, X sells the property to Y for 
$200,000 in cash (which represents the agreed upon compensation for the 
tax benefits to be enjoyed by Y as lessor) plus a 9-year, $800,000 note 
calling for nine $168,000 annual payments of principal and interest. Y 
then leases the property back to X under an agreement providing for nine 
annual rental payments of $168,000. The parties elect in accordance with 
the provisions of Sec. 5c.168(f)(8)-2 to have the provisions of section 
168(f)(8) apply. The timing and amount of the rental payments required 
to be made by X (as the lessee-user) under the lease will be exactly 
equal to the timing and amount of the principal and interest payments 
that Y will be required to make to X under Y's purchase money note, so 
that the only cash transferred between X and Y is the $200,000 down 
payment. Y's obligation to make debt service payments on the note is 
contingent on X's obligation to make rental payments under the lease. 
Under these circumstances, Y is treated as the owner and lessor of the 
property for Federal tax law purposes; it therefore is entitled to the 
investment tax credit and ACRS deductions with respect to the property. 
Y's basis in the property is $1 million. Y must report the rent as 
income and will be entitled to deduct the interest on the purchase money 
note. No gain or loss will be recognized by X on the sale of the 
property since the sale price equals X's basis in the property. X must 
report as income the interest paid by Y on the note and will be entitled 
to a deduction for the rental payments it makes under the lease in 
accordance with Sec. 5c.168(f)(8)-7.
    Example (3). Assume that in both examples (1) and (2) X has an 
option to purchase the equipment at the end of the lease term for $1.00. 
The fact that the property may (or must) be bought or sold at the end of 
the lease term at a fixed or determinable price that is more or less 
than its fair market value is not taken into account in determining the 
status of the transactions as leases under section 168(f)(8).

[T.D. 7791, 46 FR 51907, Oct. 23, 1981, as amended by T.D. 7795, 46 FR 
56148, Nov. 13, 1981]



Sec. 5c.168(f)(8)-2  Election to characterize transaction as a section 
168(f)(8) lease.

    (a) Election--(1) In general. The election to characterize a 
transaction as a lease qualifying under section 168(f)(8) shall be made 
within the time and manner as set forth in this section without regard 
to section 168(f)(4).
    (2) Lease agreement. For an agreement to be treated as a lease under 
section 168(f)(8) and this section, the lease agreement must be executed 
not later than 3 months after the property was first placed in service, 
as defined in Sec. 5c.168(f)(8)-6(b)(2)(i) (or prior to November 14, 
1981, if the property was first placed in service by the lessee after 
December 31, 1980, and before August 14, 1981). The agreement must be in 
writing and must state that all of the parties to the agreement agree to 
characterize it as a lease for purposes of Federal tax law and elect to 
have the provisions of section 168(f)(8) apply to the transaction. The 
agreement

[[Page 80]]

must also name the party who will be treated as the lessor and the party 
who will be treated as the lessee.
    (3) Information return concerning the election. (i) Except as 
provided in subdivision (ii), for each lease agreement, the lessor and 
lessee must jointly file Form 6793, Safe Harbor Lease Information 
Return, concerning their election under section 168(f)(8). The 
information return must be signed by both the lessor and the lessee and 
filed not later than the 30th day after the agreement is executed with 
the Commissioner of Internal Revenue, 1111 Constitution Avenue, N.W., 
Washington, D.C. 20224 (Attn: Form 6793). Unless the failure to file 
timely is shown to be due to reasonable cause, the failure to file the 
information return timely shall void the section 168(f)(8) election as 
of the date of the execution of the lease agreement. The information 
return shall include the following items:
    (A) The name, address, and taxpayer identifying number of the lessor 
and the lessee (and the common parent company if a consolidated return 
is filed);
    (B) The service center with which the income tax returns of the 
lessor and lessee are filed;
    (C) A description of each property with respect to which the 
election is made;
    (D) The date on which the lessee places the property in service 
(determined as defined in Sec. 5c.168(f)(8)-6(b)(2)(i)), the date on 
which the lease begins, and the term of the lease;
    (E) The recovery property class of the leased property under section 
168(c)(2) (for example, 5 years) and the ADR midpoint life of the leased 
property;
    (F) The terms of the payments between the parties to the lease 
transaction;
    (G) Whether the ACRS deductions and the investment tax credit are 
allowable to the same taxpayer;
    (H) The aggregate amount paid to outside parties to arrange or carry 
out the transaction, such as, for example, legal and investment banking 
fees;
    (I) For the lessor only: The unadjusted basis of the property as 
defined in section 168(d)(1);
    (J) For the lessor only: If the lessor is a partnership or a grantor 
trust, the name, address, and taxpayer identifying number of the 
partners or the beneficiaries, and the Service Center with which the 
income tax return of each partner or beneficiary is filed; and
    (K) Such other information as may be required by the return or its 
instructions.

The aggregate amount paid to outside parties which is described in 
paragraph (a)(3)(i)(H) of this section need not be disclosed unless it 
is reasonable to estimate that either the lessor or the lessee will 
lease property under section 168(f)(8) for the calendar year which has 
an aggregate adjusted basis to such person of more than $1,000,000. If 
either the lessor or the lessee reasonably expects to lease property 
with an aggregate basis of more than $1,000,000, then both parties must 
disclose their transaction costs.
    (ii) In the case of an agreement executed before January 1, 1982, 
only the lessor is required to file the information return described in 
paragraph (a)(3)(i) of this section and the return must be postmarked 
not later than January 31, 1982. Unless the failure to file timely is 
shown to be due to reasonable cause, or unless the lessee files the 
information return postmarked by January 31, 1982, the lessor's failure 
to file the information return timely shall be a disqualifying event as 
of February 1, 1982, which shall cause an agreement to cease to be 
treated as a lease under section 168(f)(8). For the Federal income tax 
consequences of a disqualifying event, see Sec. 5c.168(f)(8)-8.
    (iii) A copy of the information return described in paragraph (a)(3) 
(i) and (ii) shall be filed by each party with its timely filed Federal 
income tax return for its taxable year during which the lease term 
begins. However, for taxable years ending in 1981 with respect to lease 
agreements executed during calendar year 1981, such statement shall be 
filed by the later of (A) the due date (taking extensions into account) 
of the party's 1981 Federal income tax return, or (B) where the filing 
of an amended return is required, with the amended return within 3 
months following the execution of the lease agreement. For

[[Page 81]]

the requirement to file an amended return within 3 months and the 
consequences of the failure to so file, see Sec. 5c.168(f)(8)-
6(b)(2)(ii). A taxpayer that is required to file the information return 
with its Federal income tax return before an information return form is 
available shall file, in lieu of the required information return, a 
statement which contains the information set forth in subparagraphs (A) 
through (J) of pargraph (a)(3)(i). The failure by the lessor to file the 
information return (or, if applicable, the statement referred to in the 
preceding sentence) with its timely filed Federal income tax return 
shall be a disqualifying event which shall cause an agreement to cease 
to be treated as a lease under section 168(f)(8). For the Federal income 
tax consequences of a disqualifying event, see Sec. 5c.168(f)(8)-8.
    (4) Election is irrevocable. An agreement made pursuant to paragraph 
(a)(2) of this section shall be irrevocable as of the later of the date 
such agreement was executed or November 23, 1981.
    (5) Disposition by lessee. Except in the case of transactions 
described in subparagraph (6), of this paragraph, if the lessee (or any 
transferee of the lessee's interest) sells or assigns its interest in 
the lease or in the property, the agreement will cease to be 
characterized as a lease under section 168(f)(8) as of the time of the 
sale or assignment unless the transferee furnishes to the lessor within 
60 days following the transfer the transferee's written consent to take 
the property subject to the lease, and the transferee and lessor file a 
statement with their timely filed Federal income tax returns for the 
taxable year in which the transfer occurs containing the following 
information:
    (i) The name, address, and taxpayer identifying number of the lessor 
and the transferee;
    (ii) The district director's office with which the income tax 
returns of the lessor and transferee are filed;
    (iii) A description of the property; and
    (iv) Confirmation of the transferee's consent.

See Sec. 5c.168(f)(8)-8 for the Federal income tax consequence where an 
agreement ceases to be characterized as a lease under section 168(f)(8).
    (6) Disposition of lessee's interest in bankruptcy, etc., or similar 
proceeding. In the case of an agreement executed after May 31, 1982, 
where the lessee's interest in the lease or in the property is sold or 
assigned in a bankruptcy, liquidation, receivership, a court-supervised 
foreclosure, or in any similar proceeding for the relief or protection 
of insolvent debtors in Federal or State court, the agreement will 
continue to be characterized as a lease under section 168(f)(8) and the 
purchaser or assignee shall take the property subject to the lease if--
    (i) Prior to the consummation of the sale or assignment, the lessor 
gives written notice of its Federal income tax ownership to the judicial 
or administrative body having jurisdiction over the proceeding and to 
the debtor in possession of the interest or, if at such time a trustee, 
receiver or similar person has been appointed by the court, to the 
person appointed. The notice must contain a request that the court and 
the debtor or the person appointed provide a copy of the notice to the 
purchaser or assignee prior to the consummation of the sale or 
assignment. Within 60 days following the sale or assignment, the lessor 
must provide notice of its Federal income tax ownership and copies of 
the lease agreement, and, in the case of a sale and leaseback 
transaction, the lessor's purchase money obligation, to the purchaser or 
assignee;
    (ii) The lessor files a statement with its timely filed Federal 
income tax return for the taxable year in which the sale or assignment 
occurs containing the following information:
    (A) The name, address, and taxpayer identifying number of the lessor 
and the purchaser or assignee;
    (B) The district director's office with which the Federal income tax 
returns of the lessor and purchaser or assignee are filed;
    (C) A description of the property; and
    (iii) Prior to the consummation of the sale or assignment, all 
secured lenders of the lessee with interests in the property, which 
interests arose not later than the time the lessee first used the 
property under the lease (and

[[Page 82]]

which were perfected in accordance with applicable local law), 
specifically either exclude or release in writing the Federal income tax 
ownership of the property from their interests.

The purchaser or assignee of the interest with respect to which this 
paragraph applies shall file a statement with its timely filed Federal 
income tax return for the taxable year in which the sale or assignment 
occurs containing the information described in subdivision (ii) of this 
subparagraph. If the interest is subsequently transferred (other than in 
a bankruptcy, liquidation, receivership, court-supervised foreclosure, 
or similar proceeding) during the term of the lease, the agreement will 
continue to be characterized as a lease under section 168(f)(8) and the 
transferee will take the property subject to the lease if either (A) the 
lessor gives the transferee, prior to the transfer, a copy of the lease, 
written notice of its Federal income tax ownership, and, in the case of 
a sale and leaseback transaction, a copy of the lessor's purchase money 
obligation, and the lessor files a statement with its timely filed 
Federal income tax return as described in subdivision (ii) of this 
subparagraph, or (B) within 60 days following the transfer, the 
transferee agrees in writing to take the property subject to the lease 
and the lessor and transferee file a statement with their timely filed 
Federal income tax returns within the time and in the manner described 
in paragraph (a)(5) of this section. However, an agreement will not 
continue to be characterized as a lease under this subparagraph if, 
under another applicable provision, it would cease to be characterized 
as a lease. See Sec. 5c.168(f)(8)-8 for the Federal income tax 
consequences where an agreement ceased to be characterized as a lease 
under section 168(f)(8).
    (7) Consequences of taking the property subject to the lease 
agreement. For purposes of Sec. Sec. 5c.168(f)(8)-1 through 
5c168(f)(8)-11, in a situation where a transferee of a lessee's interest 
acquires the property subject to the lease, the transferee shall be 
deemed to have acquired a leasehold interest in the property equal to 
the remaining lease term, any unpaid obligation of the lessor arising in 
connection with the sale of the property by the original lessee in a 
sale and leaseback transaction, and any option of the lessee to purchase 
the property. Any consideration paid by the transferee for the property 
shall be allocated to the lessor's obligation to the extent of the 
unpaid balance of the obligation. Any excess over the unpaid balance 
shall be allocated between the leasehold interest and the purchase 
option in proportion to their relative fair market values. As the new 
lessee, the transferee shall not be entitled to claim any ACRS deduction 
with respect to the property while the lease remains in effect and shall 
not be entitled to any investment tax credit with respect to the 
property. The transferee shall report interest income on the lessor's 
obligation, and shall be entitled to deduct the rent paid under the 
lease, in accordance with Sec. 5c.168(f)(8)-7. In addition, the 
transferee shall be entitled to amortize the portion of its cost 
allocable to the leasehold interest. Coversely, as long as the lease 
remains in effect, the lessor will continue to be recognized as the 
owner of the property for Federal income tax purposes, shall be required 
to report rents due under the lease, and shall be entitled to deduct 
interest on its obligation.
    (8) Election to treat certain leases under subparagraph (6) rules. 
The lessor under a section 168(f)(8) lease executed on or before May 31, 
1982, may elect to have the provisions of paragraph (a)(6) of this 
section apply in the case of a sale or assignment of the lessee's 
interest in the lease or in the property in a bankruptcy, receivership, 
liquidation, court-supervised foreclosure, or similar proceeding. The 
election of the lessor with respect to any leased property may be made 
at any time prior to the consummation of any sale or assignment of such 
property in a bankruptcy, etc., or similar proceeding, by complying with 
the provisions of subparagraph (6) of this paragraph.
    (b) Examples. The application of the provisions of this section may 
be illustrated by the following examples:

    Example (1). X Corp. maintains its books and records for Federal tax 
law purposes on a calendar year basis. On February 1, 1981, X acquires 
certain equipment for use in its

[[Page 83]]

business, and the equipment is deemed to be placed in service on that 
date within the meaning of Sec. 5c.163(f)(8)-6(b)(2)(i). On November 1, 
1981, X sells the equipment to Y and leases it back under a lease in 
which the parties elect to have the provisions of section 168(f)(8) 
apply. The election is considered timely for purposes of making Y the 
owner of the property under section 168(f)(8) since the lease agreement 
was executed before November 14, 1981.
    Example (2). The facts are the same as in example (1) except that X 
Corp.'s taxable year ends on February 28, 1981. X claimed the investment 
tax credit and depreciation deductions with respect to the property in 
its return filed April 1, 1981. The lease will qualify for safe harbor 
treatment under section 168(f)(8) provided X, within 3 months after the 
lease agreement was executed, files an amended return pursuant to Sec. 
5c.168(f)(8)-6(b)(2)(ii) for its taxable year ending February 28, 1981, 
in which X foregoes its right to claim any investment tax credit or ACRS 
deductions with respect to the property subject to the lease.
    Example (3). X Corp. (as lessee) sells certain new equipment to Y 
Corp. (as lessor) and leases it back under a section 168(f)(8) lease. 
During the term of the lease X sells its interest in the property to T 
Corp. (other than in a bankruptcy or similar proceeding), and T does not 
give Y a written consent to take the property subject to the leased. The 
agreement ceases to be treated as a lease under section 168(f)(8) as of 
the date of the sale.
    Example (4). The facts are the same as in example (3) except that 
the sale of the property takes place while X is under the jurisdiction 
of a court in a bankruptcy proceeding. All lenders of X having perfected 
interests in the property that arose by the time the property was first 
used under the lease have specifically either excluded or released the 
ownership of the property for Federal income tax purposes from their 
interests. Within the required time periods, Y gives appropriate 
notification to the court, the bankruptcy trustee, and T that the 
property is subject to the lease and files the required statement with 
its Federal income tax return for the taxable year in which the sale 
occurs. The agreement continues to be treated as a lease under section 
168(f)(8). T will take the property subject to the lease. T must 
allocate the purchase price among the lessor's note, the leasehold 
interest, and the option (if any) to purchase the property.
    Example (5). The facts are the same as in example (4), except that 
one lender of X having a perfected and timely interest in the property 
does not specifically exclude or release the Federal income tax 
ownership of the property from its interest. The agreement will cease to 
be treated as a lease under section 168(f)(8) as of the date of the 
transfer to T. The result would be the same if Y failed to furnish any 
of the notices required by subdivision (i) of paragraph (a) and (6) or 
failed to file a statement as required by subdivision (ii) of paragraph 
(a)(6).
    Example (6). The facts are the same as in example (4). In addition, 
during the term of the lease T transfers the property to U Corp. and Y 
fails to furnish U with written notice that the property is subject to 
the lease prior to the sale and U refuses to agree to consent to the 
lease agreement. The agreement will cease to be treated as a lease under 
section 168(f)(8) as of the date of the transfer to U. The result would 
be the same if Y furnished U with timely written notice of its tax 
ownership but failed to file the required statement with its tax return 
for its taxable year in which the sale occurred.

[T.D. 7791, 46 FR 51907, Oct. 23, 1981, as amended by T.D. 7795, 46 FR 
56148, Nov. 13, 1981; T.D. 7800, 46 FR 63257, Dec. 31, 1981]



Sec. 5c.168(f)(8)-3  Requirements for lessor.

    (a) Qualified lessor. In order for an agreement to be treated as a 
lease under section 168(f)(8), the party characterized in the agreement 
as the lessor must be a qualified lessor. The term ``qualified lessor'' 
means--
    (1) A corporation which is neither an electing small business 
corporation under section 1371(b) nor a personal holding company under 
section 542(a), or
    (2) A partnership all of whose partners are corporations described 
in subparagraph (1), or
    (3) A grantor trust whose grantor and beneficiaries are all 
corporations described in paragraph (a)(1) or partnerships described in 
paragraph (a)(2).
    (b) Effect of disqualification of lessor. If at any time during the 
term of the agreement the lessor ceases to be a qualified lessor, the 
agreement will lose its characterization as a lease under section 
168(f)(8) as of the date of the event causing such disqualification. If 
any partner of a partnership described in paragraph (a)(2) ceases to be 
a corporation described in paragraph (a)(1), the partnership entity 
shall cease to be a qualified lessor. Similarly, if any beneficiary of a 
trust described in paragraph (a)(3) ceases to be a corporation described 
in paragraph (a)(1), the trust shall cease to be a qualified lessor. See 
Sec. 5c.168(f)(8)-8 for the Federal income tax consequences of such a 
disqualification.

[[Page 84]]

    (c) One tax owner per property. Only one person may be a qualified 
lessor under section 168(f)(8) with respect to leased property. Thus, 
property that is subject to a lease under section 168(f)(8) may not be 
subleased under a lease for which a section 168(f)(8) election is made. 
In addition, if a lessor sells or assigns in a taxable transaction its 
interest in a section 168(f)(8) lease or in the underlying property, the 
lease shall cease to qualify under section 168(f)(8) and no other lease 
may be executed under section 168(f)(8) with respect to the property. 
The preceding sentence applies to a sale or assignment of its interest 
by a partner of a lessor that is a partnership described in paragraph 
(a)(2) of this section or by a beneficiary of a lessor that is a trust 
described in paragraph (a)(3) of this section. See Sec. 5c.168(f)(8)-8 
for the Federal income tax consequences where a lease ceases to qualify 
under section 168(f)(8). However, lease brokers, agents, etc., may, for 
example, prepare executory contracts with the lessee whereby the 
broker's assignee may execute a lease as lessor, and, if the 
requirements of section 168(f)(8) and Sec. Sec. 5c.168(f)(8)-1 through 
5c.168(f)(8)-11 are met, the lease will qualify under section 168(f)(8).
    (d) Examples. The application of paragraph (c) may be illustrated by 
the following examples:

    Example (1). X Corp. (as lessee) sells certain new equipment to Y 
Corp. (as lessor) and leases it back under a section 168(f)(8) lease. 
Within 3 months after the property was placed in service, Y assigns its 
interest in the lease to Z. Upon the transfer to Z, the lease will no 
longer qualify for treatment under section 168(f)(8). The property may 
not thereafter be the subject of a section 168(f)(8) lease.
    Example (2). X Corp., which wishes to acquire certain equipment for 
use in its business and to transfer ownership of the property for 
Federal income tax law purposes, purchases the equipment and enters into 
an executory contract with LB, a lease broker, under which X agrees to 
execute a section 168(f)(8) lease as lessee with a third party lessor. 
At a later date (but within the prescribed 3-month period), LB arranges 
for X and T Corp. (which wishes to secure Federal income tax law 
ownership) to execute a lease agreement in accordance with Sec. 
5c.168(f)(8)-2. The lease will qualify for treatment under section 
168(f)(8).

[T.D. 7791, 46 FR 51907, Oct. 23, 1981, as amended by T.D. 7795, 46 FR 
56149, Nov. 13, 1981]



Sec. 5c.168(f)(8)-4  Minimum investment of lessor.

    (a) Minimum investment. Under section 168(f)(8)(B)(ii), an agreement 
will not be characterized as a lease for purposes of section 168(f)(8) 
unless the qualified lessor has a minimum at risk investment which, at 
the time the property is placed in service under the lease and at all 
times during the term of the lease, is not less than 10 percent of the 
adjusted basis of the leased property. As the adjusted basis of the 
leased property is reduced by capital cost recovery deductions, the 
minimum investment required will also be reduced to 10 percent of the 
revised adjusted basis, until the adjusted basis has been completely 
recovered, at which time no minimum investment will be required. 
Financing provided by the lessee or a party related to the lessee, such 
as a recourse note given by the lessor to the lessee, will not be taken 
into account in determining the lessor's minimum investment.
    (b) At risk amount. The minimum investment which the lessor has at 
risk with respect to the leased property for purposes of paragraph (a) 
of this section includes only consideration paid and recourse 
indebtedness incurred by the lessor to purchase the property. The lessor 
must have sufficient net worth (without regard to the value of any 
leases which qualify under section 168(f)(8)) to satisfy any personal 
liability incurred. Any tax benefits which the lessor derives from the 
leased property shall not be taken into account to reduce the amount the 
lessor has at risk. An agreement between the lessor and the lessee 
requiring either or both parties to purchase or sell the qualified 
leased property at some price (whether or not fixed in the agreement) at 
the end of the lease term shall not affect the amount the lessor has at 
risk with respect to the property. However, an option held by the lessor 
to sell the property that is exercisable before the end of the period 
prescribed under section 168(c)(2) for the recovery property

[[Page 85]]

class of the leased property (taking into account any election by the 
lessor or lessee under section 168(b)(3)) shall reduce the amount the 
lessor is considered to have at risk by the amount of the option price 
at the time the option becomes exercisable.



Sec. 5c.168(f)(8)-5  Term of lease.

    (a) Term of lease--Basic rules. To qualify as a lease under section 
168(f)(8) and Sec. 5c.168 (f)(8)-1 (a), the lease agreement must 
provide for a term that does not exceed the maximum term described in 
paragraph (b) of this section; such term must also at least equal the 
minimum term described in paragraph (c).
    (b) Maximum term. For purposes of section 168(f)(8)(B)(iii) and this 
section, the term of the lease may not exceed the greater of--
    (1) 90 percent of the useful life of the property under section 167, 
or
    (2) 150 percent of the asset depreciation range (ADR) present class 
life (``midpoint'') of such property, applicable as of January 1, 1981 
(without regard to section 167(m)(4)), published in Rev. Proc. 77-10, 
1977-1 C. B. 548, and revisions thereto.

Solely for purposes of this paragraph (b), ``useful life'' means the 
period when the leased asset can reasonably be expected to be 
eonomically useful in anyone's trade or business; such term does not 
mean the period during which the lessor expects to lease the property. 
Any option to extend the term of the lease, whether or not at fair 
market value rent, must be included in the term of the lease for 
purposes of this paragraph. If several different pieces of property are 
the subject of a single lease, the maximum allowable term for such lease 
will be measured with respect to the property with the shortest life. In 
no case, however, will the lease term qualify under this section if such 
term with respect to any piece of property is less than the minimum term 
described in paragraph (c).
    (c) Minimum term. For purposes of this section, the term of the 
lease must at least equal the period prescribed under section 168(c)(2) 
for the recovery property class of the leased property. For example, if 
a piece of leased equipment is in the 5-year recovery property class, 
the lease agreement must have a minimum term of 5 years. In general, the 
determination of whether property is 3-year recovery property, 5-year 
recovery property, etc., in the hands of the lessor will be based on the 
characterization of the property in the hands of the owner as determined 
without regard to the section 168(f)(8) lease. Thus, for example, 
property which is public utility property or RRB replacement property 
absent the section 168(f)(8) lease will be characterized as such in the 
hands of the lessor for purposes of section 168(f)(8). However, with 
respect to RRB replacement property, the transitional rule of section 
168(f)(3) shall be inapplicable to the lessor. In addition, any election 
under section 168(b)(3) by the lessor with respect to the class of 
recovery property to which the qualified leased property is assigned 
shall apply to the leased property in determining the term of the lease. 
A lease term that does not exceed the term required to satisfy the 
minimum lease term of this paragraph will be deemed to comply with the 
maximum lease term described in paragraph (b) if such minimum lease term 
exceeds such maximum lease term.
    (d) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). X Corp. (as lessee) and Y Corp. (as lessor) enter into 
a lease which they elect to be treated under section 168(f)(8) with 
respect to a chemical manufacturing facility that will also generate 
steam for use in the production of electricity. The assets comprising 
the chemical plant are described in ADR guideline class 28.0 (midpoint 
life of 9.5 years), and the assets comprising the steam plant are 
described in ADR class 00.4 (midpoint life of 22 years). To satisfy the 
maximum lease term requirement of section 168(f)(8)(B)(iii)(II) and 
Sec. 5c.168 (f)(8)-5(b), the lease term may not exceed 14.25 years (150 
percent of the 9.5 year midpoint life of the chemical plant).
    Example (2). The facts are the same as in example (1) except that 
the chemical plant and the steam plant are the subject of separate 
leases. For purposes of section 168(f)(8)(B)(iii)(II) and Sec. 
5c.168(f)(8)-5 (b), the maximum term of the lease with respect to the 
chemical plant is 14.25 years (150 percent of 9.5 years) and the maximum 
term of the lease with respect to the steam plant is 33 years (150 
percent of 22 years).

[T.D. 7791, 46 FR 51907, Oct. 23, 1981; 50 FR 13020, Apr. 2, 1985]

[[Page 86]]



Sec. 5c.168(f)(8)-6  Qualified leased property.

    (a) Basic rules--(1) In general. An agreement shall be treated as a 
section 168(f)(8) lease only if the property which is leased is 
qualified leased property. Qualified leased property is recovery 
property as defined in section 168(c) and is either--
    (i) Except as provided in subparagraph (2), new section 38 property 
of the lessor which is leased no later than 3 months after the date the 
property was placed in service (or prior to November 14, 1981, if the 
property was placed in service after December 31, 1980, and before 
August 14, 1981) and which, if acquired by the lessee, would have been 
new section 38 property of the lessee, or
    (ii) Property which is a qualified mass commuting vehicle (as 
defined in section 103(b)(9)) and which is financed in whole or in part 
by proceeds from an issue of obligations the interest on which is 
excludable from income under section 103(a).
    (2) Sale and leaseback arrangement. (i) Where the leased property is 
purchased, directly or indirectly, by the lessor from the lessee (or a 
party related to the lessee), the property will not be qualified leased 
property unless the property was (or would have been) new section 38 
property of the lessee and was purchased and leased no later than 3 
months after the date the property was placed in service by the lessee 
(or prior to November 14, 1981, if the property was placed in service by 
the lessee after December 31, 1980 and before August 14, 1981) and with 
respect to which the lessor's adjusted basis does not exceed the 
adjusted basis of the lessee (or a party related to the lessee) at the 
time of the lease. If the lessor's adjusted basis in the property 
exceeds the seller's adjusted basis with respect to the property at the 
beginning of the lease, the property will not be qualified leased 
property.
    (ii) For purposes of this paragraph (a)(2) and paragraph (b)(3)(ii) 
of this section, transactional costs with respect to a sale and 
leaseback arrangement that are not currently deductible shall be 
allocated to the lease agreement (and not included in the lessor's 
adjusted basis with respect to the property) and amortized over the term 
of the lease. These costs include legal and investment banking fees and 
printing costs.
    (iii) The application of this paragraph (a)(2) may be illustrated by 
the following examples:

    Example (1). X, an airline, contracts to have an airplane 
constructed for a fixed price of $10 million. Prior to completion of 
construction of the airplane, the value of the airplane increases to $11 
million. X buys the airplane at the contract price of $10 million and, 
before it is placed in service, sells the airplane at its fair market 
value of $11 million to Y and then leases it back. The lease will not 
qualify for safe harbor protection under section 168(f)(8) because the 
lessor's adjusted basis in the airplane exceeds the lessee's adjusted 
basis. This result obtains even though the airplane qualifies as new 
section 38 property of X airline.
    Example (2). Assume the same facts as in example (1) except that, 
prior to completion of the construction of the airplane, X assigns its 
contract to Y for $1 million, and Y thereafter buys the airplane at the 
contract price of $10 million. The acquisition by Y is treated as an 
indirect purchase from the lessee. Because Y's adjusted basis in the 
airplane would exceed the lessee's adjusted basis, the lease will not 
qualify under section 168(f)(8).

    (b) Special rules--(1) New section 38 property. (i) New section 38 
property is section 38 property described in subsection (b) of section 
48 and the regulations thereunder other than a qualified rehabilitated 
building (within the meaning of section 48(g)(1)). Qualified leased 
property must be new section 38 property at the beginning of the lease 
and must continue to be section 38 property in the hands of the lessor 
and the lessee throughout the lease term. The fact that the lessee used 
the property within the 3-month period prior to the lease will not 
disqualify the property as new section 38 property of the lessee.
    (ii) The application of this paragraph (b)(1) may be illustrated by 
the following examples:

    Example (1). N is a hospital exempt from Federal income tax and 
wishes to purchase certain equipment for use in furtherance of its 
exempt functions (i.e., other than for use in an unrelated trade or 
business). O, a qualified lessor as defined in Sec. 5c.168(f)(8)-3(a), 
acquires the property and leases it to N. Since the equipment would not 
be new section 38 property of N if N had acquired it by virtue of 
section 48(a)(4) (relating to exception from

[[Page 87]]

definition of section 38 property for certain property used by certain 
tax-exempt organizations), the equipment is not qualified leased 
property and the lease does not qualify under section 168(f)(8). Whether 
O is considered the owner of the property for Federal tax law purposes 
will be determined without regard to the provisions of section 
168(f)(8).
    Example (2). P Corp. is constructing progress expenditure property 
as defined in section 46(d)(2) for R Corp. Progress expenditure property 
is property which it is reasonable to believe will be section 38 
property in the hands of the taxpayer when it is placed in service. 
Before the date that the property is placed in service (as defined in 
Sec. 5c.168(f)(8)-6(b)(2)(i)), the property is not new section 38 
property. Accordingly, progress expenditure property cannot be qualified 
leased property.
    Example (3). R Corp., a foreign railroad, acquires new rolling stock 
and enters into a sale and leaseback transaction with B Corp., a 
domestic corporation. R uses the rolling stock within and without the 
United States, but predominantly outside the United States within the 
meaning of section 48(a)(2)(A). Section 48(a)(2)(B)(ii) is inapplicable 
to R because R is neither a domestic railroad corporation nor a United 
States person; therefore, the rolling stock cannot be section 38 
property to R. The property is not qualified leased property.

    (2) Placed in service. (i) Property shall be considered as placed in 
service at the time the property is placed in a condition or state of 
readiness and availability for a specifically assigned function. If an 
entire facility is leased under one lease, property which is part of the 
facility will not be considered placed in service under this rule until 
the entire facility is placed in service. If the lessee claims any 
investment tax credit or ACRS deductions with respect to any component 
which is part of an entire facility that is subsequently leased, the 
lessee must file an amended return within the time prescribed in 
paragraph (b)(2)(ii) of this section in which it foregoes its claim to 
the investment tax credit and ACRS deductions. If such amended return 
may not be filed because the time for filing a claim for refund with 
respect to any component under section 6511 has expired, each component 
of the facility will be considered as placed in service at the time the 
individual component is placed in a condition or state of readiness and 
availability for a specifically assigned function and not when the 
entire facility is placed in service.
    (ii) For purposes other than determining whether property is 
qualified leased property, property subject to a lease under section 
168(f)(8) will be deemed to have been placed in service not earlier than 
the date such property is used under the lease. If the lessee claims any 
investment tax credit or ACRS deductions with respect to property placed 
in service under a lease, the lessee must file an amended return within 
3 months following the execution of the lease agreement in which the 
lessee foregoes its claim to the investment tax credit and ACRS 
deductions with respect to the leased property or the election under 
section 168(f)(8) will be void.
    (iii) The application of this paragraph (b)(2) may be illustrated by 
the following examples:

    Example (1). X Corp. acquires equipment on December 31, 1982, and 
places the equipment in service. X's taxable year ends December 31. On 
March 20, 1983, X sells the equipment to Y Corp. and leases it back in a 
transaction that qualifies under section 168(f)(8). The property is 
considered to be new section 38 property to X under paragraph (b)(1). X 
is not allowed any investment tax credit or ACRS deductions with respect 
to the property in 1982 because the property is not considered to have 
been placed in service for purposes other than determining whether it is 
qualified leased property until it is used under the lease under 
subdivision (ii) of this subparagraph (2). If X has claimed credits or 
deductions on its 1982 return, it must file an amended return for 1982 
within 3 months following the execution of the lease agreement or the 
election will be void.
    Example (2). In March 1985, K Corp. completes reconditioning of a 
machine, which it constructed and placed in service in 1982 and which 
has an adjusted basis in 1985 of $10,000. The cost of reconditioning 
amounts to an additional $20,000. K would be entitled to a basis of 
$20,000 in computing its qualified investment in new section 38 property 
for 1985. In May 1985, K enters into a sale and leaseback transaction 
with L Corp. with respect to the reconditioned parts of the machine that 
are new section 38 property to K. K and L elect to have section 
168(f)(8) apply. Assuming that the adjusted basis of the leased property 
is the same to L as it is to K, the property qualifies as qualified 
leased property under section 168(f)(8)(D)(ii) and L is considered the 
tax owner of the property. Since, for purposes other than determining

[[Page 88]]

whether property is qualified leased property, the property is deemed 
originally placed in service not earlier than the date the property is 
used under the lease, the property is new section 38 property to L and L 
may claim the investment tax credit (and ACRS deductions) with respect 
to the leased property.

    (3) Qualified mass commuting vehicle. (i) A qualified mass commuting 
vehicle as defined in section 103(b)(9) will constitute qualified leased 
property for purposes of section 168(f)(8)(D)(iii) and this section 
provided all of the following requirements are met:
    (A) At least part (as, for example, 5 percent) of the financing for 
the purchase of such vehicle must be derived from proceeds of 
obligations the interest on which is excludable from income under 
section 103(a)(1) (whether or not such obligations are described in 
section 103(b)(4)(I));
    (B) The vehicle must be recovery property (i.e., it must have been 
first placed in service by the lessee after December 31, 1980); and
    (C) The vehicle must not have been previously leased under a section 
168(f)(8) lease by the lessee.

A qualified mass commuting vehicle that is qualified leased property may 
be leased under section 168(f)(8) at any time after December 31, 1980. 
The requirement of paragraph (b)(3)(i)(A) of this section may be 
satisfied where the vehicles leased under a section 168(f)(8) lease are 
refinanced with proceeds of an obligation the interest on which is 
excludable from income under section 103(a)(1).
    (ii) Where the leased property is purchased, directly or indirectly, 
by the lessor from the lessee (or a party related to the lessee), the 
property will not qualify under this subsection unless the lessor's 
adjusted basis in the property does not exceed the adjusted basis of the 
lessee (or related party) at the time of the execution of the lease. The 
adjusted basis of property to a lessee (or related party) shall be 
determined under Part II of Subchapter O of Chapter I of the Code for 
purposes of determining gain, except that the adjustment described in 
section 1016(a)(3) and Sec. 1.1016-4 need not be made for property 
acquired during calendar year 1981 and leased no later than March 1, 
1982.
    (iii) In a transaction characterized as a lease under section 
168(f)(8), the lessor's adjusted basis may not include that portion, if 
any, of the cost of the vehicle to the lessee (or related party) that is 
financed, directly or indirectly, with an Urban Mass Transportation 
Administration (UMTA) grant (excluding a grant under the interstate 
transfer provision of the Federal-Aid Highway Act (FAHA)), a FAHA grant, 
or any other Federal grant. Where a vehicle is included as part of an 
UMTA-funded project, 80 percent of the vehicle's cost will be deemed to 
be financed with an UMTA grant and 20 percent will be deemed to be 
financed from non-Federal sources without regard to whether the UMTA 
funds or the non-Federal funds are traceable to any particular vehicle 
included within the project. For purposes of this subparagraph and 
paragraph (b)(3)(ii) of this section, amounts originating from non-
Federal sources which are paid or incurred with respect to leased 
property by a State or political subdivision of the State (or political 
subdivision created by the joint authorization of two or more States) 
shall be taken into account in computing the lessee's adjusted basis in 
the leased property as if the lessee had paid or incurred such amounts.
    (iv) If a vehicle is purchased pending approval of an UMTA grant, 
the lessor's unadjusted basis in the vehicle may equal the lessee's 
unadjusted basis unreduced by any subsequently approved UMTA grant; 
however, if an UMTA grant is later approved and the vehicle is included 
as part of an UMTA-funded project, except as provided hereinafter in 
this subparagraph, the lease shall terminate with respect to an 
undivided 80 percent interest in the vehicle. For the Federal income tax 
consequences of the termination of a lease, see Sec. 5c.168(f)(8)-8. If 
such a subsequently approved UMTA grant is used to purchase additional 
qualified mass commuting vehicles, the portion of each vehicle deemed to 
be allocable to non-UMTA financing (i.e., 20 percent) may be leased 
under section 168(f)(8). If a vehicle is purchased pending approval of 
an UMTA grant and leased under

[[Page 89]]

section 168(f)(8), the lease will not be deemed to have terminated with 
respect to 80 percent of the vehicle when the UMTA grant is later 
approved if the total interest leased before the grant is approved did 
not exceed 20 percent of the lessee's adjusted basis in the vehicle 
(unadjusted basis prior to March 1, 1982) unreduced by any subsequently 
approved UMTA grant. For purposes of this subparagraph and paragraph 
(b)(3)(iii) of this section, the allocation principles applicable to 
UMTA grants shall apply in the case of FAHA grants except that 85 
percent and 15 percent shall be substituted for 80 percent and 20 
percent, respectively. Similar allocation rules shall also apply to 
other Federal grants used to finance the acquisition of qualified mass 
commuting vehicles.
    (v)(A) Notwithstanding the provisions of Sec. 5c.168(f)(8)-
2(a)(3)(iii), the lessee in a transaction to which this paragraph (b)(3) 
applies is not required to file an information return or a statement 
concerning its election under section 168(f)(8).
    (B) Notwithstanding the provisions of Sec. 5c.168(f)(8)-2(a)(5), if 
the transfer of a qualified mass commuting vehicle is not otherwise a 
disqualifying event, the transferee is not required to file the 
statement mentioned therein.
    (C) The fact that a qualified mass commuting vehicle is not section 
38 property because it is used by an exempt entity will not disqualify 
the lease under Sec. 5c.168(f)(8)-8(b)(4); however, a disqualifying 
event will occur, and the agreement will cease to be characterized as a 
lease under section 168(f)(8), with respect to a vehicle which (1) 
ceases to be a qualified mass commuting vehicle or (2) would cease to be 
section 38 property if used by a taxable entity as, for example, a 
vehicle used predominantly outside the United States. For the Federal 
income tax consequences of a disqualifying event, see Sec. 
5c.168(f)(8)-8.
    (vi) The lessor of a qualified vehicle will not be allowed an 
investment tax credit with respect to it under section 38.
    (vii) The application of this paragraph (b)(3) may be illustrated by 
the following examples:

    Example (1). On July 1, 1981, a unit of city X, X Transit Authority 
(XTA), purchases 100 buses after receiving an UMTA grant for 80 percent 
of their purchase price. Fifteen percent of the purchase price is 
financed with a combination of State and local governmental grants and 5 
percent is financed with proceeds from an issue of tax-exempt 
obligations described in section 103(b)(4)(I). Because UMTA financed an 
80 percent interest in the 100 buses, XTA may lease under section 
168(f)(8) only a 20 percent interest in each bus. If XTA were to lease 
100 percent of 20 buses, only 20 percent of such buses would be deemed 
to be leased under a safe harbor lease.
    Example (2). The facts are the same as in example (1) except that 
UMTA has not yet approved XTA's application in 1981. Pending the UMTA 
approval, XTA purchases and places in service 20 buses in July 1981. The 
20 buses are financed with tax-exempt obligations described in section 
103(b)(4)(I). On December 15, 1981, XTA sells a 100 percent interest in 
these 20 buses to Corporation M and leases them back under a lease in 
which the parties elect to have the provisions of section 168(f)(8) 
apply. M is a calendar-year taxpayer and claims an ACRS deduction with 
respect to the buses on its return for taxable year 1981. On July 1, 
1982, UMTA approves XTA's grant application, thus enabling XTA to 
purchase an additional 80 buses. Because 80 percent of the original 20 
buses are deemed to have been financed by UMTA beginning on July 1, 
1982, the safe harbor lease terminates with respect to an undivided 80 
percent interest in the 20 buses. If XTA would be considered the owner 
of the buses without regard to section 168(f)(8), the termination will 
result in a deemed sale of an undivided 80 percent interest in the 20 
buses by M to XTA. The amount realized by M on the sale will include a 
proportionate part of the outstanding amount of M's debt plus the sum of 
any other consideration received by M. M will realize gain or loss, 
depending upon its basis, with applicable section 1245 recapture. 
However, XTA may lease the 20 percent interest in the 80 new buses it 
purchased in 1982 which is deemed to have been financed with non-Federal 
funds.
    Example (3). The facts are the same as in example (2) except that 
the grant approved by UMTA is used to purchase and renovate a bus garage 
facility. Eighty percent of the original 20 buses are deemed to have 
been financed by UMTA beginning on July 1, 1982. The lease would still 
terminate with respect to an undivided 80 percent interest in the 
vehicles. XTA cannot lease the garage facility under 168(f)(8) because 
it does not constitute a qualified mass commuting vehicle.
    Example (4). The facts are the same as in example (2) except that on 
December 15, 1981, XTA sells and leases back only a 20 percent interest 
in the 20 buses acquired in July 1981.

[[Page 90]]

When the UMTA grant is later approved, the lease will not terminate with 
respect to any portion of the 20 buses. In addition, XTA may lease the 
20 percent interest in the 80 new buses purchased in 1982 and deemed to 
have been financed with non-Federal funds.
    Example (5). On August 1, 1982, UMTA approves a grant for a major 5-
year capital expenditure program to improve city Y's rapid rail transit 
system. None of the funds relating to this UMTA-funded project, provided 
either by UMTA or by city Y, will be used to purchase qualified mass 
commuting vehicles. Instead, a number of rapid rail cars and buses will 
be purchased entirely with funds provided with a combination of grants 
by the State and city governments and of proceeds from an issue of tax-
exempt obligations described in section 103(a). Because none of the 
rapid rail cars and buses are included as part of the UMTA-funded 
project, no part of them is deemed to be financed by UMTA. If at least 5 
percent of the cost of the qualified mass commuting vehicles is provided 
by tax exempt obligations under section 103(a), the vehicles will be 
qualified leased property in their entirety.
    Example (6). City Z has a mass transit agency (ZTA) which purchases 
on July 1, 1982, 10 buses for which it pays $1,000,000, 95 percent of 
which is derived from grants from city Z and 5 percent from tax exempt 
obligations described in section 103(a). The buses have a useful life 
within the meaning of Sec. 1.167(a)-1(b) of 10 years and their salvage 
value is zero. On July 1, 1983, ZTA sells these buses to corporation P 
and leases them back in a transaction which the parties elect to have 
treated as a lease under section 168(f)(8). At the time of the sale and 
leaseback, ZTA's adjusted basis in the 10 buses under section 1016(a)(3) 
and Sec. 1.1016-4 is $900,000 ($1,000,000 cost less $100,000 of 
depreciation sustained, computed on a stright-line basis). Before the 
transaction will qualify under section 168(f)(8) and Sec. 5c.168(f)(8)-
6(b)(3)(ii), P's adjusted basis in the vehicles may not exceed ZTA's 
basis, or $900,000. Assuming that the transaction qualifies under 
section 168(f)(8) and that corporation P is a calendar year taxpayer, P 
may claim ACRS deductions for 1982 of $135,000 (15 percent of $900,000).
    Example (7). The facts are the same as in example (6) except that 
the sale and leaseback transaction is closed on December 31, 1982. P's 
adjusted basis in the vehicles may not exceed ZTA's basis, or $950,000 
($1,000,000 cost less $50,000 of depreciation sustained, computed on a 
straight-line basis).
    Example (8). The facts are the same as in example (6) except that 
ZTA purchases the buses on June 1, 1981, and enters into the sale and 
leaseback transaction with corporation P on December 31, 1981. Under 
Sec. 5c.168(f)(8)-6(b)(3)(ii), no adjustment is made to ZTA's basis in 
the buses for depreciation sustained. Therefore, P's basis in the buses 
may equal ZTA's cost of $1,000,000.
    Example (9). On July 1, 1981, a unit of city W, W Transit Authority 
(WTA), purchases 100 buses with local grants derived entirely from a 
city W sales tax. The buses do not constitute qualified leased property 
under Sec. 5c.168(f)(8)-6(b)(3) because no part of the financing for 
their purchase was derived from the proceeds of tax exempt obligations.
    Example (10). The facts are the same as in example (9) except that 
on November 1, 1981, WTA borrows 5 percent of the cost of the buses and 
pledges them as security. The interest on WTA's obligation is excludable 
from income under section 103(a)(1). On December 31, 1981, WTA sells to 
T Corp. all 100 buses and leases them back. Under Sec. 5c.168(f)(8)-
6(b)(3)(i), each bus is deemed to be financed with the proceeds of tax 
exempt obligations. Therefore, if the vehicles otherwise meet the 
definition of qualified leased property, all the vehicles will be 
qualified leased property under this section.

    (4) Foreign lessees. In addition to the other provisions of this 
section, property which is leased under a section 168(f)(8) lease to a 
foreign person shall not be qualified leased property unless the gross 
income attributable to the property from all sources (determined without 
regard to section 872(a) or 882(b)) is effectively connected with a 
trade or business within the United States, and the taxable income, if 
any, attributable to the property is subject to tax under section 
871(b)(1) or 882(a)(1). For this purpose, if income attributable to the 
property is not included in gross income of a foreign lessee, and is 
exempt from taxation, under sections 872 or 833, or if the income is 
otherwise exempt from taxation under any income tax convention to which 
the United States is a party, then the property shall not be qualified 
leased property.
    (5) Other rules. (i) Qualified leased property may include undivided 
interests in property or property regardless of whether or not it is 
considered separate property under State or local law. If property 
subject to a section 168(f)(8) lease is later determined not to be 
qualified leased property, disqualification of the lease under section 
168(f)(8) will apply only as to that property.
    (ii) The application of this paragraph (b)(5) may be illustrated by 
the following examples:


[[Page 91]]


    Example (1). On July 1, 1981, X Corp. contracts to have a 
manufacturing facility constructed for use in its business. Construction 
of the facility is completed on July 1, 1982, and the facility is deemed 
to be placed in service as of that date under Sec. 5c.168(f)(8)-
6(b)(2)(i). The facility is comprised of a mixture of new section 38 
property and buildings that do not qualify as section 38 property. On 
August 1, 1982, X sells the new section 38 property in the facility to Y 
and leases it back under an agreement in which the parties elect to be 
treated as a lease described in section 168(f)(8). Assuming that the 
other requirements of this paragraph are met, the new section 38 
property contained in the facility will be qualified leased property. If 
it is later determined that property subject to the section 168(f)(8) 
lease is not new section 38 property (and thus not qualified leased 
property), the safe harbor protection will be lost only as to that 
property.
    Example (2). X Corp. acquires a certain piece of equipment (which is 
new section 38 property) for use in its business. Within 3 months, X 
sells a 70 percent undivided interest in the property to lessor A and a 
10 percent undivided interest in the property to lessor B and leases 
both portions back under separate section 168(f)(8) leases. The 
investment tax credit and ACRS deductions associated with the property 
will be divided among X, lessor A, and lessor B, on a basis of 20 
percent, 70 percent, and 10 percent, respectively.

[T.D. 7791, 46 FR 51907, Oct. 23, 1981, as amended by T.D. 7795, 46 FR 
56150, Nov. 13, 1981; T.D. 7800, 46 FR 63258, Dec. 31, 1981]



Sec. 5c.168(f)(8)-7  Reporting of income, deductions and investment tax
credit; at risk rules.

    (a) In general. The fact that the lessor's payments of interest and 
principal and the lessee's rental payments under the lease are not equal 
in amount will not prevent the lease from qualifying under section 
168(f)(8). However, see paragraph (b) for special requirements in sale 
and leaseback transactions. In determining the parties' income, 
deductions, and investment tax credit under the lease, the rules in 
paragraphs (c) through (g) of this section shall apply regardless of the 
overall method of accounting otherwise used by the parties.
    (b) Requirements for sale and leaseback transaction. If the property 
leased is financed by the lessee (or a related party of the leasee) in a 
sale and leaseback transaction, the lease will not qualify under section 
168(f)(8) unless--
    (1) The term of the lessor's purchase money obligation is 
coterminous with the term of the lease, and
    (2) The lessor's obligation bears a reasonable rate of interest. For 
this purpose, a rate of interest shall be presumed to be reasonable if, 
on the date the agreement is executed, it is within 3 percentage points 
of (i) the rate in effect under section 6621, the prime rate in effect 
at any local commercial bank, or the most recent applicable rate 
determined by the Secretary under Sec. 1.385-6 (e)(2)(i), or (ii) an 
arm's-length rate as defined in Sec. 1.482-2, or (iii) any rate between 
any two of the rates described by subdivisions (i) and (ii) of this 
paragraph (b)(2).
    (c) Interest deductions and income--(1) Deductibility from income. 
In determining the amount of interest that a lessor may deduct in a 
taxable year with respect to its purchase money obligation given to the 
lessee or to a third party creditor, the lessor may not claim a 
deduction that would be--
    (i) Greater than a deduction that would be allowed to an accrual 
basis taxpayer under a level-payment mortgage, amortized over a period 
equal to the term of the lessor's obligation, or
    (ii) Less than a deduction that would be allowed to an accrual basis 
taxpayer under a straight line amortization of the principal over the 
term of the lessor's obligation.

In cases in which the property is not financed by the lessee or a party 
related to the lessee, the computation of the interest deduction may 
take into account fluctuations in the interest rate which are dependent 
on adjustments in the prime rate or events outside the control of the 
lessor and the third party creditor.
    (2) Includibility in income. The lessee shall include interest on 
the lessor's purchase money obligation in income at the same time and in 
the same amount as the lessor's interest deductions, as determined under 
paragraph (c)(1).
    (d) Rental income and deductions--(1) Deductibility from income. The 
amount of the lessee's rent deduction under a section 168(f)(8) lease 
with respect to any taxable year shall be a pro rata portion of the 
aggregate amount required to be paid by the lessee to the

[[Page 92]]

lessor under the terms of the lease agreement. If the lessee is required 
to purchase the leased property at the end of the lease term, of if the 
lessor has an option to sell the property to the lessee, rent shall not 
include the lesser of--
    (i) The amount of the lessee's purchase obligation, whether fixed by 
the terms of the lease agreement or conditioned on the exercise of the 
lessor's option to sell the property to the lessee, or
    (ii) The fair market value of the property at the end of the lease 
term determined at the beginning of the lease term.

For this purpose, fair market value shall be determined without taking 
into account any increase or decrease for inflation or deflation during 
the lease term. Rent deductions may be adjusted pursuant to the terms of 
the lease agreement to account for fluctuations which are dependent on 
events outside the control of the lessor and lessee, such as a change in 
the interest rate charged by a third party creditor of the lessor on the 
debt incurred to finance the purchase of the leased property.
    (2) Includibility in income. The lessor shall include rent in income 
as follows:
    (i) In the case of prepayments of rent, the earlier of when such 
rent is paid by the lessee or accrued under the lease, and
    (ii) In the case of other rent, at the same time and in the same 
amount as the lessee's rent deductions, as determined under paragraph 
(d)(1).
    (e) ACRS deductions. The deductions that the lessor is allowed under 
section 168(a) with respect to property subject to a section 168(f)(8) 
lease shall be determined without regard to the limitation in section 
168(f)(10)(B)(iii). The recovery class of qualified leased property in 
the hands of the lessor shall be determined by the character of the 
property in the hands of the owner of the property without regard to 
section 168(f)(8). Any elections under section 168(b)(3) by the lessor 
with respect to the class of recovery property to which the qualified 
leased property is assigned shall apply to the leased property. However, 
with respect to RRB replacement property, the transitional rule of 
section 168(f)(3) shall be inapplicable to the lessor.
    (f) At risk requirements. The amount of the investment credit and 
ACRS deductions that a lessor shall be allowed with respect to the 
leased property shall be limited to the extent the at risk rules under 
the investment tax credit provisions and section 465 apply to the lessee 
or to the lessor. In determining the amount the lessee would be at risk, 
the at risk rules will be applied as if the lessee had not elected to 
have section 168(f)(8) apply. Thus, for example, if, without regard to 
section 168(f)(8), an individual lessee would be treated as the owner of 
the leased property for Federal tax law purposes, the lessor under a 
section 168(f)(8) lease would be allowed ACRS deductions or investment 
tax credits with respect to the property only to the extent that the 
lessee may have claimed them had the parties not elected treatment under 
section 168(f)(8). In addition, the ACRS deductions and investment tax 
credits that a lessor is allowed with respect to the property are 
further limited to the extent that the at risk rules apply to the lessor 
as owner of the property under the section 168(f)(8) lease. If the 
lessor and the lessee are subject to the at risk rules, the lessor is 
allowed only the lesser of the ACRS deductions and investment tax 
credits allowable to the lessor and the lessee.
    (g) Limitation on section 48(d) amount. If in a sale and leaseback 
transaction the lessor elects pursuant to section 48(d) to treat the 
lessee (which is the user of the property) as having acquired the 
property for purposes of claiming the investment tax credit, the lessee 
shall be treated as acquiring the property for an amount equal to the 
basis of the property to the lessor (and not for an amount equal to its 
fair market value). The investment tax credit allowable to the lessee is 
further limited to the extent the at risk rules apply to either the 
lessor or to the lessee. See paragraph (f) of this section.
    (h) Examples. The application of the provisions of this section may 
be illustrated by the following examples.

    Example (1). Y, a qualified lessor, acquires a piece of equipment 
which is qualified leased property for $1 million and leases it to X 
under a lease which the parties properly

[[Page 93]]

elect to have characterized as a lease described in section 168(f)(8). 
The equipment has a 10-year economic life and falls within the 5-year 
ACRS class. Under the terms of the lease, X, the lessee-user, is 
obligated to pay Y nine annual payments of $10,000 and, at the end of 
the lease term, Y has the option to sell the property to X for 
$2,160,000. Under Sec. 5c.168(f)(8)-7(d), the aggregate payments 
required to be made by X under the lease are $2,250,000 ($90,000 rent 
plus $2,160,000 option price) and are treated as rent to Y (less a 
reasonable estimate for the residual value of the property) and taxable 
as such. Assuming a reasonable estimate of the residual value is zero, 
the full $2,250,000 will be treated as rent, and under Sec. 
5c.168(f)(8)-7(d), such amount is deductible by X and includible in Y's 
income ratably over the term of the lease, i.e., at a rate of $250,000 
per year ($2,250,000 divided by 9).
    Example (2). The facts are the same as in example (1) except that 
under the terms of the lease X is obligated to make rental payments of 
$100,000 for each of the first 5 years of the lease and $300,000 for 
each of the 4 remaining years under the lease. Further, X has an option 
to purchase the equipment for $1.00 at the end of the lease term. 
Pursuant to Sec. 5c.168(f)(8)-7(d), X's aggregate rental payments are 
deductible by X and are includible in Y's income ratably over the term 
of the lease. Thus, the annual rental payments are deemed to be $188,000 
per year ($1,700,000 divided by 9).

[T.D. 7791, 46 FR 51907, Oct. 23, 1981, as amended by T.D. 7795, 46 FR 
56150, Nov. 13, 1981]



Sec. 5c.168(f)(8)-8  Loss of section 168(f)(8) protection; recapture.

    (a) In general. Upon the occurrence of an event that causes an 
agreement to cease to be characterized as a lease under section 
168(f)(8), the characterization of the lessor and lessee shall be 
determined without regard to section 168(f)(8).
    (b) Events which cause an agreement to cease to be characterized as 
a lease. A disqualifying event shall cause an agreement to cease to be 
treated as a lease under section 168(f)(8) as of the date of the 
disqualifying event. A disqualifying event shall include the following:
    (1) The lessor sells or assigns its interest in the lease or in the 
qualified leased property in a taxable transaction.
    (2) The failure by the lessor to file a copy of the information 
return (or applicable statement) with its income tax return as required 
in Sec. 5c.168(f) (8)-2 (a)(3)(iii).
    (3) The lessee (or any transferee of the lessee's interest) sells or 
assigns its interest in the lease or in the qualified leased property in 
a transaction not described in Sec. 5c.168(f)(8)-2(a)(6) and the 
transferee fails to execute, within the prescribed time, the consent 
described in Sec. 5c.168(f)(8)-2(a)(5), or either the lessor or the 
transferee fail to file statements with their income tax returns as 
required by that paragraph.
    (4) The property ceases to be section 38 property as defined in 
Sec. 1.48-1 in the hands of the lessor or lessee, for example, due to 
its conversion to personal use or to use predominantly outside the 
United States, or to use by a lessee exempt from Federal income 
taxation.
    (5) The lessor ceases to be a qualified lessor by becoming an 
electing small business corporation or a personal holding company 
(within the meaning of section 542(a)).
    (6) The minimum investment of the lessor becomes less than 10 
percent of the adjusted basis of the qualified leased property as 
described in section 168(f)(8)(B)(ii) and Sec. 5c.168(f)(8)-4.
    (7) The lease terminates.
    (8) The property becomes subject to more than one lease for which an 
election is made under section 168(f)(8).
    (9) Retirements and casualties. [Reserved]
    (10) The property is transferred in a bankruptcy or similar 
proceeding and the lessor fails either to furnish the appropriate 
notification or to file a statement with its income tax return as 
required by Sec. 5c.168(f)(8)-2(a)(6).
    (11) The property is transferred in a bankruptcy or similar 
proceeding and not all lenders with perfected and timely interests in 
the property specifically exclude or release the Federal income tax 
ownership of the property as required under Sec. 5c.168(f)(8)-
2(a)(6)(iii.)
    (12) The property is transferred subsequent to a bankruptcy or 
similar proceeding and the lessor fails to furnish notice to the 
transferee prior to the transfer or fails to file a statement with its 
income tax return, and either the lessor fails to secure the 
transferee's consent or the lessor or the transferee fail to file 
statements with their returns.

[[Page 94]]

    (13) The property is leased under the provisions of section 
168(f)(8)(D)(iii) and Sec. 5c.168(f)(8)-6(b)(3) and ceases to be a 
qualified mass commuting vehicle.
    (14) The failure by the lessor to file the required information 
return described in Sec. 5c.168(f)(8)-2 (a)(3)(ii) by January 31, 1982, 
unless the lessee files such return by January 31, 1982.
    (c) Recapture. The required amount of recapture of the investment 
tax credit and of accelerated cost recovery deductions after a 
disqualifying event shall be determined under sections 47 and 1245, 
respectively.
    (d) Consequences of loss of safe harbor protection. The tax 
consequences of a disqualifying event depend upon the characterization 
of the parties without regard to section 168(f)(8). If the lessee would 
be the owner of the property without regard to section 168(f)(8), the 
disqualifying event will be deemed to be a sale of the qualified leased 
property by the lessor to the lessee. The amount realized by the lessor 
on the sale will include the outstanding amount (if any) of the lessor's 
debt on the property plus the sum of any other consideration received by 
the lessor. A disposition that results from a disqualifying event shall 
not be treated as an installment sale under section 453.
    (e) Examples. The application of the provisions of this section may 
be illustrated by the following examples:

    Example (1). M Corp. and N Corp. enter into a sale and leaseback 
transaction in which the leaseback agreement is characterized as a lease 
under section 168(f)(8) and M is treated as the lessor. In the second 
year of the lease, M becomes an electing small business corporation 
under subchapter S. The agreement ceases to be treated as a lease under 
section 168(f)(8) as of the date of the subchapter S election. Without 
respect to section 168(f)(8), N would be considered the owner of the 
property. The disqualification of M will be treated as a sale of the 
qualified leased property from M to N for the amount of the purchase 
money debt on the property then outstanding. M will realize gain or 
loss, depending upon its basis, with applicable investment tax credit 
and section 1245 recapture. N will acquire the property with a basis 
equal to the amount of the outstanding obligation. The property will not 
be used section 38 property to N under Sec. 1.48-3(a)(2).
    Example (2). Q Corp. (as lessor) and P Corp. (as lessee) enter into 
a lease that is characterized as a lease under section 168(f)(8). The 
lease has a 6-year term. P has no option to renew the lease or to 
purchase the property. At the end of 6 years, if P would be considered 
the owner of the property without regard to section 168(f)(8), upon the 
termination of the lease the property will be deemed to be sold by Q to 
P for the amount of the purchase money debt outstanding with respect to 
the property.

[T.D. 7791, 46 FR 51907, Oct. 23, 1981, as amended by T.D. 7795, 46 FR 
56150, Nov. 13, 1981; T.D. 7800, 46 FR 63259, Dec. 31, 1981]



Sec. 5c.168(f)(8)-9  Pass-through leases--transfer of only the 
investment tax credit to a party other than the ultimate user of 

the property. [Reserved]



Sec. 5c.168(f)(8)-10  Leases between related parties. [Reserved]



Sec. 5c.168(f)(8)-11  Consolidated returns. [Reserved]



Sec. 5c.1305-1  Special income averaging rules for taxpayers otherwise
required to compute tax in accordance with Sec. 5c.1256-3.

    (a) In general. If an eligible individual (as defined in section 
1303 and the regulations thereunder) is described in the first sentence 
of Sec. 5c.1256-3(a), chooses the benefits of income averaging and 
otherwise complies with the special rules under section 1304 and the 
regulations thereunder, and has averagable income (as defined in section 
1302 and the regulations thereunder) in excess of $3,000, then the 
individual shall compute the tax under section 1301 as provided in this 
section. The computation under this section shall be in lieu of the 
computation under Sec. 5c.1256-3.
    (b) Computation of tax. The individual shall compute the tax under 
section 1301 as follows:

Step (1). Compute tax under section 1301 and the regulations thereunder 
on all taxable income, including gains or losses on regulated futures 
contracts subject to section 1256(a) and the regulations thereunder, 
using rates applicable to the taxpayer for the taxable year which 
includes June 23, 1981.
Step (2). Compute tax under section 1301 and the regulations thereunder 
on all taxable income, including gains or losses on regulated futures 
contracts subject to section 1256(a) and the regulations thereunder, 
using rates applicable to the taxpayer for taxable years beginning in 
1982.

[[Page 95]]

Step (3). Compute the percentage of adjusted gross income attributable 
to all sources except regulated futures contracts subject to section 
1256(a) and the regulations thereunder.
Step (4). Compute the percentage of adjusted gross income attributable 
to regulated futures contracts subject to section 1256(a) and the 
regulations thereunder. Both the percentage in Step (3) and the 
percentage in Step (4) are to be rounded to the nearest percent. The sum 
of both percentages must equal 100 percent.
Step (5). Multiply the result of Step (1) with the result of Step (3).
Step (6). Multiply the result of Step (2) with the result of Step (4).
Step (7). Add the result of Step (5) and the result of Step (6). This is 
the tax for the individual under section 1301 for the taxable year which 
includes June 23, 1981.

    (c) Option to defer tax. If an individual computes the tax under 
section 1301 as provided in paragraph (a) of this section, the 
individual may also opt to pay part or all of the deferrable tax under 
income averaging (as defined in paragraph (d) of this section) for the 
taxable year which includes June 23, 1981, in 2 or more, but not more 
than 5, equal installments in accordance with this section. Such 
individual may not opt to pay part or all of the deferrable tax in 
installments under Sec. 5c.1256-3. An individual opting to defer 
payment must attach a statement to Form 6781 indicating the computation 
of deferrable tax under income averaging, the number of installments in 
which the individual opts to pay the deferrable tax under income 
averaging, and the amount of each such payment.
    (d) Deferrable tax under income averaging. The deferrable tax under 
income averaging is the excess of--
    (1) The tax for the taxable year which includes June 23, 1981, 
computed pursuant to paragraph (b) of this section, over
    (2) The tax for the taxable year which includes June 23, 1981, 
computed pursuant to paragraph (b) of this section, except that pre-
transitional year gain or loss (as described in Sec. 5c.1256-2(g)) is 
omitted for purposes of recomputing the percentage in Step (4). As 
computed under this subparagraph (2), the sum of the percentage in Step 
(3) and Step (4) will not equal 100 percent.
    (e) Rules of application. The provisions of Sec. 5c.1256-3 (c), 
(f), (g), (h), (i), and (j) shall apply in computing the tax and in 
determining the deferrable tax under income averaging under this 
section.
    (f) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). Individual A is a single, calendar year taxpayer with 
no dependents. A reported the following amounts for the following years 
on line 34 of Form 1040:


 1977--$80,000
 1978--$90,000
 1979--$100,000
 1980--$110,000

A reports the following amounts for the following lines on Form 1040 for 
1981:

 line 7--$120,000
 line 12--$600,000
 line 32b--$19,000
 line 33--$1,000

    The amount on line 12 is computed as follows: $937,500 of gain is 
attributable to regulated futures contracts subject to section 1256(a). 
Of that total, 40 percent is short term capital gain ($375,000) and 60 
percent is long term capital gain ($562,500). Of the long term capital 
gain, 40 percent is taxable ($225,000). Therefore, A reports $600,000 on 
line 12 ($375,000+$225,000).
    The result of Step (1) is $464,013.41. The result of Step (2) is 
$337,051.52. The result of Step (3) is 17 percent. The result of Step 
(4) is 83 percent. The result of Step (5) is $78,882.28. The result of 
Step (6) is $279,752.76. The result of Step (7) is $358,635.04. This is 
A's tax for 1981 under section 1301.
    Example (2). The facts are the same as in Example (1), except that 
$703,125 of the $937,500 gain attributable to regulated futures 
contracts is pre-transitional year gain or loss (as described in Sec. 
5c.1256-2(g)). A's tax for 1981 under section 1301 is $358,635.04. A may 
opt to pay in installments a maximum of $221,004.68 of the tax due in 
1981. If A opts to defer the maximum amount and pay in 5 equal 
installments, A must pay for 1981 a tax of $181,831.30. Each of the 4 
succeeding installments is $44,200.94 plus interest computed in 
accordance with Sec. 5c.1256-3(g)(3).

(Secs. 1305 and 7805 of the Internal Revenue Code of 1954 (78 Stat. 110, 
26 U.S.C. 1305; 68A Stat. 917, 26 U.S.C. 7805); secs. 508(c) and 509 of 
the Economic Recovery Tax Act of 1981 (95 Stat. 333-335))

[T.D. 7826, 47 FR 38692, Sept. 2, 1982]

[[Page 96]]



PART 5e_TEMPORARY INCOME TAX REGULATIONS, TRAVEL EXPENSES OF MEMBERS OF 
CONGRESS--Table of Contents



    Authority: Secs. 280A(f)(4)(B) and 7805 of the Internal Revenue Code 
of 1954 (95 Stat. 1641, 26 U.S.C. 7805; 68A Stat. 917, 26 U.S.C. 7805).



Sec. 5e.274-8  Travel expenses of Members of Congress.

    (a) In general. Members of Congress (including any Delegate and 
Resident Commissioner) who are away from home within the meaning of 
section 162 (a), in the Washington, DC area, may elect in accordance 
with paragraph (f) of this section to deduct an amount described in 
paragraph (c) of this section as living expenses, without 
substantiation. A Member who elects under this section may not deduct 
any amount for the living expenses described in paragraph (b). A Member 
who does not make an election under this section must substantiate his 
expenses for living in Washington, DC in accordance with section 274 and 
Sec. 1.274-5.
    (b) Living expenses covered. The amount allowed to be deducted 
without substantiation, pursuant to this section, for costs incurred for 
living in the Washington, DC area represents amounts expended for meals, 
lodging, and other incidental expenses. Meals include the actual cost of 
the food and expenses incident to the preparation and serving thereof. 
Lodging includes amounts paid for rent, care of premises, utilities, 
insurance and depreciation of household furnishings owned by the Member. 
In the case of a Member who lives in a residence owned by him in the 
Washington, DC area, the cost of lodging also includes depreciation on 
such residence. Other incidental expenses include laundry, cleaning, and 
local transportation. Local transportation includes travel within a 50 
mile radius of Washington, DC, whether by private automobile, taxicab or 
other transportation for hire. Interest and taxes on personal property 
will not be considered expenses to be included within this paragraph.
    (c)(1) Amounts allowed without substantiation. The amount that may 
be deducted pursuant to section 162 and these regulations is an amount 
equal to the product of the number of Congressional days in the taxable 
year, multiplied by the designated amount. The designated amount is--
    (i) In the case of a Member who deducts interest and taxes 
attributable to the ownership of a personal residence in the Washington, 
DC area, two-thirds of the maximum amount of actual subsistence for 
Washington, DC payable pursuant to 5 U.S.C. 5702(c), or
    (ii) In the case of a Member not described in paragraph (c)(1)(i), 
the maximum amount of actual subsistence for Washington, DC payable 
pursuant to 5 U.S.C. 5702(c).

A Member who incurs interest and taxes on his residence in the 
Washington, DC area may forego the deduction of such amounts and use the 
designated amount prescribed by paragraph (c)(1)(ii).
    (2) If a Member, who lives in a residence owned by him in the 
Washington, DC area, chooses to deduct amounts prescribed in paragraph 
(c)(1) of this section, the Member must treat as an adjustment to the 
basis of such residence an amount equal to 20 percent of the maximum 
amount of actual subsistence multiplied by the number of Congressional 
days. Such adjustments will be considered a proper adjustment for 
exhaustion, wear, and tear under this subtitle.
    (d) Congressional days. The number of Congressional days with 
respect to a Member is the number of days in the taxable year less the 
number of days in periods in which the Member's Congressional chamber 
was not in session for 5 consecutive days or more (including Saturday 
and Sunday). The number of days with respect to a Member is determined 
without regard to whether or not the Member was in the Washington, DC 
area on such days.

[[Page 97]]

[GRAPHIC] [TIFF OMITTED] TC16OC91.000

    (e) Other deductible amounts. This section does not preclude the 
deduction of otherwise allowable expenses for travel fares (other than 
local travel in the Washington, DC), long distance telephone and 
telegraph, and travel expenses incurred other than in the Washington, DC 
area. However, such

[[Page 98]]

expenses are subject to the substantiation requirements of section 274.
    (f) Election. To elect to deduct the amounts prescribed by this 
section, a Member must attach to his return for the taxable year a 
statement indicating, (1) that the deduction for travel expenses while 
living in the Washington, DC area are computed pursuant to Sec. 5e.274-
8, and (2) whether a separate deduction is being taken for interest and 
taxes paid or incurred with respect to the personal residence of the 
Member if in the Washington, DC area.
    (g) Effective date. This section is effective for taxable year 
beginning after December 31, 1980.
    (h) Examples. The following examples are based on a calendar from a 
Final Edition of the Calendar of the United States, House of 
Representatives and History of Legislation. The marked days indicate 
days the House of Representatives was in session.

    Example 1. In determining the number of Congressional days for 198X 
for which the designated amount may be computed, the number of days in 
such year is reduced by 125 days determined as follows:

------------------------------------------------------------------------
                                                                   Days
------------------------------------------------------------------------
Feb. 14-18.....................................................        5
Apr. 3-14......................................................       12
May 23-27......................................................        5
July 3-20......................................................       18
Aug. 2-17......................................................       16
Aug. 29-Sept. 2................................................        5
Oct. 3-Nov. 11.................................................       40
Nov. 22-Nov. 30................................................        9
Dec. 17-Dec. 31................................................       15
                                                                --------
    Total......................................................      125
------------------------------------------------------------------------


Thus for 198X (a leap year) a typical Member of the House of 
Representatives will have 241 (366-125) Congressional days.
    Example 2. On August 1, Z a calendar year taxpayer is elected to the 
Congress to fill the unexpired term of Member Y. In determining the 
number of Congressional days, Z may only consider the number of days 
during the year for which he was a Member of Congress. For Z the number 
of Congressional days is 68.
    Example 3. Member X, a calendar year taxpayer, owns his own home in 
Washington, DC, where he lives with his family. While in Washington, DC, 
Member X is away from home within the meaning of section 162(a). X 
maintains no records attributable to his expenses in Washington, DC X 
has been a Member of Congress for the entire year. The maximum amount of 
subsistence for Washington, DC for 198X is $75. X may deduct for 198X 
$18,075 (241 daysx$75) attributable to expenses while away from home in 
Washington, DC. Even if X maintained records as to living expenses in 
Washington, DC, X may choose to deduct $18,075 as the total amount 
attributable to living expenses in Washington, DC. If X deducts $18,075 
X may not deduct any interest and taxes under section 163 or 164 
attributable to the residence in Washington, DC.
    Example 4. Member C, a calendar year taxpayer owns his own home in 
Washington, DC, where he lives with his family. While in Washington, DC. 
Member C is away from home within the meaning of section 162(a). C can 
establish that he paid $12,000 as interest on a mortgage and $3,000 in 
local real estate taxes. C has been a Member of Congress for the entire 
year. C may choose to deduct $12,050 (241 daysx[\2/3\x$75]) attributable 
to expenses in Washington, DC. Further, C may deduct under sections 163 
and 164 $12,000 of interest and $3,000 of taxes respectively.
    Example 5. Assume the same facts as in Example (4). In addition, on 
March 15, 16, and 17, Member C travels to New York City to deliver a 
speech for which he receives an honorarium which he includes in income. 
C receives no additional amounts for travel reimbursement. While in New 
York City C incurs $350 for 3 nights lodging at a hotel and $150 for 
meals. In addition to the amounts deductible pursuant to this section, C 
may deduct the $500 as a travel expenses. Such deduction is subject to 
the substantiation rules of section 274.
    Example 6. Assume the same facts as example (5). Member C receives, 
in addition to the honorarium, $600 reimbursement for travel expenses. C 
must include the $600 in income and may deduct the travel expenses he 
incurred.

[T.D. 7802, 47 FR 2987, Jan. 21, 1982; 47 FR 4680, Feb. 2, 1982]



PART 5f_TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX EQUITY AND 
FISCAL RESPONSIBILITY ACT OF 1982--Table of Contents



Sec.
5f.103-1 Obligations issued after December 31, 1982, required to be in 
          registered form.
5f.103-2 Public approval of industrial development bonds.
5f.103-3 Information reporting requirements for certain bonds.
5f.163-1 Denial of interest deduction on certain obligations issued 
          after December 31, 1982, unless issued in registered form.
5f.168(f)(8)-1 Questions and answers concerning transitional rules and 
          related matters regarding certain safe harbor leases.


[[Page 99]]


    Authority: 26 U.S.C. 7805. Secs. 5f.103-1 and 5f.163-1 also issued 
under 26 U.S.C. 103(j), 26 U.S.C. 163(f), and 96 Stat. 595.



Sec. 5f.103-1  Obligations issued after December 31, 1982, required to 
be in registered form.

    (a) Registration; general rule. Interest on a registration-required 
obligation (as defined in paragraph (b) of this section) shall not be 
exempt from tax notwithstanding section 103 (a) or any other provision 
of law, exclusive of any treaty obligation of the United States, unless 
the obligation is issued in registered form (as defined in paragraph (c) 
of this section).
    (b) Registration-required obligation. For purposes of this section, 
the term ``registration-required obligation'' means any obligation 
except any one of the following:
    (1) An obligation not of a type offered to the public. The 
determination as to whether an obligation is not of a type offered to 
the public shall be based on whether similar obligations are in fact 
publicly offered or traded.
    (2) An obligation that has a maturity at the date of issue of not 
more than 1 year.
    (3) An obligation issued before January 1, 1983. An obligation first 
issued before January 1, 1983, shall not be considered to have been 
issued on or after that date merely as a result of the existence of a 
right on the part of the holder of such obligation to convert the 
obligation from registered form into bearer form, or as a result of the 
exercise of such a right.
    (4) An obligation described in Sec. 5f.163-1 (c) (relating to 
certain obligations issued to foreign persons).
    (c) Registered form--(1) General rule. An obligation issued after 
January 20, 1987, pursuant to a binding contract entered into after 
January 20, 1987, is in registered form if--
    (i) The obligation is registered as to both principal and any stated 
interest with the issuer (or its agent) and transfer of the obligation 
may be effected only by surrender of the old instrument and either the 
reissuance by the issuer of the old instrument to the new holder or the 
issuance by the issuer of a new instrument to the new holder,
    (ii) The right to the principal of, and stated interest on, the 
obligation may be transferred only through a book entry system 
maintained by the issuer (or its agent) (as described in paragraph 
(c)(2) of this section), or
    (iii) The obligation is registered as to both principal and any 
stated interest with the issuer (or its agent) and may be transferred 
through both of the methods described in subdivisions (i) and (ii).
    (2) Special rule for registration of a book entry obligation. An 
obligation shall be considered transferable through a book entry system 
if the ownership of an interest in the obligation is required to be 
reflected in a book entry, whether or not physical securities are 
issued. A book entry is a record of ownership that identifies the owner 
of an interest in the obligation.
    (d) Effective date. The provisions of this section shall apply to 
obligations issued after December 31, 1982, unless issued on an exercise 
of a warrant for the conversion of a convertible obligation if such 
warrant or obligation was offered or sold outside the United States 
without registration under the Securities Act of 1933 and was issued 
before August 10, 1982.
    (e) Special rules. The following special rules apply to obligations 
issued after January 20, 1987, pursuant to a binding contract entered 
into after January 20, 1987.
    (1) An obligation that is not in registered form under paragraph (c) 
of this section is considered to be in bearer form.
    (2) An obligation is not considered to be in registered form as of a 
particular time if it can be transferred at that time or at any time 
until its maturity by any means not described in paragraph (c) of this 
section.
    (3) An obligation that as of a particular time is not considered to 
be in registered form by virtue of subparagraph (2) of this paragraph 
(e) and that, during a period beginning with a later time and ending 
with the maturity of the obligation, can be transferred only by a means 
described in paragraph (c) of this section, is considered to be in 
registered form at all times during such period.
    (f) Examples. The application of this section may be illustrated by 
the following examples:


[[Page 100]]


    Example (1). Municipality X publicly offers its general debt 
obligations to United States persons. The obligations have a maturity at 
issue exceeding 1 year. The obligations are registration-required 
obligations under Sec. 5f.103-1(b). When individual A buys an 
obligation, X issues an obligation in A's name evidencing A's ownership 
of the principal and interest under the obligation. A can transfer the 
obligation only by surrendering the obligation to X and by X issuing a 
new instrument to the new holder. The obligation is issued in registered 
form.
    Example (2). Municipality Y issues a single obligation on January 4, 
1983 to Bank M provided that (i) Bank M will not at any time transfer 
any interest in the obligation to any person unless the transfer is 
recorded on Municipality Y's records (except by means of a transfer 
permitted in (ii) of this example) and (ii) interests in the obligation 
that are sold by Bank M (and any persons who acquire interests from M) 
will be reflected in book entries. C, an individual, buys an interest in 
Y's obligation from Bank M. Bank M receives the interest or principal 
payments with respect to C's interest in the obligation as agent for C. 
Bank M records interests in the Municipality Y obligation as agent of 
Municipality Y. Any transfer of C's interest must be reflected in a book 
entry in accordance with Bank M's agreement with Municipality Y. Since 
C's interest can only be transferred through a book entry system 
maintained by the issuer (or its agent), the obligation is considered 
issued in registered form. Interest received by C is excludable from 
gross income under section 103(a).
    Example (3). Municipality Z wishes to sell its debt obligations 
having a maturity in excess of 1 year. The obligations are sold to Banks 
N, O, and P, all of which are located in Municipality Z. By their terms 
the obligations are freely transferable, although each of the banks has 
stated that it acquired the obligations for purposes of investment and 
not for resale. Obligations similar to the obligations sold by 
Municipality Z are traded in the market for municipal securities. The 
obligations issued by Municipality Z are of a type offered to the public 
and are therefore registration-required under Sec. 5f.103-1 (b).
    Example (4). Corporation A issues an obligation that is registered 
with the corporation as to both principal and any stated interest. 
Transfer may be effected by the surrender of the old instrument and 
either the reissuance by the issuer of the old instrument to the new 
holder or the issuance by the issuer of a new instrument to the new 
holder. The obligation can be converted into a form in which the right 
to the principal of, or stated interest on, the obligation may be 
effected by physical transfer of the obligation. Under Sec. 5f.103-1 
(c) and (e), the obligation is not considered to be in registered form 
and is considered to be in bearer form.
    Example (5). Corporation B issues its obligations in a public 
offering in bearer definitive form. Beginning at X months after the 
issuance of the obligations, a purchaser (either the original purchaser 
or a purchaser in the secondary market) may deliver the definitive bond 
in bearer form to the issuer in exchange for a registration receipt 
evidencing a book entry record of the ownership of the obligation. The 
issuer maintains the book entry system. The purchaser identified in the 
book entry as the owner of record has the right to receive a definitive 
bearer obligation at any time. Under Sec. 5f.103-1 (c) and (e), the 
obligation is not considered to be issued in registered form and is 
considered to be issued in bearer form. All purchasers of the obligation 
are considered to hold an obligation in bearer form.
    Example (6). Corporation C issues obligations in bearer form. A 
foreign person purchases a definitive bearer obligation and then sells 
it to a United States person. At the time of the sale, the United States 
person delivers the bearer obligation to Corporation C and receives an 
obligation that is identical except that the obligation is registered as 
to both principal and any stated interest with the issuer or its agent 
and may be transferred at all times until its maturity only through a 
means described in Sec. 5f.103-1(c). Under Sec. 5f.103-1(e), the 
obligation is considered to be in registered form from the time it is 
delivered to Corporation C until its maturity.

    (g) Cross-references. See section 103A(j)(1) for the registration 
requirement of certain mortgage subsidy bonds issued after December 31, 
1981, and Sec. 6a.103A-1(a)(5) for the definition of registered form 
for such obligations issued after December 31, 1981, and on or before 
December 31, 1982. See also section 103(h) (requiring registration of 
certain energy bonds issued on or after October 18, 1979).

[T.D. 7852, 47 FR 51361, Nov. 15, 1982, as amended by T.D. 8111, 51 FR 
15463, Dec. 19, 1986]



Sec. 5f.103-2  Public approval of industrial development bonds.

    (a) General rule. An industrial development bond (within the meaning 
of Sec. 1.103-7(b)(1) issued after December 31, 1982, shall be treated 
as an obligation not described in section 103(a) unless it is issued as 
part of an issue which satisfies the public approval requirement of 
section 103(k) and paragraph (c) of

[[Page 101]]

this section or is described in the exceptions set forth in paragraph 
(b) of this section.
    (b) Exceptions--(1) No extension of maturity. Paragraph (a) of this 
section does not apply to a refunding obligation if--
    (i) It refunds an obligation which was approved under section 103(k) 
and this section (or which is treated as approved pursuant to paragraph 
(f) of this section), and
    (ii) It has a maturity date which is not later than the maturity 
date of the obligation to be refunded.
    (2) Refunding of pre-July 1, 1982, obligation. Paragraph (a) of this 
section does not apply to an obligation issued solely to refund an 
obligation which--
    (i) Was issued before July 1, 1982, and
    (ii) Has a term which does not exceed 3 years.

The term of an obligation is determined without regard to whether it is 
a refunding obligation. With respect to the refunding of an issue also 
containing obligations with terms which exceed 3 years, paragraph (b)(2) 
applies only if the refunding issue proceeds are used solely to refund 
obligations with terms not exceeding 3 years and to pay reasonable 
incidental costs of the refunding (e.g., legal and accounting fees, 
printing costs, and rating fees) attributable thereto. Paragraph (b)(2) 
applies only to issues issued after December 31, 1982, the proceeds of 
which are used to refund issues issued prior to July 1, 1982. Thus, 
subsequent refundings of such refunding issues must satisfy the public 
approval requirement of section 103(k) and paragraph (c) of this 
section.
    (c) Public approval requirement--(1) In general. An issue is 
publicly approved if prior to the date of issue the governmental unit(s) 
described in subparagraphs (2) and (3) this paragraph (c) approve the 
issue, in the manner described in paragraph (d) of this section. See 
paragraph (f) for rules pertaining to determining the scope of an 
approval and paragraph (g)(1) for the definition of ``governmental 
unit''.
    (2) Issuer approval. The governmental unit (i) which will issue the 
obligations or (ii) on behalf of which the issue is to be issued must 
approve the issue (``issuer approval''). If the issuer is not a 
governmental unit, the governmental unit on behalf of which the issuer 
acts shall be determined in a manner consistent with determinations 
under Sec. 1.103-1, and such unit must approve the issue. However, in 
the case of an issuer which issues obligations on behalf of more than 
one governmental unit (e.g., an authority which acts for two counties), 
any one of such units may give the issuer approval required by this 
paragraph (c)(2).
    (3) Host approval. Each governmental unit the geographic 
jurisdiction (as defined in paragraph (g)(4)) of which contains the site 
of a facility to be financed by the issue must approve the issue (``host 
approval''). However, if the entire site of a facility to be financed by 
the issue is within the geographic jurisdiction of more than one 
governmental unit within a State (counting the State as a governmental 
unit within such State), then any one of such units may provide host 
approval for the issue with respect to that facility. For purposes of 
this paragraph (c)(3), if property to be financed by the issue is 
located within two or more governmental units but not entirely within 
either of such units, each portion of the property which is located 
entirely within the smallest respective governmental units may be 
treated as a separate facility. The issuer approval (as described in 
paragraph (c)(2)) may be treated as a host approval if the governmental 
unit giving the issuer approval is also a governmental unit described in 
this paragraph (c)(3). See paragraph (e)(2) with respect to host 
approval by a governmental unit with no applicable elected 
representative.
    (d) Method of public approval. For purposes of this section, an 
issue is approved by a governmental unit only if--
    (1) An applicable elected representative (as defined in paragraph 
(e)) of such unit approves the issue following a public hearing (as 
defined in paragraph (g)(2)) held in a location which, under the facts 
and circumstances, is convenient for residents of the unit, and for 
which there was reasonable public notice (as defined in paragraph 
(g)(3)), or
    (2) A referendum of the voters of the unit (as defined in paragraph 
(g)(5)) approves the issue.

[[Page 102]]


An approval may satisfy the requirements of this section without regard 
to the authority under State or local law for the acts constituting such 
approval. The location of hearing will be presumed convenient for 
residents of the unit if it is located in the approving governmental 
unit's capital or seat of government. If more than one governmental unit 
is required to provide a public hearing, such hearings may be combined 
as long as the combined hearing is a joint undertaking that provides all 
of the residents of the participating governmental units (i.e., those 
relying on such hearing as an element of public approval) a reasonable 
opportunity to be heard. The location of any combined hearing is 
presumed to provide a reasonable opportunity to be heard provided it is 
no farther than 100 miles from the seat of government of each 
participating governmental unit beyond whose geographic jurisdiction the 
hearing is conducted.
    (e) Applicable elected representative--(1) In general. The 
applicable elected representative of a governmental unit means--
    (i) Its elected legislative body,
    (ii) Its chief elected executive officer,
    (iii) In the case of a State, the chief elected legal officer of the 
State's executive branch of government, or
    (iv) Any official elected by the voters of the unit and designated 
for purposes of this section by the unit's chief elected executive 
officer or by State or local law to approve issues for the unit.

For purposes of subdivisions (ii), (iii), and (iv) of this paragraph 
(e)(1), an official shall be considered elected by the voters of the 
unit only if he is popularly elected at-large by the voters of the 
governmental unit. If an official popularly elected at-large by the 
voters of a governmental unit is appointed or selected pursuant to State 
or local law to be the chief executive officer of the unit, such 
official is deemed to be an elected chief executive officer for purposes 
of this section but for no longer than his tenure as an official elected 
at-large. In the case of a bicameral legislature which is popularly 
elected, both chambers together constitute an applicable elected 
representative, but neither chamber does independently, unless so 
designated under paragraph (e)(1)(iv). If multiple elected legislative 
bodies of a governmental unit have independent legislative authority, 
however, the body with the more specific authority relating to the issue 
is the only legislative body described in paragraph (e)(1)(i) of this 
section. See paragraph (h), Example (7) of this section.
    (2) Governmental unit with no applicable elected representative. (i) 
The applicable elected representatives of a governmental unit with no 
representative (but for this paragraph (e)(2) and section 
103(k)(2)(E)(ii)) are deemed to be those of the next higher governmental 
unit (with an applicable elected representative) from which the 
governmental unit derives its authority. For purposes of this 
subparagraph (2), a governmental unit derives its authority from another 
unit which--
    (A) Enacts a specific law (e.g., a provision in a State 
constitution, charter or statute) by or under which the governmental 
unit is created,
    (B) Otherwise empowers or approves the creation of the governmental 
unit, or
    (C) Appoints members to the governing body of the governmental unit.

In the case of a governmental unit with no applicable elected 
representative (but for this paragraph (e)(2)), any unit described in 
subdivision (A), (B), or (C) or this paragraph (e)(2)(i) may be treated 
as the next higher unit, without regard to the relative status of all of 
such units under State law.
    (ii) In the case of a host approval (as required under paragraph 
(c)(3) of this section), a unit may be treated as the next higher unit, 
only if--
    (A) The facility is located within its geographic jurisdiction, and
    (B) Eligible individuals, if any, residing at the site of the 
facility are entitled to vote for the applicable elected representative 
of that unit (as determined under this paragraph (e)).
    (3) On behalf of issuers. In the case of an issuer which is not a 
governmental unit but which issues bonds on behalf of a governmental 
unit, the applicable elected representative is any applicable elected 
representative of the unit on behalf of which the bonds are issued. If 
the unit on behalf of which the bonds are issued has no applicable 
elected representative (but for paragraph (e)(2)

[[Page 103]]

of this section), the applicable elected representative of the 
governmental unit is determined in the manner described in paragraph 
(e)(2).
    (f) Scope of approval--(1) In general. Public approval is required 
by section 103(k) and this section for issues of industrial development 
bonds, except as otherwise provided in paragraphs (a) and (b) of this 
section. An issue is treated as approved if the governmental units 
(described in paragraph (c) of this section in relation to the issue) 
have approved either--
    (i) The issue (by approving each facility to be financed), not more 
than one year before the date of issue, or
    (ii) A plan of financing for each facility financed by the issue 
pursuant to which the issue in question is timely issued (as required in 
paragraph (f)(3) of this section).

In either case, the scope of the approval is determined by the 
information, as specified in paragraph (f)(2), contained in the notice 
of hearing (when required) and the approval.
    (2) Information required. A facility is within the scope of an 
approval if the notice of hearing (when required) and the approval 
contain--
    (i) A general, functional description of the type and use of the 
facility to be financed (e.g., ``a 10,000 square foot machine shop and 
hardware manufacturing plant'', ``400-room airport hotel building'', 
``dock facility for supertankers'', ``convention center auditorium and 
sports arena with 25,000 seating capacity'', ``air and water pollution 
control facilities for oil refinery''),
    (ii) The maximum aggregate face amount of obligations to be issued 
with respect to the facility,
    (iii) The initial owner, operator, or manager of the facility,
    (iv) The prospective location of the facility by its street address 
or, if none, by a general description designed to inform readers of its 
specific location.

An approval is valid for purposes of this section with respect to any 
issue used to provide publicly approved facilities, notwithstanding 
insubstantial deviations with respect to the maximum aggregate face 
amount of the bonds issued under the approval for the facility, the name 
of its initial owner, manager, or operator, or the type or location of 
the facility from that described in the approval. An approval or notice 
of public hearing will not be considered to be adequate if any of the 
items in subdivisions (i) through (iv) of this subparagraph (2), with 
respect to the facility to be financed, are unknown on the date of the 
approval or the date of the public notice.
    (3) Timely issuance pursuant to a plan of financing. An issue is 
timely issued pursuant to a plan of financing for a facility if--
    (i) The issue is issued no later than 3 years after the first issue 
pursuant to the plan, and
    (ii) The first such issue in whole or in part issued pursuant to the 
plan was issued no later than 1 year after the date of approval.
    (4) Facility--definition. For purposes of this paragraph (f), the 
term ``facility'' includes a tract or adjoining tracts of land, the 
improvements thereon and any personal property used in connection with 
such real property. Separate tracts of land (including improvements and 
connected personal property) may be treated as one facility only if they 
are used in an integrated operation.
    (g) Definitions. For purposes of this section--
    (1) Governmental unit. Governmental unit has the same meaning as in 
Sec. 1.103-1. Thus, a governmental unit is a State, territory, a 
possession of the United States, the District of Columbia, or any 
political subdivision thereof. The term ``political subdivision'' 
denotes any division of any State or local governmental unit which is a 
municipal corporation or which has been delegated the right to exercise 
part of the sovereign power of the unit.
    (2) Public hearing. Public hearing means a forum providing a 
reasonable opportunity for interested individuals to express their 
views, both orally and in writing, on the proposed issue of bonds and 
the location and nature of a proposed facility to be financed. In 
general, a governmental unit may select its own procedure for the 
hearing, provided that interested individuals have a reasonable 
opportunity to express their views. Thus, it may impose reasonable 
requirements on persons

[[Page 104]]

who wish to participate in the hearing, such as a requirement that 
persons desiring to speak at the hearing so request in writing at least 
24 hours before the hearing or that they limit their oral remarks to 10 
minutes. For purposes of this public hearing requirement, it is not 
necessary, for example, that the applicable elected representative who 
will approve the bonds be present at the hearing, that a report on the 
hearing be submitted to that official, or that State administrative 
procedural requirements for public hearings in general be observed. 
However, compliance with such State procedural requirements (except 
those at variance with a specific requirement set forth in this section) 
will generally assure that the hearing satisfies the requirements of 
this section. The hearing may be conducted by any individual appointed 
or employed to perform such function by the governmental unit or its 
agencies, or by the issuer (if on behalf of issuer). Thus, for example, 
for bonds to be issued by an authority that acts on behalf of a county, 
the hearing may be conducted by the authority, the county, or an 
appointee or employee of either.
    (3) Reasonable public notice. Reasonable public notice means 
published notice which is reasonably designed to inform residents of the 
affected governmental units, including residents of the issuing unit and 
the governmental unit where a facility is to be located, of the proposed 
issue. The notice must state the time and place for the hearing and 
contain the information contained in paragraph (f)(2) of this section. 
Notice is presumed reasonable if published no fewer than 14 days before 
the hearing. Except in the locality of the facility, publication is 
presumed to be reasonably designed to inform residents of the approving 
governmental unit if given in the same manner and same locations as 
required of the approving governmental unit for any other purposes for 
which applicable State or local law specifies a notice of public hearing 
requirement (including laws relating to notice of public meetings of the 
governmental unit). Notice is presumed reasonably designed to inform 
affected residents in the locality of the facility only if published in 
one or more newspapers of general circulation available to residents of 
that locality or if announced by radio or television broadcast to those 
residents.
    (4) Geographic jurisdiction. Geographic jurisdiction is the area 
encompassed by the boundaries prescribed by State or local law for a 
governmental unit or, if there are no such boundaries, the area in which 
a unit may exercise such sovereign powers that make that unit a 
governmental unit for purposes of Sec. 1.103-1 and this section.
    (5) Voter referendum. A voter referendum is a vote by the voters of 
the affected governmental unit conducted in the manner and at such a 
time as voter referenda on matters relating to governmental spending or 
bond issuances by the governmental unit under applicable State and local 
law.
    (h) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). State X proposes to issue an industrial development 
bond, the proceeds of which are to finance a facility located entirely 
within the geographic jurisdiction of City Y (which is located in State 
X). Under the provisions of paragraph (c), only State X must approve the 
issue because State X is the issuer and the facility is to be located 
entirely within the State's geographic jurisdiction. Its applicable 
elected representative must approve the issue after the public notice 
and public hearing requirements are satisfied.
    Example (2). (i) Industrial Development Authority X proposes to 
issue an industrial development bond, the proceeds of which are to 
finance a facility located entirely within the geographic jurisdiction 
of City Y (which is located in State Z). Authority X acts on behalf of 
State Z. Under the provisions of paragraph (c), only State Z must 
approve the issue because State Z is the governmental unit on behalf of 
which Authority X, the issuer, is acting and the facility is to be 
located entirely within its geographic jurisdiction.
    (ii) State Z has a governor, an elected bicameral legislature and an 
appointed attorney general who is the chief legal officer of State Z. 
Under the laws of State Z, the attorney general must approve any issue 
of industrial development bonds. The approval by the attorney general is 
not a sufficient approval under this section, since the attorney general 
is not an applicable elected representative within the meaning of this 
section. Under the provisions of paragraphs (d) and (e), either the 
governor, both chambers of the legislature or any popularly elected

[[Page 105]]

official of the State who is designated for this purpose by the governor 
or by State law must approve the issue after the public notice and 
public hearing requirements are satisfied.
    Example (3). (i) County Y, a county in State X, proposes to issue an 
industrial development bond, the proceeds of which are to finance a 
facility located entirely within its jurisdiction. Under the provisions 
of paragraph (c), only County Y must approve the issue because County Y 
is the issuer and the facility is to be located entirely within the 
geographic jurisdiction of County Y.
    (ii) County Y has no elected officials or legislature. County Y 
derives its authority from State X which is the next higher governmental 
unit with an applicable elected representative. The laws of State X 
designate the attorney general, who is an official of State X elected 
at-large, as the official who must approve any issue of industrial 
development bonds for the State. Under this section, State X's attorney 
general is an applicable elected representative who may approve the 
issue after the public notice and public hearing requirements are 
satisfied.
    Example (4). (i) City X, a city located in County Y and State Z, 
proposes to issue an industrial development bond, the proceeds of which 
are to finance a facility located entirely within the geographic 
jurisdiction of City X. Under the provisions of paragraph (c), only City 
X must approve the issue because it is the issuer and the facility is to 
be located entirely within the geographic jurisdiction of City X.
    (ii) Mayor A, the chief elected executive officer of City X, has 
designated, for purposes of this section, Deputy Mayor B, an official of 
City X elected at-large, to approve industrial development bond issues 
for the city. Under the provisions of paragraph (e), Deputy Mayor B may 
approve the issue, since he is an applicable elected representative, 
after the public notice and public hearing requirements are satisfied.
    Example (5). (i) County M proposes to issue an industrial 
development bond to finance a project located partly within the 
geographic jurisdiction of County M and partly within the geographic 
jurisdiction of County N. Both counties are located in State X. The part 
of the project in County N is also located partly within the geographic 
jurisdiction of City O and partly within the geographic jurisdiction of 
City P. Under the provisions of paragraph (c)(2), County M must give 
issuer approval. Additionally, under the provisions of paragraph (c)(3), 
either State X, County N, or both Cities O and P, must give host 
approval.
    (ii) Counties M and N will approve the issue, but neither has any 
officials who are elected at-large by the voters of the respective 
governmental units. Both governmental units derive their authority from 
State X which is the next higher governmental unit with an applicable 
elected representative. Under the provisions of paragraph (e), an 
applicable elected representative of State X must approve the issue for 
Counties M and N after the public notice and public hearing requirements 
are satisfied.
    Example (6). (i) County M proposes to issue an industrial 
development bond to finance two facilities. One facility is located 
entirely within the geographic jurisdiction of County M and the second 
facility is located partly within the geographic jurisdiction of County 
M and partly within the geographic jurisdiction of County N. The second 
facility is also located within the geographic jurisdictions of Cities O 
and P, which cities are located within the geographic jurisdiction of 
County N. Under the provisions of paragraph (c)(2), County M must give 
issuer approval. Additionally, under the provisions of paragraph (c)(3), 
either State X, County N, or both Cities O and P, must give host 
approval.
    (ii) Counties M and N will approve the issue. Each has a chief 
elected executive officer. Under the provisions of paragraphs (d) and 
(e), the chief elected executive officer of each county may approve the 
issue, after the public notice and public hearing requirements are 
satisfied.
    Example (7). (i) State X proposes to issue an industrial development 
bond to finance a facility located partly within the geographic 
jurisdiction of State X and partly within the geographic jurisdiction of 
State Y. That portion of the facility located in State Y is located 
entirely within the geographic jurisdiction of City Z. State X must give 
issuer approval. Additionally, either State Y or City Z must give host 
approval as that part of the facility to be located outside State X will 
be entirely within the geographic jurisdiction of each unit.
    (ii) Under the provisions of paragraphs (d) and (e), the governor of 
State X may approve the issue, after the public notice and public 
hearing requirements are satisfied. City Z (assuming that it give host 
approval for the bond) has a city council and a school board, both of 
which are elected legislative bodies with independent jurisdiction. The 
authority of the school board is limited under State law to matters 
directly concerning the provision of public education. Under paragraph 
(e), the school board is not an applicable elected representative of 
City Z but the city council is an applicable elected representative of 
City Z. The city council may approve the issue after the public hearing 
and public notice requirements are satisfied.
    Example (8). (i) Public Housing Authority M, a governmental unit, 
proposes to issue an

[[Page 106]]

industrial development bond to finance several housing projects with 
known sites located entirely within its geographic jurisdiction. M's 
geographic jurisdiction is coextensive with the combined geographic 
jurisdictions of Counties N and O. The projects are separately owned and 
managed. They are not adjacent to each other. The projects also are 
located in County N. Under the provisions of paragraph (c), M must give 
issuer approval.
    (ii) M, which has no elected officials or legislature, was created 
by both Counties N and O pursuant to a special statute of State Q 
permitting such a joint undertaking. Both Counties N and O have an 
applicable elected representative. Under the provisions of paragraph 
(e)(2), either County N, County O, or State Q is deemed to be the next 
higher governmental unit with an applicable elected representative, and 
an applicable elected representative from any of these units may give 
the issuer approval for Authority M. Therefore, either the applicable 
representative of County N, County O, or State Q can give the issuer 
approval for Authority M.
    (iii) For purposes of the host approval, the issuer approval by M 
will satisfy the host approval requirement only if the applicable 
elected representative of County N or State Q gives issuer approval for 
M. Under the provisions of paragraph (e)(2), the host approval 
requirement is satisfied only if qualified persons residing at the site 
of the facility are entitled to vote for the applicable elected 
representative who gave the approval (i.e., the representative of State 
Q or County N). However, if the applicable elected representative of O 
gave issuer approval for Authority M, a separate host approval would be 
required because the residents of the sites where the projects are 
located (i.e., County N) could not note for the applicable elected 
representative of County O.
    (iv) Public Housing Authority M conducts a public hearing concerning 
prospective housing projects following notice thereof published in a 
newspaper of general circulation in County N. Additionally, M provides 
notice to the residents of O (which are also within M's jurisdiction) in 
the manner required for notice of public hearing for other purposes 
under State Q law. Following the public hearing, the chief elected 
executive officer of County N approves for Authority M prospective 
issues for the project. M issues two $7 million issues, one for each 
project. One issue is issued six months after the date of approval; the 
second issue is issued thirteen months thereafter. On these facts, only 
the first issue satisfied the public approval requirement of this 
section.

[T.D. 7892, 48 FR 21117, May 11, 1983]



Sec. 5f.103-3  Information reporting requirements for certain bonds.

    (a) General rule. Under section 103(l), any private purpose bond 
issued after December 31, 1982 (including any obligation issued 
thereafter to refund private purpose bonds issued before December 31, 
1982) shall be treated as an obligation not described in section 103(a) 
unless the information reporting requirement (as described in paragraph 
(c) of this section) is substantially satisfied with respect to the 
issue of which the bond is a part. For rules concerning bonds issued 
after December 31, 1986, see Sec. 1.149(e)-1 of this chapter.
    (b) Private purpose bonds. For purposes of this section, the term 
``private purpose bond'' means--
    (1) Any industrial development bond (as defined in section 103(b)(2) 
and Sec. 1.103-7(b)(1)), or
    (2) Any obligation which is issued as part of an issue all or a 
major portion of the proceeds of which are to be used directly or 
indirectly--
    (i) To finance loans to individuals for educational or related 
expenses (hereinafter referred to as a ``student loan bond''), or
    (ii) By an organization described in section 501(c)(3) which is 
exempt from taxation by reason of section 501(a) (hereinafter referred 
to as ``private exempt entity bond'').

The meaning of the terms ``major portion'' and ``directly or 
indirectly'' shall be the same as under Sec. 1.103-7. Student loan 
bonds include, but are not limited to, qualified scholarship funding 
bonds (as defined in section 103(e)).
    (c) Information required. An obligation satisfies the requirements 
of section 103(l) and this section only if it is issued as part of an 
issue with respect to which the issuer, based on information and 
reasonable expectations determined as of the date of issue, submits on 
Form 8038 the information required therein, including--
    (1) The name, address, and employer identification number of the 
issuer,
    (2) The date of issue (as defined in paragraph (g)(1)),
    (3) The face amount of the issue,
    (4) The total purchase price of the issue,

[[Page 107]]

    (5) The amount allocated to a reasonably required reserve or 
replacement fund,
    (6) The amount of lendable proceeds (as defined in paragraph (g)(4) 
of this section),
    (7) The stated interest rate of each maturity (as defined in 
paragraph (g)(2) of this section) or, if the interest rate is variable, 
a description of the method under which the interest rate is computed,
    (8) The term (as defined in paragraph (g)(3)) of each maturity,
    (9) A general description of the property to be financed by the 
issue (including property financed by an obligation that will be 
refunded with the issue proceeds) which includes--
    (i) The type of bond issued, that is, a student loan bond, a private 
exempt entity bond, or an industrial development bond and in the case of 
an industrial development bond described in section 103(b)(4), the 
subparagraph of section 103(b)(4) that describes the property, e.g., for 
a football stadium, that the property is described in section 
103(b)(4)(B),
    (ii) The recovery classes (as defined in section 168(c)(2)), if 
applicable, of the various items of financed property and the 
approximate amount of lendable proceeds attributable thereto,
    (iii) The approximate amount of lendable proceeds attributable to 
land or other property not described in subdivision (ii),
    (iv) In the case of obligations described in section 103(b)(6) or 
private exempt entity bonds, the four-digit Standard Industrial 
Classification Code of the facilities financed,
    (10) If section 103(k) (relating to public approval requirement for 
industrial development bonds) applies to such issue, the name(s) of the 
approving governmental unit(s) and of the applicable elected 
representative(s) (as defined in section 103(k)(2)(E) and Sec. 5f.103-
2(e)) or a description of the voter referendum that approved the issue 
for such unit(s), and
    (11) The name, address, and employer identification number of--
    (i) Each initial principal user (as defined in paragraph (g)(5) of 
this section) of any facilities provided with the proceeds of the issue,
    (ii) The common parent, if any, of any affiliated group of 
corporations (as defined in section 1504(a) but determined without 
regard to the exceptions of section 1504(b)) of which such initial 
principal user is a member, and
    (iii) Any person (not included under paragraph (c)(11)(i)) that is 
treated as a principal user under section 103(b)(6)(L), but only if the 
issue is treated as a separate issue under section 103(b)(6)(K).

The information to be supplied must be determined based on information 
and reasonable expectations as of the date of issue. Therefore, such 
statement need not be amended to report information learned subsequent 
to the date of issue. However, if the statement is filed after the date 
of issue it may reflect such information and the reasonable expectations 
of the issuer as of that date.
    (d) Additional information. An issuer may supply the following 
information--
    (1) The average maturity of the issue (as defined in section 
103(b)(14)), and
    (2) The average reasonably expected economic life (as defined in 
section 103(b)(14)) of the facility which is financed with the issue.
    (e) Time for filing. The statement required by section 103(l) and 
this section shall be filed not later than the 15th day of the 2nd 
calendar month after the close of the calendar quarter in which the 
obligation is issued. It may be filed at any time before such date but 
must be complete based on facts and reasonable expectations as of the 
date of issue. The Secretary may grant an extension of time for filing 
the statement required under section 103(l) and this section if there is 
reasonable cause for the failure to file such statement in a timely 
fashion.
    (f) Place for filing. Form 8038 is to be mailed to the Internal 
Revenue Service Center, Philadelphia, Pennsylvania 19255.
    (g) Definitions. For purposes of this section--
    (1) The term date of issue means the date on which the issuer 
physically exchanges the first of the obligations which are part of the 
issue for the underwriter's (or other purchaser's) funds. In the event 
that amounts are

[[Page 108]]

periodically advanced with respect to an issue, the date of issue is 
when the first of such obligations under the issue is created and the 
funds are advanced.
    (2) The term maturity means those obligations of the issue having 
both the same maturity date and the same stated interest rate.
    (3) The term term of an issue means the duration of the period 
beginning on the date of issue and ending on the latest maturity date of 
any obligation of the issue without regard to optional redemption dates.
    (4) The term lendable proceeds means the amount of the original 
proceeds, net of amounts allocated to a reasonably required reserve or 
replacement fund. See generally Sec. 1.103-13(b) and Sec. 1.103-14(d) 
for further definitions.
    (5) The term initial principal user means each person who as of the 
date of issue is obligated to use the facility to such an extent that 
under section 103(b)(6) such person would be treated as a principal 
user. With respect to organizations described in section 501(c)(3), 
however, such determination is made without regard to whether such 
organization is treated as an exempt organization under section 
103(b)(3) and Sec. 1.103-7(b)(2).

[T.D. 7892, 48 FR 21120, May 11, 1983, as amended by T.D. 8129, 52 FR 
7411, Mar. 11, 1987; T.D. 8425, 57 FR 36003, Aug. 12, 1992]



Sec. 5f.163-1  Denial of interest deduction on certain obligations 
issued after December 31, 1982, unless issued in registered form.

    (a) Denial of deduction generally. Interest paid or accrued on a 
registration-required obligation (as defined in paragraph (b) of this 
section) shall not be allowed as a deduction under section 163 or any 
other provision of law unless such obligation is issued in registered 
form (as defined in Sec. 5f.103-1(c)).
    (b) Registration-required obligation. For purposes of this section, 
the term ``registration-required obligation'' means any obligation 
except any one of the following:
    (1) An obligation issued by a natural person.
    (2) An obligation not of a type offered to the public. The 
determination as to whether an obligation is not of a type offered to 
the public shall be based on whether similar obligations are in fact 
publicly offered or traded.
    (3) An obligation that has a maturity at the date of issue of not 
more than 1 year.
    (4) An obligation issued before January 1, 1983. An obligation first 
issued before January 1, 1983, shall not be considered to have been 
issued on or after such date merely as a result of the existence of a 
right on the part of the holder of such obligation to convert such 
obligation from registered form into bearer form, or as a result of the 
exercise of such a right.
    (5) An obligation described in subparagraph (1) of paragraph (c) 
(relating to certain obligations issued to foreign persons).
    (c) [Reserved]
    (d) Effective date. The provisions of this section shall apply to 
obligations issued after December 31, 1982, unless issued on an exercise 
of a warrant for the conversion of a convertible obligation if such 
warrant or obligation was offered or sold outside the United States 
without registration under the Securities Act of 1933 and was issued 
before August 10, 1982.
    (e) Obligations first issued after December 31, 1982, where the 
right exists for the holder to convert such obligation from registered 
form into bearer form. [Reserved]
    (f) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). All of the shares of Corporation X are owned by two 
individuals, A and B. X desires to sell all of its assets to Corporation 
Y, all of the shares of which are owned by individual C. Following the 
sale, Corporation X will be completely liquidated. As partial 
consideration for the Corporation X assets, Corporation Y delivers a 
promissory note to X, secured by a security interest and mortgage on the 
acquired assets. The note given by Y to X is not of a type offered to 
the public.
    Example (2). Corporation Z has a credit agreement with Bank M 
pursuant to which Corporation Z may borrow amounts not exceeding $10X 
upon delivery of Z's note to Bank M. The note Z delivers to M is not of 
a type offered to the public.
    Example (3). Individuals D and E operate a retail business through 
partnership DE. D wishes to loan partnership DE $5X. DE's note 
evidencing the loan from D is not of a type offered to the public.

[[Page 109]]

    Example (4). Individual F owns one-third of the shares of 
Corporation W. F makes a cash advance to W. W's note evidencing F's cash 
advance is not of a type offered to the public.
    Example (5). Closely-held Corporation R places its convertible 
debentures with 30 individuals who are United States persons. The 
offering is not required to be registered under the Securities Act of 
1933. Similar debentures are publicly offered and traded. The 
obligations are not considered of a type not offered to the public.
    Example (6). In 1980, Corporation V issued its bonds due in 1986 
through an offering registered with the Securities and Exchange 
Commission. Although the bonds were initially issued in registered form, 
the terms of the bonds permit a holder, at his option, to convert a bond 
into bearer form at any time prior to maturity. Similarly, a person who 
holds a bond in bearer form may, at any time, have the bond converted 
into registered form.
    (i) Assume G bought one of Corporation V's bonds upon the original 
issuance in 1980. In 1983, G requests that V convert the bond into 
bearer form. Except for the change from registered to bearer form, the 
terms of the bond are unchanged. The bond held by G is not considered 
issued after December 31, 1982, under Sec. 5f.163-1(b)(4).
    (ii) Assume H buys one of Corporation V's bonds in the secondary 
market in 1983. The bond H receives is in registered form, but H 
requests that V convert the obligation into bearer form. There is no 
other change in the terms of the instrument. The bond held by H is not 
considered issued after December 31, 1982, under Sec. 5f.163-1(b)(4).
    (iii) Assume the same facts as in (ii) except that in 1984 I 
purchases H's V Corporation bond, which is in bearer form. I requests V 
to convert the bond into registered form. There is no other change in 
the terms of the instrument. In 1985, I requests V to convert the bond 
back into bearer form. Again, there is no other change in the terms of 
the instrument. The bond purchased by I is not considered issued after 
December 31, 1982, under Sec. 5f.163-1(b)(4).
    Example (7). Corporation U wishes to make a public offering of its 
debentures to United States persons. U issues a master note to Bank N. 
The terms of the note require that any person who acquires an interest 
in the note must have such interest reflected in a book entry. Bank N 
offers for sale interests in the Corporation U note. Ownership interests 
in the note are reflected on the books of Bank N. Corporation U's 
debenture is considered issued in registered form.
    Example (8). Issuer S wishes to make a public offering of its debt 
obligations to United States persons. The obligations will have a 
maturity in excess of one year. On November 1, 1982, the closing on the 
debt offering occurs. At the closing, the net cash proceeds of the 
offering are delivered to S, and S delivers a master note to the 
underwriter of the offering. On January 2, 1983, S delivers the debt 
obligations to the purchasers in definitive form and the master note is 
cancelled. The obligations are not registration-required because they 
are considered issued before January 1, 1983.
    Example (9). In July 1983, Corporation T sells an issue of debt 
obligations maturing in 1985 to the public in the United States. Three 
of the obligations of the issue are issued to J in bearer form. The 
balance of the obligations of the issue are issued in registered form. 
The terms of the registered and bearer obligations are identical. The 
obligations issued to J are of a type offered to the public and are 
registration-required obligations. Since the three obligations are 
issued in bearer form, T is subject to the tax imposed under section 
4701 with respect to the three bearer obligations. In addition, interest 
paid or accrued on the three bearer obligations is not deductible by T. 
Moreover, since the issuance of the three bearer obligations is subject 
to tax under section 4701, J is not prohibited from deducting losses on 
the obligations under section 165(j) or from treating gain on the 
obligations as capital gain under section 1232(d). The balance of the 
obligations in the issue do not give rise to liability for the tax under 
section 4701, and the deductibility of interest on such obligations is 
not affected by section 163(f).
    Example (10). Broker K acquires a bond issued in 1980 by the United 
States Treasury through the Bureau of Public Debt. Broker K sells 
interests in the bond to the public after December 31, 1982. A purchaser 
may acquire an interest in any interest payment falling due under the 
bond or an interest in the principal of the bond. The bond is held by 
Custodian L for the benefit of the persons acquiring these interests. On 
receipt of interest and principal payments under the bond, Custodian L 
transfers the amount received to the person whose ownership interest 
corresponds to the bond component giving rise to the payment. Under 
section 1232B, each bond component is treated as an obligation issued 
with original issue discount equal to the excess of the stated 
redemption price at maturity over the purchase price of the bond 
component. The interests sold by K are obligations of a type offered to 
the public. Further, the interests are, in accordance with section 
1232B, considered issued after December 31, 1982. Accordingly, the 
interests are registration-required obligations under Sec. 5f.163-1(b).

[T.D. 7852, 47 FR 51362, Nov. 15, 1982, as amended by T.D. 7965, 49 FR 
33235, Aug. 22, 1984]

[[Page 110]]



Sec. 5f.168(f)(8)-1  Questions and answers concerning transitional rules
and related matters regarding certain safe harbor leases.

    The following questions and answers concern the transitional rules 
and related matters regarding certain safe harbor leases under section 
208(d) of the Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 
97-248) (``TEFRA''):

    Q-1: If a lessee, prior to the period beginning after December 31, 
1980, and ending before July 2, 1982 (the ``window period''), enters 
into a binding contract to acquire property and the property is 
delivered to the lessee during the window period, is the property 
eligible for the transitional rule provided in section 208(d)(3) of 
TEFRA which applies the safe harbor leasing rules of section 168(f)(8) 
of the Internal Revenue Code of 1954 as in effect before the enactment 
of TEFRA?
    A-1: Yes, assuming all other requirements of the TEFRA transitional 
rules are met. Section 208(d)(3)(A) (i) and (ii) of TEFRA provide 
alternative tests under which an item of property may constitute 
``transitional safe harbor lease property'' for purposes of the 
transitional rules under the modifications to the safe harbor lease 
provisions of section 168(f)(8). The tests are:
    (i) The lease entered into a binding contract to acquire the 
property;
    (ii) The lessee entered into a binding contract to construct the 
property;
    (iii) The property was acquired by the lessee; or
    (iv) Construction of the property was commenced by or for the 
lessee.

These tests are stated in the alternative, and, accordingly, property 
may be eligible for pre-TEFRA safe harbor leasing if any one of the 
tests is satisfied. Thus, if a lessee acquired property during the 
window period, the property may be eligible for pre-TEFRA safe harbor 
leasing even though a binding contract to acquire the property was 
executed before the window period. Similarly, if construction of 
property commences during the window period, the property may be 
eligible for pre-TEFRA safe harbor leasing even though a binding 
contract to construct the property was executed before the window 
period.
    Q-2: How do the transitional rules apply to components of an 
integrated manufacturing, production, or extraction process, none of 
which would be considered ``placed in service'' until all of the 
components are placed in service?
    A-2: (i) The transitional rules regarding acquisition, binding 
contracts, and commencement of construction are applied to each separate 
item of property which is part of a manufacturing, production, or 
extraction process. What constitutes a separate item will be determined 
on a case-by-case basis, taking into account all relevant factors. In 
general, a discrete component capable of performing a function which is 
separate from or in addition to the function of other components to 
which it may be related is a separate item of property; but an item that 
is integrated into a component which performs a function separate from 
other components to which it is related is not itself a separate item of 
property. For example, a bolt or a nut that is used to construct a 
machine does not constitute a separate item of property. On the other 
hand, the transitional rules will not be applied to an entire facility 
as a whole, as was the case under the investment tax credit transition 
rule of section 50 in Hawaiian Independent Refinery, Inc. v. United 
States, 49 AFTR 2d 675 (Ct. Cl. Tr. Judge 1982), where the taxpayer was 
held to have constructed a property which consisted of an entire 
refinery complex. Thus, for example, for purposes of these transitional 
rules, an oil or gas well, storage tanks, and pipeline located on a 
lease would not be considered a single item of property. Although each 
item is related to the production of oil or gas, each is discrete and 
each is capable of performing a separate function from the other. In 
addition, in the case of an integrated manufacturing, production, or 
extraction process, commencement of construction of one item of property 
within the process would not be considered construction of any other 
item of property that is part of the process.
    (ii) If property qualifies as transitional safe harbor lease 
property, all direct and indirect costs allocable to the property 
(except for those described in Sec. 5c.168(f)(8)-6(a)(2)(ii)) and 
required to be capitalized for Federal income tax purposes will also 
qualify as transitional safe harbor lease property to the extent such 
costs are incurred on or before the date on which the property is leased 
under section 168(f)(8).
    (iii) The adjusted basis to the lessor of property leased on or 
prior to December 1, 1982, under a transitional safe harbor lease shall 
be deemed to include all direct and indirect costs (including 
installation costs) described in subdivision (ii) allocable to such 
property that were incurred before it was leased despite the fact that 
such costs were not included in the lessor's adjusted basis of such 
property under the terms of the lease agreement, provided that the 
parties to such agreement reasonably believed that they had leased the 
whole of such property. Such costs will be treated as having been 
included in the lessor's adjusted basis of such safe harbor lease 
property on the date the lease agreement was executed without regard to 
any provisions in the lease agreement that limits the dollar amount of 
the permissible adjustment of the lessor's adjusted basis to such 
property. To qualify for inclusion of

[[Page 111]]

such direct and indirect costs within the basis of such property, the 
parties to such agreement must file an amended Form 6793, the Safe 
Harbor Lease Information Return, no later than April 21, 1983, which 
reflects the parties' intent to include installation and other such 
costs within the basis of such property. For purposes of this 
subdivision, a transitional safe harbor lease is a lease either which 
was executed after July 1, 1982, and on or prior to December 1, 1982, or 
which includes some transitional safe harbor lease property, as defined 
in TEFRA section 208(d)(3), that was placed in service after July 1, 
1982, and on or prior to December 1, 1982.
    Q-3: What test will be applied in determining whether an item of 
property is constructed or acquired by the lessee?
    A-3: Except as expressly provided in section 208(d)(3) (D) or (E) of 
TEFRA, the determination of whether and when any such events occurred 
with respect to an item of property will generally be made in accordance 
with the principles and precedents prior to TEFRA under the investment 
tax credit and depreciation allowance transitional provisions. See 
Sec. Sec. 1.48-2(b)(6) and 1.167(c)-1(a)(2), which provide definitions 
of the term ``acquired'', and Sec. Sec. 1.48-2(b)(1) and 1.167(c)-
1(a)(1), which provide definitions of the term ``constructed by''. Also 
see Rev. Rul. 80-312, 1980-2 C.B. 21, which discusses the factors to be 
considered in determining when a taxpayer has control over a project 
being constructed.
    In general, for purposes of TEFRA section 208(d)(3), construction of 
an item of property is considered to have commenced when physical work 
of a significant nature has begun with respect to the property. Thus, 
construction does not begin when parts or components which enter into 
construction are acquired. If property is assembled from purchased parts 
or components, the commencement of construction occurs when actual 
assembly of the property begins. If a taxpayer manufactures a major part 
or component of an item of property for itself, construction will be 
considered to have begun when the manufacturing of that part or 
component commences. However, construction of an item of property will 
not be considered as begun if physical work by the taxpayer relates to 
minor parts or components. Clearing and grading of land will be 
considered in determining when construction begins on an item of 
property only if they are directly associated with the construction of 
the property.
    Q-4: Under section 168(f)(8)(J), the at-risk rules are liberalized 
for closely held lessors that engage in safe harbor leasing. These rules 
apply ``in the case of property placed in service after the date of 
enactment of this subparagraph,'' namely, after September 3, 1982.
    Do the liberalized at-risk rules apply in the case where otherwise 
qualified property is placed in service by a lessee in August of 1982 
but is leased by a corporate lessor subject to the at-risk rules after 
September 3, 1982?
    A-4: The liberalized at-risk rule in section 168 (f)(8)(J) is 
applicable in this case because, in determining whether property is 
placed in service before or after the date of enactment of section 
168(f)(8)(J), the relevant date is the date the property is placed in 
service by the lessor. Additionally, a closely held corporate lessor, 
which is not a personal service corporation, may lease transitional safe 
harbor lease property placed in service after September 3, 1982, under 
the liberalized at-risk rule.
    Q-5: Is it necessary for property placed in service by a lessee in 
December of 1982 to be leased before January 1, 1983, in order to 
qualify under the general transitional rule of section 208(d)(3)(A) of 
TEFRA, which requires that the property be placed in service before 
January 1, 1983?
    A-5: The legislative intent of this transitional rule was to provide 
a 3-month period after property is placed in service by a lessee in 
which a safe harbor lease could be entered into. Cf. section 209(c) of 
TEFRA (3-month window applies to true leases entered into after 1983). 
The legislative intent further was to permit property to qualify as 
transitional safe harbor lease property if it was placed in service by 
the end of 1982 by a lessee. Accordingly, transitional safe harbor lease 
property placed in service in 1982 by a lessee may be leased in a safe 
harbor lease transaction within 3 months after it is placed in service 
by the lessee without losing its status as transitional safe harbor 
lease property.
    However, for all other purposes of the Code other than section 
168(f)(8)(D)(i), section 168(f)(8)(D)(viii)(II) will apply and the 
property will be treated as originally placed in service not earlier 
than the date that the property is used under the lease. Thus, for 
example, if transitional safe harbor lease property is placed in service 
in December of 1982 and leased under section 168(f)(8) in January of 
1983, the property will not lose its status as transitional safe harbor 
lease property, but the basis adjustment rules of section 48(g) will 
apply with respect to the property.
    Q-6: Will a contract to acquire property be considered ``binding'' 
for purposes of section 208(d)(3)(A)(i) of TEFRA if the contract 
contains no liquidated damages clause?
    A-6: Generally, an irrevocable contract which contains no provision 
for liquidated damages in the event of breach or cancellation would be 
considered binding. Morover, in determining the amount of the lessee's 
potential liability, the fair market value of the property will not be 
taken into account. For example, if a lessee entered into an irrevocable 
contract to purchase an asset for $100 and the contract contained no 
provision for liquidated damages, the contract would be

[[Page 112]]

considered binding notwithstanding the fact that the property at all 
times after July 1, 1982, had a value of $99 and under local law the 
seller could only recover the difference in the event the lessee failed 
to perform. On the other hand, if the contract by its terms provided for 
liquidated damages of less than 5 percent of the purchase price which is 
in lieu of any damages allowable by law, in the event of breach or 
cancellation, the contract would not be considered binding.
    Q-7: How does the 50-percent limitation on lessors in section 
168(i)(1) and the 45-percent limitation on lessees in section 
168(f)(8)(D)(ii) apply to corporations which are part of an affiliated 
group filing consolidated returns?
    A-7: Both the 50-percent limitation on lessors and the 45-percent 
limitation on lessees will be applied on a consolidated basis for 
corporations filing consolidated returns.
    Q-8: Section 168(f)(8)(J) liberalized the at-risk rules for safe 
harbor leasing and provides that in cases where the safe harbor lessee 
would be considered the owner of the property without regard to the safe 
harbor lease, the lessor is considered to be at risk with respect to the 
property in an amount equal to the amount the lessee is considered at 
risk with respect to such property as determined under section 465.
    Will a corporate lessor that would ordinarily be subject to the at-
risk rules under section 465 be exempt from such rules under section 
168(f)(8)(J) in a situation where acquisition of the leased property is 
financed with nonrecourse debt by a lessee that is not subject to the 
at-risk rules?
    A-8: Yes. The liberalized at-risk rules of section 168(f)(8)(J) will 
apply in cases where the lessee's ACRS deductions and investment tax 
credit with respect to the property would not have been limited under 
the at-risk rules had the parties not elected treatment under section 
168(f)(8).
    Q-9: Section 168(f)(8)(J)(ii) excepts certain service corporations 
from the liberalized at-risk rules of section 168(f)(8)(J)(i). Does the 
exception in subdivision (ii) also extend to subsidiaries of such 
service corporations that file consolidated returns?
    A-9: Yes. The liberalized at-risk rules of section 168(f)(8)(J)(i) 
will not apply to any subsidiary filing a consolidated return with a 
service organization described in section 168(f)(8)(J)(ii).
    Q-10: Will property lose its status as transitional safe harbor 
lease property under section 208(d)(3) of TEFRA solely by reason of the 
fact that the person who is a party to a binding contract to acquire the 
property assigns his rights in the contract to another person?
    A-10: When a person who is a party to a binding contract transfers 
his rights in the contract (or the property covered by the contract) to 
another person and the transferor (or a corporation which is a member of 
the same affiliated group as the transferor) will use the property under 
a lease for a period not less than 50 percent of the appropriate 
recovery period for the leased property under section 168(c), then to 
the extent of the transferred rights, this other person will succeed to 
the position of the transferor with respect to the binding contract and 
the property. Accordingly, under these circumstances, property will not 
lose its status as transitional safe harbor lease property.
    In addition, property will not be disqualified as transitional safe 
harbor lease property solely by reason of a transfer by a person of his 
rights in a contract (or the property covered by the contract) in a 
transaction in which the basis of the property in the hands of the 
transferee is determined by reference to its basis in the hands of the 
transferor (e.g., transfers governed by sections 332, 351, 361, 721, and 
731). Thus, for example, if a corporation entered into a binding 
contract for the construction or acquisition of property prior to July 
1, 1982, and after such date assigned the contract to a corporation 
within the same affiliated group which files consolidated returns, the 
assignee will be entitled to treat the property acquired pursuant to the 
contract as transitional safe harbor lease property, assuming the 
property would have so qualified in the hands of the transferor. 
Similarly, if a joint venture or partnership between two corporations 
entered into a binding contract or commenced construction of property 
before July 2, 1982, but dissolved and distributed its assets to the 
partners or joint venturers after July 2, 1982, the joint venturers or 
partners may treat the assets as transitional safe harbor lease 
property, assuming the property would have so qualified had the joint 
venture or partnership remained in existence.
    Q-11: During 1982, Corporation Y placed in service section 38 
property with a total cost of $100X. On August 15, 1982, Corporation Y 
placed in service the last component of an entire facility within the 
meaning of Sec. 5c.168(f)(8)-6(b)(2). The facility had a total cost 
basis of $40X, of which $30X was transitional safe harbor lease property 
within the meaning of section 208(d)(3) of TEFRA and $10X was not 
transitional safe harbor lease property. On November 1, 1982, 
Corporation Y sold and leased back under a section 168(f)(8) lease the 
$30X of transitional safe harbor lease property in the facility.
    Will the entire facility rule in Sec. 5c.168(f)(8)-6(b)(2) apply in 
this situation where the taxpayer has not leased all of the section 38 
property in the facility?
    A-11: No. The placed in service date, for purposes of the rule 
requiring that property be leased within 3 months after such property 
was placed in service by the lessee, would be determined under the 
entire facility rule in Sec. 5c.168(f)(8)-6(b)(2) only if Corporation Y 
had leased all the qualified leased property in the facility. Since 
Corporation Y leased only the $30X of transitional section

[[Page 113]]

38 property, of the facility and did not lease the $10X of 
nontransitional property, Corporation Y may not rely on the entire 
facility rule of Sec. 5c.168(f)(8)-6(b)(2) for purposes of determining 
the placed in service date for the property under the section 168(f)(8) 
lease.
    Q-12: Assume the same facts as in Q-11, except that Corporation Y 
had also placed in service by August 15, 1982, $30X of miscellaneous 
machinery and equipment all of which was transitional safe harbor lease 
property within the meaning of section 208(d)(3) of TEFRA. On November 
1, 1982, in addition to the $30X of transitional property in the 
facility, Corporation Y also sold and leased back under a separate 
section 168(f)(8) lease the $30X of miscellaneous machinery and 
equipment.
    Will the entire facility rule in Sec. 5c.168(f)(8)-6(b)(2) apply in 
this situation to the $30X of transitional property in the facility?
    A-12: Yes. Since Corporation Y leased $30X of transitional machinery 
and equipment and the $30X of the facility which consisted of 
transitional property, Corporation Y can lease none of the 
nontransitional property in the facility because, by reason of the 45-
percent cap on lessees contained in section 168(f)(8)(D) (ii) and (iii) 
and (I), it is not qualified leased property for purposes of section 
168(f)(8). Thus, on the facts, Corporation Y has leased all the 
qualified leased property in the facility.
    Q-13: Corporation X constructed a manufacturing complex consisting 
of three integrated operational components, each with a different ADR 
present class life midpoint, which together constitute an ``entire 
facility'' within the meaning of Sec. 5c.168(f)(8)-6(b)(2). The last 
components of the facility were placed in service on August 15, 1982. On 
October 1, 1982, Corporation X sold to Corporation Z and leased back 
under section 168(f)(8) all the qualified leased property of the 
facility.
    For purposes of the rule requiring that property be leased within 3 
months after such property was placed in service by the lessee, will the 
leased components of the entire facility be considered placed in service 
by the lessee on August 15, 1982, the date the last components were 
placed in service, if the components are leased at one time pursuant to 
documents consisting of three section 168(f)(8) leases with different 
terms to reflect the different ADR midpoint lives of the qualified 
leased property in the facility?
    A-13: Yes. If the entire facility rule in Sec. 5c.168(f)(8)-6(b)(2) 
applies, the facility components which were placed in service prior to 
August 15, 1982, will be treated as placed in service by the lessee on 
August 15, 1982, for purposes of the 3-month rule. This rule will apply 
if all the qualified leased property of the facility is leased at one 
time. The documentation may be in the form of multiple, simultaneously 
executed agreements or maybe in the form of an agreement comprised of 
one or more parts or schedules. Each of the multiple agreements, or each 
of the parts or schedules of an agreement, may have different lease 
terms for property with different ADR midpoint lives, so long as each 
such agreement or part of schedule individually would be treated as a 
lease under section 168(f)(8), taking into account the entire facility 
rule, with lease terms commencing on the same date. A single transaction 
effected by multiple agreements or by an agreement with one or more 
parts or schedules will meet the maximum lease term requirement of Sec. 
5c.168(f)(8)-5(b) so long as each agreement or each part or schedule of 
an agreement meets the maximum lease term requirement.
    Q-14: Under Sec. 5c.168(f)(8)-6(b)(2), the special rule for 
facilities applies only if the entire facility is leased under a section 
168(f)(8) lease.
    Will a transaction not qualify under section 168(f)(8) if the 
parties, acting in good faith, omit an insubstantial portion of the 
qualified lease property from the lease?
    A-14: No. The facility rule of Sec. 5c.168(f)(8)-6(b)(2) will apply 
if the parties, acting in good faith, substantially comply with its 
terms.
    Q-15: When will construction of an aircraft be considered to have 
been begun after June 25, 1981, and before February 20, 1982, for 
purposes of TEFRA section 208(d)(3)(D)?
    A-15: Construction of an aircraft will be considered to have been 
begun after June 25, 1981, and before February 20, 1982, if during such 
period any of the following events occurred:
    (i) Construction or reconstruction of a subassembly designated for 
the aircraft was commenced;
    (ii) Construction of a lot increment of subassemblies (one or more 
of which was designated for the aircraft) was commenced; or
    (iii) The stub wing join occurred.
    Q-16: Does the definition of assets used in the manufacture or 
production of steel for purposes of TEFRA section 208(d)(2)(F) include 
all assets used in this function (such as electrical and steam 
generators and distribution equipment, coke oven by-product equipment) 
although not necessarily includible in the former ADR guideline class 
for primary steel mill products?
    A-16: Yes, all assets that are used, in their primary function, as 
an integral part of the steel manufacturing or production process are 
included. Cf. Sec. 1.48-1(d)(4). However, the steel manufacturing or 
production process does not include processing beyond the production of 
primary ferrous metals (as defined by the ADR Class for Manufacture of 
Primary Ferrous Metals).
    Q-17: Where a qualified mass commuting vehicle meets the 
requirements for both the TEFRA section 208(d)(2) transitional rule and 
the TEFRA section 208(d)(5) special rule for mass commuting vehicles, 
which provision will control?
    A-17: The general transitional rule of TEFRA section 208(d)(2) will 
apply. Thus,

[[Page 114]]

pursuant to TEFRA section 208(d)(2)(B), the provisions of section 
168(f)(8)(J), but not the provisions of section 168(i)(1), will apply 
only to such property. If the general transitional rule does not apply 
to a specific mass commuting vehicle, the provision of section 168(i)(1) 
applies to the lessor who leases such vehicle.
    Q-18: Does the definition of a qualified mass commuting vehicle 
include component parts of a qualified mass commuting vehicle--such as 
an undercarriage of a subway car or the costs of rehabilitation or 
reconstruction of a mass commuting vehicle (or component part thereof)?
    A-18: Yes.

[T.D. 7850, 47 FR 50853, Nov. 10, 1982, as amended by T.D. 7879, 48 FR 
11942, Mar. 22, 1983]



PART 6a_TEMPORARY REGULATIONS UNDER TITLE II OF THE OMNIBUS 
RECONCILIATION ACT OF 1980--Table of Contents



Sec.
6a.103A-1 Interest on mortgage subsidy bonds.
6a.103A-2 Qualified mortgage bond.
6a.103A-3 Qualified veterans' mortgage bonds.
6a.6652(g)-1 Failure to make return or furnish statement required under 
          section 6039C.

    Authority: 26 U.S.C. 7805.
    Sections 6a.103A-2(k), (l), and (m) also issued under 26 U.S.C. 
103A(j) (3), (4), and (5).



Sec. 6a.103A-1  Interest on mortgage subsidy bonds.

    (a) In general--(1) Mortgage subsidy bond. A mortgage subsidy bond 
shall be treated as an obligation not described in section 103 (a)(1) or 
(a)(2). Thus, the interest on a mortgage subsidy bond is includable in 
gross income and subject to Federal income taxation.
    (2) Exceptions. Any qualified mortgage bond and any qualified 
veterans' mortgage bond shall not be treated as a mortgage subsidy bond. 
See Sec. 6a.103A-2 with respect to requirements of qualified mortgage 
bonds and Sec. 6a.103A-3 with respect to requirements of qualified 
veterans' mortgage bonds.
    (3) Additional requirement. In addition to the requirements of Sec. 
6a.103A-2, Sec. 6a.103A-3, and this section, qualified mortgage bonds 
and qualified veterans' mortgage bonds shall be subject to the 
requirements of section 103(c) and the regulations thereunder.
    (4) Advance refunding. On or after December 5, 1980, no tax-exempt 
obligation may be issued for the advance refunding of a mortgage subsidy 
bond (determined without regard to section 103A(b)(2) or Sec. 6a.103A-
1(a)(2)). An obligation issued for the refunding of a mortgage subsidy 
bond will be considered to be an advance refunding obligation if it is 
issued more than 180 days before the prior issue is discharged.
    (5) Registration. Any obligation that is part of a qualified 
mortgage bond issue or qualified veterans' mortgage bond issue and which 
is issued after December 31, 1981, must be in registered form. The term 
``in registered form'' has the same meaning as in Sec. 1.6049-2(d). 
Thus, in general, an obligation is issued in registered form if it is 
registered as to both principal and interest and if its transfer must be 
effected by the surrender of the old instrument to the issuer and by 
either the reissuance of the old instrument to a new holder or the 
issuance of a new instrument to a new holder.
    (b) Definitions. For purposes of Sec. Sec. 6a.103A-2, 6a.103A-3, 
and this section the following definitions apply:
    (1) Mortgage subsidy bond. (i) The term ``mortgage subsidy bond'' 
means any obligation which is issued as part of an issue a significant 
portion of the proceeds of which is to be used directly or indirectly to 
provide mortgages on owner-occupied residences.
    (ii) For purposes of subdivision (i), a significant portion of the 
proceeds of an issue is used to provide mortgages if 5 percent or more 
of the proceeds are so used.
    (2) Mortgage. The term ``mortgage'' includes deeds of trust, 
conditional sales contracts, pledges, agreements to hold title in 
escrow, and any other form of owner financing.
    (3) Bond. The term ``bond'' means any obligation. The term 
``obligation'' means any evidence of indebtedness.
    (4) State. (i) The term ``State'' includes a possession of the 
United States and the District of Columbia.
    (ii) For purposes of subdivision (i), obligations issued by or on 
behalf of any State or local governmental unit by constituted 
authorities impowered

[[Page 115]]

to issue such obligations are the obligations of such governmental unit. 
See Sec. 1.103-1(b).
    (5) Proceeds. The term ``proceeds'' includes original proceeds and 
investment proceeds. The terms ``original proceeds'' and ``investment 
proceeds'' shall have the same meaning as in Sec. 1.103-13(b)(2). 
Unless otherwise provided in Sec. 6a.103A-2 or this section, however, 
amounts earned from the investment of proceeds which are derived from 
qualified mortgage bonds in nonmortgage investments may not be 
commingled for the purposes of accounting for expenditures with other 
non-bond amounts, and such proceeds are investment proceeds even though 
not treated as investment proceeds for purposes of section 103(c). 
Repayments of principal on mortgages shall be treated as proceeds of an 
issue. Amounts (such as State appropriations or surplus funds) which are 
provided by the issuer or a private lender in conjunction with a 
qualified mortgage bond or a qualified veterans' mortgage bond shall not 
be treated as proceeds of a mortgage subsidy bond under this section. 
However, fees which are paid by a participating financial institution 
pursuant to an agreement with the issuer whereby such institution 
receives the right to originate or service mortgages and which are 
retained by an issuer are treated as original proceeds of the issue. 
Amounts provided by the issuer or a private lender may be treated as 
proceeds of an issue for purposes of section 103(c).
    (6) Single-family and owner-occupied residences. Except for purposes 
of Sec. 6a.103A-2 (g) and (h)(2)(ii), the terms ``single-family'' and 
``owner-occupied,'' when used with respect to residences, include two-, 
three-, and four-family residences--
    (i) One unit of which is occupied by the owner of the units, and
    (ii) Which were first occupied as a residence at least 5 years 
before the mortgage is executed.

[T.D. 7780, 46 FR 34314, July 1, 1981; 46 FR 37890, July 23, 1981, as 
amended by T.D. 7794, 46 FR 55514, Nov. 10, 1981]



Sec. 6a.103A-2  Qualified mortgage bond.

    (a) In general--(1) Qualified mortgage bond. A qualified mortgage 
bond shall not be treated as a mortgage subsidy bond, and the interest 
on a qualified mortgage bond will be exempt from Federal income 
taxation.
    (2) Termination date. No obligation issued after December 31, 1987, 
shall be treated as part of a qualified mortgage bond issue.
    (b) Definitions and special rules. For purposes of this section and 
Sec. 6a.103A-1, the following definitions apply:
    (1) Qualified mortgage bond. The term ``qualified mortgage bond'' 
means one or more obligations issued by a State or any political 
subdivision thereof (hereinafter referred to as ``governmental unit'') 
as part of an issue--
    (i) All of the original proceeds of which, net of the costs of 
issuing the obligations and proceeds invested in a reasonably required 
reserve fund (such net amount hereinafter in this section referred to as 
``lendable proceeds''), are to be used to finance owner-occupied 
residences, and
    (ii) Which meets each of the requirements of Sec. 6a.103A-1 and 
this section.

A qualified mortgage bond does not include any bond that is an 
industrial development bond under section 103(b).
    (2) Constitutional home rule city. The term ``constitutional home 
rule city'' means, with respect to any calendar year, any political 
subdivision of a State which, under a State constitution which was 
adopted in 1970 and effective on July 1, 1971, had home rule powers on 
the 1st day of the calendar year.
    (3) Targeted area residence. The term ``targeted area residence'' 
means a residence in an area which is either--
    (i) A qualified census tract, or
    (ii) An area of chronic economic distress.
    (4) Qualified census tract. (i) The term ``qualified census tract'' 
means a census tract in which 70 percent or more of the families have an 
income which is 80 percent or less of the State-wide median family 
income.
    (ii) The determination under subdivision (i) shall be made on the 
basis of the most recent decennial census for which data are available. 
With respect to any particular bond issue, such determination may be 
based upon the decennial census data available 3 months prior to the 
date of issuance and shall

[[Page 116]]

not be affected by official changes to such data during or after such 3-
month period.
    (iii) The term ``census tract'' means a census tract as defined by 
the Secretary of Commerce.
    (5) Areas of chronic economic distress. (i) The term ``area of 
chronic economic distress'' means an area designated by a State as 
meeting the standards established by that State for purposes of this 
subparagraph and approved by the Secretary and by the Secretary of 
Housing and Urban Development in accordance with the criteria set forth 
in (iii) of this subparagraph. A State may withdraw such designation at 
any time, with reasonable cause. Such withdrawal shall be effective upon 
notification by the State to the Assistant Secretary for Housing/Federal 
Housing Commissioner of the Department of Housing and Urban Development. 
Such withdrawal shall not affect the tax-exempt status of any 
outstanding issue of obligations.
    (ii) For purposes of making a designation under this subparagraph, 
withdrawing a designation, or making any other submission, ``State'' 
means the governor of a State, or a State official commissioned by the 
governor or by State statute for such purposes.
    (iii) The following criteria will be used in evaluating a proposed 
designation of an area of chronic economic distress:
    (A) The condition of the housing stock, including the age of the 
housing and the number of abandoned and substandard residential units. 
Data pertinent to this criterion include the number and percentage of 
housing units that were constructed prior to 1940, the average age of 
the housing stock, the number and percentage of abandoned housing units, 
and the number and percentage of substandard residential units.
    (B) The need of area residents for owner financing under a qualified 
mortgage bond issue as indicated by low per capita income, a high 
percentage of families in poverty, a high number of welfare recipients, 
and high unemployment rates. Data pertinent to this criterion include 
the per capita income of the population in the area, the number and 
percentage of families eligible to receive food stamps from a program 
pursuant to 7 U.S.C. 2011, the number and percentage of families 
eligible to receive payments under the Aid to Families with Dependent 
Children program, and the unemployment rate.
    (C) The potential for use of owner financing under a qualified 
mortgage bond issue to improve housing conditions in the area. Data 
pertinent to this criterion include the number and percentage of owner-
occupied homes that are substandard, the number and percentage of 
families that are low- or moderate-income renters, and the number and 
percentage of substandard units in the area that will be improved 
through the use of owner financing provided by the proceeds of a 
qualified mortgage bond issue.
    (D) The existence of a housing assistance plan which provides a 
displacement program and a public improvements and services program 
(similar to the Housing Assistance Plan (HAP) required by the Department 
of Housing and Urban Development under the Community Development Block 
Grant program (42 U.S.C. 5301 et seq.)).

This determination shall be based upon the most recent data availabe. 
The certification described in subdivision (iv)(C) shall satisfy the 
criteria set forth in subdivisions (C) and (D). A certification 
described in (iv)(D) shall satisfy the criteria set forth in 
subdivisions (A) and (B): Provided, That the majority of the households 
in the proposed area have incomes less than 80 percent of the median 
income for the standard metropolitan statistical area (SMSA) in which 
the proposed area is located or, if the proposed area is not within a 
SMSA, less than 80 percent of the median income for the State.
    (iv) A proposal by the State that an area be approved as an area of 
chronic economic distress shall contain the following information:
    (A) A description of the proposed area by its geographical limits.
    (B) Maps of the State and of areas within the State that are 
qualified census tracts and existing or proposed areas of chronic 
economic distress.

[[Page 117]]

    (C) Where applicable, a certification of the local Area Manager of 
the Department of Housing and Urban Development in which the proposed 
area is located that the proposed area is a Neighborhood Strategy Area 
(NSA) under 24 CFR 570.301(c) promulgated pursuant to the Community 
Development Block Grant program or an area comparable to a NSA which has 
been reviewed and approved by the Area Manager as meeting the standards 
for an NSA.
    (D) Where applicable, a certification from the HUD Area Manager with 
jurisdiction over the proposed area that the proposed area is within a 
geographic area which has been declared eligible for grants under the 
Urban Development Action Grant Program, Pursuant to 24 CFR 570.452, by 
the Secretary of Housing and Urban Development.
    (E) Statistical and descriptive information pertinent to the 
criteria enumerated in subdivision (iii) of this subparagraph, and a 
succinct statement of how the information furnished satisfies those 
criteria. Such statistical information shall be based upon the most 
recent data available.
    (F) If the State so desires, a written request for a conference 
prior to any adverse decision on the proposed designation.
    (G) A certification by the Governor or designated official that the 
proposed designation conforms to these regulations.
    (v) The proposed designation and the information furnished with it 
as required by subdivision (iv) of this subparagraph shall be submitted 
in triplicate to the Assistant Secretary for Housing/Federal Housing 
Commissioner of the Department of Housing and Urban Development 
(Attention: Office of State Agency and Bond Financed Programs, Rm. 6138, 
451 7th Street, SW., Washington, D.C. 20410).
    (vi) Only those areas of chronic economic distress that have been 
previously designated by the State and approved in accordance with this 
subparagraph at least 3 months prior to the date of issuance need to be 
taken into account for any particular bond issue. Residences located in 
areas designated as areas of chronic economic distress approved in 
accordance with this subparagraph within such 3-month period or after 
the date of issue, however, may be treated as targeted area residences. 
However, for purposes of paragraph (h)(2), relating to the specified 
portion of proceeds to be placed in targeted areas, and paragraph 
(i)(3)(ii)(A), relating to the 1\1/2\ year temporary period, only areas 
approved as areas of chronic economic distress in accordance with this 
subparagraph at the time of issue may be taken into consideration.
    (6) Standard metropolitan statistical area. A standard metropolitan 
statistical area (``SMSA'') is an area in and around a city of 50,000 
inhabitants or more (or equivalent area) and defined by the Secretary of 
Commerce as an SMSA.
    (7) Statistical area. The term ``statistical area'' means--
    (i) An SMSA,
    (ii) Any county (or portion thereof) which is not within an SMSA, or
    (iii) If there is insufficient recent statistical information with 
respect to a county (or portion thereof) described in subdivision (ii) 
of this subparagraph, such other area as may be designated by the 
Commissioner, upon proper application, as a substitute for such county 
(or portion thereof).

For purposes of subdivisions (ii) and (iii) of this subparagraph, in 
Alaska, the entire State, and in Louisiana, a parish, shall be treated 
in a manner similar to a county.
    (8) Acquisition cost. (i) The term ``acquisition cost'' means the 
cost of acquiring a residence from the seller as a completed residential 
unit. Acquisition cost includes the following:
    (A) All amounts paid, either in cash or in kind, by the purchaser 
(or a related party or for the benefit of the purchaser) to the seller 
(or a related party or for the benefit of the seller) as consideration 
for the residence.
    (B) If a residence is incomplete, the reasonable cost of completing 
the residence whether or not the cost of completing construction is to 
be financed with bond proceeds. For example, where a mortgagor purchases 
a building which is so incomplete that occupancy of the building is not 
permitted under local law, the acquisition cost

[[Page 118]]

includes the cost of completing the building so that occupancy of the 
building is permitted.
    (C) Where a residence is purchased subject to a ground rent, the 
capitalized value of the ground rent. Such value shall be calculated 
using a discount rate equal to the yield on the issue (as defined in 
Sec. 6a.103A-2(i)(2)(vi)).
    (ii) The term ``acquisition cost'' does not include the following:
    (A) The usual and reasonable settlement or financing costs. 
Settlement costs include titling and transfer costs, title insurance, 
survey fees, or other similar costs. Financing costs include credit 
reference fees, legal fees, appraisal expenses, ``points'' which are 
paid by the buyer (but not the seller, even though borne by the 
mortgagor through a higher purchase price) or other costs of financing 
the residence. However, such amounts will be excluded in determining 
acquisition cost only to the extent that the amounts do not exceed the 
usual and reasonable costs which would be paid by the buyer where 
financing is not provided through a qualified mortgage bond issue. For 
example, if the purchaser agrees to pay to the seller more than a pro 
rata share of property taxes, such excess shall be treated as part of 
the acquisition cost of a residence.
    (B) The value of services performed by the mortgagor or members of 
the mortgagor's family in completing the residence. For purposes of the 
preceding sentence, the family of an individual shall include only the 
individual's brothers and sisters (whether by the whole or half blood), 
spouse, ancestors, and lineal descendants. For example, where the 
mortgagor builds a home alone or with the help of family members, the 
acquisition cost includes the cost of materials provided and work 
performed by subcontractors (whether or not related to the mortgagor) 
but does not include the imputed cost of any labor actually performed by 
the mortgagor or a member of the mortgagor's family in constructing the 
residence. Similarly, where the mortgagor purchases an incomplete 
residence the acquisition cost includes the cost of material and labor 
paid by the mortgagor to complete the residence but does not include the 
imputed value of the mortgagor's labor or the labor of the mortgagor's 
family in completing the residence.
    (C) The cost of land which has been owned by the mortgagor for at 
least 2 years prior to the date on which construction of the residence 
begins.
    (iii) The following examples illustrate the provisions of 
subparagraph (8):

    Example (1). A contracts with B, a builder of single-family 
residences, for the purchase of a residence. Under the terms of the 
contract, B will deliver a residential unit to A that contains an 
uncompleted recreation room and an unfinished third floor and which 
lacks a garage. Normally, a completed recreation room, a finished third 
floor and a garage are provided as part of the residence built by B. The 
contract price for the residence is $58,000. At the same time, A 
contracts with C, an affiliate of B, to complete the recreation room and 
third floor and to construct the garage for a contract price of $10,000. 
C will perform this work after A receives title to the unit from B. 
Under Sec. 6a.103A-2(b)(8)(i)(A), the acquisition cost of A's completed 
residential unit is $68,000, which represents the contract price of the 
residence plus the cost of completion of the recreation room and third 
floor and construction of the garage.
    Example (2). E owns a single-family residence which E has listed for 
sale. D contracts to purchase E's residence, and the contract provides 
for a selling price of $30,000. D also agrees to pay an unsecured debt 
in the amount of $5,000, which E owes to X, a local bank. D further 
agrees to purchase from E the refrigerator, stove, washer, and dryer 
located in E's residence for $500. Such amount is equal to the fair 
market value of such personalty. D also agrees to purchase the light 
fixtures, curtain rods, and wall-to-wall carpeting for a fair market 
value price of $700. Under Sec. 6a.103A-2(b)(8)(i)(A), the acquisition 
cost of D's completed residential unit is $35,700. Such amount includes 
the $5,000 unsecured debt paid off by D. The $500 paid for the 
refrigerator, stove, washer, and dryer are not included because such 
items are not included within the definition of a residence under Sec. 
6a.103A-2(d)(4). Such definition does include, however, the light 
fixtures, curtain rods, and wall-to-wall carpeting purchased by D.
    Example (3). F contracts with G to purchase G's home for $40,000. 
After purchasing the residence, F pays a party unrelated to G $3,000 for 
painting, minor repairs, and refinishing the floors. Under Sec. 
6a.103A-2(b)(8)(i)(A), the acquisition cost of the residence is $40,000. 
Such fix-up expenses are not treated as part of the acquisition costs. 
If G had incurred such fix-up expenses, however,

[[Page 119]]

F may not reduce his acquisition cost of the residence by such amounts.

    (9) Qualified home improvement loan. (i) The term ``qualified home 
improvement loan'' means the financing (whether or not secured by a 
mortgage), in an amount which does not exceed $15,000 with respect to 
any residence, of alterations, repairs, and improvements on, or in 
connection with, an existing single-family, owner-occupied residence by 
the owner thereof, but only if such items substantially protect or 
improve the basic livability or energy efficiency of the residence.
    (ii) Alterations, repairs, or improvements that satisfy the 
requirement of subdivision (i) of this subparagraph include the 
renovation of plumbing or electric systems, the installation of improved 
heating or air conditioning systems, the addition of living space, or 
the renovation of a kitchen area. Items that will not be considered to 
substantially protect or improve the basic livability of the residence 
include swimming pools, tennis courts, saunas, or other recreational or 
entertainment facilities.
    (iii) If--
    (A) Two or more qualified home improvement loans are provided for 
the same residence, whether or not by the same lender, and
    (B) Any person who had a present ownership interest in such 
residence at the time the previous qualified home improvement loan or 
loans were made has a present ownership interest in the residence at the 
time the subsequent qualified home improvement loan is made,

Then the allowable amount of the subsequent qualified home improvement 
loan shall be reduced by the amount, at origination, of any previous 
qualified home improvement loan, so that the sum of such loans does not 
exceed $15,000.
    (iv) The following example illustrates the provisions of 
subparagraph (9):

    Example. A and B jointly own a residence located in Town M. They 
obtain a qualified home improvement loan for $10,000 from Town M. A 
acquires B's interest in the residence. A applies to State X for a 
qualified home improvement loan. The maximum amount of a qualified home 
improvement loan which may be made by State X is $5,000, the amount that 
when added to the $10,000 previous loan from Town M does not exceed 
$15,000.

    (10) Qualified rehabilitation loans. (i) The term ``qualified 
rehabilitation loan'' means any owner financing provided in connection 
with--
    (A) A qualified rehabilitation, or
    (B) The acquisition of a residence with respect to which there has 
been a qualified rehabilitation,

But only if the mortgagor to whom such financing is provided is the 
first resident of the residence after completion of the rehabilitation. 
Where there are two or more mortgagors of a rehabilitation loan, the 
first residency requirement is met if any of the mortgagors meets the 
first residency requirement.
    (ii) The term ``qualified rehabilitation'' means any rehabilitation 
of a residence if--
    (A) There is a period of at least 20 years between the date on which 
the building was first used and the date on which physical work on such 
rehabilitation begins,
    (B) 75 percent or more of the existing external walls of such 
building are retained in place as external walls in the rehabilitation 
process, and
    (C) The expenditures for such rehabilitation are 25 percent or more 
of the mortgagor's adjusted basis in the residence (including the land 
on which the residence is located).
    (iii) For purposes of (A) and (B), the rules applicable to the 
investment tax credit for qualified rehabilitated buildings under 
section 48(g)(1) (A)(iii) and (B) shall apply. However, unlike section 
48(g)(1)(B), once a building meets the 20-year test, more than one 
rehabilitation of that building within a 20-year period may qualify as a 
qualified rehabilitation.
    (iv) The adjusted basis to the mortgagor is the mortgagor's adjusted 
basis for purposes of determining gain or loss on the sale or exchange 
of a capital asset (as defined in section 1221). The mortgagor's 
adjusted basis shall be determined as of the date of completion of the 
rehabilitation, or, if later, the date the mortgagor acquires the 
residence, i.e., the date on which the mortgagor includes in basis any 
amounts

[[Page 120]]

expended for rehabilitation that are expended for capital assets.
    (v) The amounts expended by the mortgagor for rehabilitation include 
all amounts expended for rehabilitation regardless of whether the 
amounts expended were financed from the proceeds of the loan or from 
other sources, and regardless of whether the expenditure is a capital 
expenditure, so long as the expenditure is made during the 
rehabilitation of the residence and is reasonably related to the 
rehabilitation of the residence. The value of services performed by the 
mortgagor or members of the mortgagor's family (as used in Sec. 
6a.103A-2(b)(8)(ii)(B)) in rehabilitating the residence will not be 
included in determining the rehabilitation expenditures for purposes of 
the 25-percent test.
    (vi) Where a mortgagor purchases a residence that has been 
substantially rehabilitated, the 25-percent test is determined by 
comparing the total expenditures made by the seller for the 
rehabilitation of the residence with the acquisition cost of the 
residence to the mortgagor. The total expenditures made by the seller 
for rehabilitation do not include the cost of acquiring the building or 
land but do include all amounts directly expended by the seller in 
rehabilitating the building (excluding overhead and other indirect 
charges).
    (c) Good faith compliance efforts--(1) Mortgage eligibility 
requirements. An issue of qualified mortgage bonds which fails to meet 
one or more of the requirements of paragraphs (d), (e), (f), and (j) of 
this section shall be treated as meeting such requirements if each of 
the following provisions is met.
    (i) The issuer in good faith attempted to meet all such requirements 
before the mortgages were executed. Good faith requires that the trust 
indenture, participation agreements with loan originators, and other 
relevant instruments contain restrictions that permit the financing of 
mortgages only in accordance with such requirements. In addition, the 
issuer must establish reasonable procedures to ensure compliance with 
such requirements. Such procedures include reasonable investigations by 
the issuer or its agent to determine that the mortgages satisfy such 
requirements.
    (ii) Ninety-five percent or more of the lendable proceeds (as 
defined in Sec. 6a.103A-2(b)(1)) that were devoted to owner financing 
were devoted to residences with respect to which, at the time the 
mortgages were executed or assumed, all such requirements were met. In 
determining whether the proceeds are devoted to owner financing which 
meets such requirements, the issuer may rely on an affidavit of the 
mortgagor that the property is located within the issuer's jurisdiction 
and an affidavit of the mortgagor and the seller that the requirements 
of Sec. 6a.103A-2(f) are met. The issuer may also rely on his own or 
his agent's examination of copies of income tax returns which were filed 
with the Internal Revenue Service and which are provided by the 
mortgagor or obtained by the issuer or loan originator in accordance 
with the procedures set forth in Sec. 301.6103(c)-1 which indicate 
that, during the preceding 3 years, the mortgagor did not claim 
deductions for taxes or interest on indebtness with respect to real 
property constituting his principal residence, in addition to an 
affidavit of the mortgagor that the requirements of Sec. 6a.103A-2(e) 
are met. The mortgagor may also provide the issuer or his agent with an 
affidavit that the mortgagor was not required to file such return in 
accordance with section 6012 during one or all of the preceding 3 years. 
Where a particular mortgage fails to meet more than one of these 
requirements, the amount of the mortgage will be taken into account only 
once in determining whether the 95-percent requirement is met. However, 
all of the defects in the mortgage must be corrected pursuant to 
paragraph (c)(1)(iii) of this section.
    (iii) Any failure to meet such requirements is corrected within a 
reasonable period after such failure is discovered. For example, where a 
mortgage fails to meet one or more of such requirements those failures 
can be corrected by calling the nonqualifying mortgage or by replacing 
the nonqualifying mortgage with a qualifying mortgage.
    (iv) Examples. The following examples illustrate the application of 
paragraph (c)(1) of this section:


[[Page 121]]


    Example (1). State X issues obligations to be used to provide 
mortgages for owner-occupied residences. X contracts with bank M to 
originate and service the mortgages. The trust indenture and 
participation agreement require that the mortgages meet the mortgage 
eligibility requirements referred to in paragraph (c)(1). In addition, 
pursuant to procedures established by X, M obtains a signed affidavit 
from each applicant that the applicant intends to occupy the property as 
his or her principal residence within 60 days after the final closing 
and thereafter to maintain the property as his or her principal 
residence. Further, M obtains from each applicant copies certified by 
the Internal Revenue Service of the applicant's Federal tax returns for 
the preceding 3 years and examines each statement to determine whether 
the applicant has claimed a deduction for taxes on real property which 
was the applicant's principal residence pursuant to section 164(a)(1) or 
a deduction pursuant to section 163 for interest paid on a mortgage 
secured by real property which was the applicant's principal residence. 
Also in accordance with X's procedures, M obtains from each applicant a 
signed affidavit as to facts that are sufficient for M to determine 
whether the residence is located within X's jurisdiction and affidavits 
from the seller and the buyer that the purchase price and the new 
mortgage requirements have been met, and neither M nor X knows or has 
reason to believe that such affidavits are false. The mortgage 
instrument provides that the mortgage may not be assumed by another 
person unless X determines that the principal residence, 3-year, and 
purchase price requirements are met at the time of the assumption. These 
facts are sufficient evidence of the good faith of the issuer and meet 
the requirements of paragraph (c)(1)(i). Further, if 95 percent of the 
lendable proceeds are devoted to owner financing which according to 
these procedures meet the requirements of paragraphs (d), (e), (f), and 
(i), then the issue meets the requirements of paragraph (c)(1)(ii).
    Example (2). State Y issues obligations to be used to provide 
mortgages for owner-occupied residences. Y contracts with bank N to 
originate and service the mortgages. The trust indenture and 
participation agreement require that the mortgagor certify compliance 
with the requirements referred to in paragraph (c)(1). By itself, this 
certification is not sufficient evidence of the good faith of the issuer 
to meet the requirements referred to in paragraph (c)(1).
    Example (3). The facts are the same as in Example 1, except that M 
discovers through a verification procedure required by X that, at the 
time of closing, A fraudulently executed the residencey affidavit. 
Instead of occupying the property as a principal residence, A leased the 
property to B for one year. A did not use the property as his residence 
during the lease term. Thus, at the time that A's mortgage was executed 
the residence failed to meet the requirements of paragraph (d) of this 
section.


More than 95 percent of the lendable proceeds of the issue were devoted 
to residences which met all the requirements referred to in paragraph 
(c)(1) at the time the mortgages were executed. Furthermore, pursuant to 
a provision in the mortgage instrument M called the loan. Any failures 
with respect to other mortgages are corrected by M. Based on these 
facts, the issue meets the requirements of subparagraph (c)(1).
    Example (4). The facts are the same as in Example (1), except that 
the issuer requires copies of the applicant's signed tax returns that 
were filed with the Internal Revenue Service for the preceding 3 years 
but does not require that such returns be certified. If 95 percent of 
the lendable proceeds are devoted to owner financing which according to 
these procedures meet the requirements of paragraphs (d), (e), (f), and 
(i), then the issue meets the requirements of paragraph (c)(1)(ii).

    (2) Nonmortgage eligibility requirements. An issue of qualified 
mortgage bonds which fails to meet one or more of the requirements of 
paragraphs (g), (h), and (i) of this section and Sec. 6a.103A-1(a)(5) 
shall be treated as meeting such requirements if each of the following 
provisions is met.
    (i) The issuer in good faith attempted to meet all such 
requirements. This good faith requirement will be met if all reasonable 
steps are taken by the issuer to ensure that the issue complies with 
these requirements.
    (ii) Any failure to meet such requirements is due to inadvertent 
error, e.g., mathematical error, after taking reasonable steps to comply 
with such requirements.
    (iii) The following examples illustrate the application of this 
subparagraph (2):

    Example (1). City X issues obligations to finance owner-occupied 
residences. However, despite taking all reasonable steps to determine 
accurately the size of the market share limitation, as provided in 
paragraph (g)(3), the limit is exceeded because the amount of the 
mortgages originated in the area during the past 3 years is incorrectly 
computed as a result of mathematical error. Such facts are sufficient 
evidence of the good faith of the issuer to meet the requirements of 
paragraph (c)(2).

[[Page 122]]

    Example (2). City Y issues $25 million of bonds to finance single-
family, owner-occupied homes. Attorney A gives an opinion that the bonds 
satisfy the arbitrage requirements of Sec. 6a.103A-2(i) and Sec. 
6a.103A-1(a)(3). In fact, however, the legal conclusion reached by A is 
erroneous, and the bonds do not meet the requirements of Sec. 6a.103A-
2(i). The issue does not meet the requirements of subparagraph (c)(2) 
because the erroneous opinion does not constitute inadvertent error.

    (d) Residence requirements--(1) In general. An issue meets the 
requirements of this paragraph only if all of the residences for which 
owner financing is provided under the issue meet the requirements of 
this paragraph. A residence meets the requirements of this paragraph 
only if--
    (i) It is a single-family residence (as defined in Sec. 6a.103A-
1(b)(6)) which, at the time the mortgage is executed or assumed, can 
reasonably be expected by the issuer to become the principal residence 
of the mortgagor within a reasonable time after the financing is 
provided; and
    (ii) It is located within the jurisdiction of the authority issuing 
the obligation.
    (2) Affidavit. The requirements of subparagraph (1)(i) of this 
paragraph may normally be met if the mortgagor executes an affidavit of 
his intent to use the residence as his principal residence within a 
reasonable time (e.g., 60 days) after the financing is provided.
    (3) Principal residence. Whether a residence is used as a principal 
residence depends upon all the facts and circumstances of each case, 
including the good faith of the mortgagor. A residence which is 
primarily intended to be used in a trade or business shall not satisfy 
the requirements of this paragraph. For purposes of the preceding 
sentence, any use of a residence which does not qualify for a deduction 
allowable for certain expenses incurred in connection with the business 
use of a home under section 280A shall not be considered as a use in a 
trade or business. Except for certain owner-occupied residences 
described in paragraph (b)(6) of Sec. 6a.103A-1, a residence more than 
15 percent of the total area of which is reasonably expected to be used 
primarily in a trade or business does not satisfy the requirements of 
this subparagraph. Further, a residence used as an investment property 
or a recreational home does not satisfy the requirements of this 
subparagraph.
    (4) Residence. (i) The term ``residence'' includes stock held by a 
tenant-stockholder in a cooperative housing corporation (as those terms 
are defined in section 216(b) (1) and (2)). It does not include property 
such as an appliance, a piece of furniture, a radio, etc., which, under 
applicable local law, is not a fixture. The term also includes factory-
made housing which is permanently fixed to real property. The 
determination of whether factory-made housing is permanently fixed to 
real property shall be made on the basis of the facts and circumstances 
of each particular case.
    (ii) Land. Land appurtenant to a residence shall be considered as 
part of the residence only if such land reasonably maintains the basic 
livability of the residence and does not provide, other than 
incidentally, a source of income to the mortgagor.
    (5) Examples. The following examples illustrate the application of 
this paragraph (d):

    Example (1). A contracts to purchase a new residence from B. Since B 
is unable to move from the residence until 1 month after the scheduled 
closing date, A agrees to lease the residence to B for 1 month at a rent 
equal to the fair rental value. A applies for a mortgage to be provided 
from the proceeds of a qualified mortgage bond. In light of all the 
facts and circumstances in the case, the fact that A temporarily leases 
the residence to B does not prevent the residence from being considered 
as property that can reasonably be expected to be used as A's principal 
residence within a reasonable period of time after financing is 
provided.
    Example (2). C contracts to purchase a new residence located on 2 
acres of land in city X. City X has a zoning regulation which prevents 
the subdividing of any lot in that part of the city for use as a private 
residence into parcels of less than 2 acres. In light of all the facts 
and circumstances in the case, the fact that the residence is located on 
2 acres of land appurtenant to the residence does not prevent the entire 
property from being considered as property to be used by C as a 
residence.
    Example (3). D contracts to purchase a new residence located on 40 
acres of land that D intends to farm. Any financing provided for the 
purchase of that portion of the property intended to be farmed will not 
be considered

[[Page 123]]

as financing provided for an owner-occupied residence.

    (e) 3-year requirement--(1) In general. An issue meets the 
requirements of this paragraph only if each of the mortgagors to whom 
owner financing is provided under the issue meets the requirements of 
this paragraph. A mortgagor meets the requirements of this paragraph 
only if the mortgagor had no present ownership interest in a principal 
residence at any time during the 3-year period prior to the date on 
which the mortgage is executed. For purposes of the preceding sentence, 
the mortgagor's interest in the residence with respect to which the 
financing is being provided shall not be taken into account.
    (2) Exceptions. Subparagraph (1) shall not apply with respect to--
    (i) Any financing provided with respect to a targeted area residence 
(as defined in Sec. 6a.103A-2(b)(3)),
    (ii) Any qualified home improvement loan (as defined in Sec. 
6a103A-2(b)(9)), and
    (iii) Any qualified rehabilitation loan (as defined in Sec. 
6a.103A-2(b)(10)).
    (3) Multiple mortgagors. In the event that there is more than one 
mortgagor with respect to a particular residence, each of such 
mortgagors must meet the 3-year requirement. A person who is liable 
under a note secured by the mortgage but who does not have a present 
ownership interest in a residence subject to the mortgage need not meet 
the 3-year requirement. For example, where a parent of a home purchaser 
cosigns the note for a child but the parent takes no interest in the 
residence, it is not necessary that the parent meet the 3-year 
requirement since the parent is not a mortgagor of the residence.
    (4) Included interests. Examples of interests which constitute 
present ownership interests are the following:
    (i) A fee simple interest;
    (ii) A joint tenancy, a tenancy in common, or tenancy by the 
entirety;
    (iii) The interest of a tenant-shareholder in a cooperative;
    (iv) A life estate;
    (v) A land contract (i.e., a contract pursuant to which possession 
and the benefits and burdens of ownership are transferred although legal 
title is not transferred until some later time); and
    (vi) An interest held in trust for the mortgagor (whether or not 
created by the mortgagor) that would constitute a present ownership 
interest if held directly by the mortgagor.
    (5) Excluded interests. Examples of interests which do not 
constitute present ownership interests are the following:
    (i) A remainder interest;
    (ii) A lease with or without an option to purchase;
    (iii) A mere expectancy to inherit an interest in a principal 
residence;
    (iv) The interest that a purchaser of a residence acquires on the 
execution of a purchase contract; and
    (v) An interest in other than a principal residence during the 
previous 3 years.
    (f) Purchase price requirements--(1) In general. An issue meets the 
requirements of this paragraph only if the acquisition cost (as defined 
in Sec. 6a.103A-2(b)(8)) of each residence, other than a targeted area 
residence, for which owner financing is provided does not exceed 90 
percent of the average area purchase price applicable to such residence. 
In the case of a targeted area residence (as defined in Sec. 6a.103A-
2(b)(3)), the acquistion cost may not exceed 110 percent of the average 
area purchase price applicable to such residence.
    (2) Exception. Paragraph (1) shall not apply with respect to any 
qualified home improvement loan (as defined in Sec. 6a.103A-2(b)(9)).
    (3) Average area purchase price. The term ``average area purchase 
price'' means, with respect to any residence, the average purchase price 
of all single-family residences in the statistical area (as defined in 
Sec. 6a.103A-2(b)(7)) in which the residence being financed is located 
for the most recent 12-month period for which sufficient statistical 
information is available. The determination whether a particular 
residence meets the purchase price requirement shall be made as of the 
date on which the commitment to provide the financing is made or, if 
earlier, the date of purchase of the residence.
    (4) Special rules. (i) In the case of a qualified rehabilitation 
loan, the requirements of this paragraph are met if the mortgagor's 
adjusted basis in the

[[Page 124]]

property as of the completion of the rehabilitation (including the cost 
of the rehabilitation) meets the requirements of paragraph (f)(1). For 
this purpose, a rehabilitated residence is to be treated as a residence 
which has been previously occupied.
    (ii) The determination of average area purchase price shall be made 
separately with respect to--
    (A) Residences which have not been previously occupied;
    (B) Residences which have been previously occupied; and
    (C) One-family, two-family, three-family, and four-family 
residences.
    (5) Safe harbor limitation. (i) For purposes of meeting the 
requirements of this paragraph, an issuer may rely upon average area 
purchase price limitations published by the Treasury Department for the 
statistical area in which a residence is located. These safe harbor 
limitations will be effective for the period stated at the time of 
publication. An issuer may use a limitation different from such safe 
harbor limitation for any statistical area (as defined in Sec. 6a.103A-
2(b)(7)) for which the issuer has more accurate and comprehensive data.
    (ii) The following example illustrates the application of 
subparagraph (5)(i):

    Example. The average area purchase price safe harbor limitation for 
new single-family residences published by the Treasury Department for 
the second half of 1981 for the jurisdiction of governmental unit X is 
$41,500. However, on July 1, 1981, X determines that its average area 
purchase price for new single-family residences is actually $43,000. 
Such determination is based on a comprehensive survey of residential 
housing sales in the jurisdiction over the previous calendar year. The 
data accumulated are based on records maintained by the county clerk's 
office in X's jurisdiction, which enables X to compute average area 
purchase prices separately for new and used residences and for one-, 
two-, three-, and four-family residences. X cannot reasonably update 
such data more often than once a year. X may use average area purchase 
prices computed from these data for mortgages made from July 1, 1981, 
through June 30, 1982, rather than the safe harbor published by the 
Treasury Department.

    (g) Limitation on aggregate amount of qualified mortgage bonds 
issued during any calendar year--(1) In general. An issue meets the 
requirements of this section only if the aggregate amount of bonds 
issued pursuant thereto, when added to the sum of (i) the aggregate 
amount of qualified mortgage bonds previously issued by the issuing 
authority during the calendar year and (ii) the amount of qualified 
mortgage bonds which the issuing authority previously elected not to 
issue under section 25(c)(2)(A)(ii) and the regulations thereunder 
during the calendar year, does not exceed the applicable limit (``market 
limitation'') for such authority for such calendar year.
    (2) State housing finance agency. Except as provided in paragraph 
(g)(4) of this section, the market limitation for any State housing 
finance agency for any calendar year shall be 50 percent of the State 
ceiling for such year. For purposes of the preceding sentence, if any 
State has more than one housing finance agency all such agencies shall 
be treated as a single agency.
    (3) Other issuers. Except as provided in paragraph (g)(4), the 
market limitation for any issuing authority (other than a State housing 
finance agency) for any calendar year is an amount equal to that 
authority's proportionate share of 50 percent of the State ceiling 
amount for such calendar year. The proportionate share is an amount 
which bears the same ratio to 50 percent of the State ceiling for such 
year as--
    (i) The average annual aggregate principal amount of mortgages 
executed during the immediately preceding 3 calendar years for single-
family, owner-occupied residences located within the jurisdiction of 
such issuing authority, bears to
    (ii) An average determined in the same way for the entire State.
    (4) Constitutional home rule city. (i) In determining the market 
limitation for any constitutional home rule city (as defined in 
paragraph (b)(2) of this section), subparagraph (3) shall be applied by 
substituting ``100 percent'' for ``50 percent.''
    (ii) In a State with one or more constitutional home rule cities, in 
computing the market limitation for issuers other than constitutional 
home rule cities, the State ceiling amount for any calendar year shall 
be reduced by the aggregate market limitation for

[[Page 125]]

such year for all constitutional home rule cities in the State.
    (5) Overlapping jurisdictions. (i) For purposes of subparagraph (3) 
of this paragraph, if an area is within the jurisdiction of two or more 
governmental units, such area shall be treated as only within the 
jurisdiction of the unit having jurisdiction over the smallest 
geographical area. However, the governmental unit with jurisdiction over 
the smallest geographical area may enter into a written agreement to 
allocate all or a designated portion of such overlapping area to the 
governmental unit having jurisdiction over the next smallest 
geographical area.
    (ii) Where two governmental units have authority to issue mortgage 
subsidy bonds and both governmental units have jurisdiction over the 
identical geographical area, the aggregate principal amount of mortgages 
on residences located within that area shall be allocated to the 
governmental unit having broader sovereign powers.
    (6) State ceiling. (i) Except as provided in paragraph (g)(6)(v), 
the State ceiling applicable to any State for any calendar year shall be 
the greater of--
    (A) 9 percent of the average annual aggregate principal amount of 
mortgages executed during the immediately preceding 3 calendar years for 
single-family, owner-occupied residences located within the jurisdiction 
of such State, or
    (B) $200,000,000.

Only single-family owner-occupied residences (without regard to the 
definition of such term under Sec. 6a.103A-1(b)(6)) may be used in 
determining the market limitation regardless of whether or not 
residences with up to four family units are to be financed by the 
program. First and second mortgages or mortgages used to refinance an 
existing mortgage shall be used in making such determination. Liens, 
special assessments, and similar encumbrances may not be taken into 
consideration.
    (ii) For mortgages on residences with more than one family unit, the 
full amount of the mortgage shall be applied toward the market 
limitation and not merely that portion allocable to the owner-occupied 
unit.
    (iii) For purposes of determining the State ceiling amount 
applicable to any State for any calendar year an issuer may rely upon 
the State ceiling amount published by the Treasury Department for such 
calendar year. An issuer may rely on a different State ceiling amount 
than such safe-harbor limitation where the issuer has made a more 
accurate and comprehensive determination of such amount.
    (iv) The following example illustrates the application of 
subparagraphs (3) and (6) of this paragraph (g):

    Example. Pursuant to the allocation rule provided in subparagraph 
(3), City Y determines that its maximum market limitation in 1981 is 
$15,000,000. This determination is based on records maintained by the 
county clerk's office from which data for the preceding 3 years have 
been accumulated by City Y as to the number of sales of single-family 
homes in City Y's jurisdiction, the purchase price in each such sales 
transaction, the number of such sales that were financed by mortgages 
and the volume of second mortgages and refinancing on previously 
purchased owner-occupied single-family residences. This information, 
combined with estimates made by City Y of the average mortgage-loan-to-
purchase-price ratio and the ratio of sales of single-family, owner-
occupied residences to all sales of single-family residences from a 
representative sample of sales transactions, enables Y to estimate the 
preceding 3 years' annual aggregate mortgage volume by using the 
following formula:
[GRAPHIC] [TIFF OMITTED] TC16OC91.001


where

v=The preceding 3 years' average annual aggregate volume of mortgages on 
          single-family, owner-occupied residences in City Y,
ui=Number of sales of single-family residences,
wi=Average purchase price of all sales,
xi=Percent of all sales transactions that were financed with 
          mortgages,
yi=Estimated average mortgage-loan-to-purchase-price ratio,
zi=Estimated percent of sales that were owner-occupied 
          residences,
ai=Total volume of second mortgages and refinancing on 
          previously purchased owner-occupied, single-family residences,
i=The annual period of calculation, and
t=The current year.

City Y determines its applicable limit for 1981 based on the following 
formula:

L=0.5 (v/s) r, where

L=Market limitation for City Y for the current year,

[[Page 126]]

s=The preceding 3 years' average annual aggregate volume of mortgages on 
          single-family, owner-occupied residences in State X, and
r=Ceiling for State X (i.e., r=the greater of .09s or $200,000,000).

City Y may use the Treasury estimate of s which will be published with 
the mortgage volume safe harbor limitation. City Y may rely on its 
determination of its market limitation for obligations issued during 
1981.

    (v) Reduction in State ceiling. If for any calendar year an issuer 
of mortgage credit certificates, as defined in section 25 and the 
regulations thereunder, fails to meet the requirements of section 25 
(d)(2) and the regulations thereunder, relating to the limit on the 
aggregate amount of mortgage credit certificates that may be issued, the 
applicable State ceiling under paragraph (g)(6)(i) of this section for 
the State in which the program operates will be reduced by 1.25 times 
the correction amount (as defined in section 25 (f)(2) and the 
regulations thereunder) with respect to that failure for the calendar 
year following the calendar year in which the Commissioner determines 
the correction amount with respect to that failure.
    (7) Excess obligations. Where an issue of obligations when added to 
the aggregate amount of bonds issued by the same issuing authority in 
the same calendar year exceeds the market limitation determined in 
accordance with this paragraph (g), no portion of the issue will be 
treated as a qualified mortgage bond issue, and interest on such 
obligations shall be subject to Federal income taxation. However, 
previously issued qualified mortgage bond issues which met the market 
limitation at the time of their issuance will not cease to be qualified 
mortgage bond issues even though a subsequent issue causes the aggregate 
amount of obligations to exceed such limitation for a calendar year.
    (8) Transitional rule obligations. In applying this paragraph (g) to 
any calendar year, there shall not be taken into account any bond which, 
by reason of section 1104 of the Mortgage Subsidy Bond Tax Act of 1980 
(94 Stat. 2670) (relating to transitional rules), receives the same tax 
treatment as bonds issued on or before April 24, 1979.
    (9) Procedure for providing a different allocation. (i) A State may, 
by law enacted after December 5, 1980, provide a different formula for 
allocating the State ceiling amount among the governmental units in such 
State (other than constitutional home rule jurisdictions) having 
authority to issue qualified mortgage bonds.
    (ii) The governor of any State may proclaim a different formula than 
provided in subparagraphs (g)(2) and (g)(3) for allocating the State 
ceiling amount among the governmental units in such State having 
authority to issue qualified mortgage bonds. The authority of the 
governor to proclaim a different formula shall not apply after the 
earlier of--
    (A) The 1st day of the 1st calendar year beginning after the 1st 
calendar year after 1980 during which the legislature of the State met 
in regular session, or
    (B) The effective date of any State legislation dealing with such 
ceiling enacted after December 5, 1980.

If, on or before either date, the governor of any State exercises the 
authority to provide a different allocation, such allocation shall be 
effective until the date specified in (B).
    (iii) Unless otherwise provided in a State constitutional amendment 
or by law changing the home rule provisions adopted in the manner 
provided by the State constitution, the allocation of that portion of 
the State ceiling which is allocated to any constitutional home rule 
city may not be changed by the governor or State legislature unless such 
city agrees to such different allocation.
    (iv) Where a State elects to make a different allocation in 
accordance with subdivision (i) or (ii) of this subparagraph, the 
determination as to whether a particular bond issue meets the 
requirements of paragraph (g) of this section will be based upon the 
allocation in effect at the time such bonds were issued. Moreover, the 
authority to provide for a different allocation may not be used directly 
or indirectly to increase the State ceiling amount.
    (v) An issuing authority located in a State with one or more 
constitutional home rule cities may use an alternative method to those 
provided in

[[Page 127]]

subparagraphs (2), (3), and (4) for determining such issuing authority's 
market limitation if, prior to issuing any obligations for the calendar 
year, it demonstrates to the satisfaction of the Commissioner that--
    (A) The use of the methods provided in subparagraph (2), (3), or (4) 
would impose an unreasonable hardship on the issuing authority, and
    (B) Such alternative method is reasonable.
    (h) Portion of loans required to be placed in targeted areas--(1) In 
general. An issue meets the requirements of this paragraph only if--
    (i) The portion of the lendable proceeds (as defined in Sec. 
6a.103A-2(b)(1)) of the issue specified in subparagraph (2) is made 
available for owner financing of targeted area residences (as defined in 
Sec. 6a.103A-2(b)(3)) for at least 1 year after the date on which owner 
financing is first made available with respect to targeted area 
residences, and
    (ii) The issuer attempts with reasonable diligence to place such 
proceeds in qualified mortgages.

Proceeds are considered first made available with respect to targeted 
area residences on the date on which any financing of mortgages with the 
lendable proceeds of an issue first becomes available. Reasonable 
diligence requires that the issuer and the loan originators use 
reasonable efforts in trying to place mortgages in targeted areas, such 
as by advertising that mortgage funds are available for targeted areas. 
Reasonable diligence is not shown by merely providing in the governing 
instruments that the required amount be set aside for targeted areas.
    (2) Specified portion. The specified portion of lendable proceeds of 
an issue required to be made available in targeted areas is the lesser 
of--
    (i) 20 percent of the lendable proceeds, or
    (ii) 40 percent of the average annual aggregate principal amount of 
mortgages executed during the immediately preceding 3 calendar years for 
single-family, owner-occupied residences in targeted areas within the 
jurisdiction of the issuing authority.
    (3) Safe harbor. For purposes of computing the required portion of 
proceeds specified in subparagraph (2)(ii) of this paragraph, where such 
provision is applicable, an issuer may rely upon the amount produced by 
the following formula:
[GRAPHIC] [TIFF OMITTED] TC16OC91.002

where

P=Required portion to be made available in targeted areas,
X=Average annual aggregate principal amount of mortgages executed during 
          the immediately preceding 3 calendar years for single-family, 
          owner-occupied residences within the State in which the 
          issuing jurisdiction is located,
Y=The total population within the State, based on the most recent 
          decennial census for which data are available, and
Z=The total population in the targeted areas located within the issuer's 
          jurisdiction, based on the most recent decennial census for 
          which data are available.


The issuing jurisdiction may use the Treasury Department estimate of X 
which will be published with the mortgage volume safe harbor limitation.
    (4) Minimum amount. (i) The specified portion required to be made 
available in targeted areas is a minimum amount. More than the minimum 
amount may be (but need not be) made available in targeted areas.
    (ii) With respect to any proceeds not required to be made available 
in targeted areas, the requirements of this paragraph do not abrogate 
the requirement of the arbitrage rules that due diligence be used in 
placing lendable proceeds into mortgages.
    (i) Arbitrage and investment gain--(1) In general. An issue meets 
the requirements of this paragraph only if such issue meets the 
requirements of subparagraphs (2), (3), and (4) of this paragraph. For 
purposes of these requirements, all determinations of yield, effective 
interest rates, and amounts required to be paid or credited to 
mortgagors under paragraph (i)(4)(i) of this section shall be made on an 
actuarial basis taking into account the present value of money. The 
requirements of section 103A(i) and this paragraph are applicable in 
addition to the requirements of section 103(c) and Sec. Sec. 1.103-13, 
1.103-14, and 1.103-15.
    (2) Effective rate of mortgage interest not to exceed bond yield by 
more than 1

[[Page 128]]

percentage point--(i) Maximum yield. An issue of qualified mortgage 
bonds shall be treated as meeting the requirements of this subparagraph 
only if the excess of--
    (A) The effective rate of interest on the mortgages financed by the 
issue, over
    (B) The yield on the issue,

is not greater over the term of the issue than 1 percentage point.
    (ii) Effective rate of interest. (A) In determining the effective 
rate of interest on any mortgage for purposes of this subparagraph, 
there shall be taken into account all fees, charges, and other amounts 
borne by the mortgagor which are attributable to the mortgage or to the 
bond issue. Such amounts include points, commitment fees, origination 
fees, servicing fees, and prepayment penalties paid by the mortgagor.
    (B) Items that shall be treated as borne by the mortgagor and shall 
be taken into account in calculating the effective rate of interest also 
include--
    (1) All points, commitment fees, origination fees, or similar 
charges borne by the seller of the property;
    (2) The excess of any amounts received from any person other than 
the mortgagor by any person in connection with the acquisition of the 
mortgagor's interest in the property over the usual and reasonable costs 
incurred by a person acquiring like property where owner financing is 
not provided through the use of qualified mortgage bonds.
    (C) The following items shall not be treated as borne by the 
mortgagor and shall not be taken into account in calculating the 
effective rate of interest:
    (1) Any expected rebate of arbitrage profit (as required by Sec. 
6a.103A-2(i)(4)).
    (2) Any application fee, survey fee, credit report fee, insurance 
fee or similar settlement or financing cost to the extent such amount 
does not exceed amounts charged in such area in cases where owner 
financing is not provided through the use of qualified mortgage bonds. 
For example, amounts paid for FHA, VA, or similar private mortgage 
insurance on an individual's mortgage need not be taken into account so 
long as such amounts do not exceed the amounts charged in the area with 
respect to a similar mortgage that is not financial with qualified 
mortgage bonds. Premiums charged for pool mortgage insurance will be 
considered amounts in excess of the usual and reasonable amounts charged 
for insurance in cases where owner financing is not provided through the 
use of qualified mortgage bonds.
    (D)(1) Where amounts other than those derived from the proceeds of a 
mortgage subsidy bond are used to finance single-family residences such 
amounts will not be treated as the proceeds of a qualified mortgage bond 
issue and will not be subject to the limitations set forth in 
subparagraphs (2), (3), and (4) of this paragraph (i). Such amounts may, 
however, be treated as proceeds for purposes of the requirements of 
section 103(c) and the regulations thereunder. Thus, the portion of the 
mortgage pool financed by the proceeds of a qualified mortgage bond 
issue will be subject to the limitations of subparagraphs (2), (3), and 
(4) of this paragraph (i), while the portion not provided with bond 
proceeds will not be subject to such limitations. The interest rate, 
points, origination fees, servicing fees, and other amounts charged with 
respect to that portion of a mortgage loan financed with non-bond 
amounts may not exceed the reasonable and customary amount which would 
be charged where financing is not provided through a qualified mortgage 
bond issue. Where the charge does exceed such reasonable and customary 
amount, any excess will be taken into account in computing the effective 
interest rate on the portion of the loan provided with the proceeds of 
the qualified mortgage bond issue. Furthermore, where such fees and 
other charges are less than the reasonable and customary charges, the 
issuer may not allocate that portion of the charges on the loan amounts 
made with bond proceeds which is equal to such differential to loan 
amounts made with non-bond proceeds.
    (2) If any mortgage is allocated to two or more sources of funds, 
the receipt of amounts which are described in paragraph (i)(2)(ii) (A) 
and (B) of this section, repayments of principal, or payments of 
interest on such mortgage must be allocated to each source of funds.

[[Page 129]]

    (E) The effective rate of interest on any mortgage shall be 
determined in a manner consistent with actuarial methods and shall take 
into account the discounted value of all amounts from the time received 
to an amount equal to the ``purchase price'' of the mortgage. Such 
discount rate is the effective rate of interest on the mortgages. The 
``purchase price'' of a mortgage means the net amount loaned to the 
mortgagor. For example, if a mortgage loan is in the amount of $30,000 
and the mortgagor is charged one point ($300) as an origination fee 
which amount is deducted from loan proceeds available to the mortgagor, 
the purchase price is $29,700. If interest on an issue is paid 
semiannually, all regular monthly mortgage payments and prepayments of 
principal may be treated as being received at the end of each semiannual 
debt service period.
    (1) If interest on an issue is paid semiannually, all regular 
monthly mortgage payments may be treated as being received at the end of 
each semiannual debt service period.
    (2) Prepayments of principal shall be treated as being received on 
the last day of the month in which the issuer reasonably expects to 
receive such prepayments.
    (F) The rate shall be determined on a composite basis for all 
mortgages financed by the issue.
    (iii) Example. The following example illustrate the provisions of 
subparagraph (2)(ii) of this paragraph:

    Example. Purchaser A contracts with seller B, who is represented by 
real estate agent C, for the purchase of B's residence for $65,000. A 
applies to County X for a mortgage provided by the proceeds of a 
qualified mortgage bond. County X requires that agent C provide it with 
a principal residence affidavit as well as verify the purchase price of 
the residence and the location of the purchasers previous residences. 
Due to the increased administrative burden imposed on agent C by County 
X, C charges B a real estate commission of 8 percent ($5,200), rather 
than 6 percent ($3,900). The normal real estate commission is 6 percent. 
Since the 8 percent commission charged by C and paid by B is in excess 
of the usual and reasonable real estate commission where owner financing 
is not provided through the use of qualified mortgage bonds, 2 percent 
($1,300) shall be treated as borne by A and taken into account in 
calculating the effective rate of interest on the mortgage.

    (iv) Prepayment assumption In determining the affective rate of 
interest on mortgages, it shall be assumed that the mortagage prepayment 
rate for mortgages made out of both original proceeds and mortgages that 
the issuer expects with reasonable certainty to be made out of 
prepayments of principal will be equal to 100 percent of the rate set 
forth in the most recent mortgage maturity experience table for 
mortgages having the same term insured under section 203 of the National 
Housing Act and published by the Federal Housing Administration in 
``Survivorship and Decrement Tables for HUD/FHA Home MORTGAGE Insurance 
Program'' for the region, or, if available, the State in which the 
residence is located. For purposes of applying these tables, either the 
original balance method or the declining balance method of calculating 
mortgage loan prepayments may be used. For proceeds used to finance 
qualified home improvement loans or shorter term qualified 
rehabilitation loans for which there are no comparable FHA mortgage 
maturity experience tables, the assumption used by the issuer as to the 
rate of prepayment shall be based upon the reasonable expectations of 
the issuer, as reflected, where applicable, by the issuer's prior 
experience with such loans.
    (v) Net losses. The projected net losses on the mortgage pool (after 
foreclosure and payment of insurance proceeds), based on the most recent 
default experience for the area in which the residences are located, 
shall be taken into consideration in calculating the effective rate of 
interest on the mortgages. However, where mortgages provided under an 
issue are insured with FHA, VA, or private mortgage insurance, in 
conjunction with pool mortgage insurance, the expected net losses will 
be presumed to be zero. In the event that the actual losses on the 
mortgage pool exceed the projected net losses which were taken into 
consideration in calculating the effective rate of interest on the 
mortgages, investment proceeds earned from nonmortgage assets may be 
used to recover the excess losses and

[[Page 130]]

need not be paid or credited to the mortgagors under Sec. 6a.103A-
2(i)(4).
    (vi) Yield on the issue. (A) The yield on an issue of qualified 
mortgage bonds shall be calculated on the basis of--
    (1) The issue price, and
    (2) An expected maturity for the bonds which is consistent with the 
prepayment assumption required under subparagraph (2)(iv) of this 
paragraph.

The expected maturity will be considered consistent with such prepayment 
assumption if all prepayments are assumed to be used to call bonds 
proportionately (i.e., a ``strip'' call). The preceding sentence shall 
not apply to prepayments of mortgages provided from original proceeds to 
the extent such prepayments are used to provide mortgages.
    (B) For purposes of (1) of this subdivision (vi), the term ``issue 
price'' shall have the same meaning as in section 1232(b)(2). Thus, in 
general, such term means the initial offering price to the public, not 
including bond houses and brokers, or similar persons or organizations 
acting in the capacity of underwriters or wholesalers, at which price a 
substantial amount of such obligations were sold or, if privately 
placed, the price paid by the first buyer of such obligations or the 
acquisition cost of the first buyer.
    (3) Nonmortgage investments--(i) Maximum investment. Except as 
provided in subdivision (ii) of this subparagraph, an issue meets the 
requirements of this subparagraph only if--
    (A) At no time during any bond year does the aggregate amount 
invested in nonmortgage investments, e.g., reasonably required reserve 
funds, with a yield materially higher than the yield on the issue exceed 
150 percent of the debt service on the issue for the current bond year, 
and
    (B) Such aggregate amount invested in nonmortgage assets with a 
yield materially higher than the yield on the issue is promptly and 
appropriately reduced as mortgages are repaid.

The amount subject to the maximum investment rule in subdivision (i)(A) 
of this subparagraph includes the original bond proceeds, investment 
proceeds and repayments of principal on the mortgages. For purposes of 
subdivision (B), the amount described in subdivision (A) shall be 
considered promptly and appropriately reduced if beginning in the first 
bond year after the expiration of the temporary period for original 
proceeds described in subdivision (ii)(A) of this subparagraph, such 
amount is reduced within 30 days of the beginning of each bond year by 
an amount equal to the difference between the average scheduled monthly 
mortgage receipts for the bond year (excluding any receipts that were 
scheduled with respect to mortgages that were discharged in the 
preceding bond year) and the average scheduled monthly mortgage receipts 
for the preceding bond year.
    (ii) Temporary periods. Subparagraph (3)(i) of this paragraph shall 
not apply to--
    (A) Proceeds (including prepayments of principal designated to be 
used to acquire additional mortgages) of the issue invested for an 
initial temporary period not to exceed 1 year (1\1/2\ years for proceeds 
required to be set aside for placing mortgages in targeted areas) until 
such proceeds are needed for mortgages, and
    (B) Repayments of principal and interest on mortgages that are 
contributed to a bona fide debt service fund (as defined in Sec. 1.103-
13(b)(12)) and invested for a 13-month temporary period as provided in 
Sec. 1.103-14(b)(10).
    (iii) Debt service defined. For purposes of subparagraph (3)(i)(A) 
of this paragraph, the debt service on the issue for any bond year is 
the scheduled amount of interest and amortization of principal payable 
for such year with respect to such issue. There shall not be taken into 
account amounts scheduled with respect to any bond which has been 
retired before the beginning of the bond year.
    (iv) Nonmortgage investments. A nonmortgage investment is any 
investment other than an investment in a qualified mortgage. For 
example, a mortgage-secured certificate or obligation is a nonmortgage 
investment. Investment earnings from participation fees (described in 
Sec. 6a.103A-1(b)(5)) are treated as investment proceeds on nonmortgage 
investments unless such fees are used to pay debt service or to finance 
owner occupied residences.

[[Page 131]]

    (v) Bonds issued after June 30, 1993. Section 1.148-2(f)(2)(iv) 
applies to bonds issued after June 30, 1993, in lieu of this paragraph 
(i)(3).
    (4) Arbitrage and investment gains to be used to reduce costs of 
owner financing--(i) Rebate requirement. An issue shall be treated as 
meeting the requirements of this subparagraph only if an amount equal to 
the sum of:
    (A) The excess of--
    (1) The net amount earned on all nonmortgage investments pursuant to 
subparagraph (3)(i) and (ii) of this paragraph (other than investments 
attributable to an excess described in this subdivision (A)) over
    (2) The amount which would have been earned if the investments were 
invested at a rate equal to the yield on the issue, plus
    (B) Any income attributable to the excess described in subdivision 
(A),--

shall be paid or credited to the mortgagors as rapidly as practicable. 
Such amount may be disproportionately distributed to the mortgagors if 
the larger portion of such amount is distributed to lower income 
mortgagors. The determination of the excess described in subdivision (A) 
shall take into account any reinvestment of nonmortgage investment 
receipts and any gain or loss realized on the disposition of nonmortgage 
investments. In addition, where nonmortgage investments are retained by 
the issuer after retirement of an issue, any unrealized gains or losses 
as of the date of retirement of such issue must be taken into account, 
in calculating the amount to be rebated to the mortgagors. The amount 
described in subdivision (A)(2) is the amount that would have been 
earned if the investments in nonmortgage obligations were invested at a 
rate equal to the yield on the issue calculated in the same manner as 
provided in Sec. 6a.103A-2(i)(2)(vi) and by using the same compounding 
method. For purposes of subdivision (B), any income attributable to the 
excess described in subdivision (A) shall be taken into account whether 
or not such income exceeds the yield on the bonds.
    (ii) Computation period. Whether earnings are amounts described in 
subdivision (i) (A) or (B) of this subparagraph shall be determined by 
making computations on an annual basis. For example, if at the end of 
the first year the earnings on nonmortgage investments exceed the amount 
that could have been earned if such investments were invested at the 
bond yield, the amount of earnings equal to such difference constitutes 
an excess described in subdivision (i)(A) of this subparagraph. In the 
following year, investment proceeds earned on such excess must be taken 
into account, whether or not such earnings exceed the yield on the 
bonds, and may not be treated as ``negative arbitrage''.
    (iii) Paid or credited. For purposes of subdivision (i) of this 
subparagraph, amounts are paid or credited to mortgagors as rapidly as 
practicable if such amounts are paid or credited to such mortgagors at 
the time the mortgagor discharges the mortgage, for example, through 
prepayment of the entire principal amount or through making the last 
regular payment on the mortgage. The amount paid or credited to the 
mortgagors must have a present value at least equal to the present value 
of the amount described in subdivision (i) of this subparagraph, using 
the yield on the bonds as the discount rate. In the case of prepayments, 
the cumulative amount required to be rebated under subparagraph (4)(i) 
of this paragraph may be determined as of a date before the actual 
prepayment but not more than 1 year earlier than the date of prepayment. 
Except as provided in subparagraph (2)(v) or subparagraph (4)(iv) of 
this paragraph, such amount may not be subject to the claim of any 
party, e.g., a bondholder, and may not be paid over to any party other 
than the mortgagor or the United States.
    (iv) Reduction where issuer does not use full 1 percentage point. 
(A) The amount required to be paid or credited to mortgagors under 
subparagraph (4)(i) of this paragraph shall be reduced by the amount 
which (if it were treated as an interest payment made by mortgagors) 
would result in the excess referred to in subparagraph (2)(i) of this 
paragraph being equal to 1 percentage point. Such amount shall be fixed 
and determined as of the yield determination date. This fixed dollar 
amount may be received by the issuer at any time but may not be adjusted 
for the time of

[[Page 132]]

payment. Such fixed dollar amount shall be equal to the difference 
between the purchase price of mortgages financed by the proceeds of the 
issue and the present value of expected payments of principal and 
interest on such mortgages, using a discount rate equal to the bond 
yield plus 1 percentage point.
    (B) The following example illustrates the provisions of subparagraph 
(4)(iv)(A) of this paragraph:

    Example. In 1981, County X issues obligations to provide mortgages 
for owner-occupied residences. The yield paid on the obligations is 10 
percent, and the effective rate of interest on the mortgages provided by 
the proceeds of such obligations is 9.75 percent. X maintains a 
reasonably required reserve fund which is invested at 15 percent and 
intends to recover that additional amount computed in the manner 
described in subparagraph (4)(iv) which could have been earned from 
investment of the proceeds in mortgages with an effective interest rate 
of 11 percent from the arbitrage earned from the reserve fund 
nonmortgage assets. X plans to recover such amount from the arbitrage 
over a period of 3 years; thus, X will not recover such amount until 
1984. X may not adjust the amount to be received to account for the time 
when such amount will be received.

    (v) Election to pay United States. Subparagraph (4)(i) of this 
paragraph shall be satisfied with respect to any issue if the issuer 
elects in writing before issuing the obligations to pay over to the 
United States--
    (A) Not less frequently than once each 5 years after the date of 
issue, an amount equal to 90 percent of the aggregate amount described 
in subdivision (i) earned during such period (and not theretofore paid 
to the United States), and
    (B) Not later than 30 days after the redemption of the last 
obligation, 100 percent of such aggregate amount not theretofore paid to 
the United States.
    (j) New mortgages--(1) In general. An issue meets the requirements 
of this paragraph only if no part of the proceeds of such issue is to be 
used to acquire or replace an existing mortgage. All of the lendable 
proceeds must be used to provide mortgage loans to persons who did not 
have a mortgage (whether or not paid off) on the residence securing the 
mortgage note at any time prior to the execution of the mortgage.
    (2) Exceptions. For purposes of this paragraph, the replacement of--
    (i) Construction period loans,
    (ii) Bridge loans or similar temporary initial financing, and
    (iii) In the case of a qualified rehabilitation, an existing 
mortgage,

shall not be treated as the acquisition or replacement of an existing 
mortgage. Generally, temporary initial financing is any financing which 
has a term of 24 months or less.
    (3) Assumptions. An issue meets the requirement of this paragraph 
only if a mortgage with respect to which owner financing has been 
provided under such issue may be assumed only if the requirements of 
paragraphs (d), (e), and (f) of this section are met with respect to 
such assumption. The determination of whether these requirements are met 
is based upon the facts as they exist at the time of the assumption as 
if the loan were being made for the first time. For example, the 
purchase price requirement is to be determined by reference to the 
average area purchase price at the time of the assumption and not when 
the mortgage was originally placed. If the bond documents and relevant 
mortgage instruments provide that a mortgage may be assumed only if the 
issuer has determined that the conditions stated in this subparagraph 
are satisfied, the good faith and 95-percent requirements of paragraph 
(c)(1) (i) and (ii) of this section will be considered satisfied with 
respect to the requirements of this subparagraph at the time the 
mortgages were executed. However, any failure to meet the requirements 
of this subparagraph at the time a mortgage is assumed is subject to the 
remedy requirement in paragraph (c)(1)(iii) of this section.
    (4) Examples. The following examples illustrate the application of 
this paragraph (j):

    Example (1). In June 1981 mortgagor A obtained a mortgage from a 
private lending institution in order to construct a house on land which 
A purchased without a mortgage in May 1981. In January 1982 A applies to 
obtain permanent financing on the residence from a program sponsored by 
State housing finance agency Y. Such program is funded with the proceeds 
of qualified mortgage bonds. If A meets the other requirements of this 
section, A qualifies for such permanent financing since the replacing of 
construction

[[Page 133]]

financing is not treated as the acquisition or replacement of an 
existing mortgage.
    Example (2). In June 1981 mortgagor B purchased a new residence in a 
targeted area but was unable to sell his former residence. Therefore, B 
obtained temporary financing for his new residence until his former 
residence was sold. In October 1981 B applies to County Z to obtain 
financing from a program funded with proceeds of qualified mortgage 
bonds. Such financing is needed by B to replace the temporary financing 
for his new residence. If B meets the other requirements of this 
section, the mortgage qualifies for such permanent financing since the 
permanent financing replaces temporary initial financing.
    Example (3). In 1979 mortgagor C purchased a residence but was 
unable to obtain financing from a program sponsored by County W because 
such program prohibited loans from the program which were in excess of 
80 percent of the fair market value of the property. Therefore, in 1979 
C obtained financing from a private lending institution with the 
intention of refinancing when he accumulated sufficient equity in the 
property. In 1981 C has accumulated sufficient equity in the property so 
as to comply with the requirements of the program. C applies to County W 
to refinance under the program, which is funded with the proceeds of 
qualified mortgage bonds. Even if C met the other requirements of this 
section, the mortgage would fail to meet the requirement of paragraph 
(j) since such a mortgage would replace an existing mortgage.
    Example (4). In 1969 mortgagor D purchased a residence and obtained 
financing from a private lending institution. In 1981 D applies to 
County U for a loan for the rehabilitation of the property and for the 
refinancing of the existing mortgage. The program is funded with 
qualified mortgage bonds. If D meets the other requirements of this 
section the mortgage qualifies for such permanent financing since the 
replacement of the mortgage is not treated as the replacement or 
acquisition of an existing mortgage.
    Example (5). In 1950 mortgagor E purchased a residence, obtaining a 
mortgage from a private lending institution to finance the purchase 
price. In 1980 E completed repaying the mortgage. In 1981 E applies for 
a loan from a program sponsored by State housing finance agency X and 
funded with the proceeds of qualified mortgage bonds. The mortgage does 
not meet the requirements of paragraph (j) since E had a previous 
mortgage on his residence, even though such mortgage was previously 
released.

    (k) Information reporting requirement. See Sec. 1.103A-2(k) for 
rules relating to section 103A(j)(3).
    (l) Policy statement. See Sec. 1.103A-2(l) for rules relating to 
section 103A(j)(5).
    (m) State certification. See Sec. 1.103A-2(m) for rules relating to 
section 103A(j)(4).

(98 Stat. 901 (26 U.S.C. 103A(j) (3) and (4)); 68A Stat. 917 (26 U.S.C. 
7805))

[T.D. 7780, 46 FR 34314, July 1, 1981, as amended by T.D. 7794, 46 FR 
55514, Nov. 10, 1981; T.D. 7817, 47 FR 22361, May 24, 1982; T.D. 7819, 
47 FR 24701, June 8, 1982; T.D. 7821, 47 FR 28094, June 29, 1982; T.D. 
7995, 49 FR 48293, Dec. 12, 1984; T.D. 8023, 50 FR 19355, May 8, 1985; 
T.D. 8049, 50 FR 35547, Sept. 3, 1985; T.D. 8476, 58 FR 33553, June 18, 
1993]



Sec. 6a.103A-3  Qualified veterans' mortgage bonds.

    (a) In general. A qualified veterans' mortgage bond shall not be 
treated as a mortgage subsidy bond, and the interest shall be exempt 
from Federal income taxation.
    (b) Qualified veterans' mortgage bond. (1) With respect to 
obligations issued prior to July 19, 1984, the term ``qualified 
veterans' mortgage bond'' means any issue of obligations--
    (i) Which meets the requirements of Sec. 6a.103A-1, Sec. 6a.103A-
2(j) (1) and (2), and this section;
    (ii) Substantially all of the proceeds of which are to be used to 
provide financing for single-family, owner-occupied residences (which 
meet the requirements of Sec. 6a.103A-1(b)(6) and Sec. 6a.103A-2(d)) 
for veterans; and
    (iii) Payment of the principal and interest on which is secured by a 
pledge of the full faith and credit of the issuing State.

A qualified veterans' mortgage bond does not include any bond that is an 
industrial development bond under section 103(b).
    (2) With respect to obligations issued after July 18, 1984, the term 
``qualified veterans' mortgage bond'' means any issue of obligations--
    (i) Which meets the requirements of Sec. 6.103A-1, Sec. 6a.103A-
2(d) (relating to residence requirements), (j) (1) and (2) (relating to 
new mortgage requirement), and (k) (relating to information reporting 
requirement), and this section;
    (ii) Substantially all of the proceeds of which are to be used to 
provide financing for qualified veterans; and
    (iii) Payment of the principal and interest on which is secured by a 
pledge

[[Page 134]]

of the full faith and credit of the issuing State.

A qualified veterans' mortgage bond does not include any bond that is an 
industrial development bond under section 103(b).
    (c) Qualified veteran. (1) An issue meets the requirements of this 
paragraph only if each of the mortgagors to whom owner financing is 
provided is a qualified veteran.
    (2) With respect to obligations issued prior to July 19, 1984, the 
term ``qualified veteran'' means any veteran.
    (3) With respect to obligations issued after July 18, 1984, the term 
``qualified veteran'' means any veteran who--
    (i) Served on active duty at some time before January 1, 1977, and
    (ii) Applied for financing before the later of--
    (A) The date 30 years after the date on which such veteran left 
active service, or
    (B) January 1, 1985.
    (4) The term ``veteran'' shall have the same meaning as in 38 U.S.C. 
101(2), that is, a person who served in the active military, naval, or 
air service, and who was discharged or released therefrom under 
conditions other than dishonorable.
    (d) Husband and wife. For purposes of this section, if a residence 
is to be owned by a husband and wife as joint tenants, as tenants by the 
entirety, or as community property, and if one spouse is a veteran, then 
both spouses shall be treated as satisfying the requirements of 
paragraph (c) of this section.
    (e) Substantially all. For purposes of this section, the term 
``substantially all'' shall have the same meaning as in Sec. 1.103-8.
    (f) Qualified home improvement loan. The term ``qualified home 
improvement loan'' means the financing (whether or not secured by a 
mortgage) of alterations, repairs, and improvements on, or in connection 
with, an existing single-family, owner-occupied residence by a veteran 
who is the owner thereof. The alterations, repairs, and improvements, 
however, must substantially protect or improve the basic livability or 
energy efficiency of the property, such as the renovation of plumbing or 
electric systems, the installation of improved heating or air 
conditioning systems, the addition of living space, or the renovation of 
a kitchen area. Items that will not be considered to substantially 
protect or improve the basic livability of the property include swimming 
pools, tennis courts, saunas, or other recreational or entertainment 
facilities.
    (g) Volume limitation--(1) In general. In the case of obligations 
issued after June 22, 1984, an issue meets the requirements of this 
paragraph only if the aggregate amount of obligations issued pursuant 
thereto, when added to the aggregate amount of qualified veterans' 
mortgage bonds previously issued by the State during the calendar year, 
does not exceed the State veterans limit for such calendar year. In 
determining the aggregate amount of qualified veterans' mortgage bonds 
issued in calendar year 1984, obligations issued prior to June 23, 1984, 
shall not be taken into account.
    (2) State veterans limit. (i) The State veterans limit for any State 
is the amount equal to--
    (A) The aggregate amount of qualified veterans' mortgage bonds 
issued by the State during the period beginning on January 1, 1979, and 
ending on June 22, 1984 (not including the amount of any qualified 
veterans' mortgage bonds actually issued during the calendar year, or 
the applicable portion of 1984, in such period for which the amount of 
such bonds was the lowest), divided by
    (B) The number (not to exceed 5) of calendar years after 1978 and 
before 1985 during which the State issued qualified veterans' mortgage 
bonds.

In determining the number of calendar years after 1978 and before 1985 
during which the State issued qualified veterans' mortgage bonds, any 
qualified veterans' mortgage bonds issued after June 22, 1984, shall not 
be taken into account. A State that did not issue qualified veterans' 
mortgage bonds during the period beginning on January 1, 1979, and 
ending on June 22, 1984, may not issue qualified veterans' mortgage 
bonds after June 22, 1984.
    (ii) In the case of any obligation which has a term of 1 year or 
less and which was issued to provide financing for property taxes, the 
amount taken

[[Page 135]]

into account under this paragraph with respect to such obligation shall 
be \1/15\ of its principal amount.
    (3) Examples. The following examples illustrate the provisions of 
this paragraph:

    Example (1). State R issued the following issues of qualified 
veterans' mortgage bonds: a $200 million issue on March 31, 1979, a $150 
million issue on May 1, 1980, a $75 million issue on September 1, 1981, 
a $200 million issue on June 5, 1982, a $125 million issue on March 1, 
1983, a $60 million issue on April 1, 1984, and a $100 million issue on 
September 1, 1984. R issued no other issues of qualified veterans' 
mortgage bonds during the period beginning January 1, 1979, and ending 
on December 31, 1984. The aggregate amount of qualified veterans' 
mortgage bonds issued during the period January 1, 1984, through June 
22, 1984 ($60 million), is not taken into account in determining R's 
State veterans limit because that is the lowest aggregate amount of 
qualified veterans' mortgage bonds issued during the calendar year or 
the applicable portion of 1984, in the period beginning on January 1, 
1979, and ending on June 22, 1984. Thus, R's State veterans limit is 
$150 million ($750 million (which is the sum of $200 million, $150 
million, $75 million, $200 million, and $125 million) divided by 5). The 
September 1, 1984, issue is not included in determinig the State 
veterans limit because that issue was issued after June 22, 1984. The 
September 1, 1984, issue of qualified veterans' mortgage bonds meets the 
requirements of Sec. 6a. 103A-3 (g) since the aggregate amount of 
qualified veterans' mortgage bonds issued in calendar year 1984 (not 
including obligations issued prior to June 23, 1984), does not exceed 
the State veterans limit.
    Example (2). State S issued a $100 million issue of qualified 
veterans' mortgage bonds on March 31, 1984. S issued no other issues of 
qualified veterans' mortgage bonds during the period beginning on 
January 1, 1979, and ending on June 22, 1984. The aggregate amount of 
qualified veterans' mortgage bonds issued in the calendar year, or the 
applicable portion of 1984, in the period January 1, 1979, through June 
22, 1984, for which the amount of bonds was the lowest is zero. Thus, 
the State veterans limit for S is $100 million (($100 million minus $0) 
divided by 1).

    (h) Good faith compliance efforts--(1) Mortgage eligibility 
requirements. An issue of qualified veterans' mortgage bonds issued 
after July 18, 1984, which fails to meet the requirements of section 
103A(o)(1), Sec. 6a.103A-2(d) relating to residence requirements), and 
Sec. 6a.103A-2(j) (1) and (2) (relating to new mortgage requirements) 
shall be treated as meeting such requirements if each of the following 
provisions is complied with:
    (i) The issuer in good faith attempted to meet all such requirements 
before the mortgages were executed. Good faith requires that the trust 
indenture, participation agreements with loan originators, and other 
relevant instruments contain restrictions that permit the financing of 
residences only in accordance with such requirements. In addition, the 
issuer must establish reasonable procedures to ensure compliance with 
such requirements. Such procedures include reasonable investigations by 
the issuer to satisfy such requirements.
    (ii) Ninety-five percent or more of the lendable proceeds (as 
defined in Sec. 6a.103A-2(b)(1)) that were devoted to owner-financing 
were devoted to residences with respect to which, at the time the 
mortgages were executed, all such requirements were met. In determining 
whether a person is a qualified veteran the issuer may rely on copies of 
the mortgagor's certificate of discharge indicating that the mortgagor 
served on active duty at some time before January 1, 1977, and stating 
the date on which the mortgagor left active service provided that 
neither the issuer nor its agent knows or has reason to believe that 
such affidavit is false. Where a particular mortgage fails to meet more 
than one of these requirements, the amount of the mortgage will be taken 
into account only once in determining whether the 95-percent requirement 
is met. However, all of the defects in the mortgage must be corrected 
pursuant to subdivision (iii).
    (iii) Any failure to meet such requirements is corrected within a 
reasonable period after such failure is discovered. For example, 
failures can be corrected by calling the nonqualifying mortgage or by 
replacing the nonqualifying mortgage with a qualifying mortgage.
    (2) Nonmortgage eligibility requirements. An issue of qualified 
veterans' mortgage bonds issued after July 18, 1984, which fails to meet 
the requirements of paragraph (g) of this section

[[Page 136]]

shall be treated as meeting such requirements if each of the 
requirements of Sec. 6a.103A-2(c)(2) (i) and (ii) is met.

(98 Stat. 901(26 U.S.C. 103A(j) (3) and (4)); 68A Stat. 917 (26 U.S.C. 
7805))

[T.D. 7780, 46 FR 34314, July 1, 1981; 46 FR 37890, July 23, 1981, as 
amended by T.D. 7995, 49 FR 48297, Dec. 12, 1984]



Sec. 6a.6652(g)-1  Failure to make return or furnish statement required
under section 6039C.

    (a) Amount imposed. In the case of each failure to meet the 
requirements of--
    (1) Section 6039C, relating to information returns with respect to 
United States real property interests, or
    (2) Section 6039C(b)(3), relating to statements to be provided to 
substantial investors in United States real property interests,

on or before the date prescribed therefor (determined with regard to any 
extension of time for filing), the person failing to meet such 
requirement shall pay $25 for each day during which such failure 
continues.
    (b) Limitation--(1) Domestic corporations and nominees. The maximum 
penalty which may be imposed under paragraph (a) of this section on a 
domestic corporation or nominee for failure to meet the requirements of 
section 6039C(a) for any calendar year is $25,000.
    (2) Partnerships, trusts, estates and foreign corporations. The 
maximum penalty which may be imposed on a partnership, trust, estate or 
foreign corporation for failure to meet the requirements of section 
6039C(b) for any calendar year is $25,000.
    (3) Foreign persons holding U.S. real property interests and 
nominees. The maximum penalty which may be imposed on a foreign person 
holding a U.S. real property interest or on a nominee holding a U.S. 
real property interest for a foreign person for failure to meet the 
requirements of section 6039C(c) for any calendar year is the lesser of 
$25,000 or 5 percent of the aggregate of the fair market value of the 
U.S. real property interests owned by such person at any time during 
such calendar year.
    (c) Definitions--(1) Fair market value. The term ``fair market 
value'' as used in this section is defined in Sec. 6a.897-1 (in the 
Federal Register 47 FR 41541, Sept. 21, 1982).
    (2) Failure. The term ``failure to meet the requirements of section 
6039C'' includes the failure to file a return for any calendar year on 
the date prescribed therefor (determined with regard to any extension of 
time for such filing), or the omission on a return of one or more items 
of information required by section 6039C and the regulations thereunder 
to be provided on the return. It also includes the failure to furnish a 
statement required by section 6039C(b)(3). The failure to furnish a 
return required under section 6039C(b)(1) and the failure to furnish a 
statement to a substantial investor as required by section 6039C(b)(3), 
are separate failures for purposes of paragraph (a) of this section. 
Also, each failure to provide a statement to each substantial investor 
is a separate failure for purposes of paragraph (a). Thus, if an entity 
has 100 substantial investors as defined in section 6039C and fails to 
furnish any of the required statements to substantial investors, there 
are 100 separate failures to furnish the required statement.
    (3) Aggregate of the fair market value of the United States real 
property interests. The ``aggregate of the fair market value of the U.S. 
real property interests'' is the total of the fair market values of each 
U.S. real property interest owned at any time during the calendar year. 
Fair market value is determined as of December 31 of such year for 
property held at the end of the year and on the date of disposition for 
property disposed of during the year.
    (d) Attribution of ownership. For purposes of calculating the 
penalty limitation under Sec. 6a.6652(g)-1(b)(3) with respect to 
failure to meet the requirements of section 6039C(c), U.S. real property 
interests held by a partnership, trust, or estate shall be treated as 
owned proportionately by its partners or beneficiaries.
    (e) Exceptions--(1) Provision of security. If a person otherwise 
required by section 6039C to file a return for a calendar year or 
furnish a statement to a substantial investor complies with the 
requirements of Sec. 6a.6039C-5 relating to furnishing security in lieu 
of filing

[[Page 137]]

such return, or is exempt, by virtue of Sec. 6a.6039C-5(f), from filing 
a return for such year with respect to its U.S. real property interests 
held, no penalty will be imposed under paragraph (a) of this section for 
failure to file such return or furnish such statement.
    (2) Showing of reasonable cause. No amount shall be imposed under 
paragraph (a) of this section for a failure described in such paragraph 
if it is established to the satisfaction of the Director of the Internal 
Revenue Service Center, 11601 Roosevelt Boulevard, Philadelphia, 
Pennsylvania 19155 or in the case of returns concerning the Virgin 
Islands, the Commissioner of the Bureau of Internal Revenue, Tax 
Division, Charlotte Amalie, St. Thomas, V.I. 00801, that such failure is 
due to reasonable cause and not to willful neglect. An affirmative 
showing of reasonable cause must be made in the form of a written 
statement, made under the penalties of perjury, containing a declaration 
by the person failing to make a return or furnish a statement under 
section 6039C setting forth all the facts alleged as reasonable cause. 
Whether reasonable cause is shown may depend upon the subsection of 
section 6039C under which the failure occurs. However, the fact that 
stock of a foreign corporation, or any other interest in any entity to 
which this section applies, is registered in bearer form does not 
constitute reasonable cause under this paragraph (e)(2) of this section 
for failure to comply with the requirements of section 6039C(b). Also, 
the fact that disclosure of ownership would contravene a secrecy law of 
any country does not constitute reasonable cause for failure to comply 
with the requirements of section 6039C(b). Where a return has been filed 
and there is an omission of one or more items of information required by 
section 6039C and the regulations thereunder, one of the facts to be 
considered in determining whether such failure is due to reasonable 
cause is the materiality of the item omitted.
    (3) Spouse or parent already filed with respect to same property. If 
an individual files a return with respect to all U.S. real property 
interests held by such individual in accordance with Sec. 6a.6039C-
4(b), no penalty shall be imposed under this section on such 
individual's spouse or minor child for failure to file a return under 
Sec. 6a.6039C-4 with respect to the same property.
    (f) Manner of payment. The amount imposed under paragraph (a) of 
this section on any person shall be paid in the same manner as tax upon 
the issuance of a notice and demand therefor.
    (g) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). Domestic corporation X is required under section 6039C 
(a) to make a return for calendar year 1982. X does not file such return 
on or before May 15, 1983 as required under Sec. 6a.6039C-1(c). The 
failure to file the return for calendar year 1982 continues throughout 
calendar years 1983, 1984, 1985, and 1986. The failure to file is not 
due to reasonable cause and no security has been furnished in lieu of 
filing. The maximum penalty which can be imposed on X for failure to 
file the 1982 return is $25,000, determined as follows:

------------------------------------------------------------------------
                                                              Cumulative
                                                   Penalty   penalty for
                                                   incurred   failure to
                                                   in given   file 1982
                                                     year       return
------------------------------------------------------------------------
Total penalty incurred in 1983 ($25 per day x        $5,750       $5,750
 230 days)......................................
Total penalty incurred in 1984 (a leap year):         9,150       14,900
 ($25 per day x 366 days).......................
Total penalty incurred in 1985 ($25 per day x         9,125       24,025
 365 days)......................................
Total penalty incurred in 1986 (lesser of $25           975       25,000
 per day x 365 days or $975 (remaining penalty
 which may be imposed)).........................
------------------------------------------------------------------------

    Example (2). The facts are the same as in example (1) except that X 
also fails to file a return under section 6039C (a) for calendar year 
1983. The failure to file its return for calendar year 1983 continues 
throughout calendar years 1984, 1985, 1986 and 1987. The total penalty 
which may be imposed on X for failure to file its return for calendar 
year 1983 is $25,000. The amount of penalty which can be imposed on X in 
calendar years 1984, 1985, 1986 and 1987 is determined as follows:

------------------------------------------------------------------------
                                                                  Total
                                             Penalty   Penalty   penalty
                                            for 1982  for 1983     for
                                             failure   failure    given
                                                                  year
------------------------------------------------------------------------
Penalty incurred in 1984 (a leap year):
  For failure to file 1982 return ($25 per    $9,150  ........  ........
   day x 366 days)........................

[[Page 138]]

 
  For failure to file 1983 return ($25 per  ........    $5,750  ........
   day x 230 days)........................
                                                               ---------
    Total.................................  ........  ........   $14,900
                                                               =========
Penalty incurred in 1985:
  For failure to file 1982 return ($25 per     9,125  ........  ........
   day x 365 days)........................
  For failure to file 1983 return ($25 per  ........     9,125  ........
   day x 365 days)........................
                                                               ---------
    Total.................................  ........  ........    18,250
                                                               =========
Penalty incurred in 1986:
  For failure to file 1982 return (lesser        975  ........  ........
   of $25 per day x 365 days or $975
   (remaining penalty which may be
   imposed))..............................
  For failure to file 1983 return ($25 per  ........     9,125  ........
   day x 365 days)........................
                                                               ---------
    Total.................................  ........  ........    10,100
                                                               =========
Penalty incurred in 1987: For failure to    ........     1,000  ........
 file 1983 return (lesser of $25 per day x
 365 days or $1,000 (remaining penalty
 which may be imposed))...................
                                                               ---------
    Total.................................  ........  ........     1,000
------------------------------------------------------------------------

    Example (3). Foreign corporation Y is required under section 
6039C(b)(1) to make a return for calendar year 1982. In addition, Y is 
required under section 6039C(b)(3) to furnish statements to each 
substantial investor in U.S. real property interests. Y has 10 such 
substantial investors. Y does not file such return on or before May 15, 
1983 as required under Sec. 6a.6039C-1(c), nor does it furnish the 
required statements on or before January 31, 1983 as required under 
Sec. 6a.6039C-3(h). The failure to file the return for calendar year 
1982 and to furnish the required statements for 1982 continues 
throughout calendar years 1984 and 1985. The failure to meet the 
requirements of section 6039C(b) are not due to reasonable cause and no 
security has been furnished in lieu of filing. The total penalty which 
can be imposed on Y for failure to file the return and statements 
required under section 6039C(b) for calendar year 1982 is $25,000. The 
amount of penalty incurred by Y in calendar year 1983 for failure to 
file the return and statements for calendar year 1982 is $25,000, 
determined as follows:

Penalty incurred in 1982:
  For failure to file return ($25 per dayx230 days)...........    $5,750
  For each failure to furnish a statement required by section     19,250
   6039C(b)(3) ($25 per dayx10 statementsxthe 334 days from
   February 1, 1983 to December 31, 1983 ($83,500) but not
   more than $19,250 (which when added to $5,750 would total
   $25,000))..................................................
                                                               ---------
    Total.....................................................    25,000
 


Since Y has incurred the maximum penalty for failure to file its return 
and statements required for 1982 by the end of calendar year 1983, no 
further penalty for these failures is imposed.
    Example (4). Under section 6039C(c) foreign person Y is required to 
make a return for calendar year 1982. Y does not file such return on May 
15, 1983 and the failure is not due to reasonable cause. No security has 
been furnished in lieu of filing. All properties owned by Y in 1982 are 
U.S. real property interests. Y purchased property M in January 1982 
when its fair market value was $10,000. In March, Y purchased property N 
when its fair market value was $15,000. In November, Y sold property M 
for $20,000. The fair market value of property N on December 31, 1982, 
was $20,000. The total of the fair market values of M and N (M as of the 
date of its sale and N as of December 31, 1982) is $40,000. The maximum 
penalty which may be imposed on Y for failure to meet the requirements 
of section 6093C(c) for any calendar year is the lesser of $25,000 or 5 
percent of the aggregate of the fair market values of the U.S. real 
property interests owned by Y at any time during such calendar year. 
Since $2,000 (5 percent of $40,000) is less than $5,750 ($25 times 230 
days, the number of days in calendar year 1983 for which the failure 
continues), the maximum penalty which may be imposed on Y in 1983 is 
$2,000. Since the maximum penalty for the failure to file the 1982 
return is incurred in 1983, no amount may be imposed for Y's continuing 
failure to file the return for calendar year 1982 during calendar years 
after 1983.

    (h) Effective date. This section shall apply to 1980 and subsequent 
calendar years. The calendar year 1980 shall be treated as beginning on 
June 19, 1980 and ending on December 31, 1980.

[T.D. 7866, 48 FR 648, Jan. 6, 1983]



PART 7_TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT OF 
1976--Table of Contents



Sec.
7.48-1 Election to have investment credit for movie and television films 
          determined in accordance with previous litigation.
7.48-2 Election of forty-percent method of determining investment credit 
          for movie

[[Page 139]]

          and television films placed in service in a taxable year 
          beginning before January 1, 1975.
7.48-3 Election to apply the amendments made by sections 804 (a) and (b) 
          of the Tax Reform Act of 1976 to property described in section 
          50(a) of the Code.
7.57(d)-1 Election with respect to straight line recovery of 
          intangibles.
7.105-1 Questions and answers relating to exclusions of certain 
          disability income payments.
7.105-2 Substantial gainful activity.
7.465-1 Amounts at risk with respect to activities begun prior to 
          effective date; in general.
7.465-2 Determination of amount at risk.
7.465-3 Allocation of loss for different taxable years.
7.465-4 Insufficient records.
7.465-5 Examples.
7.704-1 Partner's distributive share.
7.936-1 Qualified possession source investment income.
7.999-1 Computation of the international boycott factor.
7.6039A-1 Information regarding carryover basis property acquired from a 
          decedent.
7.6041-1 Return of information as to payments of winnings from bingo, 
          keno, and slot machines.

    Authority: 26 U.S.C. 7805, unless otherwise stated.



Sec. 7.48-1  Election to have investment credit for movie and television
films determined in accordance with previous litigation.

    (a) Generally. Under section 804(c)(3) of the Tax Reform Act of 1976 
(Pub. L. 94-455, 90 Stat. 1595), any taxpayer who filed an action in any 
court of competent jurisdiction before January 1, 1976, for a 
determination of such taxpayer's rights to investment credit under 
section 38 of the Internal Revenue Code of 1954 with respect to any film 
placed in service in any taxable year beginning before January 1, 1975, 
may elect to have investment credit on all films placed in service in 
taxable years beginning before January 1, 1975, (except those subject to 
an election under section 804(e)(2) of the Act), determined as though 
section 804 of the Act (except section 804(c)(3) of the Act) had not 
been enacted.
    (b) Manner of making the election. The election allowed by section 
804(c)(3) of the Act may be made by a notification in the form of a 
letter signed by the taxpayer or an authorized representative of the 
taxpayer stating:
    (1) The taxpayer's name, address, and identification number;
    (2) The taxable years in which the films were placed in service with 
respect to which the election shall apply; and
    (3) The court in which the litigation was commenced and information 
adequate to identify the particular litigation, for example, the names 
of the litigants, the date the suit was commenced, and the court case or 
docket number of the litigation.

The letter should be sent to the Deputy Commissioner of Internal 
Revenue, Attention: CC:RL:Br2, Room 4617, 1111 Constitution Avenue, 
N.W., Washington, DC 20224.
    (c) Time for making the election. The election under section 
804(c)(3) of the Act must be made not later than January 3, 1977. If 
mailed, the cover containing the notification of such election must be 
postmarked not later than January 3, 1977.
    (d) Revocation of election. An election under section 804(c)(3) of 
the Act, once made, shall be irrevocable.

[T.D. 7449, 41 FR 56629, Dec. 29, 1976]



Sec. 7.48-2  Election of forty-percent method of determining investment
credit for movie and television films placed in service in a taxable 

year beginning before January 1, 1975.

    (a) General rule. Under section 804(c)(2) of the Tax Reform Act of 
1976 (90 Stat. 1595), taxpayers who placed movie or television films 
(here- inafter referred to as films and tapes) in service during taxable 
years beginning before January 1, 1975, may elect to have their 
investment credit on all such films and tapes determined under section 
46(c) of the Code using an amount equal to 40 percent of aggregate 
production costs in lieu of the basis of such property. If the election 
is made, 100 percent is the applicable percentage used in determining 
qualified investment under section 46(c) of the Code regardless of 
actual useful life. The election can be made only with respect to 
qualified films and tapes that are new section 38 property and the 
investment credit is allowed only to the extent that a taxpayer has an 
ownership interest in the film or tape. No investment credit is allowed 
under section 804(c)(2)

[[Page 140]]

of the Act on any film or tape that is not section 38 property or that 
was produced and shown exclusively outside of the United States. Thus, 
no election may be made under this section with respect to a film or 
tape which is suspension period property to which section 48(h) applies 
or to a film or tape which is termination period property to which 
section 49(a) applies. Any investment credit taken on any film or tape 
subject to the election is not subject to recapture because of an early 
disposition or because a film or tape otherwise ceases to be section 38 
property under section 47(a) of the Code. Thus, there will be no 
recapture because a film or tape is used outside the United States under 
section 48(a)(2) of the Code or section 804(c)(1)(C) of the Act, or 
because of any disposition under section 47(a)(7)(B) of the Code.
    (b) Time and manner of making an election--(1) Time for making the 
election. The election under section 804(c)(2) of the Act must be made 
not later than April 25, 1977.
    (2) Manner of making the election. An election under this section 
must be made by filing amended income tax returns for each taxable year 
beginning before January 1, 1975, in which films and tapes subject to 
the election were placed in service, together with a statement signed by 
the taxpayer containing the information described below. The amended 
returns and the statement must be filed with the district director 
having audit jurisdiction over the last return filed to which the 
election relates. Each amended return shall contain a schedule listing 
by name all films and tapes placed in service during the year to which 
the amended return relates and setting forth all computations necessary 
to determine the aggregate production costs of each such film or tape 
listed and the ownership interest of the taxpayer in each film or tape 
listed. In the case of a taxpayer which is a partner, shareholder of an 
electing small business corporation, or beneficiary of a trust or 
estate, such computations must be adequate to determine the ownership 
interest of the partnership, electing small business corporation, or 
trust or estate in each such film or tape, (a taxpayer which is a 
partner, shareholder, or beneficiary may satisfy the requirements of the 
preceding sentence by attaching to his amended return a copy of an 
amended return, if one is filed, of the partnership, electing small 
business corporation, or trust or estate which sets forth computations 
necessary to determine the ownership interest of the entity in each such 
film or tape.) No amended return need be filed for a taxable year if 
application of the election to films and tapes placed in service during 
that year would not affect tax liability for any taxable year.
    The statement shall contain the following information:
    (i) The taxpayer's name and taxpayer identification number (under 
section 6109 of the Code).
    (ii) A statement that the taxpayer is making the election under 
section 804(c)(2) of the Act.
    (iii) A statement that the taxpayer agrees that the period for 
assessment and collection under section 6501 of the Code will remain 
open until December 31, 1978, solely with respect to adjustments of tax 
liability attributable to investment credit allowed on films and tapes 
placed in service in each year covered by the election. Unless the 
district director notifies the taxpayer within 7 days of receipt of the 
statement that such extension is denied, it will be presumed that the 
district director consents to such extension. Of course, the period 
covered by this statement may be extended beyond December 31, 1978 by 
mutual agreement. This statement does not shorten the regular statutory 
period for any year or take precedence over a previous or subsequent 
agreement with the Internal Revenue Service extending the statutory 
period for any year.
    (iv) A list of the addresses used by the taxpayer on each return 
filed during each taxable year subject to the election.
    (v) A statement that the taxpayer consents to join in judicial 
proceedings to determine the investment credit allowable and entitlement 
to investment credit on any film or tape subject to the election, which 
meets all of the requirements set forth in paragraph (b)(3) of this 
section.
    (vi) A statement as to whether an election has been made by the 
taxpayer

[[Page 141]]

under section 804(e)(2) of the Act for films and tapes which are 
property described in section 50(a) of the Code which were placed in 
service in taxable years beginning before January 1, 1975.
    (vii) A list by name of all films or tapes placed in service during 
the years to which the election relates.
    (viii) With respect to each film or tape listed in paragraph 
(b)(2)(vii) of this section, a list of all producers, distributors, and 
persons with a participation interest (with addresses where available).
    (ix) In the case of an election made by a partner, shareholder of an 
electing small business corporation (as defined in section 1371(b) of 
the Code), or beneficiary, a statement indicating the name, taxpayer 
identification number, and address for tax return purposes of the 
respective partnership, electing small business corporation, or trust or 
estate.
    (3) Consent to join in judicial proceedings. No election may be made 
by any taxpayer unless the statement made under paragraph (b)(2)(v) of 
this section provides that the taxpayer shall:
    (i) Treat the determination of the investment credit allowable on 
each film or tape subject to an election as a separate cause of action;
    (ii) Make all reasonable efforts necessary to join in or intervene 
in any judicial proceeding in any court for determining the person 
entitled to, and the amount of, the investment credit allowable with 
respect to any film or tape covered by the election after receiving 
notice from the Commissioner of Internal Revenue or his delegate 
indicating that a conflicting claim to the investment credit for such 
film or tape is being asserted in such court by another person; and
    (iii) Consent to revocation of the election by the Commissioner of 
Internal Revenue or his delegate with respect to all films and tapes 
placed in service in taxable years for which the election applies, if 
the taxpayer fails to make all reasonable efforts necessary to join in 
or intervene in any judicial proceeding under paragraph (b)(3)(ii) of 
this section.
    (4) Who makes the election. The election must be made separately by 
each person who has an ownership interest. However, where a film or tape 
is owned by a partnership, electing small business corporation (as 
defined in section 1371(b) of the Code), or trust or estate, the 
election must be made separately by each partner, shareholder or 
beneficiary. The election is not to be made by a partnership or electing 
small business corporation, and is to be made by a trust or estate only 
if the trust or estate in determining its tax liability would be allowed 
investment credit on a film or tape subject to the election. The 
election of any partner, shareholder, beneficiary or trust or estate 
shall be effective regardless of whether any related partner, 
shareholder, beneficiary, or trust or estate makes the election.
    (5) Additional time to perfect election. A taxpayer that by April 
25, 1977, files a statement containing the information described in 
paragraph (b)(2) (i) through (v) of this section shall be deemed to have 
made a timely election under paragraph (b)(2) of this section if by July 
5, 1977, the taxpayer has complied with all of the requirements of 
paragraph (b)(2) of this section. If a taxpayer demonstrates to the 
satisfaction of the district director that it is unable to meet the July 
5, 1977, date even though it has made a good faith effort to do so, the 
district director may at his discretion extend that date to no later 
than October 4, 1977, for that taxpayer. Requests for extensions of the 
July 5, 1977, date should be addressed to the district director with 
whom the statement was filed.
    (c) Revocation of election--(1) Revocation by taxpayer. (i) Except 
as provided in paragraph (c)(1)(ii) of this section, an election made 
under section 804(c)(2) of the Act may not be revoked by a taxpayer 
unless consent to revoke the election is obtained from the Commissioner 
of Internal Revenue or his delegate. Application for consent to revoke 
the election will be accepted only if permanent regulations are issued 
which contain rules which may not reasonably have been anticipated by 
taxpayers at the time the election was made. Any permanent regulations 
will provide a reasonable period of time within which taxpayers will be 
permitted to apply for consent to revoke

[[Page 142]]

the election and will allow revocation (where revocation is not barred 
by the limitations on credit or refund inspection 6511 of the Code) in 
the event of a determination by the Commissioner of Internal Revenue or 
his delegate that such permanent regulations contain provisions that may 
not reasonably have been anticipated by taxpayers at the time of making 
such election.
    (ii) An election properly made under section 804(e)(2) of the Act, 
to have sections 48(k) and 47 (a)(7) of the Code apply to films and 
tapes which are property described in section 50(a) of the Code and 
which were placed in service in taxable years beginning before January 
1, 1975, shall automatically revoke any election under section 804(c)(2) 
of the Act with respect to such films and tapes. Such revocation does 
not require the consent of the Commissioner of Internal Revenue or his 
delegate.
    (2) Revocation by Commissioner. The Commissioner of Internal Revenue 
or his delegate shall revoke an election made under section 804(c)(2) of 
the Act if a taxpayer fails to make all reasonable efforts necessary to 
join in or intervene, in a judicial proceeding for determination of the 
person entitled to, and the amount of, the investment credit allowable 
with respect to any film or tape covered by the election after receiving 
notice from the Commissioner or his delegate which indicates that a 
conflicting claim to the investment credit for such film or tape is 
being asserted in court by another person.
    (d) Furnishing of supplementary information required. If these 
regulations are revised to require the furnishing of information in 
addition to that which was furnished with the amended returns and 
statement of election filed pursuant to paragraph (b) (2) and (3) of 
this section, the taxpayer must furnish such additional information in a 
statement addressed to the district director with whom the amended 
return and statement of election were filed.

((68A Stat. 917; 26 U.S.C. 7804); sec. 804(c)(2) (C) and (D) of the Tax 
Reform Act of 1976 (90 Stat. 1595))

[T.D. 7474, 42 FR 17123, Mar. 31, 1977; T.D. 7480, 42 FR 19479, Apr. 14, 
1977]



Sec. 7.48-3  Election to apply the amendments made by sections 804 (a) 
and (b) of the Tax Reform Act of 1976 to property described in section

50(a) of the Code.

    (a) General rule. Under section 804(e)(2) of the Tax Reform Act of 
1976 (90 Stat. 1596), taxpayers may elect to apply the amendments made 
by section 804 (a) and (b) of the Act to movie and television films that 
are property described in section 50(a) of the Code and that were placed 
in service in taxable years beginning before January 1, 1975.
    (b) Time for and manner of making election--(1) Time for making 
election. The election under section 804(e)(2) the Act must be made not 
later than October 4, 1977.
    (2) Manner of making election. The election under section 804(e)(2) 
shall be made by applying the same rules applicable under section 
804(c)(2) as described in Sec. 7.48-2(b) (2), (3), and (4) except that 
Sec. 7.48-2(b)(2)(ii) shall be read to require a statement that the 
taxpayer is making an election under section 804(e)(2) of the Act, and 
Sec. 7.48-2(b)(2)(vi) shall not apply. An election properly made under 
section 804(e)(2) of the Act may not be revoked after October 4, 1977.

(Sec. 804(e)(2), Tax Reform Act of 1976 (90 Stat. 1596))

[T.D. 7509, 42 FR 47828, Sept. 22, 1977]



Sec. 7.57(d)-1  Election with respect to straight line recovery of 
intangibles.

    (a) Purpose. This section prescribes rules for making the election 
permitted under section 57(d)(2), as added by the Tax Reform Act of 
1976. Under this election taxpayers may use cost depletion to compute 
straight line recovery of intangibles.
    (b) Election. The election under section 57(d) is subject to the 
following rules:
    (1) The election is made within the time prescribed by law 
(including extensions thereof) for filing the return for the taxable 
year in which the intangible drilling costs are paid or incurred or, if 
later, by July 25, 1978.
    (2) The election is made separately for each well. Thus, a taxpayer 
may make the election for only some of his or her wells.

[[Page 143]]

    (3) The election is made by using, for the well or wells to which 
the election applies, cost depletion to compute straight line recovery 
of intangibles for purposes of determining the amount of the preference 
under section 57(a)(11).
    (4) The election may be made whether or not the taxpayer uses cost 
depletion in computing taxable income.
    (5) The election is made by a partnership rather than by each 
partner.
    (c) Computation of cost depletion. For purposes of computing 
straight line recovery of intangibles through cost depletion, both 
depletable and depreciable intangible drilling and development costs for 
the taxable year are taken into account. They are treated as if 
capitalized, added to basis, and recovered under Sec. 1.611-2(a). Costs 
paid or incurred in other taxable years are not taken into account.

(Secs. 57(d) and 7805 of the Internal Revenue Code of 1954 (90 Stat. 
1551; 68A Stat. 917; 26 U.S.C. 57(d), 7805))

[T.D. 7541, 43 FR 17816, Apr. 26, 1978; 43 FR 18993, May 3, 1978]



Sec. 7.105-1  Questions and answers relating to exclusions of certain
disability income payments.

    The following questions and answers relate to the exclusion of 
certain disability income payments under section 105(d) of the Internal 
Revenue Code of 1954, as amended by sections 505 (a) and (c) of the Tax 
Reform Act of 1976 (90 Stat. 1566):

    Q-1: What effect on the sick pay exclusion does the new law have?
    A-1: The ``sick pay'' provisions of prior law (which allowed a 
limited exclusion from gross income of sick pay received before 
mandatory retirement age by active employees temporarily absent from 
work because of sickness or injury, as well as by disability retirees) 
have been replaced by provisions of the new law (which provide for a 
limited exclusion of disability payments but restrict its application to 
individuals retired on disability who meet certain requirements as to 
permanent and total disability, age, etc.) (Q-4). As a result of the 
more restrictive provisions of the new law, many taxpayers who qualified 
for the exclusion in previous taxable years will not be eligible to 
claim the disability payments exclusion beginning with the effective 
date of the new law.
    Q-2: What is the effective date of the new law relating to 
disability exclusion?
    A-2: The disability income exclusion and related annuity provisions 
of the Tax Reform Act of 1976 are effective for taxable years beginning 
on or after January 1, 1977. In addition, the Tax Reduction and 
Simplification Act of 1977 allows certain taxpayers to begin excluding 
pension or annuity costs in taxable years beginning in 1976. In the case 
of a retiree who uses the cash receipts and disbursements method of 
accounting, the new law applies to payments received on or after the 
effective date even if the payment is for a period before the effective 
date. Thus, a payment for December 1976 that is received in January 1977 
by a calendar-year, cash-basis taxpayer is controlled by the new law.
    Q-3: What are disability payments?
    A-3: In general, disability payments are amounts constituting wages 
or payments in lieu of wages made under provisions of a plan providing 
for the payment of such amounts to an employee for a period during which 
the employee is absent from work on account of permanent and total 
disability. Amounts paid to such an employee after mandatory retirement 
age is attained are not wages or payments in lieu of wages for purposes 
of the disability income exclusion.
    Q-4: Who is eligible to exclude disability payments?
    A-4: A taxpayer who receives disability payments in lieu of wages 
under a plan providing for the payment of such amounts may qualify for 
the exclusion provided all of the following requirements are met:
    (1) The taxpayer has not reached age 65 (see Q-9) before the end of 
the taxable year;
    (2) The taxpayer has not reached mandatory retirement age (see Q-8) 
before the beginning of the taxable year;
    (3) The taxpayer retired on disability (see Q-10) (or if retired 
prior to January 1, 1977 and did not retire on disability, would have 
been eligible to retire on disability at the time of such retirement);
    (4) The taxpayer was permanently and totally disabled (see Q-11) 
when the taxpayer retired (or if the taxpayer retired before January 1, 
1977, was permanently and totally disabled on January 1, 1976, or 
January 1, 1977); and
    (5) The taxpayer has not made an irrevocable election not to claim 
the disability income exclusion (see Q-17 through Q-19).
    Q-5: What limitations are placed on the amounts excludable?
    A-5: The amount of disability income that is excludable:
    (a) Cannot exceed the amount of the disability income payments 
received for any pay period;
    (b) Cannot exceed a maximum weekly rate of $100 per taxpayer. Thus, 
the maximum disability income exclusion allowable on a joint return (see 
Q-7) in the usual case where one spouse receives disability payments, 
generally, would be $5,200, and if both spouses

[[Page 144]]

received disability payments the maximum exclusion, generally, would be 
$10,400 ($5,200 for each spouse);
    (c) Cannot exceed, in the case of a disability income payment for a 
period of less than a week, a prorated portion of the amount otherwise 
excludable for that week (see Q-6); and
    (d) Cannot exceed, for the entire taxable year, the total amount 
otherwise excludable for such taxable year reduced, dollar for dollar, 
by the amount by which the taxpayer's adjusted gross income (determined 
without regard to the disability income exclusion) exceeds $15,000. 
Where a disability income exclusion is claimed by either or both spouses 
on a joint return, the taxpayer's adjusted gross income means the total 
adjusted gross income of both spouses combined (determined without 
regard to the disability income exclusion) (see also Q-7).
    Q-6: On what occasion is a taxpayer likely to receive part-week 
disability payments? How do you prorate such payments?
    A-6: Such part-week payments may be received when one of the 
following events occurs after the first day of the taxpayer's normal 
workweek: (a) the disability retirement commences: (b) the taxpayer 
reaches mandatory retirement age in a taxable year prior to the taxable 
year in which such taxpayer attains age 65; or (c) the taxpayer dies. To 
prorate a part-week disability income payment for purposes of the 
exclusion, the taxpayer must:
    (1) Determine the ``daily exclusion,'' which is the lesser of--
    (a) The taxpayer's daily rate of disability pay, or
    (b) $100 divided by the number of days in the taxpayer's normal 
workweek.
    (2) Multiply the daily exclusion by the number of days for which the 
part-week payment was made.

Thus, for a taxpayer whose normal workweek was Monday through Friday and 
whose retirement on permanent and total disability began on Wednesday, 
the first disability income payment would include a payment for a part-
week consisting of three days. Assuming that the daily exclusion 
determined in (1), above, is $20, the taxpayer's exclusion for the first 
week would be $60 ($20x3).
    Q-7: What filing restrictions apply to a married taxpayer who claims 
a disability income exclusion?
    A-7: A taxpayer married at the close of the taxable year who lived 
with his or her spouse at any time during such taxable year must file a 
joint return in order to claim the disability income exclusion. However, 
a taxpayer married at the close of the taxable year who lived apart from 
his or her spouse for the entire taxable year may claim the exclusion on 
either a joint or separate return.
    Q-8: What is ``mandatory retirement age''?
    A-8: Generally, mandatory retirement age is the age at which the 
taxpayer would have been required to retire under the employer's 
retirement program, had the taxpayer not become disabled.
    Q-9: Does a taxpayer reach age 65 on the day before his or her 65th 
birthday for purposes of the disability income exclusion, as is the case 
for purposes of the exemption for age and the credit for the elderly?
    A-9: No. For purposes of the disability income exclusion, a taxpayer 
reaches age 65 on the day of his or her 65th birthday anniversary. Thus, 
a taxpayer whose 65th birthday occurs on January 1, 1978, is not 
considered to reach age 65 during 1977, for purposes of the disability 
income exclusion.
    Q-10: What does ``retired on disability'' mean?
    A-10: Generally, it means that an employee has ceased active 
employment in all respects because of a disability and has retired under 
a disability provision of a plan for employees. However, an employee who 
has actually ceased active employment in all respects because of a 
disability may be treated as ``retired on disability'' even though the 
employee has not yet gone through formal ``retirement'' procedures, as 
for example, where an employer carries the disabled employee in a non-
retired status under the disability provisions of the plan solely for 
the purpose of continuing such employee's eligibility for certain 
employer-provided fringe benefits. In addition, such an employee may be 
treated as ``retired on disability'' even though the initial period 
immediately following his or her ceasing of employment on account of a 
disability must first be used against accumulated ``sick leave'' or 
``annual leave'' prior to the employee being formally placed in 
disability retirement status.
    Q-11: What is permanent and total disability?
    A-11: It is the inability to engage in any substantial gainful 
activity by reason of any medically determinable physical or mental 
impairment that:
    (a) Can be expected to result in death;
    (b) Has lasted for a continuous period of not less than 12 months; 
or
    (c) Can be expected to last for a continuous period of not less than 
12 months. The substantial gainful activity referred to is not limited 
to the activity, or a comparable activity, in which the individual 
customarily engaged prior to such individual's retirement on disability.
    See Sec. 7.105-2 for additional information relating to substantial 
gainful activity.
    Q-12: If a taxpayer retired on disability but it is not clear until 
the following taxable year that the disability as of the date of such 
retirement was permanent and total (so that the employee did not exclude 
any amount as disability income in the earlier taxable year), may the 
taxpayer file an amended return to claim the disability income exclusion 
for the taxable year in which

[[Page 145]]

such taxpayer retired on disability which was permanent and total?
    A-12: Yes.
    Q-13: What proof must a taxpayer furnish to establish the existence 
of permanent and total disability?
    A-13: If retired on disability before January 1, 1977: A certificate 
from a qualified physician attesting that--
    (a) The taxpayer was permanently and totally disabled on January 1, 
1976 or January 1, 1977; or
    (b) The records of the Veterans Administration show that the 
taxpayer was permanently and totally disabled as defined in 38 CFR 3.340 
or 3.342 on January 1, 1976 or January 1, 1977.
    If retired on disability during 1977 or thereafter: A certificate 
from a qualified physician attesting that--
    (a) The taxpayer was permanently and totally disabled on the date he 
or she retired; or
    (b) The records of the Veterans Administration show that the 
taxpayer was permanently and totally disabled as defined in 38 CFR 3.340 
or 3.342 on the date he or she retired.
    In either case, the taxpayer must attach the certificate or a copy 
of the certificate to his or her income tax return. The certificate 
shall give the physician's name and address. No certificate from any 
employer is required with regard to the determination of permanent and 
total disability.
    Q-14: For what period does a taxpayer eligible (see Q-4) for the 
disability income exclusion (without regard to the $15,000 income 
phaseout explained in Q-5) continue to be eligible for such exclusion?
    A-14: Unless the taxpayer earlier makes the irrevocable election not 
to claim the disability income exclusion described in Q-17 through Q-19, 
such taxpayer continues to be eligible until the earlier of:
    (a) The beginning of the taxable year in which the taxpayer reaches 
age 65; and
    (b) The day on which the taxpayer reaches mandatory retirement age.
    Q-15: May a taxpayer while eligible (see Q-4) for the disability 
income exclusion under the new law, exclude any applicable pension or 
annuity costs?
    A-15: No. This is true even though while eligible for the disability 
income exclusion, such taxpayer is unable to exclude any amount of the 
disability income payments because of the $15,000 income phaseout (see 
Q-5).
    Q-16: When will a taxpayer who is eligible (see Q-4) to exclude 
disability income payments (without regard to the $15,000 phaseout 
explained in Q-5) under the new law be able to exclude any applicable 
pension or annuity costs?
    A-16: In general, such a taxpayer will begin to exclude any of his 
or her pension or annuity costs under applicable rules of the Code 
beginning on the first day of the taxable year in which he or she 
attains age 65 or, if mandatory retirement age is attained in an earlier 
taxable year, beginning on the day the taxpayer attains mandatory 
retirement age.
    Q-17: May a taxpayer who is eligible (see Q-4) to exclude disability 
income payments (without regard to the $15,000 phaseout explained in Q-
5) under the new law begin to exclude applicable pension or annuity 
costs in an earlier taxable year?
    A-17: Yes, but such a taxpayer must make the election described in 
Q-18 and Q-19 in which case the taxpayer would no longer be eligible for 
the disability income exclusion.
    Q-18: What is an election not to claim the disability income 
exclusion?
    A-18: It is an irrevocable election for the taxable year for which 
the election is made, and each taxable year thereafter. If such an 
election is made the taxpayer will begin to recover tax-free, out of the 
payments, his or her annuity costs as provided under the applicable 
provision of the Code.
    Q-19: How does a taxpayer who is eligible to exclude disability 
income payments (without regard to the $15,000 phaseout explained in Q-
5) under the new law make this election?
    A-19: The election is made by means of a statement attached to the 
taxpayer's income tax return (or amended return) for the taxable year in 
which the taxpayer wishes to have the applicable annuity rule apply. The 
statement shall set forth the taxpayers qualifications to make the 
election (i.e., that the taxpayer is eligible (see Q-4) to exclude 
disability income payments (without regard to the $15,000 income 
phaseout explained in Q-5)) and that such taxpayer irrevocably elects 
not to claim the benefit of excluding disability income payments under 
section 105(d), as amended, for such taxable year and each taxable year 
thereafter. The election cannot be made for any taxable year beginning 
before January 1, 1976.
    Q-20: Did the changes made by the Tax Reduction and Simplification 
Act provide any relief to taxpayers eligible for the sick pay exclusion 
in taxable years beginning in 1976?
    A-20: Yes. As originally enacted, the more restrictive provisions of 
the disability income exclusion applied to taxable years beginning in 
1976. The Tax Reduction and Simplification Act postponed the effective 
date of these provisions for 1 year. Thus, taxpayers may claim the sick 
pay exclusion in taxable years beginning in 1976.

(Secs. 105(d) and 7805 of the Internal Revenue Code of 1954 (90 Stat. 
1566; 68A Stat. 917; 26 U.S.C. 105(d); 7805))

[T.D. 7450, 41 FR 56630, Dec. 29, 1976, as amended at 42 FR 2954, Jan. 
14, 1977; T.D. 7544, 43 FR 19655, May 8, 1978]

[[Page 146]]



Sec. 7.105-2  Substantial gainful activity.

    (a) Purpose. This section defines substantial gainful activity for 
purposes of section 105(d) and Sec. 7.105-1, prescribes rules for 
determining whether a taxpayer has the ability to engage in substantial 
gainful activity, and provides examples of the application of the 
definition and rules in specific factual situations.
    (b) Definition. Substantial gainful activity is the performance of 
significant duties over a reasonable period of time in work for 
remuneration or profit (or in work of a type generally performed for 
remuneration or profit).
    (c) General rules. (1) Full-time work under competitive 
circumstances generally indicates ability to engage in substantial 
gainful activity.
    (2) Work performed in self-care or the taxpayer's own household 
tasks, and nonremunerative work performed in connection with hobbies, 
institutional therapy or training, school attendance, clubs, social 
programs, and similar activities is not substantial gainful activity. 
However, the nature of the work performed may be evidence of ability to 
engage in substantial gainful activity.
    (3) The fact that a taxpayer is unemployed for any length of time is 
not, of itself, conclusive evidence of inability to engage in 
substantial gainful activity.
    (4) Regular performance of duties by a taxpayer in a full-time, 
competitive work situation at a rate of pay at or above the minimum wage 
will conclusively establish the taxpayer's ability to engage in 
substantial gainful activity. For purposes of paragraphs (c)(4) and 
(c)(5) of this section, the minimum wage is the minimum wage prescribed 
by section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended, 
29 U.S.C. 206(a)(1).
    (5) Regular performance of duties by a taxpayer in a part-time, 
competitive work situation at a rate of pay at or above the minimum wage 
will conclusively establish the taxpayer's ability to engage in 
substantial gainful activity, if the duties are performed at the 
employer's convenience.
    (6) In situations other than those described in paragraphs (c)(4) 
and (c)(5) of this section, other factors, such as the nature of the 
duties performed, may establish a taxpayer's ability to engage in 
substantial gainful activity.
    (d) Examples. The following examples illustrate the application of 
the definition in paragraph (b) of this section and the rules in 
paragraph (c) of this section in specific factual situations. In 
examples 1 through 5, the facts establish that the taxpayers are able to 
engage in substantial gainful activity and, therefore, are not entitled 
to claim the disability income exclusion of section 105(d). In examples 
6 through 9, the facts do not, of themselves, establish the taxpayers' 
ability or inability to engage in substantial gainful activity. In these 
situations, all the facts and circumstances must be examined to 
determine whether the taxpayers are able to engage in substantial 
gainful activity.

    Example (1). Before retirement on disability, taxpayer worked for a 
hotel as night desk clerk. After retirement, the taxpayer is hired by 
another hotel as night desk clerk at a rate of pay exceeding the minimum 
wage. Since the taxpayer regularly performs duties in a full-time 
competitive work situation at a rate of pay at or above the minimum 
wage, he or she is able to engage in substantial gainful activity.
    Example (2). A taxpayer who retired on disability from employment as 
a sales clerk is employed as a full-time babysitter at a rate of pay 
equal to the minimum wage. Since the taxpayer regularly performs duties 
in a full-time, competitive work situation at a rate of pay at or above 
the minimum wage, he or she is able to engage in substantial gainful 
activity.
    Example (3). A taxpayer retired on disability from employment as a 
teacher because of terminal cancer. The taxpayer's physician recommended 
continuing employment for therapeutic reasons and taxpayer accepted 
employment as a part-time teacher at a rate of pay in excess of the 
minimum wage. The part-time teaching work is done at the employer's 
convenience. Even though the taxpayer's illness is terminal, the 
employment was recommended for therapeutic reasons, and the work is 
part-time, the fact that the work is done at the employer's convenience 
demonstrates that the taxpayer is able to engage in substantial gainful 
activity.
    Example (4). A taxpayer who retired on disability, is employed full-
time in a competitive work situation that is less demanding than his or 
her former position. The rate of pay exceeds the minimum wage but is 
about half of the taxpayer's rate of pay in the

[[Page 147]]

former position. It is immaterial that the new work activity is less 
demanding or less gainful than the work in which the taxpayer was 
engaged before his or her retirement on disability. Since the taxpayer 
regularly performs duties in a full-time, competitive work situation at 
a rate of pay at or above the minimum wage, he or she is able to engage 
in substantial gainful activity.
    Example (5). A taxpayer who retired on disability from employment as 
a bookkeeper drives trucks for a charitable organization at the 
taxpayer's convenience. The taxpayer receives no compensation, but 
duties of this nature generally are performed for remuneration or 
profit. Some weeks the taxpayer works 10 hours, some weeks 40 hours, and 
over the year the taxpayer works an average of 20 hours per week. Even 
though the taxpayer receives no compensation, works part-time, and at 
his or her convenience, the nature of the duties performed and the 
average number of hours worked per week conclusively establish the 
taxpayer's ability to engage in substantial gainful activity.
    Example (6). A taxpayer who retired on disability was instructed by 
a doctor that uninterrupted bedrest was vital to the treatment of his or 
her disability. However, because of financial need, the taxpayer secured 
new employment in a sedentary job. After attempting the new employment 
for approximately two months, the taxpayer was physically unable to 
continue the employment. The fact that the taxpayer attempted to work 
and did, in fact, work for two months, does not, of itself, conclusively 
establish the taxpayer's ability to engage in substantial gainful 
activity.
    Example (7). A taxpayer who retired on disability accepted 
employment with a former employer on a trial basis. The purpose of the 
employment was to determine whether the taxpayer was employable. The 
trial period continued for an extended period of time and the taxpayer 
was paid at a rate equal to the minimum wage. However, because of the 
taxpayer's disability only light duties of a nonproductive make-work 
nature were assigned. Unless the activity is both substantial and 
gainful, the taxpayer is not engaged in substantial gainful activity. 
The activity was gainful because the taxpayer was paid at a rate at or 
above the minimum wage. However, the activity was not substantial 
because the duties were of a nonproductive, make-work nature. 
Accordingly, these facts do not, of themselves, establish the taxpayer's 
ability to engage in substantial gainful activity.
    Example (8). A taxpayer who retired on disability from employment as 
a bookkeeper lives with a relative who manages several motel units. The 
taxpayer assisted the relative for one or two hours a day by performing 
duties such as washing dishes, answering phones, registering guests, and 
bookkeeping. The taxpayer can select the times during the day when he or 
she feels most fit to perform the tasks undertaken. Work of this nature, 
performed off and on during the day at the taxpayer's convenience, is 
not activity of a ``substantial and gainful'' nature even if the 
individual is paid for the work. The performance of these duties does 
not, of itself, show that the taxpayer is able to engage in substantial 
gainful activity.
    Example (9). A taxpayer who retired on disability because of a 
physical or mental impairment accepts sheltered employment in a 
protected environment under an institutional program. Sheltered 
employment is offered in sheltered workshops, hospitals and similar 
institutions, homebound programs, and Veterans Administration 
domiciliaries. Typically, earnings are lower in sheltered employment 
than in commercial employment. Consequently, impaired workers normally 
do not seek sheltered employment if other employment is available. The 
acceptance of sheltered employment by an impaired taxpayer does not 
necessarily establish his or her ability to engage in substantial 
gainful activity.

(Secs. 105(d) and 7805 of the Internal Revenue Code of 1954 (90 Stat. 
1566; 68A Stat. 917; 26 U.S.C. 105(d); 7805))

[T.D. 7544, 43 FR 19656, May 8, 1978]



Sec. 7.465-1  Amounts at risk with respect to activities begun prior to 
effective date; in general.

    Section 465 provides that a taxpayer (other than a corporation which 
is not a subchapter S corporation or a personal holding company) engaged 
in certain activities may not deduct losses from such activity to the 
extent the losses exceed the amount the taxpayer is at risk with respect 
to the activity. For the types of activities to which section 465 
applies and for determining what constitutes a separate activity, see 
section 465(c). Section 465 generally applies to losses attributable to 
amounts paid or incurred in taxable years beginning after December 31, 
1975. For the purposes of applying the at risk limitation to activities 
begun before the effective date of the provision (and which were not 
excepted from application of the provision), it is necessary to 
determine the amount at risk as of the first day of the first taxable 
year beginning after December 31, 1975. The amount at risk in an 
activity as of the first day of the first taxable year of the taxpayer 
beginning after December

[[Page 148]]

31, 1975, (for the purposes of Sec. 7.465-1 through 7.465-5 such first 
day shall be referred to as the effective date) shall be determined 
according to the rules provided in Sec. Sec. 7.465-2 through 7.465-5.

[T.D. 7504, 42 FR 42197, Aug. 22, 1977]



Sec. 7.465-2  Determination of amount at risk.

    (a) Initial amount. The amount a taxpayer is at risk on the 
effective date with respect to an activity to which section 465 applies 
shall be determined in accordance with this section. The initial amount 
the taxpayer is at risk in the activity shall be the taxpayer's initial 
basis in the activity as modified by disregarding amounts described in 
section 465(b) (3) or (4) (relating generally to amounts protected 
against loss or borrowed from related persons).
    (b) Succeeding adjustments. For each taxable year ending before the 
effective date, the initial amount at risk shall be increased and 
decreased by the items which increased and decreased the taxpayer's 
basis in the activity in that year as modified by disregarding the 
amounts described in section 465(b) (3) or (4).
    (c) Application of losses and withdrawals. (1) Losses described in 
section 465(d) which are incurred in taxable years beginning prior to 
January 1, 1976 and deducted in such taxable years, will be treated as 
reducing first that portion of the taxpayer's basis which is 
attributable to amounts not at risk. On the other hand, withdrawals made 
in taxable years beginning before January 1, 1976, will be treated as 
reducing the amount which the taxpayer is at risk.
    (2) Therefore, if in a taxable year beginning prior to January 1, 
1976 there is a loss described in section 465(d), it shall reduce the 
amount at risk only to the extent it exceeds the amount of the 
taxpayer's basis which is not at risk. For the purposes of this 
paragraph the taxpayer's basis which is not at risk is that portion of 
the taxpayer's basis in the activity (as of the close of the taxable 
year and prior to reduction for the loss) which is attributable to 
amounts described in section 465(b) (3) or (4).
    (d) Amount at risk shall not be less than zero. If, after 
determining the amount described in paragraph (a), (b), and (c) of this 
section, the amount at risk (but for this paragraph) would be less than 
zero, the amount at risk on the effective date shall be zero.

[T.D. 7504, 42 FR 42197, Aug. 22, 1977]



Sec. 7.465-3  Allocation of loss for different taxable years.

    If the taxable year of the entity conducting the activity differs 
from that of the taxpayer, the loss attributable to the activity for the 
first taxable year of the entity ending after the beginning of the first 
taxable year of the taxpayer beginning after December 31, 1975, shall be 
allocated in the following manner. That portion of the loss from the 
activity for such taxable year of the entity which bears the same ratio 
as the number of days in such taxable year before January 1, 1976, 
divided by the total number of days in the taxable year, shall be 
attributable to taxable years of the taxpayer beginning before January 
1, 1976. Consequently, that portion shall be treated in accordance with 
Sec. 7.465-2.

[T.D. 7504, 42 FR 42198, Aug. 22, 1977]



Sec. 7.465-4  Insufficient records.

    If sufficient records do not exist to accurately determine under 
Sec. 7.465-2 the amount which a taxpayer is at risk on the effective 
date, the amount at risk shall be the taxpayer's basis in the activity 
reduced (but not below zero) by the taxpayer's share of amounts 
described in section 465(b) (3) or (4) with respect to the activity on 
the day before the effective date.

[T.D. 7504, 42 FR 42198, Aug. 22, 1977]



Sec. 7.465-5  Examples.

    The provisions of Sec. 7.465-1 and Sec. 7.465-2 may be illustrated 
by the following examples:

    Example (1). J and K, as equal partners, form partnership JK on 
January 1, 1975. Partnership JK is engaged solely in an activity 
described in section 465(c)(1). On January 1, 1975, each partner 
contributes $10,000 in cash from personal assets to JK. On July 1, 1975, 
JK borrows $40,000 (of which J's share is $20,000) from a bank under a 
nonrecourse financing arrangement secured only by the new equipment (for 
use in the activity) purchased with the $40,000. On September 1, 1975, 
JK reduces the amount due on the loan to $36,000 (of which J's share is 
$18,000). On October 1, 1975, JK distributes $3,000 to each

[[Page 149]]

partner. For taxable year 1975, JK has no income or loss. Although J's 
basis in the activity is $25,000 ($10,000+$18,000--$3,000) J's amount at 
risk on the effective date is $7,000 determined as follows:

Initial amount at risk........................................   $10,000
Plus: Items which increased basis other than amounts described         0
 in sec. 465(b) (3) or (4)....................................
                                                               ---------
   Total......................................................    10,000
Less: Distribution............................................     3,000
                                                               =========
J's amount at risk on effective date..........................     7,000
 

    Example (2). Assume the same facts as in Example (1) except that JK 
has a loss (as described in section 465(d) for 1975 of which J's share 
is $12,000. Although J's basis in the activity is $13,000 
($10,000+$18,000--($3,000+$12,000)) J's amount at risk on the effective 
date is $7,000 determined as follows:

Initial amount at risk........................................   $10,000
Plus: Items which increased basis other than amounts described         0
 in sec. 465(b) (3) or (4)....................................
                                                               ---------
   Total......................................................    10,000
                                                               =========
Less: Distribution............................................     3,000
Portion of loss ($12,000) in excess of portion of basis not at         0
 risk ($18,000)...............................................
                                                               ---------
   Total......................................................     3,000
                                                               =========
J's amount at risk on effective date..........................     7,000
 

    Example (3). Assume the same facts as in Example (1) except that JK 
has a loss (as described in section 465(d) for 1975, and J's share is 
$23,000. J's basis in the activity is $2,000 ($10,000+$18,000--
($3,000+$23,000)). The amount at risk on the effective date is 
determined as follows:

Initial amount at risk........................................   $10,000
Plus: Items which increased basis other than amounts described         0
 in sec. 465(b) (3) or (4)....................................
                                                               ---------
   Total......................................................    10,000
                                                               =========
Less: Distribution............................................     3,000
Portion of loss ($23,000) in excess of portion of basis not at     5,000
 risk ($18,000)...............................................
                                                               ---------
   Total......................................................     8,000
                                                               =========
J's amount at risk on the effective date......................     2,000
 


[T.D. 7504, 42 FR 42198, Aug. 22, 1977]



Sec. 7.704-1  Partner's distributive share.

    (a)-(c) [Reserved]
    (d) Limitation on allowance of losses. (1)-(2) [Reserved]
    (3)(i) Section 213(e) of the Tax Reform Act of 1976 amended section 
704(d) of the Internal Revenue Code relating to the deductions by 
partners of losses incurred by a partnership. A partner is entitled to 
deduct the share of partnership loss to the extent of the adjusted basis 
of the partner's interest in the partnership. As amended, section 704(d) 
provides, in general, that the adjusted basis of a partner's interest in 
the partnership for the purpose of deducting partnership losses shall 
not include any portion of a partnership liability for which the partner 
has no personal liability. This restriction, however, does not apply to 
any activity to the extent that section 465 of the Code applies nor to 
any partnership whose principal activity is investing in real property, 
other than mineral property. Section 465 does not apply to corporations 
other than a subchapter S corporation or a personal holding company.
    (ii) The restrictions in the amendment to section 704(d) will not 
apply to any corporate partner with respect to liabilities incurred in 
an activity described in section 465(c)(1). In all other respects the 
restrictions in the amendment will apply to all corporate partners 
unless the partnership's principal activity is investment in real 
property, other than mineral property.

[T.D. 7445, 41 FR 55344, Dec. 20, 1976]



Sec. 7.936-1  Qualified possession source investment income.

    For purposes of this section, interest earned after September 30, 
1976 (less applicable deductions), by a domestic corporation, engaged in 
the active conduct of a trade or business in Puerto Rico, which elects 
the application of section 936 with respect to deposits with certain 
Puerto Rican financial institutions will be treated as qualified 
possession source investment income within the meaning of section 
936(d)(2) if (1) the interest qualifies for exemption from Puerto Rican 
income tax under regulations issued by the Secretary of the Treasury of 
Puerto Rico, as in effect on September 28, 1976, under the authority of 
section 2(j) of the Puerto Rico Industrial Incentive Act of 1963, as 
amended, (2) the interest is from sources within Puerto Rico (within the 
meaning of section 936(d)(2)(A)), and (3) the funds with respect to 
which the interest is earned are derived from the active conduct of a 
trade or business in Puerto Rico or from investment of funds so derived.

[T.D. 7452, 41 FR 56794, Dec. 30, 1976]

[[Page 150]]



Sec. 7.999-1  Computation of the international boycott factor.

    (a) In general. Sections 908(a), 952(a)(3), and 995(b)(1)(F) provide 
that certain benefits of the foreign tax credit, deferral of earnings of 
foreign corporations, and DISC are denied if a person or a member of a 
controlled group (within the meaning of section 993(a)(3)) that includes 
that person participates in or cooperates with an international boycott 
(within the meaning of section 999(b)(3)). The loss of tax benefits may 
be determined by multiplying the otherwise allowable tax benefits by the 
``international boycott factor.'' Section 999(c)(1) provides that the 
international boycott factor is to be determined under regulations 
prescribed by the Secretary. The method of computing the international 
boycott factor is set forth in paragraph (c) of this section. A special 
rule for computing the international boycott factor of a person that is 
a member of two or more controlled groups is set forth in paragraph (d). 
Transitional rules for making adjustments to the international boycott 
factor for years affected by the effective dates are set forth in 
paragraph (e). The definitions of the terms used in this section are set 
forth in paragraph (b).
    (b) Definitions. For purposes of this section:
    (1) Boycotting country. In respect of a particular international 
boycott, the term ``boycotting country'' means any country described in 
section 999(a)(1) (A) or (B) that requires participation in or 
cooperation with that particular international boycott.
    (2) Participation in or cooperation with an international boycott. 
For the definition of the term ``participation in or cooperation with an 
international boycott'', see section 999(b)(3) and Parts H through M of 
the Treasury Department's International Boycott Guidelines.
    (3) Operations in or related to a boycotting country. For the 
definitions of the terms ``operations'', ``operations in a boycotting 
country'', ``operations related to a boycotting country'', and 
``operations with the government, a company, or a national of a 
boycotting country'', see Part B of the Treasury Department's 
International Boycott Guidelines.
    (4) Clearly demonstrating clearly separate and identifiable 
operations. For the rules for ``clearly demonstrating clearly separate 
and identifiable operations'', see Part D of the Treasury Department's 
International Boycott Guidelines.
    (5) Purchase made from a country. The terms ``purchase made from a 
boycotting country'' and ``purchases made from any country other than 
the United States'' mean, in respect of any particular country, the 
gross amount paid in connection with the purchase of, the use of, or the 
right to use:
    (i) Tangible personal property (including money) from a stock of 
goods located in that country,
    (ii) Intangible property (other than securities) in that country,
    (iii) Securities by a dealer to a beneficial owner that is a 
resident of that country (but only if the dealer knows or has reason to 
know the country of residence of the beneficial owner),
    (iv) Real property located in that country, or
    (v) Services performed in, and the end product of services performed 
in, that country (other than payroll paid to a person that is an officer 
or employee of the payor).
    (6) Sales made to a country. The terms ``sales made to a boycotting 
country'' and ``sales made to any country other than the United States'' 
mean, in respect of any particular country, the gross receipts from the 
sale, exchange, other disposition, or use of:
    (i) Tangible personal property (including money) for direct use, 
consumption, or disposition in that country,
    (ii) Services performed in that country,
    (iii) The end product of services (wherever performed) for direct 
use, consumption, or disposition in that country,
    (iv) Intangible property (other than securities) in that country,
    (v) Securities by a dealer to a beneficial owner that is a resident 
of that country (but only if the dealer knows or has reason to know the 
country of residence of the beneficial owner), or

[[Page 151]]

    (vi) Real property located in that country.

To determine the country of direct use, consumption, or disposition of 
tangible personal property and the end product of services, see 
paragraph (b)(10) of this section.
    (7) Sales made from a country. The terms ``sales made from a 
boycotting country'' and ``sales made from any country other than the 
United States'' mean, in respect of a particular country, the gross 
receipts from the sale, exchange, other disposition, or use of:
    (i) Tangible personal property (including money) from a stock of 
goods located in that country,
    (ii) Intangible property (other than securities) in that country, or
    (iii) Services performed in, and the end product of services 
performed in, that country.

However, gross receipts from any such sale, exchange, other disposition, 
or use by a person that are included in the numerator of that person's 
international boycott factor by reason of paragraph (b)(6) of this 
section shall not again be included in the numerator by reason of this 
subparagraph.
    (8) Payroll paid or accrued for services performed in a country. The 
terms ``payroll paid or accrued for services performed in a boycotting 
country'' and ``payroll paid or accrued for services performed in any 
country other than the United States'' mean, in respect of a particular 
country, the total amount paid or accrued as compensation to officers 
and employees, including wages, salaries, commissions, and bonuses, for 
services performed in that country.
    (9) Services performed partly within and partly without a country--
(i) In general. Except as provided in paragraph (b)(9)(ii) of this 
section, for purposes of allocating to a particular country:
    (A) The gross amount paid in connection with the purchase or use of,
    (B) The gross receipts from the sale, exchange, other disposition or 
use of, and
    (C) The payroll paid or accrued for services performed, or the end 
product of services performed, partly within and partly without that 
country, the amount paid, received, or accrued to be allocated to that 
country, unless the facts and circumstances of a particular case warrant 
a different amount, will be that amount that bears the same relation to 
the total amount paid, received, or accrued as the number of days of 
performance of the services within that country bears to the total 
number of days of performance of services for which the total amount is 
paid, received, or accrued.
    (ii) Transportation, telegraph, and cable services. Transportation, 
telegraph, and cable services performed partly within one country and 
partly within another country are allocated between the two countries as 
follows:
    (A) In the case of a purchase of such services performed from 
Country A to Country B, fifty percent of the gross amount paid is deemed 
to be a purchase made from Country A and the remaining fifty percent is 
deemed to be a purchase made from Country B.
    (B) In the case of a sale of such services performed from Country A 
to Country B, fifty percent of the gross receipts is deemed to be a sale 
made from Country R and the remaining fifty percent is deemed to be a 
sale made to Country B.
    (10) Country of use, consumption, or disposition. As a general rule, 
the country of use, consumption, or disposition of tangible personal 
property (including money) and the end product of services (wherever 
performed) is deemed to be the country of destination of the tangible 
personal property or the end product of the services. (Thus, if legal 
services are performed in one country and an opinion is given for use by 
a client in a second country, the end product of the legal services is 
used, consumed, or disposed of in the second country.) The occurrence in 
a country of a temporary interruption in the shipment of the tangible 
personal property or the delivery of the end product of services shall 
not constitute such country the country of destination. However, if at 
the time of the transaction the person providing the tangible personal 
property or the end product of services knew, or should have known from 
the facts and circumstances surrounding the transaction, that the 
tangible personal property or the end product of services probably would 
not be used, consumed,

[[Page 152]]

or disposed of in the country of destination, that person must determine 
the country of ultimate use, consumption or disposition of the tangible 
personal property or the end product of services. Notwithstanding the 
preceding provisions of this subparagraph, a person that sells, 
exchanges, otherwise disposes of, or makes available for use, tangible 
personal property to any person all of whose business except for an 
insubstantial part consists of selling from inventory to retail 
customers at retail outlets all within one country may assume at the 
time of such sale to such person that the tangible personal property 
will be used, consumed, or disposed of within such country.
    (11) Controlled group taxable year. The term ``controlled group 
taxable year'' means the taxable year of the controlled group's common 
parent corporation. In the event that no common parent corporation 
exists, the members of the group shall elect the taxable year of one of 
the members of the controlled group to serve as the controlled group 
taxable year. The taxable year election is a binding election to be 
changed only with the approval of the Secretary of his delegate. The 
election is to be made in accordance with the procedures set forth in 
the instructions to Form 5713, the International Boycott Report.
    (c) Computation of international boycott factor--(1) In general. The 
method of computing the international boycott factor of a person that is 
not a member of a controlled group is set forth in paragraph (c)(2) of 
this section. The method of computing the international boycott factor 
of a person that is a member of a controlled group is set forth in 
paragraph (c)(3) of this section. For purposes of paragraphs (c) (2) and 
(3), purchases and sales made by, and payroll paid or accrued by, a 
partnership are deemed to be made or paid or accrued by a partner in 
that proportion that the partner's distributive share bears to the 
purchases and sales made by, and the payroll paid or accrued by, the 
partnership. Also for purposes of paragraphs (c) (2) and (3), purchases 
and sales made by, and payroll paid or accrued by, a trust referred to 
in section 671 are deemed to be made both by the trust (for purposes of 
determining the trust's international boycott factor), and by a person 
treated under section 671 as the owner of the trust (but only in that 
proportion that the portion of the trust that such person is considered 
as owning under sections 671 through 679 bears to the purchases and 
sales made by, and the payroll paid and accrued by, the trust).
    (2) International boycott factor of a person that is not a member of 
a controlled group. The international boycott factor to be applied by a 
person that is not a member of a controlled group (within the meaning of 
section 993(a)(3)) is a fraction.
    (i) The numerator of the fraction is the sum of the--
    (A) Purchases made from all boycotting countries associated in 
carrying out a particular international boycott.
    (B) Sales made to or from all boycotting countries associated in 
carrying out a particular international boycott, and
    (C) Payroll paid or accrued for services performed in all boycotting 
countries associated in carrying out a particular international boycott 
by that person during that person's taxable year, minus the amount of 
such purchases, sales, and payroll that is clearly demonstrated to be 
attributable to clearly separate and identifiable operations in 
connection with which there was no participation in or cooperation with 
that international boycott.
    (ii) The denominator of the fraction is the sum of the--
    (A) Purchases made from any country other than the United States,
    (B) Sales made to or from any country other than the United States, 
and
    (C) Payroll paid or accrued for services performed in any country 
other than the United States by that person during that person's taxable 
year.
    (3) International boycott factor of a person that is a member of a 
controlled group. The international boycott factor to be applied by a 
person that is a member of a controlled group (within the meaning of 
section 993(a)(3)) shall be computed in the manner described in 
paragraph (c)(2) of this section, except that there shall be taken into 
account the purchases and sales made by, and the payroll paid or accrued 
by,

[[Page 153]]

each member of the controlled group during each member's own taxable 
year that ends with or within the controlled group taxable year that 
ends with or within that person's taxable year.
    (d) Computation of the international boycott factor of a person that 
is a member of two or more controlled groups. The international boycott 
factor to be applied under sections 908(a), 952(a)(3), and 995(b)(1)(F) 
by a person that is a member of two or more controlled groups shall be 
determined in the manner described in paragraph (c)(3), except that the 
purchases, sales, and payroll included in the number and denominator 
shall include the purchases, sales, and payroll of that person and of 
all other members of the two or more controlled groups of which that 
person is a member.
    (e) Transitional rules--(1) Pre-November 3, 1976 boycotting 
operations. The international boycott factor to be applied under 
sections 908(a), 952(a)(3), and 995(b)(1)(F) by a person that is not a 
member of a controlled group, for that person's taxable year that 
includes November 3, 1976, or a person that is a member of a controlled 
group, for the controlled group taxable year that includes November 3, 
1976, shall be computed in the manner described in paragraphs (c)(2) and 
(c)(3), respectively, of this section. However, that the following 
adjustments shall be made:
    (i) There shall be excluded from the numerators described in 
paragraphs (c)(2)(i) and (c)(3)(i) of this section purchases, sales, and 
payroll clearly demonstrated to be attributable to clearly separate and 
identifiable operations--
    (A) That were completed on or before November 3, 1976, or
    (B) In respect of which it is demonstrated that the agreements 
constituting participation in or cooperation with the international 
boycott were renounced, the renunciations were communicated on or before 
November 3, 1976, to the governments or persons with which the 
agreements were made and the agreements have not been reaffirmed after 
November 3, 1976, and
    (ii) The international boycott factor resulting after the numerator 
has been modified in accordance with paragraph (e)(1)(i) of this section 
shall be further modified by multiplying it by a fraction. The numerator 
of that fraction shall be the number of days in that person's taxable 
year (or, if applicable, in that person's controlled group taxable year) 
remaining after November 3, 1976, and the denominator shall be 366.

The principles of this subparagraph are illustrated in the following 
example:

    Example. Corporation A, a calendar year taxpayer, is not a member of 
a controlled group. During the 1976 calendar year, Corporation DA had 
three operations in a boycotting country under three separate contracts, 
each of which contained agreements constituting participation in or 
cooperation with an international boycott. Each contract was entered 
into on or after September 2, 1976. Operation (1) was completed on 
November 1, 1976. The sales made to a boycotting country in connection 
with Operation (1) amounted to $10. Operation (2) was not completed 
during the taxable year, but on November 1, 1976, Corporation A 
communicated a renunciation of the boycott agreement covering that 
operation to the government of the boycotting country. The sales made to 
a boycotting country in connection with Operation (2) amounted to $40. 
Operation (3) was not completed during the taxable year, nor was any 
renunciation of the boycott agreement made. The sales made to a 
boycotting country in connection with Operation (3) amounted to $25. 
Corporation A had no purchases made from, sales made from, or payroll 
paid or accrued for services performed in, a boycotting country. 
Corporation A had $500 of purchases made from, sales made from, sales 
made to, and payroll paid or accrued for services performed in, 
countries other than the United States. Company A's boycott factor for 
1976, computed under paragraph (c)(2) of this section (before the 
application of this subparagraph) would be:
[GRAPHIC] [TIFF OMITTED] TC16OC91.003

    However, the $10 is eliminated from the numerator by reason of 
paragraph (e)(1)(i)(A) of this section, and the $40 is eliminated from 
the numerator by reason of paragraph (e)(1)(i)(B) of this section. Thus, 
before the application of paragraph (e)(1)(ii) of this section, 
Corporation A's international boycott factor is $25/$500. After the 
application of paragraph (e)(1)(ii), Corporation A's international 
boycott factor is:
[GRAPHIC] [TIFF OMITTED] TC16OC91.004

    (2) Pre-December 31, 1977 boycotting operations. The international 
boycott factor to be applied under sections 908(a), 952(a)(3), and 
995(b)(1)(F) by a person that is not a member of a controlled

[[Page 154]]

group, for that person's taxable year that includes December 31, 1977, 
or by a person that is a member of a controlled group, for the 
controlled group taxable year that includes December 31, 1977, shall be 
computed in the manner described in paragraphs (c)(2) and (c)(3), 
respectively, of this section. However, the following adjustments shall 
be made:
    (i) There shall be excluded from the numerators described in 
paragraphs (c)(2)(i) and (c)(3)(i) of this section purchases, sales, and 
payroll clearly demonstrated to be attributable to clearly separate and 
identifiable operations that were carried out in accordance with the 
terms of binding contracts entered into before September 2, 1976, and--
    (A) That were completed on or before December 31, 1977, or
    (B) In respect of which it is demonstrated that the agreements 
constituting participation in or cooperation with the international 
boycott were renounced, the renunciations were communicated on or before 
December 31, 1977, to the governments or persons with which the 
agreements were made, and the agreements were not reaffirmed after 
December 31, 1977, and
    (ii) In the case of clearly separate and identifiable operations 
that are carried out in accordance with the terms of binding contracts 
entered into before September 2, 1976, but that do not meet the 
requirements of paragraph (e)(2)(i) of this section, the numerators 
described in paragraphs (c)(2)(i) and (c)(3)(i) of this section shall be 
adjusted by multiplying the purchases, sales, and payroll clearly 
demonstrated to be attributable to those operations by a fraction, the 
numerator of which is the number of days in such person's taxable year 
(or, if applicable, in such person's controlled group taxable year) 
remaining after December 31, 1977, and the denominator of which is 365.

The principles of this subparagraph are illustrated in the following 
example:

    Example. Corporation A is not a member of a controlled group and 
reports on the basis of a July 1-June 30 fiscal year. During the 1977-
1978 fiscal year, Corporation A had 2 operations carried out pursuant to 
the terms of separate contracts, each of which had a clause that 
constituted participation in or cooperation with an international 
boycott. Neither operation was completed during the fiscal year, nor 
were either of the boycotting clauses renounced. Operation (1) was 
carried out in accordance with the terms of a contract entered into on 
November 15, 1976. Operation (2) was carried out in accordance with the 
terms of a binding contract entered into before September 2, 1976. 
Corporation A had sales made to a boycotting country in connection with 
Operation (1) in the amount of $50, and in connection with Operation (2) 
in the amount of $100. Corporation A had sales made to countries other 
than the United States in the amount of $500. Corporation A had no 
purchases made from, sales made from, or payroll paid or accrued for 
services performed in, any country other than the United States. In the 
absence of this subparagraph, Corporation A's international boycott 
factor would be
[GRAPHIC] [TIFF OMITTED] TC16OC91.005


However, by reason of the application of this subparagraph, Corporation 
A's international boycott factor is reduced to
[GRAPHIC] [TIFF OMITTED] TC16OC91.006

    (3) Incomplete controlled group taxable year. If, at the end of the 
taxable year of a person that is a member of a controlled group, the 
controlled group taxable year that includes November 3, 1976 has not 
ended, or the taxable year of one or more members of the controlled 
group that includes November 3, 1976 has not ended, then the 
international boycott factor to be applied under sections 908(a), 
952(a)(3) and 995(b)(1)(F) by such person for the taxable year shall be 
computed in the manner described in paragraph (c)(3) of this section. 
However, the numerator and the denominator in that paragraph shall 
include only the purchases, sales, and payroll of those members of the 
controlled group whose taxable years ending after November 3, 1976 have 
ended as the end of the taxable year of such person.
    (f) Effective date. This section applies to participation in or 
cooperation with an international boycott after November 3, 1976. In the 
case of operations which constitute participation in or cooperation with 
an international boycott and which are carried out in accordance with 
the terms of a binding contract entered into before September

[[Page 155]]

2, 1976, this section applies to such participation or cooperation after 
December 31, 1977.

[T.D. 7467, 42 FR 11833, Mar. 1, 1977]



Sec. 7.6039A-1  Information regarding carryover basis property acquired
from a decedent.

    (a) Information for Internal Revenue Service. In the case of a 
decedent who dies after December 31, 1976, the executor (as defined in 
section 2203) shall furnish to the Internal Revenue Service the 
following information, as applicable--
    (1) If an estate tax return is required to be filed under section 
6018 of the Internal Revenue Code of 1954, as amended, and if the return 
form contains questions relating to carryover basis property, the 
executor must answer those questions.
    (2) If no estate tax return is required to be filed under section 
6018 of the Internal Revenue Code of 1954, as amended, or if a return is 
required to be filed but the return form used does not contain questions 
relating to carryover basis property, the executor must file the form 
prescribed by the Commissioner. This form may be attached to the estate 
tax return or the decedent's final individual income tax return. If this 
form is not attached to the estate tax return or the decedent's final 
individual income tax return, it must be filed with the Internal Revenue 
Service office where the decedent's final income tax return would be 
filed if one were required within 9 months after the date of the 
decedent's death or by December 31, 1978, whichever is later.
    (b) Information to be furnished to beneficiaries. Any executor 
required under paragraph (a) of this section to furnish information to 
the Internal Revenue Service relating to carryover basis property must 
furnish in writing to the distributee of each piece of carryover basis 
property--
    (1) A description of the property,
    (2) The adjusted basis of the property as computed under section 
1023 (a), (c), and (d),
    (3) The amount of the increase in the basis of the property 
determined under section 1023(h),
    (4) The value of the property for Federal estate tax purposes, and
    (5) A notice that the beneficiary should keep this information as 
part of permanent records.
    (c) Time for furnishing information to beneficiaries. The 
information which an executor is required to furnish to the 
beneficiaries under this paragraph must be furnished on or before the 
latest of--
    (1) The date the property is distributed to the beneficiary,
    (2)(i) In the case of an executor who is required to file an estate 
tax return, 6 months after the due date (including extensions) of such 
return,
    (ii) In the case of an executor who is not required to file an 
estate tax return, 15 months from the date of death of the decedent, or
    (3) December 31, 1978.
    (d) Subsequent adjustments to carryover basis. In the event 
subsequent adjustments are made which relate to the carryover basis of 
any piece of property included in a decedent's gross estate, whether by 
reason of an adjustment resulting from an examination of the estate tax 
return or otherwise, any executor required under paragraph (a) of this 
section to furnish information to the Internal Revenue Service shall, 
within 3 months of a determination, as defined in section 1313 (a), of 
such adjustments, provide to the recipient of each item of carryover 
basis property the information set forth in paragraph (b) of this 
section recomputed as required by such adjustments.
    (e) Effective date. This section is effective in respect of 
decedents dying after December 31, 1976.

(Secs. 7805 and 6039A of the Internal Revenue Code of 1954 (68A Stat. 
917, 90 Stat. 1878; 26 U.S.C. 7805, 6039A))

[T.D. 7540, 43 FR 16735, Apr. 20, 1978, as amended by T.D. 7559, 43 FR 
36244, Aug. 16, 1978]



Sec. 7.6041-1  Return of information as to payments of winnings from 
bingo, keno, and slot machines.

    (a) In general. On or after May 1, 1977, every person engaged in a 
trade or business and making a payment in the course of such trade or 
business of winnings (including winnings which are exempt from 
withholding under section 3402(q)(5)) of $1,200 or more from a bingo 
game or slot machine play or of

[[Page 156]]

$1,500 or more from a keno game shall make an information return with 
respect to such payment.
    (b) Special rules. For purposes of paragraph (a) of this section, in 
determining whether such winnings equal or exceed the $1,200 or $1,500 
amount--
    (1) In the case of a bingo game or slot machine play, the amount of 
winnings shall not be reduced by the amount wagered;
    (2) In the case of a keno game, the amount of winnings from one game 
shall be reduced by the amount wagered in that one game;
    (3) Winnings shall include the fair market value of a payment in any 
medium other than cash;
    (4) All winnings by the winner from one bingo or keno game shall be 
aggregated; and
    (5) Winnings and losses from any other wagering transaction by the 
winner shall not be taken into account.
    (c) Prescribed form. The return required by paragraph (a) of this 
section shall be made on Form W-2G and shall be filed with the Internal 
Revenue Service Center serving the district in which is located the 
principal place of business of the person making the return on or before 
February 28 of the calendar year following the calendar year in which 
the payment of winnings is made. Each Form W-2G shall contain the 
following:
    (1) Name, address, and employer identification number of the person 
making the payment;
    (2) Name, address, and social security number of the winner;
    (3) General description of two types of identification (e.g., 
``driver's license'', ``social security card'', or ``voter registration 
card'') furnished to the maker of the payment for verification of the 
winner's name, address, and social security number;
    (4) Date and amount of the payment; and
    (5) Type of wagering transaction.

In addition, in the case of a bingo or keno game, Form W-2G shall show 
any number, color, or other designation assigned to the game with 
respect to which the payment is made. In the case of a slot machine 
play, Form W-2G shall show the identification number of the slot 
machine.

[T.D. 7457, 42 FR 1471, Jan. 7, 1977, as amended by T.D. 7492, 42 FR 
33286, June 30, 1977]



PART 8_TEMPORARY INCOME TAX REGULATIONS UNDER SECTION 3 OF THE ACT OF
OCTOBER 26, 1974 (PUB. L. 93	483)--Table of Contents



    Authority: Secs. 2055(e)(3) and 7805 of the Internal Revenue Code of 
1954 (68A Stat. 917; 26 U.S.C. 7805).



Sec. 8.1  Charitable remainder trusts.

    (a) Certain wills and trusts in existence on September 21, 1974. In 
the case of a will executed before September 21, 1974, or a trust 
created (within the meaning of applicable local law) after July 31, 
1969, and before September 21, 1974, which is amended pursuant to 
section 2055(e)(3) and Sec. 24.1 of this chapter (Temporary Estate Tax 
Regulations), a charitable remainder trust resulting from such amendment 
will be treated as a charitable remainder trust from the date it would 
be deemed created under Sec. 1.664-1(a) (4) and (5) of this chapter 
(Income Tax Regulations), whether or not such date is after September 
20, 1974.
    (b) Certain transfers to trusts created before August 1, 1969. 
Property transferred to a trust created (within the meaning of 
applicable local law) before August 1, 1969, whose governing instrument 
provides that an organization described in section 170(c) receives an 
irrevocable remainder interest in such trust shall be deemed transferred 
to a trust created on the date of such transfer, provided that the 
transfer occurs after July 31, 1969 and prior to October 18, 1971, and 
pursuant to an amendment provided in Sec. 24.1 of this chapter 
(Temporary Estate Tax Regulations), the transferred property and any 
undistributed income therefrom is severed and placed in a separate trust 
as of the date of the amendment.

[T.D. 7393, 40 FR 58853, Dec. 19, 1975]

[[Page 157]]



PART 9_TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REDUCTION ACT OF
1975--Table of Contents



Sec.
9.1 Investment credit--public utility property elections.
9.2 [Reserved]
9.3 Temporary TRASOP requirements for 1-percent additional investment 
          credit.



Sec. 9.1  Investment credit--public utility property elections.

    (a) Applicability of prior election under section 46(f)--(1) In 
general. Except as provided in paragraph (a)(2) of this section, an 
election made before March 10, 1972 (hereinafter referred to as a 1972 
election) under section 46(f) (redesignated from section 46(e) by the 
Tax Reduction Act of 1975) applies to the credit allowable for a taxable 
year with respect to public utility property described in section 
46(f)(5) by reason of sections 301 and 302 of the Tax Reduction Act of 
1975.
    (2) 1972 immediate flow-through election. A 1972 election under 
section 46(f)(3) (hereinafter referred to as an election for immediate 
flow-through) does not apply to the additional credit allowed under 
section 38 with respect to limited property (public utility property 
described in section 46(c)(3)(B) to which section 167(1)(2)(C) applies, 
other than nonregulated communication property of the type described in 
the last sentence of section 46(c)(3)(B) by reason of the Tax Reduction 
Act of 1975. However, a 1972 election for immediate flow-through does 
apply to the additional credit allowed for a taxable year with respect 
to property described in section 46(f)(5)(B). See paragraph (b) of this 
section for a new election under section 46(f)(3) with regard to the 
additional credit with respect to limited property allowed by reason of 
the Tax Reduction Act of 1975. See paragraph (a)(3) of this section for 
determination of additional credit. For purposes of this section the 
phrase ``determined as if the Tax Reduction Act had not been enacted'' 
means the following amendments shall be disregarded in determining 
credit allowable or allowed:
    (i) The increase in the amount of credit from 7 percent to 10 or 11 
percent under section 46(a)(1) (A), (B), and (D),
    (ii) The increase in the amount of qualified investment from 4/7 to 
7/7 under section 46(a)(1)(C) and (c)(3)(A),
    (iii) The increase in the dollar limitation from $50,000 to $100,000 
on used property under section 48(c)(2), and
    (iv) The increase in the limitation based on tax under section 
46(a)(6) for certain public utilities.

In determining the amount of credit attributable to limited property 
possible disallowance under section 46(f) shall be disregarded.
    (3) Additional credit allowed--(i) Credit earned in taxable year. 
The amount of additional credit allowed for credit earned for limited 
property for taxable year is an amount equal to the excess of--
    (A) The credit allowed by section 38 for the taxable year 
(determined without regard to section 46(b)) multiplied by a fraction, 
the numerator of which is the amount of credit earned for limited 
property for the taxable year and the denominator of which is the amount 
of credit earned for all section 38 property for the taxable year, over
    (B) The amount of normal credit allowed for limited property for the 
taxable year (determined without regard to section 46(b)). The amount of 
normal credit allowed for limited property is the amount of credit that 
would be allowed for the taxable year determined as if the Tax Reduction 
Act had not been enacted multiplied by a fraction, the numerator of 
which is the amount of credit earned for limited property for the 
taxable year determined as if the Tax Reduction Act had not been enacted 
and the denominator of which is the credit earned for all section 38 
property for the taxable year determined as if the Tax Reduction Act had 
not been enacted.
    (ii) Carryover or carryback to taxable year. The amount of 
additional credit allowed for limited property attributable to a 
carryover or a carryback of any unused credit to any taxable year in an 
amount equal to the excess of--
    (A) The amount of credit allowed by section 38 for the taxable year 
by reason of section 46(b) multiplied by the fraction contained in 
paragraph (a)(3)(i)(A) of this section for the unused credit year, over

[[Page 158]]

    (B) The amount of unused normal credit allowed for limited property 
for the taxable year. The amount of unused normal credit allowed for 
limited property is the amount of unused credit that would be allowed 
for the taxable year under section 38 by reason of section 46(b), taking 
into account the amount of unused credit that would be allowed for any 
preceding year, determined as if the Tax Reduction Act had not been 
enacted, multiplied by the fraction contained in paragraph (a)(3)(i)(B) 
of this section for the unused credit year.
    (b) New election--(1) In general. A taxpayer who made a 1972 
election for immedite flow-through under section 46(f)(3) with respect 
to limited property may elect to apply section 46(f)(3) to the 
additional credit allowed by the Tax Reduction Act of 1975 with respect 
to such property, or, if eligible, may make the election in paragraph 
(b)(2) of this section to apply section 46(f)(2) to such additional 
credit. The election to apply section 46(f) (2) or (3) must be made 
before June 28, 1975, in the manner provided in paragraph (c) of this 
section. If the taxpayer does not make a new election, section 46(f)(1) 
shall apply to additional credit for limited property. However, if the 
taxpayer made a 1972 election under section 46(f)(2) with respect to 
property to which section 46(f)(3) does not apply, then section 46(f)(2) 
shall apply to such additional credit notwithstanding any prohibition in 
section 46(f)(3) to the contrary.
    (2) Special section 46(f)(2) election. A taxpayer who:
    (i) Made a 1972 election under section 46(f)(3),
    (ii) Did not make an election to apply section 46(f)(2) with respect 
to property to which section 46(f)(3) does not apply, and
    (iii) Did not acquire property to which section 46(f)(1) applied in 
any taxable year ending before January 1, 1975, may elect to apply 
section 46(f)(2) to the additional credit allowed by the Tax Reduction 
Act of 1975 with respect to limited property notwithstanding any 
prohibition in section 46(f)(3) to the contrary.
    (c) Method of making election. A taxpayer may make an election 
described in paragraph (b) of this section by filing a statement before 
June 28, 1975, with the district director or director of the internal 
revenue service center with whom the taxpayer ordinarily files its 
income tax return. For rules with respect to taxpayers filing 
consolidated returns, see Sec. 1.1502-77(a) of part 1 of this chapter. 
The statement shall contain the following information: (1) The name, 
address, and taxpayer identification number of the taxpayer, and (2) the 
election which the taxpayer is making under paragraph (b) of this 
section. If a taxpayer is electing flow-through under section 46(f)(3), 
the statement shall also contain a written recitation that the election 
is made at the taxpayer's own option and without regard to any 
requirement imposed by an agency described in section 46(c)(3)(B) having 
jurisdiction over the taxpayer. The recitation shall be verified by a 
written declaration that it is made under the penalties of perjury.

(Secs. 46(f) and 7805 of the Internal Revenue Code of 1954 (85 Stat. 
503, 68A Stat. 917; 26 U.S.C. 46, 7805))

[T.D. 7360, 40 FR 25472, June 16, 1975]



Sec. 9.2  [Reserved]



Sec. 9.3  Temporary TRASOP requirements for 1-percent additional 
investment credit.

    The provisions listed in Sec. 1.46-8 (a)(4) (i)-(ix) (Income Tax 
Regulations) are deemed effective only as temporary regulations under 
this section.

(Sec. 301(d)(2)(C) and (10) of the Tax Reduction Act of 1975 and sec. 
7805 of the Internal Revenue Code of 1954 (89 Stat. 38, 68A Stat. 917 
(26 U.S.C. 7805)))

[T.D. 7589, 44 FR 4145, Jan. 16, 1979; 44 FR 6715, Feb. 2, 1979]



PART 11_TEMPORARY INCOME TAX REGULATIONS UNDER THE EMPLOYEE RETIREMENT 
INCOME SECURITY ACT OF 1974--Table of Contents



Sec.
11.401(a)-11 Qualified joint and survivor annuities.
11.401(a)-19 Nonforfeitability in case of certain withdrawals.
11.401(b)-1 Certain retroactive changes in plan.

[[Page 159]]

11.401(d)(1)-1 Nonbank trustees of trusts benefiting owner-employees.
11.402(e)(4)(A)-1 Lump sum distributions in the case of an employee who 
          has separated from service.
11.402(e)(4)(B)-1 Election to treat an amount as a lump sum 
          distribution.
11.404(a)(6)-1 Time when contributions to ``H.R. 10'' plans considered 
          made.
11.408(a)(2)-1 Trustee of individual retirement accounts.
11.410-1 Election by church to have participation, vesting, funding, 
          etc., provisions apply.
11.410(b)-1 Minimum coverage requirements.
11.412(c)-7 Election to treat certain retroactive plan amendments as 
          made on the first day of the plan year.
11.412(c)-11 Election with respect to bonds.
11.412(c)-12 Extension of time to make contributions to satisfy 
          requirements of section 412.

    Authority: Sec. 7805 of the Internal Revenue Code of 1954 (68A Stat. 
917; 26 U.S.C. 7805), unless otherwise noted.



Sec. 11.401(a)-11  Qualified joint and survivor annuities.

    (a) In general--(1) General rule. A trust, which is a part of a plan 
providing for the payment of benefits in any form of a life annuity 
(i.e., an annuity requiring survival of the participant or his spouse as 
a condition for payment), shall not constitute a qualified trust under 
section 401(a)(11) and this section unless such plan provides that these 
benefits must be paid in a form having the effect of a qualified joint 
and survivor annuity. Therefore, any benefits which may be paid in any 
form of a life annuity must be paid in a form having the effect of a 
qualified joint and survivor annuity unless the participant makes the 
election, described in paragraph (c) of this section, not to receive 
benefits in this form. A plan will not fail to meet the requirements of 
section 401(a)(11) and this section merely because it provides that the 
spouse of a deceased participant may elect to have benefits paid in a 
form other than a qualified joint and survivor annuity. Section 
401(a)(11) and this section shall apply only in the case of a plan to 
which section 411 (relating to minimum vesting standards) applies 
without regard to section 411(e)(2). Without regard to the election 
provided under paragraph (d)(3) of this section, unless an election has 
been made under paragraph (c) of this section, a plan to which this 
section applies must provide that a survivor annuity shall be payable on 
the death of an active participant after normal retirement age.
    (2) Illustration. The provisions of this paragraph may be 
illustrated by the following example:

    Example. The X Corporation Defined Contribution Plan was established 
in 1960. As in effect on January 1, 1974, the plan provided that, upon 
his retirement, a participant could elect to receive the balance of his 
individual account in the form of (1) a lump-sum cash payment, (2) a 
lump-sum distribution consisting of X Corporation stock, (3) five equal 
annual cash payments, (4) a life annuity, or (5) a combination of 
options (1) through (4). The plan also provided that, if a participant 
did not elect another form of distribution, the balance of his 
individual account would be distributed to him in the form of a lump-sum 
cash payment upon his retirement. Assume that section 401(a)(11) and 
this section first become applicable to the plan as of its plan year 
beginning January 1, 1976, with respect to persons who were active 
participants in the plan on such date (see paragraph (h) of this 
section). Unless the X Corporation Defined Contribution Plan either 
discontinues the life annuity payment option or is amended to provide 
that the balance of a participant's individual account will be paid to 
him in a form having the effect of a qualified joint and survivor 
annuity unless the participant elects another form of benefit payment, 
the trust established under the plan will fail to qualify under section 
401(a).

    (b) Definitions. As used in this section--
    (1) Qualified joint and survivor annuity. The term ``qualified joint 
and survivor annuity'' means an annuity for the life of the participant 
with a survivor annuity for the life of his spouse which is neither (i) 
less than one-half of, nor (ii) greater than, the amount of the annuity 
payable during the joint lives of the participant and his spouse. A 
qualified joint and survivor annuity must be at least the actuarial 
equivalent of the normal form of annuity or any optional form of benefit 
offered under the plan. Equivalence may be determined, on the basis of 
consistently applied reasonable actuarial factors, for each participant 
or for all participants or reasonable groupings of participants, if such 
determination does not result in discrimination in favor of

[[Page 160]]

employees who are officers, shareholders, or highly compensated. An 
annuity is not a qualified joint and survivor annuity if payments to the 
spouse of a deceased participant are terminated because of such spouse's 
remarriage.
    (2) Annuity starting date. The term ``annuity starting date'' means 
the first day of the first period with respect to which an amount is 
received as an annuity, whether by reason of retirement or by reason of 
disability.
    (3) Earliest retirement age. The term ``earliest retirement age'' 
means the earliest date on which, under the plan, the participant could 
elect to receive retirement benefits, including any benefit the 
participant is entitled to receive on account of disability.
    (c) Election not to take joint and survivor annuity form--(1) In 
general. A plan shall not be treated as satisfying the requirements of 
this section unless each participant has the right to elect in writing 
not to take a joint and survivor annuity during a reasonable period 
before the annuity starting date. However, if a plan provides that a 
qualified joint and survivor annuity is the only form of benefit payable 
under the plan, no election need be provided.
    (2) Information to be provided to the participant. (i) The plan 
administrator must furnish to the participant a written notification, in 
nontechnical terms, of the availability of the election provided by this 
paragraph, within a reasonable amount of time after the first day of the 
election period. This notification shall also inform the participant of 
the availability of the information specified in subdivision (ii) of 
this subparagraph.
    (ii) The plan administrator must furnish to the participant a 
written explanation in nontechnical language of the terms and conditions 
of the joint and survivor annuity and the financial effect upon the 
participant's annuity (in terms of dollars per annuity payment) of 
making an election under this paragraph. This explanation must be 
provided to the participant within a reasonable amount of time from the 
date of the participant's request during the election period.
    (3) Form of election. The election shall be in writing and clearly 
indicate that the participant is electing to receive his benefits under 
the plan in a form other than that of a joint and survivor annuity.
    (4) Election is revocable. This election may be revoked in writing 
during the election period. After an election is revoked another 
election under this paragraph may be made during the election period.
    (d) Plans providing for early retirement--(1) Period during which 
qualified joint and survivor annuity not required. Notwithstanding the 
provisions of paragraph (a) of this section, in the case of a plan which 
provides for the payment of benefits before the normal retirement age 
(as defined in section 411(a)(8)), the plan is not required to provide 
for the payment of annuity benefits in a form having the effect of a 
qualified joint and survivor annuity during the period beginning on the 
date on which the employee enters into the plan as a participant and 
ending on the later of--
    (i) The date the employee reaches the earliest retirement age under 
the plan (as defined in paragraph (b)(3) of this section), or
    (ii) The first day of the 120th month beginning before the date on 
which the employee reaches normal retirement age.
    (2) Period during which qualified joint and survivor annuity 
required. (i) If a participant terminates employment and begins to 
receive retirement benefits during the period described in subparagraph 
(1) of this paragraph, he and his spouse must receive, after the 
termination of such period (or after the date such period would have 
terminated if the participant had survived), benefits having the effect 
of a qualified joint and survivor annuity, unless the participant has 
made an election under paragraph (c) of this section.
    (ii) If a participant terminates employment and begins to receive 
retirement benefits after the period described in subparagraph (1) of 
this paragraph, he and his spouse must receive benefits having the 
effect of a qualified joint and survivor annuity, unless the participant 
has made an election under paragraph (c) of this section.

[[Page 161]]

    (iii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. A plan which provides a benefit in the form of a life 
annuity also provides that a participant may retire before the normal 
retirement age of 65 and receive a benefit, if he has completed 30 years 
of service. A, an employee, became a participant at the age of 18. A 
retires and begins to receive retirement benefits at the age of 48. 
Unless A otherwise elects, the plan must provide a qualified joint and 
survivor annuity to A and his spouse after A reaches age 55 (the later 
of the earliest retirement age (age 48) or 10 years before normal 
retirement age (age 55)) or after the date A would have reached age 55, 
if he had survived. The survivor annuity paid to the spouse must satisfy 
the requirements of paragraph (b)(1) of this section. The plan may, but 
is not required to, provide the survivor annuity before age 55 if the 
participant dies between age 48 and age 55.

    (3) Election of survivor annuity--(i) In general. (A) A plan 
described in subparagraph (1) of this paragraph does not meet the 
requirements of paragraph (a) of this section unless, under the plan, a 
participant may elect, during a reasonable period, a survivor annuity to 
be payable on his death during the period beginning on the date on which 
the period described in subparagraph (1) of this paragraph ends and 
ending on the date on which he reaches normal retirement age if he 
continues his employment during that period. Breaks in service during 
that period will neither invalidate a previous election or revocation 
nor prevent an election from being made or revoked during the election 
period.
    (B) If a plan provides that a survivor annuity is the only form of 
benefit payable under the plan, no election need be provided.
    (ii) Example. The provisions of subdivision (i) of this subparagraph 
may be illustrated by the following example:

    Example. A plan which provides a life annuity also provides that a 
participant may retire before the normal retirement age of 65 and 
receive a benefit, if he has completed 30 years of service. Under this 
plan, an employee who became a participant at the age of 18 will be 
eligible to receive retirement benefits at the age of 48. This plan must 
allow a participant who continues his employment to elect a survivor 
annuity, described in subdivision (v) of this subparagraph, to be 
payable on the death of the participant if death occurs after age 55 
(the later of the date the participant reaches the earliest retirement 
age (age 48) or 10 years before normal retirement age (age 55)) but 
before the date the participant reaches normal retirement age (age 65).

    (iii) Information to be provided by plan administrator. (A) The plan 
administrator must furnish to the participant a written notification in 
nontechnical terms of the availability of the election provided by this 
subparagraph, within a reasonable amount of time after the first day of 
the election period. This notification shall also inform the participant 
of the availability of the information specified in subdivision (iii)(B) 
of this subparagraph.
    (B) During the election period, the plan administrator must furnish 
to the participant, within a reasonable amount of time from the date of 
his request, a written explanation in nontechnical language of the terms 
and conditions of the survivor annuity and the financial effect upon the 
participant's annuity (in terms of dollars per annuity payment) of an 
election or of a revocation of an election under this subparagraph.
    (iv) Payments under the survivor annuity. In order to meet the 
requirements of this subparagraph, if an election is made, the payments 
under the survivor annuity must not be less than the payments which 
would have been made under the joint and survivor annuity to which the 
surviving spouse would have been entitled if the participant had made 
the election described in this subparagraph immediately prior to his 
retirement and if his retirement had occurred on the day before his 
death and within the period during which an election can be made. For 
example, if a participant is entitled to a single life annuity of $100 
per month or a reduced amount under a qualified joint and survivor 
annuity of $80 per month, regardless of when he makes a valid election 
under subparagraph (2) of this paragraph, his spouse is entitled to a 
payment of at least $40, but not more than $80 per month, under the 
survivor annuity.
    (v) Form of election. The election shall be in writing and clearly 
indicate that the participant is electing the joint and survivor annuity 
form.

[[Page 162]]

    (vi) Election is revocable. An election under this subparagraph may 
be revoked in writing during the election period. After an election has 
been revoked, another election under this subparagraph may be made 
during the election period. See paragraph (c) of this section, relating 
to the right to elect not to take the joint and survivor annuity form.
    (e) Marriage requirements. (1) A plan shall be treated as satisfying 
the requirements of this section even though it requires the participant 
and his spouse to have been married to each other on the annuity 
starting date.
    (2) A plan shall be treated as satisfying the requirements of this 
section even though it provides that the spouse of the participant is 
not entitled to receive a survivor annuity (whether or not the election 
described in paragraph (d)(3) of this section has been made) unless the 
participant and his spouse have been married to each other throughout 
the 1-year period ending on the date of such participant's death.
    (f) Effect of participant's death on an election or revocation of an 
election under paragraph (c) or (d)(3). A plan shall not be treated as 
not satisfying the requirements of this section merely because the plan 
contains a provision that any election made under paragraph (c) or 
(d)(3) of this section and any revocation of any such election does not 
become effective or ceases to be effective if the participant dies 
within a period, not in excess of 2 years, beginning on the date of such 
election or revocation. A plan containing a provision described in the 
preceding sentence shall not satisfy the requirements of this section 
unless it also provides that any such election and any revocation of any 
such election will be given effect in any case in which--
    (1) The participant dies from accidental causes,
    (2) A failure to give effect to the election or revocation would 
deprive the participant's survivor of a survivor annuity, and
    (3) Such election or revocation is made before such accident 
occurred.
    (g) Costs of providing joint and survivor annuity form. A plan may 
take into account in any equitable manner consistent with generally 
accepted actuarial principles applied on a consistent basis any 
increased costs resulting from providing joint and survivor annuity 
benefits.
    (h) Application and effective date. (1) Section 401(a)(11) and this 
section shall apply to a plan only with respect to plan years to which 
section 411 (relating to minimum vesting standards) is applicable to the 
plan.
    (2) Section 401(a)(11) and this section shall apply if--
    (i) The participant's annuity starting date falls within a plan year 
beginning after December 31, 1975, and
    (ii) The participant was an active participant in the plan on or 
after the first day of the first plan year beginning after December 31, 
1975.

For purposes of this paragraph, the term ``active participant'' means a 
participant for whom benefits are being accrued under the plan on his 
behalf, the employer is obligated to contribute to or under the plan on 
his behalf, or the employer would have been obligated to contribute to 
or under the plan on his behalf if any contributions were made to or 
under the plan.

(Sec. 401(a)(11) of the Internal Revenue Code of 1954, 88 Stat. 935 (26 
U.S.C. 401(a)(11)))

[T.D. 7379, 40 FR 45810, Oct. 3, 1975; 40 FR 49326, Oct. 22, 1975]



Sec. 11.401(a)-19  Nonforfeitability in case of certain withdrawals.

    (a) Application of section. Section 401(a)(19) and this section 
apply to a plan to which section 411(a) applies. (See section 411(e) and 
Sec. 11.411(a)-2 for applicability of section 411.)
    (b) Prohibited forfeitures--(1) General rule. A plan to which this 
section applies is not a qualified plan (and a trust forming a part of 
such plan is not a qualified trust) if, under such plan, any part of a 
participant's accrued benefit derived from employer contributions is 
forfeitable solely because a benefit derived from the participant's 
contributions under the plan is voluntarily withdrawn by him after he 
has become a 50 percent vested participant.
    (2) 50 percent vested participant. For purposes of paragraph (b)(1) 
of this section, a participant is a 50 percent vested participant when 
he has a nonforfeitable right (within the meaning

[[Page 163]]

of section 411 and the regulations thereunder) to at least 50 percent of 
his accrued benefit derived from employer contributions.
    (3) Certain forfeitures. Paragraph (b)(1) of this section does not 
apply in the case of a forfeiture permitted by section 411(a)(3)(D)(iii) 
and Sec. 11.411(a)-4(b)(5)(i) (relating to forfeitures of certain 
benefits accrued before September 2, 1974).

[T.D. 7387, 40 FR 51421, Nov. 5, 1975]



Sec. 11.401(b)-1  Certain retroactive changes in plan.

    (a) General rule. (1) Under section 401(b), a stock bonus, pension, 
profit-sharing or annuity plan or bond purchase plan which does not 
satisfy the requirements of section 401(a) on any day solely as a result 
of a disqualifying provision (as defined in paragraph (b) of this 
section) shall be considered to have satisfied such requirements on such 
day if there is adopted during the remedial amendment period (as 
determined under paragraphs (c) and (d) of this section) with respect to 
such disqualifying provision an amendment which causes the plan to 
satisfy all such requirements of section 401(a), 403(a) or 405(a) for 
the whole of the remedial amendment period (including extension 
thereof).
    (2) This section shall not apply to any disqualifying provision if 
the remedial amendment period (as determined under paragraphs (c) and 
(d)(1) of this section determined without regard to paragraph (d)(2) of 
this section) with respect to such disqualifying provision ends prior to 
September 2, 1974.
    (b) Disqualifying provisions. For purposes of this section, with 
respect to a plan described in paragraph (a) of this section the term 
``disqualifying provision'' means any provision of--
    (1) A plan as adopted,
    (2) A plan amendment, or
    (3) The Employee Income Security Act of 1974 (Pub. L. 93-406, 88 
Stat. 829),

which causes such plan to fail to satisfy the requirements of section 
401(a), 403(a), or 405(a).
    (c) Remedial amendment period. (1) The remedial amendment period 
with respect to a disqualifying provision begins on the effective date 
of the disqualifying provision. For purposes of this section, the 
effective date of a disqualifying provision is--
    (i) In the case of a disqualifying provision in a plan as adopted, 
the date the plan is put into effect,
    (ii) In the case of a plan amendment, the date the plan amendment is 
adopted or put into effect (whichever is earlier), or
    (iii) In the case of a statutory provision described in paragraph 
(b)(3) of this section, the effective date of such provision.
    (2) Unless extended as provided by paragraph (d) of this section, 
the remedial amendment period ends with the time prescribed by law 
(including extensions) for filing the return of the employer for the 
employer's taxable year in which falls--
    (i) With respect to a disqualifying provision in a plan as adopted, 
or a plan amendment, the later of the date on which such provision was 
adopted or put into effect.
    (ii) With respect to a statutory provision described in paragraph 
(b)(3) of this section, the effective date of such provision.
    (d) Extension for determination letters--(1) In general. If, before 
the end of the remedial amendment period (determined without regard to 
this paragraph) with respect to a disqualifying provision, the employer 
or plan administrator files a request pursuant to Sec. 601.210(o) of 
this chapter (Statement of Procedural Rules) for a determination letter 
with respect to the initial qualifications of the plan or the effect of 
such disqualifying provision on the qualified status of the plan (or a 
trust which is part of a plan) under section 401(a), 403(a), or 405(a), 
then except as provided in subparagraph (3) of this paragraph, such 
remedial amendment period may be extended for a period not to exceed 150 
days, beginning on the day after the last day of the employers taxable 
year in which falls the dates described in subdivisions (i) and (ii) of 
paragraph (c)(2) of this section. The 150-day period does not include 
any day on which there is pending before the Internal Revenue Service a 
request for a determination letter described in this subparagraph. For 
this purpose, such a request is considered to be pending before the 
Internal Revenue Service from

[[Page 164]]

the date it is filed with the Internal Revenue Service to the date on 
which notice of the final determination with respect to the request is 
issued by the Internal Revenue Service, the request is withdrawn, or the 
request is otherwise finally disposed of by the Internal Revenue 
Service.
    (2) Special rules. Except as provided in subparagraph (3) of this 
paragraph, the period provided by subparagraph (1) of this paragraph 
shall not end prior to the later of December 31, 1975, or the expiration 
of 30 days after--
    (i) The date on which a notice of final determination with respect 
to a request described in that subparagraph is issued by the Internal 
Revenue Service, or, where applicable,
    (ii) The date on which a judgment pursuant to section 7476 (relating 
to declaratory judgments) by the United States Tax Court in a case or 
controversy involving such determination becomes final.
    (3) Overall limitation. The period provided by subparagraph (1) of 
this paragraph shall not expire later than the last day (determined 
under section 6501) for assessment of any tax imposed by the Internal 
Revenue Code with respect to the taxable year of the employer 
immediately preceding the first day of such period.

(Sec. 401(b), Internal Revenue Code of 1954, 88 Stat. 943 (26 U.S.C. 
401(b)))

[T.D. 7377, 40 FR 44544, Sept. 29, 1975]



Sec. 11.401(d)(1)-1  Nonbank trustees of trusts benefiting 
owner-employees.

    (a) Effective dates--(1) General rule. For a plan not in existence 
on January 1, 1974, this section shall apply to the first plan year 
commencing after September 2, 1974, and all subsequent plan years.
    (2) Existing plans. For a plan in existence on January 1, 1974, this 
section shall apply to the first plan year commencing after December 31, 
1975, and all subsequent plan years.
    (b) In general. For plan years to which this section applies, the 
trustee of a trust described in Sec. 1.401-12(c)(1)(i) may 
(notwithstanding Sec. 1.401-12(c)) be a person other than a bank 
(within the meaning of section 401(d)(1)) if he demonstrates to the 
satisfaction of the Commissioner that the manner in which he will 
administer trusts will be consistent with the requirements of section 
401. Such demonstration must be made by a written application to the 
Commissioner of Internal Revenue, Attention: E:EP, Internal Revenue 
Service, Washington, DC 20224. Such application must meet the 
requirements set forth in paragraphs (c) to (g) of this section.
    (c) Fiduciary ability. The applicant must demonstrate in detail his 
ability to act within the accepted rules of fiduciary conduct. Such 
demonstration must include the following elements of proof:
    (1) Continuity. (i) The applicant must assure the uninterrupted 
performance of its fiduciary duties notwithstanding the death or change 
of its owners. Thus, for example, there must be sufficient diversity in 
the ownership of the applicant to ensure that the death or change of its 
owners will not interrupt the conduct of its business. Therefore, the 
applicant cannot be an individual.
    (ii) Sufficient diversity in the ownership of an incorporated 
applicant means that individuals each of whom owns more than 20 percent 
of the voting stock in the applicant own, in the aggregate, no more than 
50 percent of such stock.
    (iii) Sufficient diversity in the ownership of an applicant which is 
a partnership means that--
    (A) Individuals each of whom owns more than 20 percent of the 
profits interest in the partnership own, in the aggregate, no more than 
50 percent of such profits interest, and
    (B) Individuals each of whom owns more than 20 percent of the 
capital interest in the partnership own, in the aggregate, no more than 
50 percent of such capital interest.
    (iv) For purposes of this subparagraph, the ownership of stock and 
of capital and profits interests shall be determined in accordance with 
the rules for constructive ownership of stock provided in section 
1563(e) and (f)(2). For this purpose, the rules for constructive 
ownership of stock provided in section 1563(e) and (f)(2). For this 
purpose, the rules for constructive ownership of stock provided in 
section 1563(e) and (f)(2) shall apply to a capital

[[Page 165]]

or profits interest in a partnership as if it were a stock interest.
    (2) Established location. The applicant must have an established 
place of business in the United States where he is accessible during 
every business day.
    (3) Fiduciary experience. The applicant must have fiduciary 
experience or expertise sufficient to ensure that he will be able to 
perform his fiduciary duties. Evidence of fiduciary experience must 
include proof that a significant part of the business of the applicant 
consists of exercising fiduciary powers similar to those he will 
exercise if his application is approved. Evidence of fiduciary expertise 
must include proof that the applicant employs personnel experienced in 
the administration of fiduciary powers similar to those he will exercise 
if his application is approved.
    (4) Fiduciary responsibility. The applicant must assure compliance 
with the rules of fiduciary conduct set out in paragraph (f) of this 
section.
    (5) Financial responsibility. The applicant must exhibit a high 
degree of solvency commensurate with the obligations imposed by this 
section. Among the factors to be taken into account are the applicant's 
net worth, his liquidity, and his ability to pay his debts as they come 
due.
    (d) Capacity to account. The applicant must demonstrate in detail 
his experience and competence with respect to accounting for the 
interests of a large number of individuals (including calculating and 
allocating income earned and paying out distributions to payees). 
Examples of accounting for the interests of a large number of 
individuals include accounting for the interests of a large number of 
shareholders in a regulated investment company and accounting for the 
interests of a large number of variable annuity contract holders.
    (e) Fitness to handle funds--(1) In general. The applicant must 
demonstrate in detail his experience and competence with respect to 
other activities normally associated with the handling of retirement 
funds.
    (2) Examples. Examples of activities normally associated with the 
handling of retirement funds include:
    (i) To receive, issue receipts for, and safely keep securities;
    (ii) To collect income;
    (iii) To execute such ownership certificates, to keep such records, 
make such returns, and render such statements as are required for 
Federal tax purposes;
    (iv) To give proper notification regarding all collections;
    (v) To collect matured or called principal and properly report all 
such collections;
    (vi) To exchange temporary for definitive securities;
    (vii) To give proper notification of calls, subscription rights, 
defaults in principal or interest, and the formation of protective 
committees;
    (viii) To buy, sell, receive, or deliver securities on specific 
directions.
    (f) Rules of fiduciary conduct--(1) Administration of fiduciary 
powers. The applicant must demonstrate that under applicable regulatory 
requirements, corporate or other governing instruments, or its 
established operating procedures:
    (i)(A) The owners or directors of the applicant will be responsible 
for the proper exercise of fiduciary powers by the applicant. Thus, all 
matters pertinent thereto, including the determination of policies, the 
investment and disposition of property held in a fiduciary capacity, and 
the direction and review of the actions of all employees utilized by the 
applicant in the exercise of his fiduciary powers, will be the 
responsibility of the owners or directors. In discharging this 
responsibility, the owners or directors may assign to designated 
employees, by action duly recorded, the administration of such of the 
applicant's fiduciary powers as may be proper to assign.
    (B) A written record will be made of the acceptance and of the 
relinquishment or closing out of all fiduciary accounts, and of the 
assets held for each account.
    (C) At least once during each period of 12 months all the assets 
held in or for each fiduciary account where the applicant has investment 
responsibilities will be reviewed to determine the advisability of 
retaining or disposing of such assets.
    (ii) All employees taking part in the performance of the applicant's 
fiduciary duties will be adequately bonded.

[[Page 166]]

Nothing in this subdivision shall require any person to be bonded in 
contravention of section 412(d) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1112(d)).
    (iii) The applicant will designate, employ, or retain legal counsel 
who will be readily available to pass upon fiduciary matters and to 
advise the applicant.
    (iv) In order to segregate the performance of his fiduciary duties 
from other business activities, the applicant will maintain a separate 
trust division under the immediate supervision of an individual 
designated for that purpose. The trust division may utilize the 
personnel and facilities of other divisions of the applicant, and other 
divisions of the applicant may utilize the personnel and facilities of 
the trust division, as long as the separate identity of the trust 
division is preserved.
    (2) Adequacy of net worth. (i) Not less frequently than once during 
each calendar year the applicant will determine the value of the assets 
held by him in trust. Such assets will be valued at their current value, 
except that the assets of an employee benefit plan to which section 
103(b)(3)(A) of the Employee Retirement Income Security Act of 1974 (29 
U.S.C. 1023(b)(3)(A)) applies will be considered to have the value 
stated in the most recent annual report of the plan.
    (ii) No fiduciary account will be accepted by the applicant unless 
his net worth (determined as of the end of the most recent taxable year) 
exceeds the greater of--
    (A) $100,000, or
    (B) Four percent of the value of all of the assets held by the 
applicant in trust (determined as of the most recent valuation date).
    (iii) The applicant will take whatever lawful steps are necessary 
(including the relinquishment of fiduciary accounts) to ensure that his 
net worth (determined as of the close of each taxable year) exceeds the 
greater of--
    (A) $50,000, or
    (B) Two percent of the value of all of the assets held by the 
applicant in trust (determined as of the most recent valuation date).
    (3) Audits. (i) The applicant will at least once during each period 
of 12 months cause detailed audits of the fiduciary books and records to 
be made by an independent qualified public accountant, and at such time 
will ascertain whether the fiduciary accounts have been administered in 
accordance with law, this section, and sound fiduciary principles. Such 
audits shall be conducted in accordance with generally accepted auditing 
standards, and shall involve such tests of the fiduciary books and 
records of the applicant as are considered necessary by the independent 
qualified public accountant.
    (ii) In the case of an applicant who is regulated, supervised, and 
subject to periodic examination by a State or Federal agency, such 
applicant may adopt an adequate continuous audit system in lieu of the 
periodic audits required by paragraph (f)(3)(i) of this section.
    (iii) A report of the audits and examinations required under this 
subparagraph, together with the action taken thereon, will be noted in 
the fiduciary records of the applicant.
    (4) Funds awaiting investment or distribution. Funds held in a 
fiduciary capacity by the applicant awaiting investment or distribution 
will not be held uninvested or undistributed any longer than is 
reasonable for the proper management of the account.
    (5) Custody of investments. (i) Except for investments pooled in a 
common investment fund in accordance with the provisions of paragraph 
(f)(6) of this section, the investments of each account will not be 
commingled with any other property.
    (ii) Fiduciary assets requiring safekeeping will be deposited in an 
adequate vault. A permanent record will be kept of fiduciary assets 
deposited in or withdrawn from the vault.
    (6) Common investment funds. Where not in contravention of local law 
the assets of an account may be pooled in a common investment fund (as 
defined in paragraph (f)(8)(iii) of this section) which must be 
administered as follows:
    (i) Each common investment fund must be established and maintained 
in accordance with a written agreement, containing appropriate 
provisions as to the manner in which the fund is to be operated, 
including provisions relating to the investment powers and a general

[[Page 167]]

statement of the investment policy of the applicant with respect to the 
fund; the allocation of income, profits and losses; the terms and 
conditions governing the admission or withdrawal of participations in 
the fund; the auditing of accounts of the applicant with respect to the 
fund; the basis and method of valuing assets in the fund, setting forth 
specific criteria for each type of asset; the minimum frequency for 
valuation of assets of the fund; the period following each such 
valuation date during which the valuation may be made (which period in 
usual circumstances may not exceed 10 business days); the basis upon 
which the fund may be terminated; and such other matters as may be 
necessary to define clearly the rights of participants in the fund. A 
copy of the agreement must be available at the principal office of the 
applicant for inspection during all business hours, and upon request a 
copy of the agreement must be furnished to any interested person.
    (ii) All participations in the common investment fund must be on the 
basis of a proportionate interest in all of the assets.
    (iii) Not less frequently than once during each period of 3 months 
applicant must determine the value of the assets in the fund as of the 
date set for the valuation of assets. No participation may be admitted 
to or withdrawn from the fund except (A) on the basis of such valuation 
and (B) as of such valuation date. No participation may be admitted to 
or withdrawn from the fund unless a written request for or notice of 
intention of taking such action has been entered on or before the 
valuation date in the fiduciary records of the applicant. No request or 
notice may be canceled or countermanded after the valuation date.
    (iv)(A) The applicant must at least once during each period of 12 
months cause an adequate audit to be made of the common investment fund 
by a qualified public accountant.
    (B) The applicant must at least once during each period of 12 months 
prepare a financial report of the fund which, based upon the above 
audit, must contain a list of investments in the fund showing the cost 
and current market value of each investment; a statement for the period 
since the previous report showing purchases, with cost; sales, with 
profit or loss and any other investment changes; income and 
disbursements; and an appropriate notation as to any investments in 
default.
    (C) The applicant must transmit and certify the accuracy of the 
financial report to the administrator of each plan participating in the 
common investment fund within 120 days after the end of the plan year.
    (v) When participations are withdrawn from a common investment fund, 
distributions may be made in cash or ratably in kind, or partly in cash 
and partly in kind, provided that all distributions as of any one 
valuation date must be made on the same basis.
    (vi) If for any reason an investment is withdrawn in kind from a 
common investment fund for the benefit of all participants in the fund 
at the time of such withdrawal and such investment is not distributed 
ratably in kind, it must be segregated and administered or realized upon 
for the benefit ratably of all participants in the common investment 
fund at the time of withdrawal.
    (7) Books and records. (i) The applicant must keep his fiduciary 
records separate and distinct from other records. All fiduciary records 
must be so kept and retained for as long as the contents thereof may 
become material in the administration of any internal revenue law. The 
fiduciary records must contain full information relative to each 
account.
    (ii) The applicant must keep an adequate record of all pending 
litigation to which he is a party in connection with the exercise of 
fiduciary powers.
    (8) Definitions. For purposes of this paragraph and paragraph (c)(5) 
of this section--
    (i) The term ``account'' or ``fiduciary account'' means a trust 
described in section 401(a) (including a custodial account described in 
section 401(f)), a custodial account described in section 403(b)(7), or 
an individual retirement account described in section 408(a) (including 
a custodial account described in section 408(h)).

[[Page 168]]

    (ii) The term ``administrator'' means an administrator as defined in 
section 3(16)(A) of the Employee Retirement Income Security Act of 1974, 
29 U.S.C. 1002(16)(A).
    (iii) The term ``common investment fund'' means a trust which 
satisfied the following requirements:
    (A) The trust consists of all or part of the assets of several 
accounts which have been established with the applicant, and
    (B) The trust is described in section 401(a) and exempt from tax 
under section 501(a), or is a common investment fund described in Sec. 
1.408-2(b)(5) (as published with notice of proposed rulemaking in the 
Federal Register on February 21, 1975, at 40 FR 7661), or both.
    (iv) The term ``employee benefit plan'' means an employee benefit 
plan as defined in section 3(2) of the Employee Retirement Income 
Security Act of 1974, 29 U.S.C. 1002(2).
    (v) The term ``fiduciary records'' means all matters which are 
written, transcribed, recorded, received or otherwise come into the 
possession of the applicant and are necessary to preserve information 
concerning the acts and events relevant to the fiduciary activities of 
the applicant.
    (vi) The term ``qualified public accountant'' means a qualified 
public accountant as defined in section 103(a)(3)(D) of the Employee 
Retirement Income Security Act of 1974, 29 U.S.C. 1023(a)(3)(D).
    (vii) The term ``net worth'' means the amount of the applicant's 
assets less the amount of his liabilities, as determined in accordance 
with generally accepted accounting principles.
    (g) Special rules--(1) Passive trustee. (i) An applicant who 
undertakes to act only as a passive trustee may be relieved of one or 
more of the requirements of this section upon clear and convincing proof 
that such requirements are not germane, under all the facts and 
circumstances, to the manner in which he will administer any trust. A 
trustee is a passive trustee only if under the written trust instrument 
he has no discretion to direct the investment of the trust funds or any 
other aspect of the business administration of the trust, but is merely 
authorized to acquire and hold particular investments specified by the 
trust instrument. Thus, for example, in the case of an applicant who 
undertakes merely to acquire and hold the stock of a single regulated 
investment company, the requirements of paragraphs (f)(1)(i)(C), 
(1)(iv), and (6) of this section shall not apply and no negative 
inference shall be drawn from the applicant's failure to demonstrate his 
experience or competence with respect to the activities described in 
paragraph (e)(2)(v) to (viii) of this section.
    (ii) The determination letter issued to an applicant who is approved 
by reason of this subparagraph shall state that the applicant is 
authorized to act only as a passive trustee.
    (2) Federal or State regulation. Evidence that an applicant is 
subject to Federal or State regulation with respect to one or more 
relevant factors shall be given weight in proportion to the extent that 
such regulatory standards are consonant with the requirements of section 
401.
    (3) Savings account. (i) An applicant will be approved to act as 
trustee under this subparagraph if the following requirements are 
satisfied:
    (A) The applicant is a credit union, industrial loan company, 
savings and loan association, or other financial institution designated 
by the Commissioner;
    (B) The investment of the trust assets will be solely in deposits in 
the applicant;
    (C) Deposits in the applicant are insured (up to the dollar limit 
prescribed by applicable law) by an agency or instrumentality of the 
United States or a State.
    (ii) Any applicant who satisfies the requirements of this 
subparagraph is hereby approved, and (notwithstanding paragraph (b) of 
this section) is not required to submit a written application. This 
approval takes effect on the first day after December 22, 1976, on which 
the applicant satisfies the requirements of this subparagraph, and 
continues in effect for so long as the applicant continues to satisfy 
those requirements.
    (4) Notification of Commissioner. The applicant must notify the 
Commissioner in writing of any change which

[[Page 169]]

affects the continuing accuracy of any representation made in the 
application required by this section, whether the change occurs before 
or after the applicant receives a determination letter. Such 
notification must be addressed to Commissioner of Internal Revenue, 
Attention: E:EP, Internal Revenue Service, Washington, DC 20224.
    (5) Substitution of trustee. No applicant shall be approved unless 
he undertakes to act as trustee only under trust instruments which 
contain a provision to the effect that the employer is to substitute 
another trustee upon notification by the Commissioner that such 
substitution is required because the applicant has failed to comply with 
the requirements of this section or is not keeping such records, or 
making such returns, or rendering such statements as are required by 
forms or regulations.
    (6) Revocation. Approval of the application required by this section 
may be revoked for any good and sufficient reason.

(Sec. 401(d)(1) and Internal Revenue Code of 1954 (88 Stat. 939 26 
U.S.C. 401))

[T.D. 7383, 40 FR 48509, Oct. 16, 1975 as amended by T.D. 7448, 41 FR 
55510, Dec. 21, 1976]



Sec. 11.402(e)(4)(A)-1  Lump sum distributions in the case of an 
employee who has separated from service.

    (a) Balance to the credit of an employee. Section 402(e)(4)(A) 
provides that in order for a distribution or payment from a qualified 
plan to be a lump sum distribution, the distribution or payment must 
represent the employee's balance under the plan. The employee's balance 
does not include any amount which is forfeited under the plan (even 
though the amount may be reinstated) as of the close of the taxable year 
of the recipient within which the distribution is made. In addition, in 
the case of an employee who has separated from service, the employee's 
balance does not include an amount which is subject to forfeiture not 
later than the close of the plan year within which the employee incurs a 
one-year break in service (within the meaning of section 411) if--
    (1) By reason of the break in service, the amount is actually 
forfeited at or prior to the close of that plan year, and
    (2) The break in service occurs within 25 months after the 
employee's separation from service. In the case of a plan which uses the 
elapsed time method of crediting service, the break in service may occur 
within 25 months of the employee's severance from service. See 
Department of Labor regulations relating to the elapsed time method for 
the date an employee severs from service.

An employee may assume that an amount subject to forfeiture will be 
treated as forfeited by the date prescribed in paragraphs (a) (1) and 
(2) of this section if, under the plan, forfeiture will occur not later 
than that date. Therefore, he may assume that a distribution is a lump 
sum distribution at the time it is made, if the other requirements for 
lump sum distributions are satisfied. However, if the amount is not 
forfeited by that date, the amount will be taken into account in 
determining the balance to the credit of the employee. Accordingly, the 
distribution will not be a lump sum distribution because it did not 
include the employee's entire balance under the plan.
    (b) Rollover contribution. As described in paragraph (a) of this 
section, an employee may assume that a distribution is a lump sum 
distribution even though part of the balance of his account has not been 
forfeited at the time the distribution is made. He may then roll the 
distribution over as a contribution to an individual retirement 
arrangement pursuant to section 402(a)(5) or 403(a)(4). It may be 
subsequently determined that the distribution was not a lump sum 
distribution because an amount subject to forfeiture was not in fact 
forfeited within the time required in paragraph (a) of this section. In 
that case, the contribution will be an excess contribution to the 
individual retirement arrangement, deemed made in the first taxable year 
of the employee in which it can be determined that an amount subject to 
forfeiture will not be forfeited.
    (c) Effective date. This section is effective for distributions made 
in taxable years of recipients beginning after December 31, 1973.

[T.D. 7488, 42 FR 27882, June 1, 1977]

[[Page 170]]



Sec. 11.402(e)(4)(B)-1  Election to treat an amount as a lump sum 
distribution.

    (a) In general. For purposes of sections 402, 403, and this section, 
an amount which is described in section 402(e)(4)(A) and which is not an 
annuity contract may be treated as a lump sum distribution under section 
402(e)(4)(A) only if the taxpayer elects for the taxable year to have 
all such amounts received during such year so treated. Not more than one 
election may be made under this section with respect to an employee 
after such employee has attained age 59\1/2\.
    (b) Taxpayers eligible to make the election. Individuals, estates, 
and trusts are the only taxpayers eligible to make the election provided 
by this section. In the case of a lump sum distribution made with 
respect to an employee to 2 or more trusts, the election provided by 
this section shall be made by the employee or by the personal 
representative of a deceased employee.
    (c) Procedure for making election--(1) Time and scope of election. 
An election under this section shall be made for each taxable year to 
which such election is to apply. The election shall be made before the 
expiration of the period (including extension thereof) prescribed in 
section 6511 for making a claim for credit or refund of the assessed tax 
imposed by Chapter I of Subtitle A of the Code for such taxable year.
    (2) Manner of making election. An election by the taxpayer with 
respect to a taxable year shall be made by filing Form 4972 as a part of 
the taxpayer's income tax return or amended return for the taxable year.
    (3) Revocation of election. An election made pursuant to this 
section may be revoked within the time prescribed in subparagraph (1) of 
this paragraph for making an election, only if there is filed, within 
such time, an amended income tax return for such taxable year, which 
includes a statement revoking the election and is accompanied by payment 
of any tax attributable to the revocation. If an election for a taxable 
year is revoked, another election may be made for that taxable year 
under subparagraphs (1) and (2) of this paragraph.

(Sec. 402(e)(4)(B) of the Internal Revenue Code of 1954 (88 Stat. 989, 
26 U.S.C. 402(e)(4)(B)))

[T.D. 7339, 40 FR 1016, Jan. 6, 1975]



Sec. 11.404(a)(6)-1  Time when contributions to ``H.R. 10'' plans 
considered made.

    (a) In general. Section 404(a)(6), as amended by section 1013(c)(2) 
of the Employee Retirement Income Security Act of 1974, provides that 
for purposes of paragraphs (1), (2), and (3) of section 404(a), a 
taxpayer shall be deemed to have made a payment on the last day of the 
preceding taxable year if the payment is on account of such taxable year 
and is made not later than the time prescribed by law for filing the 
return for such taxable year (including extensions thereof). Under 
section 1017(b) of the Employee Retirement Income Security Act of 1974 
(prior to its amendment by the Tax Reduction Act of 1975), in the case 
of a plan which was in existence on January 1, 1974, the foregoing 
provision generally applies for contributions on account of taxable 
years of an employer ending with or within plan years beginning after 
December 31, 1975. In the case of a plan not in existence on January 1, 
1974, the foregoing provision generally applies for contributions on 
account of taxable years of an employer ending with or within plan years 
beginning after September 2, 1974. See Sec. 11.410(a)-2(c) for time a 
plan is considered in existence. See also Sec. 11.410(a)-2(d), which 
provides that a plan in existence on January 1, 1974 may elect to have 
certain provisions, including the amendment to section 404(a)(6) 
contained in section 1013 of the Employee Retirement Income Security Act 
of 1974, apply to a plan year beginning after September 2, 1974, and 
before the otherwise applicable effective date contained in that 
section.
    (b) ``H.R. 10'' plans may elect new provision. Under section 402 of 
the Tax Reduction Act of 1975 (89 Stat. 47), in the case of a plan which 
was in existence on January 1, 1974, and which provides contributions or 
benefits for employees some or all of whom are employees within the 
meaning of section 401(c)(1)

[[Page 171]]

of the Code and Sec. 1.401-10(b), the provision described in paragraph 
(a) of this section shall apply for taxable years of an employer ending 
with or within plan years beginning after December 31, 1974, but only if 
the employer (within the meaning of section 401(c)(4) of the Code and 
Sec. 1.401-10(e)) elects to have such provisions apply as provided in 
paragraph (c) of this section.
    (c) Manner of election. The election described in paragraph (b) of 
this section shall be considered to be made if the employer (as 
described in paragraph (b) of this section)--
    (1) Makes a contribution which relates to his preceding taxable year 
within the time prescribed in paragraph (a) of this section to a plan 
described in paragraph (b) of this section, and
    (2) Claims a deduction for such contribution on his tax return for 
such year (or, in the case of a contribution by a partnership on behalf 
of a partner, the contribution is shown on Schedule K of the partnership 
tax return for such year); no formal statement is necessary. In the case 
of an employer whose income tax return for the year on account of which 
the payment is made is required to be filed (determined without regard 
to extensions of time) on or before April 15, 1976, and who made a 
payment within the time prescribed in paragraph (a) of this section, the 
election also may be made by filing an amended return or claim for 
refund with respect to such year on or before September 30, 1976.
    (d) Election is irrevocable. Any election made under paragraph (c) 
of this section, once made, shall be irrevocable.
    (e) Examples. The rules of this section are illustrated by the 
following examples.

    Example (1). On October 15, 1976, the ABC Partnership made a 
contribution to the ABC Profit Sharing Plan and Trust on behalf of 
partners and common-law employees with respect to the plan year ending 
December 31, 1975. The ABC Profit Sharing Trust was exempt under section 
501 (a) throughout 1975. The contribution for both partners and 
employees was reflected on the partnership return for the calendar year 
1975 which was filed on October 10, 1976; proper extensions of the due 
date of the partnership return had been received, extending the due date 
to October 15, 1976. The election is valid since all requirements of 
this section have been met.
    Example (2). The XYZ Partnership made a plan contribution on April 
10, 1976, with respect to the plan year ending December 31, 1975, but 
the amount contributed for 1975 was not reflected in the partnership 
return filed for the calendar year 1975 on April 15, 1976. However, the 
XYZ Partnership filed an amended partnership return for the year 1975 on 
September 30, 1976, claiming a deduction for the employee-related 
contribution and setting forth on Schedule K the contribution relating 
to partners. The election is valid, since the contribution on account of 
1975 was made within the time required, and was shown on the amended tax 
return of the employer for 1975 filed within the time prescribed in 
paragraph (c)(2) of this section.
    Example (3). Mr. Smith, a sole proprietor whose taxable year is the 
calendar year, made a contribution to the Smith Profit Sharing Plan and 
Trust on April 15, 1976, for the plan year which began December 1, 1974, 
and ended November 30, 1975. The plan was in existence on January 1, 
1974. Since the contribution was made within the time prescribed by this 
section and was on account of a taxable year of the employer ending 
within a plan year which began after December 31, 1974, the contribution 
may be deducted on Mr. Smith's return for 1975, even though the 
contribution was for a plan year beginning before December 31, 1974.
    Example (4). The DEF Partnership, reporting its income on the basis 
of a fiscal year ending June 30, made a contribution to its ``H.R. 10'' 
plan which was in existence on January 1, 1974, and whose plan year was 
the calendar year. The contribution was made on September 30, 1975, and 
was on account of the taxable year of the partnership ending June 30, 
1975. The contribution was properly reflected in the partnership return 
for the fiscal year ending June 30, 1975. The partnership's election to 
have section 404(a)(6), as amended, apply to its fiscal year ending June 
30, 1975, is valid since that year ended with or within a plan year 
beginning after December 31, 1974.

[T.D. 7402, 41 FR 5633, Feb. 9, 1976]



Sec. 11.408(a)(2)-1  Trustee of individual retirement accounts.

    A person may demonstrate to the satisfaction of the Commissioner 
that the manner in which he will administer the trust will be consistent 
with the requirements of section 408 only upon the filing of a written 
application to the

[[Page 172]]

Commissioner of Internal Revenue, Attention: E:EP, Internal Revenue 
Service, Washington, D.C. 20224. Such application must meet the 
applicable requirements of the regulations under section 401(d)(1) 
relating to nonbank trustees of pension and profit-sharing trusts 
benefiting owner-employees.

(Sec. 408(a)(2) of the Internal Revenue Code of 1954 (88 Stat. 959, 26 
U.S.C. 408(a)(2)))

[T.D. 7390, 40 FR 53580, Nov. 19, 1975]



Sec. 11.410-1  Election by church to have participation, vesting, 
funding, etc., provisions apply.

    (a) In general. If a church or convention or association of churches 
which maintains any church plan, as defined in section 414(e), makes an 
election under this section, certain provisions of the Code and title I 
of the Employee Retirement Income Security Act of 1974 (the ``Act'') 
shall apply to such church plan as if such plan were not a church plan. 
The provisions of the Code referred to are section 410 (relating to 
minimum participation standards), section 411 (relating to minimum 
vesting standards), section 412 (relating to minimum funding standards), 
section 4975 (relating to prohibited transactions), and paragraphs (11), 
(12), (13), (14), (15), and (19) of section 401(a) (relating to joint 
and survivor annuities, mergers and consolidations, assignment or 
alienation of benefits, time of benefit commencement, certain social 
security increases, and withdrawals of employee contributions, 
respectively).
    (b) Election is irrevocable. An election under this section with 
respect to any church plan shall be binding with respect to such plan 
and, once made, shall be irrevocable.
    (c) Procedure for making election--(1) Time of election. An election 
under this section may be made for plan years for which the provisions 
of section 410(d) of the Code apply to the church plan. By reason of 
section 1017(b) of the Act section 410(d) does not apply to a plan in 
existence on January 1, 1974, for plan years beginning before December 
31, 1975. Section 1017(d) of the Act permits a plan administrator to 
elect to have certain provisions of the Code (including section 410(d)) 
apply to a plan before the otherwise applicable effective dates of such 
provisions. See Sec. 420.0-1 of the regulations in this chapter 
(Temporary Regulations on Procedure and Administration under the 
Employee Retirement Income Security Act of 1974). Therefore, an election 
under section 410(d) of the Code may be made for a plan year beginning 
before December 31, 1975, only if an election has been made under 
section 1017(d) of the Act with respect to that plan year.
    (2) By whom election is to be made. The election provided by this 
section may be made only by the plan administrator of the church plan.
    (3) Manner of making election. The plan administrator may elect to 
have the provisions of the Code described in paragraph (a) of this 
section apply to the church plan as if it were not a church plan by 
attaching the statement described in subparagraph (5) of this paragraph 
to either (i) the annual return required under section 6058(a) (or an 
amended return) with respect to the plan which is filed for the first 
plan year for which the election is effective or (ii) a written request 
for a determination letter relating to the qualification of the plan 
under section 401(a), 403(a), or 405(a) of the Code and, if trusteed, 
the exempt status under section 501(a) of the Code of a trust 
constituting a part of the plan.
    (4) Conditional election. If an election is made with a written 
request for a determination letter, the election may be conditioned upon 
issuance of a favorable determination letter and will become irrevocable 
upon issuance of such letter.
    (5) Statement. The statement described in subparagraph (3) of this 
paragraph shall indicate (i) that the election is made under section 
410(d) of the Code and (ii) the first plan year for which it is 
effective.

(Sec. 410(d), Internal Revenue Code, 1954 (88 Stat. 901; 26 U.S.C. 
410(d)))

[T.D. 7363, 40 FR 27217, June 27, 1975]



Sec. 11.410(b)-1  Minimum coverage requirements.

    (a)-(c) [Reserved]
    (d) Special rules. (1) [Reserved]
    (2) Discrimination. The determination as to whether a plan 
discriminates in favor of employees who are officers, shareholders, or 
highly compensated, is

[[Page 173]]

made on the basis of the facts and circumstances of each case, allowing 
a reasonable difference between the percentage of such employees 
benefited by the plan to all employees benefited by the plan and the 
percentage of all such employees of the employer to all employees of the 
employer. A showing that a specified percentage of employees covered by 
a plan are not officers, shareholders, or highly compensated, without a 
showing that the difference (if any) between such percentage and the 
percentage of all employees who are not officers, shareholders, or 
highly compensated is reasonable, is not sufficient to establish that 
the plan does not discriminate in favor of employees who are officers, 
shareholders, or highly compensated.

(Sec. 410, Internal Revenue Code of 1954 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7380, 40 FR 45816, Oct. 3, 1975, as amended by T.D. 7508, 42 FR 
47197, Sept. 20, 1977]



Sec. 11.412(c)-7  Election to treat certain retroactive plan amendments
as made on the first day of the plan year.

    (a) General rule. Under section 412(c)(8), a plan administrator may 
elect to have any amendment which is adopted after the close of the plan 
year to which it applies deemed to have been made on the first day of 
such plan year if the amendment--
    (1) Is adopted no later than 2 and one-half months after the close 
of such plan year (or, in the case of a multiemployer plan, no later 
than 2 years after the close of such plan year),
    (2) Does not reduce the accrued benefit of any participant 
determined as of the beginning of such plan year, and
    (3) Does not reduce the accrued benefit of any participant 
determined as of the time of adoption of the amendment, or, if it does 
so reduce such accrued benefit, it is shown that the plan administrator 
filed a notice with the Secretary of Labor notifying him of the 
amendment, and--
    (i) The Secretary of Labor approved the amendment, or
    (ii) The Secretary of Labor failed to disapprove the amendment 
within 90 days after the date on which the notice was filed.
    (b) Time and manner of making election. (1) The election under 
section 412(c)(8) shall be made by the plan administrator by a statement 
of election described in subparagraph (3) of this paragraph, attached to 
the annual return relating to minimum funding standards required to be 
filed under section 6058 with respect to the plan year to which the 
election relates.
    (2) In the event that an amendment to which paragraph (a) of this 
section applies is adopted after the filing of the annual return 
required under section 6058, the plan administrator may make the 
election under section 412(c)(8) by attaching a statement of election, 
described in paragraph (b)(3) of this section, to a copy of such annual 
return, and filing such copy no later than the time allowed for the 
filing of such returns under section 6058. (In the case of multiemployer 
plans, such copy may be filed within a 24 month period beginning with 
the date prescribed for the filing of such returns.)
    (3) The statement of election filed by or on behalf of the plan 
administrator shall--
    (i) State the date of the close of the first plan year to which the 
amendment applies and the date on which the amendment was adopted;
    (ii) Contain a statement that the amendment does not reduce the 
accrued benefit of any participant determined as of the beginning of the 
plan year preceding the plan year in which the amendment is adopted; and
    (iii) Contain either--
    (A) A statement that the amendment does not reduce the accrued 
benefit of any participant determined as of the time of adoption of such 
amendment, or
    (B) A copy of the notice filed with the Secretary of Labor under 
section 412(c)(8) and a statement that either the Secretary of Labor has 
approved the amendment or he has failed to act within 90 days after 
notification of the amendment.

[T.D. 7338, 39 FR 44751, Dec. 27, 1974]



Sec. 11.412(c)-11  Election with respect to bonds.

    (a) In general. Section 412(c)(2)(B) provides that, at the election 
of the administrator of a plan which includes a

[[Page 174]]

trust qualified under section 401(a) or of a plan which satisfies the 
requirements of section 403(a) or section 405(a), the value of a bond or 
other evidence of indebtedness which is held by the plan and which is 
not in default as to principal or interest may be determined on an 
amortized basis running from initial cost at purchase to the amount 
payable at maturity (or, in the case of a bond which is callable prior 
to maturity, the earliest call date). So long as this election is in 
effect, the value of any such evidence of indebtedness shall, for 
purposes of section 412, be determined on such an amortized basis rather 
than on a method taking into account fair market value as described in 
section 412(c)(2)(A).
    (b) Manner of making election. The election to value evidences of 
indebtedness in accordance with paragraph (a) of this section shall be 
made by a statement to that effect attached to and filed as a part of 
the annual return of the plan required under section 6058 of the Code.
    (c) Effect of election. The election provided by section 
412(c)(2)(B), once made, will affect the valuation of all evidences of 
indebtedness, not in default as to principal or interest, which are held 
by the plan for the plan year for which the election is made and any 
evidences of indebtedness which are subsequently acquired by the plan. 
The value of any evidence of indebtedness which is in default as of the 
valuation date for the plan year must be determined on the basis of any 
reasonable actuarial method of valuation which takes into account fair 
market value in accordance with section 412(c)(2)(A) and must continue 
to be so valued until the indebtedness is no longer in default.
    (d) Consent to revoke required--(1) In general. An election made in 
accordance with paragraph (a) of this section may be revoked only if 
consent to revoke the election is obtained from the Secretary or his 
delegate.
    (2) Manner of obtaining permission for revocation. [Reserved]

(Secs. 302(c)(2)(B), 412(c)(2)(B) of the Internal Revenue Code of 1954 
(88 Stat. 871, 914))

[T.D. 7335, 39 FR 44009, Dec. 20, 1974]



Sec. 11.412(c)-12  Extension of time to make contributions to satisfy 
requirements of section 412.

    (a) In general. Section 412(c)(10) of the Internal Revenue Code of 
1954 provides that for purposes of section 412 a contribution for a plan 
year made after the end of such plan year but not later than two and 
one-half months after the last day of such plan year shall be deemed to 
have been made on such last day. Section 412(c) (10) further provides 
that the two and one-half month period may be extended for not more than 
six months under regulations.
    (b) Six month extension of two and one-half month period. (1) For 
purposes of section 412 a contribution for a plan year to which section 
412 applies that is made not more than eight and one-half months after 
the end of such plan year shall be deemed to have been made on the last 
day of such year.
    (2) The rules of this section relating to the time a contribution to 
a plan is deemed made for purposes of the minimum funding standard under 
section 412 are independent from the rules contained in section 404(a) 
(6) relating to the time a contribution to a plan is deemed made for 
purposes of claiming a deduction for such contribution under section 
404.

(Sec. 412(c)(10), Internal Revenue Code of 1954 (88 Stat. 917; 26 U.S.C. 
412(c)(10)))

[T.D. 7439, 41 FR 46597, Oct. 22, 1976]



PART 12_TEMPORARY INCOME TAX REGULATIONS UNDER THE REVENUE ACT OF 
1971--Table of Contents



Sec.
12.3 Investment credit, public utility property elections.
12.4 Election of Class Life Asset Depreciation Range System (ADR).
12.7 Election to be treated as a DISC.
12.8 Elections with respect to net leases of real property.
12.9 Election to postpone determination with respect to the presumption 
          described in section 183(d).

    Authority: 26 U.S.C. 167, 263, and 7805.



Sec. 12.3  Investment credit, public utility property elections.

    (a) Elections--(1) In general. Under section 46(e), three elections 
may be made on or before March 9, 1972, with

[[Page 175]]

respect to section 46(e) property (as defined in subparagraph (3) of 
this paragraph). An election made under the provisions of section 46(e) 
shall be irrevocable.
    (2) Applicability of elections. (i) Any election under section 46(e) 
shall be made with respect to all of the taxpayer's property eligible 
for the election whether or not the taxpayer is regulated by more than 
one regulatory body.
    (ii)(a) Paragraph (1) of section 46(e) shall apply to all of the 
taxpayer's section 46(e) property in the absence of an election under 
paragraph (2) or (3) of section 46(e). If an election is made under 
paragraph (2) of section 46(e), paragraph (1) of such section shall not 
apply to any of the taxpayer's section 46(e) property.
    (b) An election made under the last sentence of section 46(e)(1) 
shall apply to that portion of the taxpayer's section 46(e) property to 
which paragraph (1) of section 46(e) applies and which is short supply 
property within the meaning of Sec. 1.46-5(b)(2) of this chapter 
(Income Tax Regulations) as set forth in a notice of proposed rule 
making published in 37 FR 3526 on February 17, 1971.
    (iii) If a taxpayer makes an election under paragraph (2) of section 
46(e), and makes no election under paragraph (3) of such section, the 
election under paragraph (2) of section 46(e) shall apply to all of its 
section 46(e) property.
    (iv) If a taxpayer makes an election under paragraph (3) of section 
46(e), such election shall apply to all of the taxpayer's section 46(e) 
property to which section 167(l)(2)(C) applies. Paragraph (1) or (2) of 
section 46(e) (as the case may be) shall apply to that portion of the 
taxpayer's section 46(e) property which is not property to which section 
167(l)(2)(C) applies. Thus, for example, if a taxpayer makes an election 
under paragraph (2) of section 46(e), and also makes an election under 
paragraph (3) of section 46(e), paragraph (3) shall apply to all of the 
taxpayer's section 46(e) property to which section 167(l)(2)(C) applies 
and paragraph (2) shall apply to the remainder of the taxpayer's section 
46(e) property.
    (3) Section 46(e) property. ``Section 46(e) property'' is section 38 
property which is both property described in section 50 and is--
    (i) Public utility property within the meaning of section 
46(c)(3)(B) (other than nonregulated communication property of the type 
described in the last sentence of section 46(c)(3)(B)), or
    (ii) Property used predominantly in the trade or business of the 
furnishing or sale of (a) steam through a local distribution system or 
(b) the transportation of gas or steam by pipeline, if the rates for 
such furnishing or sale are established or approved by a governmental 
unit, agency, instrumentality, or commission described in section 
46(c)(3)(B).
    (b) Method of making elections. A taxpayer may make the elections 
described in section 46(e) by filing a statement, on or before March 9, 
1972, with the district director or director of the internal revenue 
service center with whom the taxpayer ordinarily files its income tax 
return. For rules in the case of taxpayers filing consolidated returns, 
see Sec. 1.1502-77(a) of this chapter (Income Tax Regulations). Such 
statement shall contain the following information:
    (1) The name, address, and taxpayer identification number of the 
taxpayer,
    (2) The paragraph (or paragraphs) of section 46(e) under which the 
taxpayer is making the election,
    (3) If an election is made under the last sentence of section 
46(e)(1), the name and address of all regulatory bodies which have 
jurisdiction over the taxpayer with respect to the section 46(e) 
property covered by such election and a statement setting forth the type 
of the public utility activity described in section 46(e)(5)(B) in which 
the taxpayer engages, and
    (4) If an election is made under paragraph (3) of section 46(e), a 
statement indicating whether an election has been made by the taxpayer 
under section 167(l)(4)(A).

[T.D. 7161, 37 FR 3511, Feb. 17, 1972]



Sec. 12.4  Election of Class Life Asset Depreciation Range System 
(ADR).

    (a) Elections filed before February 1, 1972. No election or tax 
return shall be filed which does not conform to section

[[Page 176]]

109 of the Revenue Act of 1971 (Pub. L. 92-178, 85 Stat. 508). If a 
taxpayer has before February 1, 1972 filed an election and a tax return 
in accordance with Sec. 1.167(a)-11 of this chapter (relating to 
depreciation allowances using the Asset Depreciation Range System 
published in the Federal Register for June 23, 1971), such election will 
be treated as an election under the Class Life Asset Depreciation Range 
System (ADR) as contained in section 109 of the Revenue Act of 1971 and 
the proposed amendments to Sec. 1.167(a)-11 of this chapter published 
in the Federal Register for January 27, 1972, provided that the election 
conforms with the provisions of the Class Life Asset Depreciation Range 
System (ADR) contained in section 109 of the Revenue Act of 1971 and the 
amendments to the regulations as finally adopted. Such an election and 
the determination of tax liability on the tax return are subject to the 
terms and conditions of section 109 of the Revenue Act of 1971 and the 
final regulations prescribing the Class Life Asset Depreciation Range 
System (ADR). (For revocation of an election, see paragraph (c) of this 
section.) An election and tax return filed before February 1, 1972, 
which does not conform with the final regulations prescribing the Class 
Life Asset Depreciation Range System (ADR) is an invalid election unless 
corrected by an amended tax return and election filed no later than the 
time permitted by paragraph (c) of this section. If a valid election 
under Sec. 1.167(a)-11 of this chapter is not filed for a taxable year, 
the taxpayer is required to file or amend his tax return and determine 
tax liability for the taxable year without regard to Sec. 1.167(a)-11 
of this chapter.
    (b) Elections filed after January 31, 1972. No election or tax 
return shall be filed which does not conform with section 109 of the 
Revenue Act of 1971. An election and tax return filed under Sec. 
1.167(a)-11 of this chapter after January 31, 1972, and before the final 
amendments to the regulations are published in the Federal Register, 
should be filed in accordance with section 109 of the Revenue Act of 
1971 and the proposed amendments to Sec. 1.167(a)-11 of this chapter 
relating to the Class Life Asset Depreciation Range System (ADR). Such 
election and the determination of tax liability on the tax return are 
subject to the terms and conditions of section 109 of the Revenue Act of 
1971 and the final regulations prescribing the Class Life Asset 
Depreciation Range System (ADR). An election and tax return filed after 
January 31, 1972, which does not conform with the final regulations 
prescribing the Class Life Asset Depreciation Range System (ADR), is not 
a valid election unless corrected by an amended tax return and election 
filed no later than the time permitted by paragraph (c) of this section. 
(For revocation of election, see paragraph (c) of this section.) If a 
valid election under Sec. 1.167(a)-11 of this chapter is not filed for 
a taxable year the taxpayer is required to file or amend his tax return 
and determine tax liability for the taxable year without regard to Sec. 
1.167(a)-11 of this chapter.
    (c) Special rule for election and revocation. Notwithstanding the 
rules of Sec. 1.167(a)-11 of this chapter, a taxpayer is permitted to 
make, amend or revoke an election under Sec. 1.167(a)-11 of this 
chapter at any time before the latest of (1) the time the taxpayer files 
his first return for the taxable year of election, (2) 120 days after 
the final regulations prescribing the Class Life Asset Depreciation 
Range System (ADR) are published in the Federal Register, or (3) the 
time prescribed by law (including extensions thereof) for filing the 
return for the taxable year of election. The notification of amendment 
or revocation of an election shall be made by filing an amended tax 
return with the Internal Revenue Service Center with which the election 
was filed. The election should be filed in the manner specified in the 
Class Life Asset Depreciation Range System (ADR) regulations as finally 
prescribed.
    (d) Examples. The principles of this section may be illustrated by 
the following examples:

    Example (1). Taxpayer A filed an election under Sec. 1.167(a)-11 
before February 1, 1972. A elected to use the modified half-year 
convention by treating all assets as placed in service on the first day 
of the second quarter of the taxable year, excluded section 1250 
property (as defined in section 1250(c)) and property used predominantly 
outside the United

[[Page 177]]

States from the election, and included ``subsidiary assets'' (as defined 
in Sec. 1.167(a)-11(b)(5)(vii) of the proposed amendments to the 
regulations) in the election. A's election does not conform with the 
regulations under Sec. 1.167(a)-11 as proposed to be amended. A should 
file an amended return and election within 120 days after the 
publication of the final Class Life Asset Depreciation Range System 
(ADR) regulations under Sec. 1.167(a)-11. Such amended return and 
election must conform to the final amendments to the regulations. In the 
amended election, A must adopt one of the conventions permitted by the 
final amendments. Assuming the proposed amendments are finally adopted, 
A may exclude his subsidiary assets from the election provided the 
conditions of paragraph (b)(5)(vii) of Sec. 1.167(a)-11 of the 
regulations, as proposed to be amended, are met, and A must include 
property used predominantly outside the United States in the election 
unless paragraph (b)(5)(iii), (v), or (vi) of Sec. 1.167(a)-11, as 
proposed to be amended, permit the exclusion of the property. Generally, 
A must include section 1250 property in the election unless paragraph 
(b)(5)(vi) of Sec. 1.167(a)-11, as proposed to be amended, permits the 
exclusion of the property.
    Example (2). Taxpayer B filed an election to compute depreciation 
under Sec. 1.167(a)-11 before February 1, 1972. B elected to use the 
half-year convention and has no assets used predominantly outside the 
United States. B excluded section 1250 property from the election and 
included his subsidiary assets in the election. Assume that the 
provisions of paragraph (b)(5)(vi) of Sec. 1.167(a)-11, as proposed to 
be amended, apply and permit the exclusion of section 1250 property and 
that B does not elect to exclude subsidiary assets pursuant to paragraph 
(b)(5)(vii), as proposed to be amended. B has no assets which were 
excluded from the election under paragraph (b)(5)(v) of Sec. 1.167(a)-
11, as proposed to be amended. The election which was filed before 
February 1, 1972, will be treated as a valid election under the Class 
Life Asset Depreciation Range System (ADR) as contained in the final 
amendments to the regulations, if it conforms with those amendments. B 
need not file an amended election provided his election conforms to the 
final regulations under Sec. 1.167(a)-11. However, B may file an 
amended election within 120 days after the final regulations under Sec. 
1.167(a)-11 are published in the Federal Register in order to include 
section 1250 property, or to exclude subsidiary assets, or to make other 
changes, or to revoke the election.

[T.D. 7159, 37 FR 1469, Jan. 29, 1972]



Sec. 12.7  Election to be treated as a DISC.

    (a) Manner and time of election--(1) Manner--(i) In general. A 
corporation can elect to be treated as a DISC under section 992(b) for a 
taxable year beginning after December 31, 1971. Except as provided in 
subdivision (ii) of this subparagraph, the election is made by the 
corporation filing Form 4876 with the service center with which it would 
file its income tax return if it were subject for such taxable year to 
all the taxes imposed by subtitle A of the Internal Revenue Code of 
1954, and a copy of the completed Form 4876 with the Commissioner of 
Internal Revenue (attention: ACTS:A:AO), Washington, D.C. 20224. The 
form shall be signed by any person authorized to sign a corporation 
return under section 6062, and shall contain the information required by 
such form. Except as provided in paragraphs (b)(3) and (c) of this 
section, such election to be treated as a DISC shall be valid only if 
the consent of every person who is a shareholder of the corporation as 
of the beginning of the first taxable year for which such election is 
effective is on or attached to such Form 4876 when filed with the 
service center.
    (ii) Transitional rule for corporations electing during 1972. If the 
first taxable year for which an election by a corporation to be treated 
as a DISC is a taxable year beginning after December 31, 1971, and on or 
before December 31, 1972, such election may be made either in the manner 
prescribed in subdivision (i) of this subparagraph or by filing, at the 
place prescribed in subdivision (i) of this subparagraph, a statement 
captioned ``Election to be Treated as a DISC''. Such statement of 
election shall be valid only if the consent of each shareholder is filed 
with the service center in the form, and at the time, prescribed in 
paragraph (b) of this section. Such statement shall be signed by any 
person authorized to sign a corporation return under section 6062 and 
shall include the name, address, and employer identification number (if 
known) of the corporation, the beginning date of the first taxable year 
for which the election is effective, the number of shares of stock of 
the corporation issued and outstanding as of the earlier of the 
beginning of the first taxable year for which the election is effective 
or the time the statement is filed, the number of shares held by each 
shareholder as of the earlier of

[[Page 178]]

such dates, and the date and place of incorporation. As a condition of 
the election being effective, a corporation which elects to become a 
DISC by filing a statement in accordance with this subdivision must 
furnish (to the service center with which the statement was filed) such 
additional information as is required by Form 4876 by March 31, 1973.
    (2) Time of making election--(i) In general. In the case of a 
corporation making an election to be treated as a DISC for its first 
taxable year, such election shall be made within 90 days after the 
beginning of such taxable year. In the case of a corporation which makes 
an election to be treated as a DISC for any taxable year beginning after 
March 31, 1972 (other than the first taxable year of such corporation), 
the election shall be made during the 90-day period immediately 
preceding the first day of such taxable year.
    (ii) Transitional rules for certain corporations electing during 
1972. In the case of a corporation which makes an election to be treated 
as a DISC for a taxable year beginning after December 31, 1971, and on 
or before March 31, 1972 (other than its first taxable year), the 
election shall be made within 90 days after the beginning of such 
taxable year.
    (b) Consent by shareholders--(1) In general--(i) Time and manner of 
consent. Under paragraph (a)(1)(i) of this section, subject to certain 
exceptions, the election to be treated as a DISC is not valid unless 
each person who is a shareholder as of the beginning of the first 
taxable year for which the election is effective signs either the 
statement of consent on Form 4876 or a separate statement of consent 
attached to such form. A shareholder's consent is binding on such 
shareholder and all transferees of his shares and may not be withdrawn 
after a valid election is made by the corporation. In the case of a 
corporation which files an election to become a DISC for a taxable year 
beginning after December 31, 1972, if a person who is a shareholder as 
of the beginning of the first taxable year for which the election is 
effective does not consent by signing the statement of consent set forth 
on Form 4876, such election shall be valid (except in the case of an 
extension of the time for filing granted under the provisions of 
subparagraph (3) of this paragraph or paragraph (c) of this section) 
only if the consent of such shareholder is attached to the Form 4876 
upon which such election is made.
    (ii) Form of consent. A consent other than the statement of consent 
set forth on Form 4876 shall be in the form of a statement which is 
signed by the shareholder and which sets forth (a) the name and address 
of the corporation and of the shareholder and (b) the number of shares 
held by each such shareholder as of the time the consent is made and (if 
the consent is made after the beginning of the corporation's taxable 
year for which the election is effective) as of the beginning of such 
year. If the consent is made by a recipient of transferred shares 
pursuant to paragraph (c) of this section, the statement of consent 
shall also set forth the name and address of the person who held such 
shares as of the beginning of such taxable year and the number of such 
shares. Consent shall be made in the following form: ``I (insert name of 
shareholder), a shareholder of (insert name of corporation seeking to 
make the election) consent to the election of (insert name of 
corporation seeking to make the election) to be treated as a DISC under 
section 992(b) of the Internal Revenue Code. The consent so made by me 
is irrevocable and is binding upon all transferees of my shares in 
(insert name of corporation seeking to make the election).'' The 
consents of all shareholders may be incorporated in one statement.
    (iii) Who may consent. Where stock of the corporation is owned by a 
husband and wife as community property (or the income from such stock is 
community property), or is owned by tenants in common, joint tenants, or 
tenants by the entirety, each person having a community interest in such 
stock or the income therefrom and each tenant in common, joint tenant, 
and tenant by the entirety must consent to the election. The consent of 
a minor shall be made by his legal guardian or by his natural guardian 
if no legal guardian has been appointed. The consent of an estate shall 
be made by the executor or administrator thereof. The consent of a

[[Page 179]]

trust shall be made by the trustee thereof. The consent of an estate or 
trust having more than one executor, administrator, or trustee may be 
made by any executor, administrator, or trustee authorized to make a 
return of such estate or trust pursuant to section 6012(b)(5). The 
consent of a corporation or partnership shall be made by an officer or 
partner authorized pursuant to section 6062 or 6063, as the case may be, 
to sign the return of such corporation or partnership. In the case of a 
foreign person, the consent may be signed by any individual (whether or 
not a U.S. person) who would be authorized under sections 6061 through 
6063 to sign the return of such foreign person if he were a U.S. person.
    (2) Transitional rule for corporations electing during 1972. In the 
case of a corporation which files an election to be treated as a DISC 
for a taxable year beginning after December 31, 1971, and on or before 
December 31, 1972, such election shall be valid only if the consent of 
each person who is a shareholder as of the beginning of the first 
taxable year for which such election is effective is filed with the 
service center with which the election was filed within 90 days after 
the first day of such taxable year or within the time granted for an 
extension of time for filing such consent. The form of such consent 
shall be the same as that prescribed in subparagraph (1) of this 
paragraph. Such consent shall be attached to the statement of election 
or shall be filed separately (with such service center) with a copy of 
the statement of election. An extension of time for filing a consent may 
be granted in the manner, and subject to the conditions, described in 
subparagraph (3) of this paragraph.
    (3) Extension of time to consent. An election which is timely filed 
and would be valid except for the failure to attach the consent of any 
shareholder to the Form 4876 upon which the election was made or to 
comply with the 90-day requirement in subparagraph (2) of this paragraph 
or paragraph (c)(1) of this section, as the case may be, will not be 
invalid for such reason if it is shown to the satisfaction of the 
service center that there was a reasonable cause for the failure to file 
such consent, and if such shareholder files a proper consent to the 
election within such extended period of time as may be granted by the 
Internal Revenue Service. In the case of a late filing of a consent, a 
copy of the Form 4876 or statement of election shall be attached to such 
consent and shall be filed with the same service center as the election. 
The form of such consent shall be the same as that set forth in 
paragraph (b)(1)(ii) of this section. In no event can any consent be 
made pursuant to this paragraph on or after the last day of the first 
taxable year for which a corporation elects to be treated as a DISC.
    (c) Consent by holder of transferred shares--(1) In general. If a 
shareholder of a corporation transfers--
    (i) Prior to the first day of the first taxable year for which such 
corporation elects to be treated as a DISC, some or all of the shares 
held by him without having consented to such election, or
    (ii) On or before the 90th day after the first day of the first 
taxable year for which such corporation elects to be treated as a DISC, 
some or all of the shares held by him as of the first day of such year 
(or if later, held by him as of the time such shares are issued), 
without having consented to such election, then consent may be made by 
any recipient of such shares on or before the 90th day after the first 
day of such first taxable year. If such recipient fails to file his 
consent on or before such 90th day, an extension of time for filing such 
consent may be granted in the manner, and subject to the conditions, 
described in paragraph (b)(3) of this section. In addition, if the 
transfer occurs more than 90 days after the first day of such taxable 
year, an extension of time for filing such consent may be granted to 
such recipient only if it is determined under paragraph (b)(3) of this 
section that an extension of time would have been granted the transferor 
for the filing of such consent if the transfer had not occurred. A 
consent which is not attached to the original Form 4876 or statement of 
election (as the case may be) shall be filed with the same service 
center as the original Form 4876 or statement of election and shall have 
attached a copy of such original form or statement of election. The form 
of such consent shall be the

[[Page 180]]

same as that set forth in paragraph (b)(1)(ii) of this section. For the 
purposes of this paragraph, a transfer of shares includes any sale, 
exchange, or other disposition, including a transfer by gift or at 
death.
    (2) Requirement for the filing of an amended form 4876 or statement 
of election. In any case in which a consent to a corporation's election 
to be treated as a DISC is made pursuant to subparagraph (1) of this 
paragraph, such corporation must file an amended form 4876 or statement 
of election (as the case may be) reflecting all changes in ownership of 
shares. Such form must be filed with the same service center with which 
the original form 4876 or statement of election was filed by such 
corporation.
    (d) Effect of election--(1) Effect on corporation. A valid election 
to be treated as a DISC remains in effect (without regard to whether the 
electing corporation qualifies as a DISC for a particular year) until 
terminated by any of the methods provided in paragraph (e) of this 
section. While such election is in effect, the electing corporation is 
subject to sections 991 through 997 and other provisions of the code 
applicable to DISC's for any taxable year for which it qualifies as a 
DISC (or is treated as qualifying as a DISC pursuant to section 
992(a)(2)). Such corporation is also subject to such provisions for any 
taxable year for which it is treated as a former DISC as a result of 
qualifying or being treated as a DISC for any taxable year for which 
such election was in effect.
    (2) Effect on shareholders. A valid election by a corporation to be 
treated as a DISC subjects the shareholders of such corporation to the 
provisions of section 995 (relating to the taxation of the shareholders 
of a DISC or former DISC) and to all other provisions of the code 
relating to the shareholders of a DISC or former DISC. Such provisions 
of the code apply to any person who is a shareholder of a DISC or former 
DISC whether or not such person was a shareholder at the time the 
corporation elected to become a DISC.
    (e) Termination of election--(1) In general. An election to be 
treated as a DISC is terminated only as provided in subparagraph (2) or 
(3) of this paragraph.
    (2) Revocation of election--(i) Manner of revocation. An election by 
a corporation to be treated as a DISC may be revoked by the corporation 
for any taxable year of the corporation after the first taxable year for 
which the election is effective. Such revocation shall be made by the 
corporation filing a statement that the corporation revokes its election 
under section 992(b) to be treated as a DISC. Such statement shall 
indicate the corporation's name, address, employer identification 
number, and the first taxable year of the corporation for which the 
revocation is to be effective. The statement shall be signed by any 
person authorized to sign a corporation return under section 6062. Such 
revocation shall be filed with the service center with which the 
corporation filed its election, except that, if it filed an annual 
information return under section 6011(e)(2), the revocation shall be 
filed with the service center with which it filed its last such return.
    (ii) Years for which revocation is effective. If a corporation files 
a statement revoking its election to be treated as a DISC during the 
first 90 days of a taxable year (other than the first taxable year for 
which such election is effective), such revocation will be effective for 
such taxable year and all taxable years thereafter. If the corporation 
files a statement revoking its election to be treated as a DISC after 
the first 90 days of a taxable year, the revocation will be effective 
for all taxable years following such taxable year.
    (3) Continued failure to be a DISC. If a corporation which has 
elected to be treated as a DISC does not qualify as a DISC (and is not 
treated as a DISC pursuant to section 992(a)(2)) for each of any 5 
consecutive taxable years, such election terminates and will not be 
effective for any taxable year after such 5th taxable year. Such 
termination will be effective automatically, without notice to such 
corporation or to the Internal Revenue Service. If, during any 5-year 
period for which an election is effective, the corporation should 
qualify as a DISC (or be treated as a DISC pursuant to section 
992(a)(2)) for a taxable year, a new 5-year period shall

[[Page 181]]

automatically start at the beginning of the following taxable year.
    (4) Election after termination. If a corporation has made a valid 
election to be treated as a DISC and such election terminates in either 
manner described in subparagraph (2) or (3) of this paragraph, such 
corporation is eligible to reelect to be treated as a DISC at any time 
by following the procedures described in paragraphs (a) through (c) of 
this section. If a corporation terminates its election and subsequently 
reelects to be treated as a DISC, the corporation and its shareholders 
continue to be subject to sections 995 and 996 with respect to the 
period during which its first election was in effect. Thus, for example, 
distributions upon disqualification includible in the gross incomes of 
shareholders of a corporation pursuant to section 995(b)(2) continue to 
be so includible for taxable years for which a second election of such 
corporation is in effect without regard to the second election.

[T.D. 7237, 37 FR 28626, Dec. 28, 1972]



Sec. 12.8  Elections with respect to net leases of real property.

    (a) In general. The elections described in this section are 
available for determining whether real property held by the taxpayer is 
subject to a net lease for purposes of section 57 (relating to items of 
tax preference for purposes of the minimum tax for tax preferences) or 
163(d) (relating to limitation on interest on investment indebtedness). 
Under sections 57(c)(1)(A) and 163(d)(4)(A)(i), property will be 
considered to be subject to a net lease for a taxable year where the sum 
of the deductions of the lessor with respect to the property for the 
taxable year allowable solely by reason of section 162 (other than rents 
and reimbursed amounts with respect to the property) is less than 15 
percent of the gross income from rents produced by the property 
(hereinafter referred to as the ``expense test''). Under sections 
57(c)(2) and 163(d)(7)(A), where a parcel of real property of the 
taxpayer is leased under two or more leases, the taxpayer may elect to 
apply the expense test set forth in sections 57(c)(1)(A) and 
163(d)(4)(A)(i) by treating all leased portions of such property as 
subject to a single lease. Under sections 57(c)(3) and 163(d)(7)(B), at 
the election of the taxpayer, the expense test set forth in sections 
57(c)(1)(A) and 163(d)(4)(A)(i) shall not apply with respect to real 
property of the taxpayer which has been in use for more than 5 years.
    (b) Election with respect to multiple leases of single parcel of 
real property. If a parcel of real property of the taxpayer is leased 
under two or more leases, the expense test referred to in paragraph (a) 
of this section shall, at the election of the taxpayer, be applied by 
treating all leased portions of such property as subject to a single 
lease. For purposes of this paragraph, the term ``parcel of real 
property'' includes adjacent properties each of which is subject to 
lease.
    (c) Election with respect to real property in use for more than 5 
years. At the election of the taxpayer, the expense test referred to in 
paragraph (a) of this section shall not apply with respect to real 
property of the taxpayer which has been in use for more than 5 years. 
For this purpose, real property is in use only during the period that 
such property is both owned and used for commercial purposes by the 
taxpayer. If an improvement to the property was made during the time 
such property was owned by the taxpayer, and if, as a result of such 
improvement, the adjusted basis of such property was increased by 50 
percent or more, use of such property for commercial purposes shall be 
deemed to have commenced for purposes of this paragraph as of the date 
such improvement was completed. An election under this paragraph shall 
apply to all real property of the taxpayer which has been in use for 
more than 5 years.
    (d) Procedure for making election--(1) Time and scope of election. 
An election under paragraph (b) or (c) of this section shall be made for 
each taxable year to which such election is to apply. The election must 
be made before the later of (i) the time prescribed by law for filing 
the taxpayer's return for the taxable year for which the election is 
made (determined with regard to any extension of time) or (ii) August 
31, 1973, but the election may not be made after the expiration of the 
time prescribed by law for the filing of a claim

[[Page 182]]

for credit or refund of tax with respect to the taxable year for which 
the election is to apply.
    (2) Manner of making election. Except as provided in the following 
sentence, an election by the taxpayer with respect to a taxable year 
shall be made by a statement containing the information described in 
paragraph (d)(3) of this section which is--
    (i) Attached to the taxpayer's return or amended return for such 
taxable year,
    (ii) Attached to a timely filed claim by the taxpayer for credit or 
refund of tax for such taxable year, or
    (iii) Filed by the taxpayer with the director of the Internal 
Revenue Service Center where the return for such taxable year was filed.

In the case of a taxable year ending before July 1, 1973, no formal 
statement of election is necessary if the taxpayer's return took into 
account an election under paragraph (b) or (c) of this section; the 
taxpayer will be considered to have made an election in accordance with 
the manner in which leases with respect to parcels of real property 
described in paragraph (b) of this section, or leases of property which 
has been in use for more than 5 years as described in paragraph (c) of 
this section, are treated in the return.
    (3) Statement. The statement described in paragraph (d)(2) of this 
section shall contain the following information:
    (i) The name, address, and taxpayer identification number of the 
taxpayer;
    (ii) The taxable year to which the election is to apply if the 
statement is not attached to the return or a claim for credit or refund;
    (iii) A description of any leases which are to be treated as a 
single lease; and
    (iv) A description of any real property in use for more than 5 years 
to which the expense test is not to apply.
    (4) Revocation of election. An election made pursuant to this 
paragraph may be revoked within the time prescribed in paragraph (d)(1) 
of this section for making an election and may not be revoked 
thereafter. Any such revocation shall be made in the manner prescribed 
by paragraph (d)(2) of this section for the making of an election.
    (e) Election by members of partnership. Under section 703(b) (as 
amended by section 304(c) of the Revenue Act of 1971), any election 
under section 57(c) or 163(d)(7) with respect to property held by a 
partnership shall be made by each partner separately, rather than by the 
partnership. If an election made by a taxpayer under paragraph (b) of 
this section applies in whole or in part to property held by a 
partnership, the taxpayer shall, in applying the expense test referred 
to in paragraph (a) of this section, take into account his distributive 
share of the deductions of the partnership with respect to the property 
for the taxable year allowable solely by reason of section 162 (other 
than rents and reimbursed amounts with respect to the property) and also 
his distributive share of the partnership's rental income from such 
property for the taxable year.

[T.D. 7271, 38 FR 9296, Apr. 13, 1973]



Sec. 12.9  Election to postpone determination with respect to the 
presumption described in section 183(d).

    (a) In general. An individual, electing small business corporation, 
trust or estate may elect in accordance with the rules set forth in this 
section to postpone a determination whether the presumption described in 
section 183(d) applies with respect to any activity in which the 
taxpayer engages until after the close of the fourth taxable year (sixth 
taxable year, in the case of an activity described in Sec. 1.183-
1(c)(3)) following the taxable year in which the taxpayer first engages 
in such activity. The election must be made in accordance with the 
applicable requirements of paragraphs (b), (c) and (d) of this section. 
Except as otherwise provided in paragraphs (c) and (e) of this section, 
an election made pursuant to this section shall be binding for the first 
taxable year in which the taxpayer first engages in the activity and for 
all subsequent taxable years in the five (or seven) year period referred 
to in the first sentence of this paragraph. For purposes of this 
section, a taxpayer shall be treated as not having engaged in an 
activity during any taxable year beginning before January 1, 1970.
    (b) Period to which an election applies. An individual, trust, 
estate, or small

[[Page 183]]

business corporation may make the election. The five year presumption 
period (seven year presumption period in the case of an activity 
described in Sec. 1.183-1(c)(3)) to which the election shall apply 
shall be the five (or seven) consecutive taxable years of such taxpayer 
beginning with the taxable year in which such taxpayer first engages in 
the activity. For purposes of this section, a taxpayer who engages in an 
activity as a partner, engages in it in each of his taxable years with 
or within which ends a partnership year during which the activity was 
carried on by the partnership.
    (c) Time for making an election. A taxpayer who is an individual, 
trust, estate or small business corporation may make the election 
provided in Sec. 183(e) by filing the statement and consents required 
by paragraph (d) of this section within--
    (1) 3 years after the due date of such taxpayer's return (determined 
without extensions) for the taxable year in which such taxpayer first 
engages in the activity, but not later than
    (2) 60 days after such taxpayer receives a written notice (if any) 
from a district director that the district director proposes to disallow 
deductions attributable to an activity not engaged in for profit under 
section 183.

The provisions of paragraph (c)(2) of this section shall in no event be 
construed to extend the period described in (c)(1) of this section for 
making such election. Notwithstanding the time periods prescribed in 
paragraph (c) (1) and (2) of this section, if no election has been made 
before a suit or proceeding described in section 7422(a) is maintained 
or a petition is filed in the Tax Court for a redetermination of a 
deficiency for any taxable year within the presumption period to which 
the election would apply, no election may be made except with the 
consent of the Commissioner which will not be given unless no 
appreciable delay in the suit or proceeding will be caused.
    (d) Manner of making election. (1) The election shall be made by the 
individual, trust, estate, or electing small business corporation, as 
the case may be, engaged in the activity, by filing a statement which 
sets forth the following information--
    (i) The name, address, and taxpayer identification number of such 
taxpayer, and, if applicable, of the partnership in which he engages in 
the activity,
    (ii) A declaration stating that the taxpayer elects to postpone a 
determination as to whether the presumption described in section 183(d) 
applies until after the close of the taxpayer's fourth taxable year 
(sixth taxable year, in the case of an activity described in Sec. 
1.183-1(c)(3)) following the taxable year in which the taxpayer first 
engaged in such activity and identifying that first such taxable year, 
and,
    (iii) A description of each activity (as defined in Sec. 1.183-
1(d)(1)) with respect to which the election is being made.
    (2) For an election to be effective, there must be attached to the 
statement properly executed consents, in the form prescribed by the 
Commissioner, extending the period prescribed by section 6501 for the 
assessment of any tax to a date which is not earlier than 18 months 
after the due date of the return (determined without extensions) for the 
final year in the presumption period to which the election applies, as 
follows:
    (i) Consents for each of the taxpayer's taxable years in the 
presumption period to which the election applies,
    (ii) If the election is made by an electing small business 
corporation, a consent of each person who is a shareholder during any 
taxable year to which the election applies, for each of such 
shareholder's taxable years with or within which end each of the 
corporation's taxable years in the presumption period,
    (iii) If a taxpayer referred to in paragraph (d)(2)(i) of this 
section or shareholder referred to in paragraph (d)(2)(ii) of this 
section is married at the time of the election, in the case of his 
present spouse, a consent for each of such spouse's taxable years which 
correspond to the taxable years (other than prior years of the 
shareholder during no part of which he was a shareholder) for which 
consents are required by paragraph (d)(2) (i) or (ii) of this section as 
the case may be.

[[Page 184]]


Such consents shall not be construed to shorten the period described in 
section 6501 for any taxable year within the presumption period to which 
the election applies.
    (3) The statement, with the required consents attached, shall be 
filed--
    (i) With the service center at which the taxpayer making the 
election is required to file his return, or
    (ii) If the taxpayer is notified by a district director that, 
pursuant to section 183 he is proposing to disallow deductions with 
respect to an activity not engaged in for profit, with such district 
director.
    (e) Subsequent invalidations. If, after a timely election has been 
made, but still within the presumption period, a suit or proceeding (as 
described in section 7422(a)) is maintained by the electing taxpayer, a 
shareholder referred to in paragraph (d)(2)(ii) of this section, or 
spouse referred to in paragraph (d)(2)(iii) of this section for any 
taxable year for which a consent is required by this section and the 
taxpayer, shareholder, or spouse has not been issued a notice of 
deficiency (as described in section 6212(a)) with respect to such 
taxable year, such election shall not be effective to postpone the 
determination whether the presumption applies, for such taxable year, 
but the consents extending the statute of limitations filed with the 
election shall not thereby be invalidated. The immediately preceding 
sentence shall not apply to a suit or proceeding maintained by the 
spouse of an electing taxpayer for a taxable year for which such spouse 
has filed a separate return, or a suit or proceeding maintained by a 
shareholder for a taxable year in which he was not such a shareholder. 
An election by an individual taxpayer or electing small business 
corporation, shall be subsequently invalidated for all years in the 
presumption period to which it had applied if--
    (1) The electing taxpayer or shareholder taxpayer files a joint 
return for one of the first three (five, in the case of an activity 
described in Sec. 1.183-1(c) (3)) taxable years in such presumption 
period, and
    (2) The spouse with whom he files such joint return has not 
previously executed a consent described in paragraph (d)(2)(iii) of this 
section, and
    (3) Within one year after the filing of such joint return (or, if 
later, 90 days after March 14, 1974), such spouse has not filed a 
consent described in paragraph (d)(2) of this section.

An election by an electing small business corporation shall be 
invalidated for all years in the presumption period to which it applies 
if a person who was not a shareholder on the date of election becomes a 
shareholder during the first three (or five) years of the presumption 
period to which the election applies and does not, within 90 days after 
the date on which he becomes a shareholder (or, if later, 90 days after 
March 14, 1974), file a consent required by paragraph (d)(2) of this 
section. Invalidation of the election by operation of this paragraph 
will in no case affect the validity of the consents filed with such 
election.
    (f) Extension of time for filing election in hardship cases. The 
Commissioner may upon application by a taxpayer, consent to an extension 
of time prescribed in this section for making an election if he finds 
that such an extension would be justified by hardship incurred by reason 
of the time at which this section is published. The burden will be on 
the taxpayer to establish that under the relevant facts the Commissioner 
should so consent.

[T.D. 7308, 39 FR 9947, Mar. 15, 1974]



PART 13_TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT OF 
1969--Table of Contents



Sec.
13.0-13.3 [Reserved]
13.4 Arbitrage bonds; temporary rules.
13.5-13.9 [Reserved]
13.10 Distribution of money in lieu of fractional shares.
13.11 Revocation of election to report income on the installment basis.

    Authority: 26 U.S.C. 7805.



Sec. Sec. 13.0-13.3  [Reserved]



Sec. 13.4  Arbitrage bonds; temporary rules.

    (a) In general--(1) Arbitrage bonds. Section 103(d)(1) provides that 
any arbitrage bond (as such term is defined in

[[Page 185]]

section 103(d)(2)) shall be treated as an obligation not described in 
section 103(a)(1). Thus, the interest on an obligation which would have 
been excluded from gross income pursuant to the provisions of section 
103(a)(1) will be included in gross income and subject to Federal income 
taxation if such obligation is an arbitrage bond. Under section 
103(d)(2), an obligation is an arbitrage bond if it is issued by a 
governmental unit as part of an issue of obligations (for purposes of 
this section referred to as ``governmental obligations'') all or a major 
portion of the proceeds of which are (i) reasonably expected to be used 
directly or indirectly to acquire certain obligations or securities (for 
purposes of this section referred to as ``acquired obligations'') which 
may reasonably be expected, at the time of issuance of such governmental 
obligations, to produce a yield over the term of the issue of such 
governmental obligations which is materially higher (taking into account 
any discount or premium) than the yield on such issue, or (ii) 
reasonably expected to be used to replace funds which were used directly 
or indirectly to acquire such acquired obligations. For rules as to 
industrial development bonds, see section 103(c).
    (2) Definitions. (i) For purposes of this section, the term 
``governmental unit'' means a State, the District of Columbia, a 
Territory, or a possession of the United States, or any political 
subdivision of any of the foregoing.
    (ii) For purposes of this section, the term ``securities'' has the 
same meaning as in section 165(g)(2) (A) and (B).
    (3) Materially higher. For purposes of this section, the yield 
produced by acquired obligations is not ``materially higher'' than the 
yield produced by an issue of governmental obligations if it is 
reasonably expected, at the time of issue of such governmental 
obligations, that the adjusted yield (computed in accordance with 
subparagraphs (4) and (5) of this paragraph) to be produced by the 
acquired obligations will not exceed the adjusted yield (computed in 
accordance with subparagraphs (4) and (5) of this paragraph) to be 
produced by the issue of governmental obligations by more than one-
eighth of 1 percentage point. In the case of an issue of governmental 
obligations issued on or before July 1, 1972, the percentage specified 
in the preceding sentence shall be one-half of 1 percentage point.
    (4) Yield. (i) For purposes of this section, ``yield'' shall be 
computed using the ``interest cost per annum'' method in accordance with 
subdivision (ii) or (iii) of this subparagraph (as the case may be) or 
any other method satisfactory to the Commissioner which is consistent 
with generally accepted principles of computing yield. In the case of 
acquired obligations, the yield to be produced by such obligations shall 
be computed as if all acquired obligations comprised a single issue of 
obligations. Thus, for example, if the governmental unit acquires two 
blocks of Federal obligations, with different interest rates and 
maturity periods for each block, the yield on such acquired obligations 
shall be computed as if one issue of obligations with different interest 
rates and maturity periods had been acquired. The maturity period of 
each acquired obligation shall be the period that the governmental unit 
reasonably expects to hold such obligation.
    (ii) If all the governmental or acquired obligations of an issue 
have a single interest rate (expressed in dollars per $1,000 of face 
amount of bonds), yield shall be computed using the following 4 steps:
    (a) Step (1). Compute the total number of bond years for the issue 
by multiplying the number of bonds (treating each $1,000 of face value 
as one bond for purposes of this computation) of each maturity by the 
length of the maturity period (expressed in years and fractions thereof) 
and then adding together the amounts determined for each maturity 
period.
    (b) Step (2). Compute the total interest payable on the issue by 
multiplying the total number of bond years (as computed in step (1)) by 
the amount payable, expressed in dollars, as interest on each $1,000 of 
bonds for 1 year.
    (c) Step (3). Compute the net interest in dollars for the issue by 
adding the amount, in dollars, of any discount to, or by subtracting the 
amount, in dollars, of any premium from, the total interest payable on 
the issue.

[[Page 186]]

    (d) Step (4). Compute yield by dividing the net interest by the 
product obtained by multiplying the total number of bond years for the 
issue by 10.
    (iii) If governmental or acquired obligations of an issue have 
different interest rates (expressed in dollars per $1,000 of face amount 
of bonds), yield shall be computed using the following 4 steps:
    (a) Step (1). Compute the total number of bond years for each group 
of bonds bearing the same interest rate (treating each $1,000 of face 
value as one bond for purposes of this computation) in the manner 
described in step 1 of subdivision (ii) of this subparagraph.
    (b) Step (2). Compute the total interest payable on the issue by 
multiplying the total number of bond years for each group of bonds 
bearing the same interest rate (as computed in step (1)) by the amount 
payable, expressed in dollars, as interest on each $1,000 of bonds for 1 
year, and then adding together the amounts determined for each group.
    (c) Step (3). Compute net interest in the manner described in step 
(3) of subdivision (ii) of this subparagraph.
    (d) Step (4). Compute the yield produced by the issue in the manner 
described in step (4) of subdivision (ii) of this subparagraph.
    (iv) For purposes of this section, the same method of computing 
yield shall be used to compute the yield to be produced by an issue of 
governmental obligations and to compute the yield to be produced by 
acquired obligations acquired with the proceeds of such issue of 
governmental obligations.
    (v) The following example illustrates the provisions of this 
subparagraph:

    Example. Assume an issue of $200,000 ($1,000 per bond) with a stated 
interest (expressed in dollars per bond) of $50 on bonds maturing in 1, 
2, or 3 years, a stated interest of $60 on bonds maturing in 4, 5, 6, or 
7 years and a stated interest of $70 on bonds maturing in 8, 9, or 10 
years. Assume also that a price of $101 has been bid for the issue. The 
yield on the issue is determined in accordance with the table below:

----------------------------------------------------------------------------------------------------------------
                                                                           Total
                                                                            bond
                                      Amount    Rate   Years to   Bond    years at   x   Interest   =   Interest
                                                       maturity   years   interest         rate           cost
                                                                            rate
----------------------------------------------------------------------------------------------------------------
                                      $10,000    $50          1
                                        5,000     50          2
                                       25,000     50          3
                                                                --------
                                     ........  .....  .........  ......         95  ..  .........  ..     $4,750
                                       10,000     60          4      40
                                       10,000     60          5      50
                                       30,000     60          6     180
                                       50,000     60          7     350
                                                                --------
                                     ........  .....  .........  ......        620  ..  .........  ..     37,200
                                       20,000     70          8     160
                                       25,000     70          9     225
                                       15,000     70         10     150
                                    ------------------------------------
                                     ........  .....  .........  ......        535  ..         70  ..     37,450
                                                                        -----------                   ----------
Totals.............................   200,000  .....  .........  ......      1,250  ..  .........  ..     79,400
                                    ----------                          ===========                   ==========
Less premium.........................................................................................      2,000
                                    -----------
Net interest cost....................................................................................     77,400
Divide by: Product of total bond years (1,250), multiplied by 10.....................................     12,500
                                    -----------
Yield (Percent)......................................................................................      6,192
----------------------------------------------------------------------------------------------------------------

    (5) Adjusted yield. (i) For purposes of this section, ``adjusted 
yield'' shall be computed in accordance with subparagraph (4) of this 
paragraph, except that in the case of--
    (a) Acquired obligations, an amount equal to the sum of the 
administrative costs reasonably expected to be incurred in purchasing, 
carrying, and selling or redeeming such obligations shall be treated as 
a premium on the

[[Page 187]]

purchase price of such acquired obligations.
    (b) An issue of governmental obligations, an amount equal to the sum 
of the reasonably expected administrative costs of issuing, carrying, 
and repaying such issue of obligations shall be treated as a discount on 
the selling price of such issue of governmental obligations.
    (ii) The provisions of subdivision (i) of this subparagraph may be 
illustrated by the following examples:

    Example (1). State Z issues $15 million of obligations all of which 
will mature in 10 years. The obligations are sold at $1,000 each (par) 
to yield 6 percent interest. The adjusted yield produced by such issue 
of obligations will be determined as follows, assuming the following 
administrative expenses of issuing, carrying, and repaying such issue of 
obligations are reasonably expected:

Issuing costs:
  Printing........................................   $12,500
  Financial advisors..............................    25,000
  Counsel fees....................................    12,500
   Total....................................................     $50,000
Carrying costs, paying agent and trustees fees..............      10,000
Repaying costs, paying agent................................       3,000
                                                   -----------
   Total administrative costs...............................      63,000
                                                   -----------
Bond years (15,000x10 years)................................     150,000
Interest cost per $1,000 bond per year......................          60
                                                   -----------
   Total interest cost......................................   9,000,000
  Discount or premium.......................................           0
  Plus adjustments..........................................      63,000
                                                   -----------
  Net interest cost.........................................   9,063,000
  Divide by product of bond years (150,000) multiplied by 10   1,500,000
                                                   -----------
  Adjusted yield............................................      6.042%
 

    Example (2). State Z uses the net proceeds of the issue of 
obligations described in Example (1) to acquire $14,922,000 of student's 
notes at par of $1,000 each under a student loan program. The students' 
notes will all mature in 10 years, and all have a stated interest of 
7\1/2\ percent. Expenses of the program including printing of forms 
($5,000), financial advisors' fees ($11,000), counsel fees ($12,000), 
trustees' fees ($5,000), fees for the collecting agents and various 
banks which administer the loans ($100,000), advertising expenses 
($10,000), credit reference checks ($20,000), and general office 
overhead ($5,000). Of the expenses listed in the preceding sentence, 
only those indicated on the following table constitute adjustments to 
yield in order to determine the adjusted yield to be produced by the 
students' notes:

Purchasing costs:
  Printing forms..................................    $5,000
  Financial advisors..............................    11,000
  Counsel fees....................................    12,000
                                                   ----------
   Total....................................................     $28,000
Carrying costs, trustees fees...............................       5,000
                                                   -----------
   Total administrative costs...............................      33,000
                                                   -----------
Bond years (14,922x10 years)................................     149,220
Interest receivable per $1,000 note per year................          75
                                                   -----------
   Total interest receivable................................  11,191,500
  Discount or premium.......................................           0
  Minus adjustments.........................................      33,000
                                                   -----------
  Net interest receivable...................................  11,158,500
  Divide by product of bond years (149,220) multiplied by 10   1,492,200
                                                   -----------
  Adjusted yield............................................      7.478%
 

    (b) Rule with respect to certain governmental programs--(1) General 
rule. Subject to the limitations of subparagraph (3) of this paragraph, 
any obligations which are part of an issue of governmental obligations 
the proceeds of which are reasonably expected to be used to finance 
certain governmental programs (described in subparagraph (2) of this 
paragraph) are not arbitrage obligations.
    (2) Governmental programs. A governmental program is described in 
this subparagraph if--
    (i) The program involves the acquisition of acquired purpose 
obligations to carry out the purposes of such program (which 
obligations, for purposes of this paragraph, are referred to as 
``acquired program obligations'');
    (ii) At least 90 percent of all such acquired program obligations, 
by amount of cost outstanding, are evidences of loans to a substantial 
number of persons representing the general public, loans to exempt 
persons within the meaning of section 103(c)(3), or loans to provide 
housing and related facilities, or any combination of the foregoing;
    (iii) At least 90 percent of all of the amounts received by the 
governmental unit with respect to acquired program obligations shall be 
used for one or more of the following purposes: To pay the principal or 
interest or otherwise to service the debt on governmental obligations 
relating to the governmental program; to reimburse the governmental 
unit, or to pay, for administrative costs of issuing such governmental 
obligations; to reimburse the governmental unit, or to pay, for 
administrative and other costs and anticipated future losses directly 
related

[[Page 188]]

to the program financed by such governmental obligations; to make 
additional loans for the same general purposes specified in such 
programs; or to redeem and retire governmental obligations at the next 
earliest possible date of redemption; and
    (iv) Requires that any person (or any related person, as defined in 
section 103(c)(6)(C)) from whom the governmental unit may, under the 
program, acquire acquired program obligations shall not, pursuant to an 
arrangement, formal or informal, purchase the governmental obligations 
in an acquired program obligations to be acquired from such person by 
the governmental unit.
    (3) Limitation. The provisions of subparagraph (1) of this paragraph 
shall apply only if it is reasonably expected that--
    (i) A major portion of the proceeds of such issue of governmental 
obligations, including proceeds represented by repayments of principal 
and interest received by the governmental unit with respect to acquired 
program obligations, shall not be invested for more than a temporary 
period (within the meaning of section 103(d)(4)(A)), in acquired 
obligations (other than acquired program obligations) which produce a 
materially higher yield than the yield produced over the term of the 
issue by such governmental obligations, and
    (ii)(a) The adjusted yield (computed in accordance with paragraphs 
(a) (4) and (5) of this section) to be produced by acquired program 
obligations shall not exceed the adjusted yield (computed in accordance 
with paragraphs (a) (4) and (5) of this section) to be produced by such 
issue of governmental obligations by more than 1\1/2\ percentage points, 
or
    (b) Where the difference in the adjusted yields described in 
subdivision (ii)(a) of this subparagraph is expected to exceed 1\1/2\ 
percentage points, the amounts to be obtained as a result of the 
difference in such adjusted yields shall not exceed the amount necessary 
to pay expenses (including losses resulting from bad debts) reasonably 
expected to be incurred as a direct result of administering the program 
to be financed with the proceeds of such issue of governmental 
obligations, to the extent that such amounts are not payable with funds 
appropriated from other sources.
    (4) Examples. The following examples illustrate governmental 
programs described in subparagraph (2) of this paragraph:

    Example (1). State A issues obligations the proceeds of which are to 
be used to purchase certain home mortgage notes from commercial banks. 
The purpose of the governmental program is to encourage the construction 
of low income residential housing by creating a secondary market for 
mortgage notes and thereby increasing the availability of mortgage money 
for low income housing. The legislation provides that the adjusted yield 
produced by the mortgage notes to be acquired will not exceed the 
adjusted yield produced by such issue of obligations by more than 1\1/2\ 
percentage points. Amounts received as interest and principal payments 
on the mortgage notes are to be used for one or more of the following 
purposes: (1) To service the debt on the governmental obligations, (2) 
to retire such obligations at their earliest possible date of 
redemption, (3) to purchase additional mortgage notes. The governmental 
program is one which is described in subparagraph (2) of this paragraph 
and the governmental obligations are not arbitrage bonds.
    Example (2). State B issues obligations the proceeds of which are to 
be used to make loans directly to students and to purchase from 
commercial banks promissory notes made by students as the result of 
loans made to them by such banks. The legislation authorizing the 
student loan program provides that the purpose of the program is to 
enable financially disadvantaged students to continue their studies. The 
legislation also provides that purchases will be made from banks only 
where such banks agree that an amount at least equal to the purchase 
price will be devoted to new or additional student loans. It is 
reasonably expected that the difference in adjusted yields between the 
issue of governmental obligations by State B and the students' notes 
will be 1\3/4\ percentage points. It is also reasonably expected that 
the amount necessary to pay the expenses (other than expenses taken into 
account in computing adjusted yield) enumerated in subparagraph 
(3)(ii)(b) of this paragraph, directly incurred as a result of 
administering State B's student loan program, such as, for example, 
losses resulting from bad debts, insurance costs, bookkeeping expenses, 
advertising expenses, credit reference checks, appraisals, title 
searches, general office overhead, service fees for collecting agents 
and various banks which administer the loans, and salaries of employees 
not paid from other sources, will not require a difference in

[[Page 189]]

adjusted yields in excess of 1\1/2\ percentage points. The governmental 
program is one which is described in subparagraph (2) of this paragraph. 
Since, however, the difference in adjusted yields produced by the 
students' notes and the issue of State B obligations is reasonably 
expected to exceed 1\1/2\ percentage points, and since State B cannot 
show that 1\3/4\ percentage points is necessary to cover such expenses, 
the provisions of subparagraph (1) of this paragraph shall not apply to 
the issue of State B obligations. If, however, State B reasonably 
expected that 1\3/4\ percentage points would be necessary to cover such 
expenses, the provisions of subparagraph (1) of this paragraph would 
apply and the governmental obligations would not be arbitrage bonds.
    Example (3). Authority C issues obligations the proceeds of which 
are to be used to purchase land to be sold to veterans. The governmental 
unit will receive purchase-money mortgage notes secured by mortgages on 
the land from the veterans in return for such land. The purpose of the 
program is to enable veterans to acquire land at reduced cost. The 
adjusted yield produced by the mortgage notes is not reasonably expected 
to exceed the adjusted yield produced by the issue of obligations issued 
by Authority C by more than 1\1/2\ percentage points. Amounts received 
as interest and principal payments on the mortgage notes are to be used 
for one or more of the following purposes: (1) To pay the administrative 
costs directly related to the program, (2) to service the debt on the 
governmental obligations, (3) to retire such governmental obligations at 
their earliest possible call date, (4) to purchase additional land to be 
sold to veterans. The governmental program is one which is described in 
subparagraph (2) of this paragraph and the governmental obligations are 
not arbitrage bonds.

    (c) Effective date. The provisions of this section will apply with 
respect to obligations issued after October 9, 1969, and before final 
regulations are promulgated.

[T.D. 7072, 35 FR 17406, Nov. 13, 1970; 35 FR 18524, Dec. 5, 1970, as 
amended by T.D. 7174, 37 FR 10932, June 1, 1972; T.D. 7273, 38 FR 10927, 
May 3, 1973]



Sec. Sec. 13.5-13.9  [Reserved]



Sec. 13.10  Distribution of money in lieu of fractional shares.

    (a) In general. (1) Under the general rule of section 305, as 
amended by section 421(a) of the Tax Reform Act of 1969, gross income 
does not include the amount of any distribution of the stock (or rights 
to acquire the stock) of a corporation made by such corporation to its 
shareholders with respect to its stock. Under an exception to the 
general rule, a distribution by a corporation of its stock or rights to 
acquire its stock is treated as a distribution of property to which 
section 301 applies if the distribution (or a series of distributions of 
which such distribution is one) has the result of (i) the receipt of 
money or other property by some shareholders, and (ii) an increase in 
the proportionate interests of other shareholders in the assets or 
earnings and profits of the corporation. Also, the Secretary or his 
delegate is directed to prescribe regulations under which a redemption 
which is treated as a distribution to which section 301 applies, or any 
other transaction having a similar effect on the interest of any 
shareholder, shall be treated as a distribution with respect to any 
shareholder whose proportionate interest in the assets or earnings and 
profits of the corporation is increased by such redemption or 
transaction.
    (2) The general rule, and not the exception, applies in the case 
where cash is distributed in lieu of fractional shares to which the 
shareholders would otherwise be entitled, provided the purpose in 
distributing the cash is to save the distributing corporation the 
trouble, expense, and inconvenience of issuing and transferring 
fractional shares (or scrip representing fractional shares), or issuing 
full shares representing the sum of fractional shares, and not to give 
any particular group of shareholders an increased interest in the assets 
or earnings and profits of the corporation.
    (b) Illustration. The application of paragraph (a) of this section 
may be illustrated by the following example:

    Example. Corporation X is a large corporation whose stock is widely 
held by the public, no one shareholder owning more than 10 percent of 
the outstanding stock. The stock is listed on a recognized exchange and 
is currently selling at less than $75 per share. During the year the 
corporation pays a 3-percent stock dividend. Cash is paid to each 
shareholder in lieu of a fractional share to which he would otherwise be 
entitled. The distribution of cash in lieu of fractional shares is not 
intended to give any particular group of

[[Page 190]]

shareholders an increased interest in the assets or earnings and profits 
of the corporation, but is intended to save the corporation the trouble, 
expense, and inconvenience of issuing and transferring scrip 
representing fractional shares. The general rule, and not the exception, 
applies in this situation.

(Sec. 305(c), 83 Stat. 614; 26 U.S.C. 305(c))

[T.D. 7039, 35 FR 7012, May 2, 1970]



Sec. 13.11  Revocation of election to report income on the installment 
basis.

    (a) In general. Under section 453(c)(4) taxpayers who are dealers in 
personal property and who elected installment-basis income reporting, 
subject to the provisions of section 453(c)(1) (relating to change from 
accrual to installment basis), may revoke their previously made 
election.
    (b) Time and manner of revoking election. The revocation by a 
taxpayer may be made by filing an amended return on an appropriate form 
or forms, such as Form 1040X for an individual taxpayer, for the year of 
change (the first year for which income was computed using the 
installment basis) and for each subsequent year for which a return was 
filed using the installment basis. The taxpayer should indicate on such 
amended returns that he is revoking an election to report income on the 
installment basis. Such revocation must be made within 3 years from the 
last date prescribed for the filing of the return for the year of change 
including any extension of time granted the taxpayer. In reporting 
income on the amended returns described in this section, the taxpayer 
shall use the accrual method of accounting.

[T.D. 7044, 35 FR 8823, June 6, 1970]



PART 15_TEMPORARY INCOME TAX REGULATIONS RELATING TO EXPLORATION 
EXPENDITURES IN THE CASE OF MINING--Table of Contents



Sec.
15.0-1 Scope of regulations in this part.
15.1-1 Elections to deduct.
15.1-2 Revocation of election to deduct.
15.1-3 Elections as to method of recapture.
15.1-4 Special rules.

    Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805.

    Source: T.D. 6907, 31 FR 16776, Dec. 31, 1966, unless otherwise 
noted.



Sec. 15.0-1  Scope of regulations in this part.

    The regulations in this part relate to expenditures of the type 
described in section 615(a) or in section 617(a)(1) paid or incurred 
after September 12, 1966. The regulations in this part do not apply to 
the income tax treatment of mining exploration expenditures paid or 
incurred before September 13, 1966, and no election made pursuant to the 
provisions of the regulations in this part shall have any effect on the 
income tax treatment of exploration expenditures paid or incurred before 
such date. See Sec. 15.1-4 for rules relating to treatment of 
exploration expenditures paid or incurred during taxable years beginning 
before September 13, 1966, and ending after September 12, 1966.



Sec. 15.1-1  Elections to deduct.

    (a) Manner of making election--(1) Election to deduct under section 
617(a). The election to deduct exploration expenditures as expenses 
under section 617(a) may be made by deducting such expenditures in the 
taxpayer's income tax return for the first taxable year ending after 
September 12, 1966, for which the taxpayer desires to deduct exploration 
expenditures which are paid or incurred by him during such taxable year 
and after September 12, 1966. This election may be exercised by 
deducting such expenditures either in the taxpayer's return for such 
taxable year or in an amended return filed before the expiration of the 
period for filing a claim for credit or refund of income tax for such 
taxable year. Where the election is made in an amended return for a 
taxable year prior to the most recent year for which the taxpayer has 
filed a return, the taxpayer shall file amended income tax returns, 
reflecting any increase or decrease in tax attributable to the election, 
for all taxable years affected by the election. See section 617(a)(2)(C) 
for provisions relating to the tolling of the statute of limitations for 
the assessment of any deficiency for any taxable year, to the extent the 
deficiency is attributable to an election under section 617(a). In 
applying the election to the years affected there shall be taken into 
account the effect that any adjustments

[[Page 191]]

resulting from the election shall have on other items affected thereby, 
such as the deduction for charitable contributions, the foreign tax 
credit, net operating loss and other deductions or credits the amount of 
which is limited by the taxpayer's taxable income, and the effect that 
adjustments of any such items have on other taxable years. Amended 
returns filed for taxable years subsequent to the taxable year for which 
the election under section 617(a) is made by amended return shall apply 
the recapture provisions of subsections (b)(1)(B), (c), and (d) of 
section 617.
    (2) Election to deduct under section 615--(i) General rule. The 
election to deduct exploration expenditures under section 615 shall be 
made in a statement filed with the district director, or director of the 
regional service center, with whom the taxpayer's income tax return is 
required to be filed. If the election is made within the time period 
prescribed for filing an income tax return (including extensions 
thereof) for the first taxable year ending after September 12, 1966, 
during which the taxpayer pays or incurs expenditures which are within 
the scope of section 615 and which are paid or incurred by him after 
September 12, 1966, this statement shall be attached to the taxpayer's 
income tax return for such taxable year. If the election is made after 
the time prescribed for filing such return but before the expiration of 
the period (described in paragraph (d)(1) of this section) for making 
the election under section 615(e), the statement must be signed by the 
taxpayer or his authorized representative. The statement shall be filed 
even though the taxpayer charges to capital account all such 
expenditures paid or incurred by him during such taxable year after such 
date. The statement shall clearly indicate that the taxpayer elects to 
have section 615 apply to all amounts deducted by him with respect to 
mining exploration expenditures paid or incurred after September 12, 
1966. If the taxpayer desires, he may file this statement by attaching 
it to his return for a taxable year prior to the first taxable year 
ending after September 12, 1966, in which he pays or incurs mining 
exploration expenditures. Except as provided, in subdivision (ii) of 
this subparagraph, if the taxpayer does not file such a statement within 
the period prescribed by section 615(e) and paragraph (d)(1) of this 
section, any amounts deducted by him with respect to exploration 
expenditures paid or incurred by him after September 12, 1966, will be 
deemed to have been deducted pursuant to an election under section 
617(a).
    (ii) Exception. The last sentence of subdivision (i) of this 
subparagraph shall not apply if all mining exploration expenditures 
which are paid or incurred by the taxpayer after September 12, 1966, and 
which are deducted by him in his income tax return for the first taxable 
year ending after September 12, 1966, during which he pays or incurs 
such expenditures are outside the scope of section 617(a). For example, 
assume that, in his return for his first taxable year ending after 
September 12, 1966, a taxpayer deducts mining exploration expenditures 
paid or incurred after September 12, 1966, and does not attach to his 
return the statement described in subdivision (i) of this subparagraph. 
However, all of the exploration expenditures paid or incurred by the 
taxpayer after September 12, 1966, and before the end of the taxable 
year were paid or incurred with respect to minerals located neither in 
the United States nor on the Outer Continental Shelf. The taxpayer will 
be deemed to have made an election under section 615(e) by deducting all 
or part of those expenditures as expenses in his income tax return.
    (b) Information to be furnished. A taxpayer who makes or has made an 
election under either section 615(e) or section 617(a) to deduct 
expenditures paid or incurred after September 12, 1966, shall indicate 
clearly on his income tax return for each taxable year for which he 
deducts any such expenditures the amount of the deduction claimed under 
section 615 (a) or (b) or section 617(a) with respect to each property 
or area of interest. Such property or area of interest shall be 
identified by a description sufficiently adequate to permit application 
of the recapture rules of section 617 (b), (c), and (d) and the rules of 
section 615(g) (relating to effect of transfer of mineral property).

[[Page 192]]

    (c) Effect of election. A taxpayer who has made an election under 
section 615(e) may never make an election under section 617(a) unless, 
within the period set forth in section 615(e) and paragraph (b)(1) of 
Sec. 15.1-2, he revokes his election under section 615(e). A taxpayer 
who has made an election under section 617(a) may never make an election 
under section 615(e) unless, within the period set forth in section 
615(e) and paragraph (b)(1) of Sec. 15.1-2, he revokes his election 
under section 617(a). A taxpayer who has made, and has not revoked, an 
election under section 617(a) may not, in his return for the taxable 
year for which the election is made or for any subsequent taxable year, 
charge to capital account any expenditures which are within the scope of 
section 617(a), and he must deduct all such expenditures as expenses. 
Except as provided in paragraph (a)(2) of Sec. 1.615-2 of this chapter 
(Income Tax Regulations), a taxpayer who makes an election under 615(e) 
may not change his treatment of exploration expenditures deducted, 
deferred, or capitalized pursuant to such election unless he revokes the 
election made under section 615(e).
    (d) Time for making election--(1) Election under section 615(e). A 
taxpayer may not make an election under section 615(e) after the 
expiration of the 3-year period beginning with the date prescribed by 
section 6072 or other provision of law for filing the taxpayer's income 
tax return for the first taxable year ending after September 12, 1966, 
in which the taxpayer pays or incurs expenditures to which section 
615(a) would apply if an election were made under section 615(e). This 
3-year period shall be determined without regard to any extension of 
time for filing the taxpayer's income tax return. An election under 
section 615(e) may not be made after the expiration of the 3-year period 
even though the taxpayer charged to capital account, or erroneously 
deducted as development expenditures under section 616, all mine 
exploration expenditures paid or incurred by him after September 12, 
1966, and before the end of his first taxable year ending after 
September 12, 1966, in which he paid or incurred such expenditures.
    (2) Election under section 617(a). The election under section 617(a) 
may be made at any time before the expiration of the period prescribed 
for filing a claim for credit or refund of the tax imposed by chapter 1 
for the first taxable year for which the taxpayer desires to deduct 
exploration expenditures under section 617.
    (3) Timely mailing treated as timely filing. Section 7502 (relating 
to timely mailing treated as timely filing) shall apply in determining 
the date when an election under either section 615(e) or section 617(a) 
is made.



Sec. 15.1-2  Revocation of election to deduct.

    (a) Manner of revoking election. A taxpayer may revoke an election 
made by him under section 615(e) or section 617(a) by filing with the 
internal revenue officer with whom the taxpayer's income tax return is 
required to be filed, within the periods set forth in paragraph (b) of 
this section, a statement, signed by the taxpayer or his authorized 
representative, which sets forth that the taxpayer is revoking the 
election previously made by him with respect to the deduction of mining 
exploration expenditures paid or incurred after September 12, 1966, and 
states with whom the document making the election was filed. A taxpayer 
revoking such an election shall file amended income tax returns, 
reflecting any increase or decrease in tax attributable to the 
revocation of election, for all taxable years affected by the revocation 
of election. See section 617(a)(2)(C) for provisions relating to the 
tolling of the statute of limitations for the assessment of any 
deficiency for any taxable year, to the extent the deficiency is 
attributable to an election or revocation of election under section 
617(a). In applying the revocation of an election to the years affected 
there shall be taken into account the effect that any adjustments 
resulting from the revocation of election shall have on other items 
affected thereby, such as the deduction for charitable contributions, 
the foreign tax credit, net operating loss, and other deductions or 
credits the amount of which is limited by the

[[Page 193]]

taxpayer's taxable income, and the effect that adjustments of any such 
items have on other taxable years.
    (b) Time for revoking election--(1) Election under section 615(e). 
An election under section 615(e) may be revoked at any time before the 
expiration of the 3-year period described in paragraph (d)(1) of Sec. 
15.1-1. Such an election may not be revoked after the expiration of the 
3-year period.
    (2) Election under section 617(a). An election under section 617(a) 
may be revoked before the expiration of the last day of the third month 
following the month in which the final regulations issued under the 
authority of section 617 are published in the Federal Register. After 
the expiration of this period, a taxpayer who has made an election under 
section 617(a) may not revoke that election unless he obtains the 
consent of the Secretary or his delegate in the manner to be set forth 
in the final regulations under section 617.
    (c) Additional information to be furnished by a transferor of 
mineral property. If, before revoking his election, the taxpayer has 
transferred any mineral property with respect to which he deducted 
exploration expenditures paid or incurred after September 12, 1966, to 
another person in a transaction as a result of which the basis of such 
property in the hands of the transferee is determined by reference to 
the basis in the hands of the transferor, the statement submitted 
pursuant to paragraph (a) of this section shall state that such property 
has been so transferred and shall identify the transferee, the property 
transferred, and the date of the transfer.



Sec. 15.1-3  Elections as to method of recapture.

    (a) In general. If the taxpayer so elects with respect to all mines 
with respect to which deductions have been allowed under section 617(a) 
and which reach the producing stage during a taxable year, he shall 
include in gross income for the taxable year an amount equal to the 
adjusted exploration expenditures with respect to such mines (determined 
under section 617(f)(1)). The amount so included in income shall be 
treated for purposes of Subtitle A of the Internal Revenue Code as 
expenditures which are paid or incurred on the respective dates on which 
the mines reach the producing stage and which are properly chargeable to 
capital account. If the taxpayer does not make this election for a 
taxable year during which any mine with respect to which deductions have 
been allowed under section 617(a) reaches the producing stage, the 
deduction for depletion under section 611 with respect to the property 
(whether determined under Sec. 1.611-2 of this chapter (Income Tax 
Regulations) or under section 613) shall be disallowed until the amount 
of depletion which would be allowable but for section 617(b)(1)(B) 
equals the amount of the adjusted exploration expenditures with respect 
to the mine. The fact that a taxpayer does not make the election 
described in the first sentence of this paragraph for a taxable year 
during which mines with respect to which deductions have been allowed 
under section 617(a) reach the producing stage shall not preclude the 
taxpayer from making the election with respect to other mines which 
reach the producing stage during a subsequent taxable year. However, an 
election may not be made for any taxable year with respect to any mines 
which reached the producing stage during a preceding taxable year.
    (b) Manner of making elections. A taxpayer will be considered to 
have made an election in accordance with the manner in which the 
adjusted exploration expenditures with respect to the mines reaching the 
producing stage during a taxable year are treated in his return for such 
taxable year.
    (c) Time for making election. The election described in paragraph 
(a) of this section may be made, or changed by filing an amended return, 
not later than the time prescribed by law for filing the return 
(including extensions thereof) for the taxable year.



Sec. 15.1-4  Special rules.

    (a) Taxable years beginning before September 13, 1966, and ending 
after September 12, 1966--(1) General rule. An election made under 
section 615(e) or section 617(a) applies only to expenditures paid or 
incurred after September 12, 1966. The income tax treatment of 
exploration expenditures paid or incurred

[[Page 194]]

before September 13, 1966, will be determined in accordance with the 
provisions of section 615 prior to its amendment by the Act of September 
12, 1966 (Pub. L. 89-570, 80 Stat. 759). If a taxpayer makes an election 
under section 615(e) in his income tax return for a taxable year 
beginning before September 13, 1966, and ending after September 12, 
1966, amounts deducted under section 615 with respect to expenditures 
paid or incurred during such taxable year but before September 13, 1966, 
will be taken into account in determining whether the $100,000 
limitation set forth in section 615(a) is reached during 1966. 
Similarly, a taxpayer making an election under section 615(e) shall take 
into account expenditures deducted under section 615 for periods prior 
to September 13, 1966, in determining when the $400,000 overall 
limitation set forth in section 615(c) is reached. The fact that a 
taxpayer deducts under section 615 expenditures paid or incurred prior 
to September 13, 1966, shall not affect his right to make an election 
under section 617(a) to deduct under section 617 expenditures paid or 
incurred after September 12, 1966.
    (2) Allocation in case of inadequate records. If a taxpayer pays or 
incurs exploration expenditures during a taxable year beginning before 
September 13, 1966, and ending after September 12, 1966, but his records 
as to any mine or property are inadequate to permit a determination of 
the amount paid or incurred during the portion of the year ending after 
September 12, 1966, and the amount paid or incurred on or before such 
date, the exploration expenditures as to which the records are 
inadequate paid or incurred with respect to the mine or property during 
the taxable year shall be allocated to each part year (that is, the part 
occurring before September 13, 1966, and the part occurring after 
September 12, 1966) in the ratio which the number of days in such part 
year bears the number of days in the entire taxable year. For example, 
if the records of a calendar year taxpayer for 1966 are inadequate to 
permit a determination of the amount of exploration expenditures paid or 
incurred with respect to a certain mine or property after September 12, 
1966, and the amount paid or incurred before September 13, 1966, \255/
365\ of the total exploration expenditures paid or incurred by the 
taxpayer with respect to the mine or property during 1966 shall be 
allocated to the period beginning January 1, 1966, and ending September 
12, 1966, and \110/365\ of the total exploration expenditures paid or 
incurred with respect to the mine or property during 1966 shall be 
allocated to the period beginning September 13, 1966, and ending 
December 31, 1966.
    (3) Partnership elections. With respect to exploration expenditures 
paid or incurred by a partnership before September 13, 1966, the option 
to deduct under section 615(a) and the election to defer under section 
615(b) shall be made by the partnership, rather than by the individual 
partners. All elections under sections 615(e), 617(a), or 617(b) as to 
the tax treatment of a partner's distributive share of exploration 
expenditures paid or incurred by any partnership of which he is a member 
shall be made by the individual partner, rather than by the partnership.
    (b) Effect of transfer of mineral property. The binding effect of a 
taxpayer's election under section 615(e) shall not be affected by his 
receiving property with respect to which deductions have been allowed 
under section 617(a). The binding effect of a taxpayer's election under 
section 617(a) shall not be affected by his receiving property with 
respect to which deductions have been allowed under section 615 pursuant 
to an election made under section 615(e). However, see section 615(g)(2) 
for rules under which amounts deducted under section 615 by a transferor 
may be subject to recapture in the hands of a transferee who has made an 
election under section 617(a).



PART 15a_TEMPORARY INCOME TAX REGULATIONS UNDER THE INSTALLMENT SALES 
REVISION ACT--Table of Contents



Sec.
15a.453-0 Taxable years affected.
15a.453-1 Installment method reporting for sales of real property and 
          casual sales of personal property.
15a.453-2 Installment obligations received as liquidating distribution. 
          [Reserved]


[[Page 195]]


    Authority: 26 U.S.C. 453(i) and 7805.



Sec. 15a.453-0  Taxable years affected.

    (a) In general. Except as otherwise provided, the provisions of 
Sec. 15a.453-1 (a) through (e) generally apply to installment method 
reporting for sales of real property and casual sales of personal 
property occurring after October 19, 1980. See 26 CFR Sec. 1.453-1 
(rev. as of April 1, 1980) for the provisions relating to installment 
method reporting for sales of real property and casual sales before 
October 20, 1980 (except as provided in paragraph (b) of this section) 
and for provisions relating to installment sales by dealers in personal 
property occurring before October 20, 1980.
    (b) Certain limitations. The provisions of prior law (section 453(b) 
of the Internal Revenue Code of 1954, in effect as of October 18, 1980) 
which required that the buyer receive no more than 30 percent of the 
selling price in the taxable year of the installment sale and that at 
least two payments be received shall not apply to reporting for casual 
installment sales of personal property and installment sales of real 
property occurring in a taxable year ending after October 19, 1980.

[T.D. 7768, 46 FR 10709, Feb. 4, 1981; 46 FR 43036, Aug. 26, 1981]



Sec. 15a.453-1  Installment method reporting for sales of real property
and casual sales of personal property.

    (a) In general. Unless the taxpayer otherwise elects in the manner 
prescribed in paragraph (d)(3) of this section, income from a sale of 
real property or a casual sale of personal property, where any payment 
is to be received in a taxable year after the year of sale, is to be 
reported on the installment method.
    (b) Installment sale defined--(1) In general. The term ``installment 
sale'' means a disposition of property (except as provided in paragraph 
(b)(4) of this section) where at least one payment is to be received 
after the close of the taxable year in which the disposition occurs. The 
term ``installment sale'' includes dispositions from which payment is to 
be received in a lump sum in a taxable year subsequent to the year of 
sale. For purposes of this paragraph, the taxable year in which payments 
are to be received is to be determined without regard to section 453(e) 
(relating to related party sales), section (f)(3) (relating to the 
definition of a ``payment'') and section (g) (relating to sales of 
depreciable property to a spouse or 80-percent-owned entity).
    (2) Installment method defined--(i) In general. Under the 
installment method, the amount of any payment which is income to the 
taxpayer is that portion of the installment payment received in that 
year which the gross profit realized or to be realized bears to the 
total contract price (the ``gross profit ratio''). See paragraph (c) of 
this section for rules describing installment method reporting of 
contingent payment sales.
    (ii) Selling price defined. The term ``selling price'' means the 
gross selling price without reduction to reflect any existing mortgage 
or other encumbrance on the property (whether assumed or taken subject 
to by the buyer) and, for installment sales in taxable years ending 
after October 19, 1980, without reduction to reflect any selling 
expenses. Neither interest, whether stated or unstated, nor original 
issue discount is considered to be a part of the selling price. See 
paragraph (c) of this section for rules describing installment method 
reporting of contingent payment sales.
    (iii) Contract price defined. The term ``contract price'' means the 
total contract price equal to selling price reduced by that portion of 
any qualifying indebtedness (as defined in paragraph (b)(2)(iv) of this 
section), assumed or taken subject to by the buyer, which does not 
exceed the seller's basis in the property (adjusted, for installment 
sales in taxable years ending after October 19, 1980, to reflect 
commissions and other selling expenses as provided in paragraph 
(b)(2)(v) of this section). See paragraph (c) of this section for rules 
describing installment method reporting of contingent payment sales.
    (iv) Qualifying indebtedness. The term ``qualifying indebtedness'' 
means a mortgage or other indebtedness encumbering the property and 
indebtedness, not secured by the property but incurred or assumed by the 
purchaser incident to the purchaser's acquisition, holding, or operation 
in the ordinary

[[Page 196]]

course of business or investment, of the property. The term ``qualifying 
indebtedness'' does not include an obligation of the taxpayer incurred 
incident to the disposition of the property (e.g., legal fees relating 
to the taxpayer's sale of the property) or an obligation functionally 
unrelated to the acquisition, holding, or operating of the property 
(e.g., the taxpayer's medical bill). Any obligation created subsequent 
to the taxpayer's acquisition of the property and incurred or assumed by 
the taxpayer or placed as an encumbrance on the property in 
contemplation of disposition of the property is not qualifying 
indebtedness if the arrangement results in accelerating recovery of the 
taxpayer's basis in the installment sale.
    (v) Gross profit defined. The term ``gross profit'' means the 
selling price less the adjusted basis as defined in section 1011 and the 
regulations thereunder. For sales in taxable years ending after October 
19, 1980, in the case of sales of real property by a person other than a 
dealer and casual sales of personal property, commissions and other 
selling expenses shall be added to basis for purposes of determining the 
proportion of payments which is gross profit attributable to the 
disposition. Such additions to basis will not be deemed to affect the 
taxpayer's holding period in the transferred property.
    (3) Payment--(i) In general. Except as provided in paragraph (e) of 
this section (relating to purchaser evidences of indebtedness payable on 
demand or readily tradable), the term ``payment'' does not include the 
receipt of evidences of indebtedness of the person acquiring the 
property (``installment obligation''), whether or not payment of such 
indebtedness is guaranteed by a third party (including a government 
agency). For special rules regarding the receipt of an evidence of 
indebtedness of a transferee of a qualified intermediary, see Sec. Sec. 
1.1031(b)-2(b) and 1.1031(k)-1(j)(2)(iii) of this chapter. A standby 
letter of credit (as defined in paragraph (b)(3)(iii) of this section) 
shall be treated as a third party guarantee. Payments include amounts 
actually or constructively received in the taxable year under an 
installment obligation. For a special rule regarding a transfer of 
property to a qualified intermediary followed by the sale of such 
property by the qualified intermediary, see Sec. 1.1031(k)-1(j)(2)(ii) 
of this chapter. Receipt of an evidence of indebtedness which is secured 
directly or indirectly by cash or a cash equivalent, such as a bank 
certificate of deposit or a treasury note, will be treated as the 
receipt of payment. For a special rule regarding a transfer of property 
in exchange for an obligation that is secured by cash or a cash 
equivalent held in a qualified escrow account or a qualified trust, see 
Sec. 1.1031(k)-1(j)(2)(i) of this chapter. Payment may be received in 
cash or other property, including foreign currency, marketable 
securities, and evidences or indebtedness which are payable on demand or 
readily tradable. However, for special rules relating to the receipt of 
certain property with respect to which gain is not recognized, see 
paragraph (f) of this section (relating to transactions described in 
sections 351, 356(a) and 1031). Except as provided in Sec. 15a.453-2 of 
these regulations (relating to distributions of installment obligations 
in corporate liquidations described in section 337), payment includes 
receipt of an evidence of indebtedness of a person other than the person 
acquiring the property from the taxpayer. For purposes of determining 
the amount of payment received in the taxable year, the amount of 
qualifying indebtedness (as defined in paragraph (b)(2)(iv) of this 
section) assumed or taken subject to by the person acquiring the 
property shall be included only to the extent that it exceeds the basis 
of the property (determined after adjustment to reflect selling 
expenses). For purposes of the preceding sentence, an arrangement under 
which the taxpayer's liability on qualifying indebtedness is eliminated 
incident to the disposition (e.g., a novation) shall be treated as an 
assumption of the qualifying indebtedness. If the taxpayer sells 
property to a creditor of the taxpayer and indebtedness of the taxpayer 
is cancelled in consideration of the sale, such cancellation shall be 
treated as payment. To the extent that cancellation is not in 
consideration of the sale, see Sec. Sec. 1.61-12(b)(1) and 1.1001-
2(a)(2) relating to

[[Page 197]]

discharges of indebtedness. If the taxpayer sells property which is 
encumbered by a mortgage or other indebtedness on which the taxpayer is 
not personally liable, and the person acquiring the property is the 
obligee, the taxpayer shall be treated as having received payment in the 
amount of such indebtedness.
    (ii) Wrap-around mortgage. This paragraph (b)(3)(ii) shall apply 
generally to any installment sale after March 4, 1981 unless the 
installment sale was completed before June 1, 1981 pursuant to a written 
obligation binding on the seller that was executed on or before March 4, 
1981. A ``wrap-around mortgage'' means an agreement in which the buyer 
initially does not assume and purportedly does not take subject to part 
or all of the mortgage or other indebtedness encumbering the property 
(``wrapped indebtedness'') and, instead, the buyer issues to the seller 
an installment obligation the principal amount of which reflects such 
wrapped indebtedness. Ordinarily, the seller will use payments received 
on the installment obligation to service the wrapped indebtedness. The 
wrapped indebtedness shall be deemed to have been taken subject to even 
though title to the property has not passed in the year of sale and even 
though the seller remains liable for payments on the wrapped 
indebtedness. In the hands of the seller, the wrap-around installment 
obligation shall have a basis equal to the seller's basis in the 
property which was the subject of the installment sale, increased by the 
amount of gain recognized in the year of sale, and decreased by the 
amount of cash and the fair market value of other nonqualifying property 
received in the year of sale. For purposes of this paragraph (b)(3)(ii), 
the amount of any indebtedness assumed or taken subject to by the buyer 
(other than wrapped indebtedness) is to be treated as cash received by 
the seller in the year of sale. Therefore, except as otherwise required 
by section 483 or 1232, the gross profit ratio with respect to the wrap-
around installment obligation is a fraction, the numerator of which is 
the face value of the obligation less the taxpayer's basis in the 
obligation and the denominator of which is the face value of the 
obligation.
    (iii) Standby letter of credit. The term ``standby letter of 
credit'' means a non-negotiable, non-transferable (except together with 
the evidence of indebtedness which it secures) letter of credit, issued 
by a bank or other financial institution, which serves as a guarantee of 
the evidence of indebtedness which is secured by the letter of credit. 
Whether or not the letter of credit explicitly states it is non-
negotiable and nontransferable, it will be treated as non-negotiable and 
nontransferable if applicable local law so provides. The mere right of 
the secured party (under applicable local law) to transfer the proceeds 
of a letter of credit shall be disregarded in determining whether the 
instrument qualifies as a standby letter of credit. A letter of credit 
is not a standby letter of credit if it may be drawn upon in the absence 
of default in payment of the underlying evidence of indebtedness.
    (4) Exceptions. The term ``installment sale'' does not include, and 
the provisions of section 453 do not apply to, dispositions of personal 
property on the installment plan by a person who regularly sells or 
otherwise disposes of personal property on the installment plan, or to 
dispositions of personal property of a kind which is required to be 
included in the inventory of the taxpayer if on hand at the close of the 
taxable year. See section 453A and the regulations thereunder for rules 
relating to installment sales by dealers in personal property. A dealer 
in real property or a farmer who is not required under his method of 
accounting to maintain inventories may report the gain on the 
installment method under section 453.
    (5) Examples. The following examples illustrate installment method 
reporting under this section:

    Example (1). In 1980, A, a calendar year taxpayer, sells Blackacre, 
an unencumbered capital asset in A's hands, to B for $100,000: $10,000 
down and the remainder payable in equal annual installments over the 
next 9 years, together with adequate stated interest. A's basis in 
Blackacre, exclusive of selling expenses, is $38,000. Selling expenses 
paid by A are $2,000. Therefore, the gross profit is $60,000 ($100,000 
selling price-$40,000 basis inclusive of selling expenses). The gross 
profit ratio is \3/5\ (gross profit of $60,000 divided by

[[Page 198]]

$100,000 contract price). Accordingly, $6,000 \3/5\ of $10,000) of each 
$10,000 payment received is gain attributable to the sale and $4,000 
($10,000-$6,000) is recovery of basis. The interest received in addition 
to principal is ordinary income to A.
    Example (2). C sells Whiteacre to D for a selling price of $160,000. 
Whiteacre is encumbered by a longstanding mortgage in the principal 
amount of $60,000. D will assume or take subject to the $60,000 mortgage 
and pay the remaining $100,000 in 10 equal annual installments together 
with adequate stated interest. C's basis in Whiteacre is $90,000. There 
are no selling expenses. The contract price is $100,000, the $160,000 
selling price reduced by the mortgage of $60,000 assumed or taken 
subject to. Gross profit is $70,000 ($160,000 selling price less C's 
basis of $90,000). C's gross profit ratio is \7/10\ (gross profit of 
$70,000 divided by $100,000 contract price). Thus, $7,000 (\7/10\ of 
$10,000) of each $10,000 annual payment is gain attributable to the 
sale, and $3,000 ($10,000-$7,000) is recovery of basis.
    Example (3). The facts are the same as in example (2), except that 
C's basis in the land is $40,000. In the year of the sale C is deemed to 
have received payment of $20,000 ($60,000-$40,000, the amount by which 
the mortgage D assumed or took subject to exceeds C's basis). Since 
basis is fully recovered in the year of sale, the gross profit ratio is 
1 ($120,000/$120,000) and C will report 100% of the $20,000 deemed 
payment in the year of sale and each $10,000 annual payment as gain 
attributable to the sale.
    Example (4). E sells Blackacre, an unencumbered capital gain 
property in E's hands, to F on January 2, 1981. F makes a cash down 
payment of $500,000 and issues a note to E obliging F to pay an 
additional $500,000 on the fifth anniversary date. The note does not 
require a payment of interest. In determining selling price, section 483 
will apply to recharacterize as interest a portion of the $500,000 
future payment. Assume that under section 483 and the applicable 
regulations $193,045 is treated as total unstated interest, and the 
selling price is $806,955 ($1 million less unstated interest). Assuming 
E's basis (including selling expenses) in Blackacre is $200,000) gross 
profit is $606,955 ($806,955-$200,000) and the gross profit ratio is 
75.21547%. Accordingly, of the $500,000 cash down payment received by E 
in 1981, $376,077 (75.21547% of $500,000) is gain attributable to the 
sale and $123,923 is recovery of basis ($500,000-$376,077).
    Example (5). In 1982, G sells to H Blackacre, which is encumbered by 
a first mortgage with a principal amount of $500,000 and a second 
mortgage with a principal amount of $400,000, for a selling price of $2 
million. G's basis in Blackacre is $700,000. Under the agreement between 
G and H, passage of title is deferred and H does not assume and 
purportedly does not take subject to either mortgage in the year of 
sale. H pays G $200,000 in cash and issues a wrap-around mortgage note 
with a principal amount of $1,800,000 bearing adequate stated interest. 
H is deemed to have acquired Blackacre subject to the first and second 
mortgages (wrapped indebtedness) totalling $900,000. The contract price 
is $1,300,000 (selling price of $2 million less $700,000 mortgages 
within the seller's basis assumed or taken subject to). Gross profit is 
also $1,300,000 (selling price of $2 million less $700,000 basis). 
Accordingly in the year of sale, the gross profit ratio is 1 
($1,300,000/$1,300,000). Payment in the year of sale is $400,000 
($200,000 cash received plus $200,000 mortgage in excess of basis 
($900,000-$700,000)). Therefore, G recognizes $400,000 gain in the year 
of sale ($400,000x1). In the hands of G the wrap-around installment 
obligation has a basis of $900,000, equal to G's basis in Blackacre 
($700,000) increased by the gain recognized by G in the year of sale 
($400,000) reduced by the cash received by G in the year of sale 
($200,000). G's gross profit with respect to the note is $900,000 
($1,800,000 face amount less $900,000 basis in the note) and G's 
contract price with respect to the note is its face amount of 
$1,800,000. Therefore, the gross profit ratio with respect to the note 
is \1/2\ ($900,000/$1,800,000).
    Example (6). The facts are the same as example (5) except that under 
the terms of the agreement H assumes the $500,000 first mortgage on 
Blackacre. H does not assume and purportedly does not take subject to 
the $400,000 second mortgage on Blackacre. The wrap-around installment 
obligation issued by H to G has a face amount of $1,300,000. The tax 
results in the year of sale to G are the same as example (5) ($400,000 
payment received and gain recognized). In the hands of G, basis in the 
wrap-around installment obligation is $400,000 ($700,000 basis in 
Blackacre plus $400,000 gain recognized in the year of sale minus 
$700,000 ($200,000 cash received and $500,000 treated as cash received 
as a result of H's assumption of the first mortgage)). G's gross profit 
with respect to the note is $900,000 ($1,300,000 face amount of the 
wrap-around installment obligation less $400,000 basis in that note) and 
G's contract price with respect to the note is its face value of 
$1,300,000. Therefore, the gross profit ratio with respect to the note 
is \9/13\ ($900,000/$1,300,000).
    Example (7). A sells the stock of X corporation to B for a $1 
million installment obligation payable in equal annual installments over 
the next 10 years with adequate stated interest. The installment 
obligation is secured by a standby letter of credit (within the meaning 
of paragraph (b)(3)(iii) of this section) issued by M bank. Under the 
agreement between B and M bank, B is required to

[[Page 199]]

maintain a compensating balance in an account B maintains with M bank 
and is required by the M bank to post additional collateral, which may 
include cash or a cash equivalent, with M bank. Under neither the 
standby letter of credit nor any other agreement or arrangement is A 
granted a direct lien upon or other security interest in such cash or 
cash equivalent collateral. Receipt of B's installment obligation 
secured by the standby letter of credit will not be treated as the 
receipt of payment by A.
    Example (8). The facts are the same as in example (7) except that 
the standby letter of credit is in the drawable sum of $600,000. To 
secure fully its $1 million note issued to A, B deposits in escrow 
$400,000 in cash and Treasury bills. Under the escrow agreement, upon 
default in payment of the note A may look directly to the escrowed 
collateral. Receipt of B's installment obligation will be treated as the 
receipt payment by A in the sum of $400,000.

    (c) Contingent payment sales--(1) In general. Unless the taxpayer 
otherwise elects in the manner prescribed in paragraph (d)(3) of this 
section, contingent payment sales are to be reported on the installment 
method. As used in this section, the term ``contingent payment sale'' 
means a sale or other disposition of property in which the aggregate 
selling price cannot be determined by the close of the taxable year in 
which such sale or other disposition occurs.

The term ``contingent payment sale'' does not include transactions with 
respect to which the installment obligation represents, under applicable 
principles of tax law, a retained interest in the property which is the 
subject of the transaction, an interest in a joint venture or a 
partnership, an equity interest in a corporation or similar 
transactions, regardless of the existence of a stated maximum selling 
price or a fixed payment term. See paragraph (c)(8) of this section, 
describing the extent to which the regulations under section 385 apply 
to the determination of whether an installment obligation represents an 
equity interest in a corporation.

This paragraph prescribes the rules to be applied in allocating the 
taxpayer's basis (including selling expenses except for selling expenses 
of dealers in real estate) to payments received and to be received in a 
contingent payment sale. The rules are designed appropriately to 
distinguish contingent payment sales for which a maximum selling price 
is determinable, sales for which a maximum selling price is not 
determinable but the time over which payments will be received is 
determinable, and sales for which neither a maximum selling price nor a 
definite payment term is determinable. In addition, rules are prescribed 
under which, in appropriate circumstances, the taxpayer will be 
permitted to recover basis under an income forecast computation.
    (2) Stated maximum selling price--(i) In general. (A) contingent 
payment sale will be treated as having a stated maximum selling price 
if, under the terms of the agreement, the maximum amount of sale 
proceeds that may be received by the taxpayer can be determined as of 
the end of the taxable year in which the sale or other disposition 
occurs. The stated maximum selling price shall be determined by assuming 
that all of the contingencies contemplated by the agreement are met or 
otherwise resolved in a manner that will maximize the selling price and 
accelerate payments to the earliest date or dates permitted under the 
agreement. Except as provided in paragraph (c)(2)(ii) and (7) of this 
section (relating to certain payment recomputations), the taxpayer's 
basis shall be allocated to payments received and to be received under a 
stated maximum selling price agreement by treating the stated maximum 
selling price as the selling price for purposes of paragraph (b) of this 
section. The stated maximum selling price, as initially determined, 
shall thereafter be treated as the selling price unless and until that 
maximum amount is reduced, whether pursuant to the terms of the original 
agreement, by subsequent amendment, by application of the payment 
recharacterization rule (discribed in paragraph (c)(2)(ii) of this 
section), or by a subsequent supervening event such as bankruptcy of the 
obligor. When the maximum amount is subsequently reduced, the gross 
profit ratio will be recomputed with respect to payments received in or 
after the taxable year in which an event requiring reduction occurs. If, 
however, application of the foregoing

[[Page 200]]

rules in a particular case would substantially and inappropriately 
accelerate or defer recovery of the taxpayer's basis, a special rule 
will apply. See paragraph (c)(7) of this section.
    (B) The following examples illustrate the provisions of paragraph 
(e)(2)(i) of this section. In each example, it is assumed that 
application of the rules illustrated will not substantially and 
inappropriately defer or accelerate recovery of the taxpayer's basis.

    Example (1). A sells all of the stock of X corporation to B for 
$100,000 payable at closing plus an amount equal to 5% of the net 
profits of X for each of the next nine years, the contingent payments to 
be made annually together with adequate stated interest. The agreement 
provides that the maximum amount A may receive, inclusive of the 
$100,000 down payment but exclusive of interest, shall be $2,000,000. 
A's basis in the stock of X inclusive of selling expenses, is $200,000. 
Selling price and contract price are considered to be $2,000,000. Gross 
profit is $1,800,000, and the gross profit ratio is 9/10 ($1,800,000/
$2,000,000). Accordingly, of the $100,000 received by A in the year of 
sale, $90,000 is reportable as gain attributable to the sale and $10,000 
is recovery of basis.
    Example (2). C owns Blackacre which is encumbered by a long-standing 
mortgage of $100,000. On January 15, 1981, C sells Blackacre to D under 
the following payment arrangement: $100,000 in cash on closing; nine 
equal annual installment payments of $100,000 commencing January 15, 
1982; and nine annual payments (the first to be made on March 30, 1982) 
equal to 5% of the gross annual rental receipts from Blackacre generated 
during the preceding calendar year. The agreement provides that each 
deferred payment shall be accompanied by a payment of interest 
calculated at the rate of 12% per annum and that the maximum amount 
payable to C under the agreement (exclusive of interest) shall be 
$2,100,000. The agreement also specifies that D will assume the long-
standing mortgage. C's basis (inclusive of selling expenses) in 
Blackacre is $300,000. Accordingly, selling price is $2,100,000 and 
contract price is $2,000,000 (selling price of $2,100,000 less the 
$100,000 mortgage). The gross profit ratio is 9/10 (gross profit of 
$1,800,000 divided by $2,000,000 contract price). Of the $100,000 cash 
payment received by C in 1981, $90,000 is gain attributable to the sale 
of Blackacre and $10,000 is recovery of basis.

    (ii) Certain interest recomputations. When interest is stated in the 
contingent price sale agreement at a rate equal to or greater than the 
applicable prescribed test rate referred to in Sec. 1.483-1(d)(1)(ii) 
and such stated interest is payable in addition to the amounts otherwise 
payable under the agreement, such stated interest is not considered a 
part of the selling price. In other circumstances (i.e., section 483 is 
applicable because no interest is stated or interest is stated below the 
applicable test rate, or interest is stated under a payment 
recharacterization provision of the sale agreement), the special rule 
set forth in this (ii) shall be applied in the initial computation and 
subsequent recomputations of selling price, contract price, and gross 
profit ratio. The special rule is referred to in this section as the 
``price-interest recomputation rule.'' As used in this section, the term 
``payment recharacterization'' refers to a contractual arrangement under 
which a computed amount otherwise payable as part of the selling price 
is denominated an interest payment. The amount of unstated interest 
determined under section 483 or (if section 483 is inapplicable in the 
particular case) the amount of interest determined under a payment 
recharacterization arrangement is collectively referred to in this 
section as ``internal interest'' amounts. The price-interest 
recomputation rule is applicable to any stated maximum selling price 
agreement which contemplates receipt of internal interest by the 
taxpayer. Under the rule, stated maximum selling price will be 
determined as of the end of the taxpayer's taxable year in which the 
sale or other disposition occurs, taking into account all events which 
have occurred and are subject to prompt subsequent calculation and 
verification and assuming that all amounts that may become payable under 
the agreement will be paid on the earliest date or dates permitted under 
the agreement. With respect to the year of sale, the amount (if any) of 
internal interest then shall be determined taking account of the 
respective components of that calculation. The maximum amount initially 
calculated, minus the internal interest so determined, is the initial 
stated maximum selling price under the price-interest recomputation 
rule. For each subsequent taxable year, stated maximum selling price 
(and thus selling price, contract price, and gross profit

[[Page 201]]

ratio) shall be recomputed, taking into account all events which have 
occurred and are subject to prompt subsequent calculation and 
verification and assuming that all amounts that may become payable under 
the agreement will be paid on the earliest date or dates permitted under 
the agreement. The redetermined gross profit ratio, adjusted to reflect 
payments received and gain recognized in prior taxable years, shall be 
applied to payments received in that taxable year.
    (iii) Examples. The following examples illustrate installment method 
reporting of a contingent payment sale under which there is a stated 
maximum selling price. In each example, it is assumed that application 
of the rules described will not substantially and inappropriately defer 
or accelerate recovery of the taxpayer's basis.

    Example (1). A owns all of the stock of X corporation with a basis 
to A of $20 million. On July 1, 1981, A sells the stock of X to B under 
an agreement calling for fifteen annual payments respectively equal to 
5% of the net profits of X earned in the immediately preceding fiscal 
year beginning with the fiscal year ending March 31, 1982. Each payment 
is to be made on the following June 15th, commencing June 15, 1982, 
together with adequate stated interest. The agreement specifies that the 
maximum amount (exclusive of interest) payable to A shall not exceed $60 
million. Since stated interest is payable as an addition to the selling 
price and the specified rate is not below the section 483 test rate, 
there is no internal interest under the agreement. The stated maximum 
selling price is $60 million. The gross profit ratio is \2/3\ (gross 
profit of $40 million divided by $60 million contract price). Thus, if 
on June 15, 1982, A receives a payment of $3 million (exclusive of 
interest) under the agreement, in that year A will report $2 million ($3 
million x \2/3\) as gain attributable to the sale, and $1 million as 
recovery of basis.
    Example (2). (i) The facts are the same as in example (1) except 
that the agreement does not call for the payment of any stated interest 
but does provide for an initial cash payment of $3 million on July 1, 
1981. The maximum amount payable, including the $3 million initial 
payment, remains $60 million. Since section 483 will apply to each 
payment received by A more than one year following the date of sale 
(section 483 is inapplicable to the contingent payment that will be 
received on June 15, 1982 since that date is within one year following 
the July 1, 1981 sale date), the agreement contemplates internal 
interest and the price-interest recomputation rule is applicable. Under 
the rule, an initial determination must be made for A's taxable year 
1981. On December 31, 1981, the last day of the taxable year, no events 
with regard to the first fiscal year have occurred which are subject to 
prompt subsequent calculation and verification because that fiscal year 
will end March 31, 1982. Under the price-interest recomputation rule, on 
December 31, 1981 A is required to assume that the maximum amount 
subsequently payable under the agreement ($57 million, equal to $60 
million less the $3 million initial cash payment received by A in 1981) 
will be paid on the earliest date permissible under the agreement, i.e., 
on June 15, 1982. Since no part of a payment received on that date would 
be treated as interest under section 483, the initial stated maximum 
selling price, applicable to A's 1981 tax calculations, is deemed to be 
$60 million. Thus, the 1981 gross profit ratio is \2/3\ and for the 
taxable year 1981 A will report $2 million as gain attributable to the 
sale.
    (ii) The net profits of X for its fiscal year ending March 31, 1982 
are $120 million. On June 15, 1982 A receives a payment from B equal to 
5% of that amount, or $6 million. On December 31, 1982, A knows that the 
maximum amount he may subsequently receive under the agreement is $51 
million, and A is required to assume that this amount will be paid to 
him on the earliest permissible date, June 15, 1983. Section 483 does 
not treat as interest any part of the $6 million received by A on June 
15, 1982, but section 483 will treat as unstated interest a computed 
part of the $51 million it is assumed A will receive on June 15, 1983. 
Assuming that under the tables in the regulations under section 483, it 
is determined that the principal component of a payment received more 
than 21 months but less than 27 months after the date of sale is 
considered to be .82270, $41,957,700 of the presumed $51 million payment 
will be treated as principal. The balance of $9,042,300 is interest. 
Accordingly, in A's 1982 tax calculations stated maximum selling price 
will be $50,957,700, which amount is equal to the stated maximum selling 
price that was determined in the 1981 tax calculations ($60 million) 
reduced by the section 483 interest component of the $6 million payment 
received by A in 1982 ($0) and further reduced by the section 483 
interest component of the $51 million presumed payment to be received by 
A on June 15, 1983 ($9,042,300). Similarly, in determining gross profit 
for 1982 tax calculations, the gross profit of $40 million determined in 
the 1981 tax calculations must be reduced by the same section 483 
interest amounts, yielding a recomputed gross profit of $30,957,700 
($40,000,000-$9,042,300). Further, since prior to 1982 A received 
payment under the agreement (1981 payment of $3 million of which $2 
million was profit), the appropriate amounts must be subtracted in the 
1982 tax calculation. The total previously received

[[Page 202]]

selling price payment of $3 million is subtracted from the recomputed 
maximum selling price of $50,957,700, yielding an adjusted selling price 
of $47,957,700. The total previously recognized gain of $2 million is 
subtracted from the recomputed maximum gross profit of $30,957,700, 
yielding an adjusted gross profit of $28,957,700. The gross profit 
percentage applicable to 1982 tax calculations thus is determined to be 
60.38175%, equal to the quotient of dividing the adjusted gross profit 
of $28,957,700 by the adjusted selling price of $47,957,700. 
Accordingly, of the $6 million received by A in 1982, no part of which 
is unstated interest under section 483, A will report $3,622,905 
(60.38175% of $6 million) as gain attributable to the sale and 
$2,377,095 ($6,000,000-$3,622,905) as recovery of basis.
    (iii) The net profits of X for its fiscal year ending March 31, 1983 
are $200 million. On June 15, 1983 A receives a payment from B equal to 
$10 million. On December 31, 1983, A knows that the maximum amount he 
may subsequently receive under the agreement is $41 million, and A is 
required to assume that this amount will be paid to him on the earliest 
permissible date, June 15, 1984. Assuming that under the tables in the 
regulations under section 483 it is determined that the principal 
component of a payment received more than 33 months but less than 39 
months after the date of sale is .74622, $30,595,020 of the presumed $41 
million ($51 million-$10 million) payment will be treated as principal 
and $10,404,980 is interest. Based upon the assumed factor for 21 months 
but less than 27 months (.82270) $8,227,000 of the $10 million payment 
is principal and $1,773,000 is interest. Accordingly, in A's 1983 tax 
calculations stated maximum selling price will be $47,822,020, which 
amount is equal to the stated maximum selling price determined in the 
1981 calculation ($60 million) reduced by the section 483 interest 
component of the $6 million 1982 payment ($0), the section 483 interest 
component of the 1983 payment ($1,773,000) and by the section 483 
interest component of the presumed $41 million payment to be received in 
1984 ($10,404,980). The recomputed gross profit is $27,822,020 ($40 
million-$10,404,980-$1,773,000). The previously reported payments must 
be deducted for the 1983 calculation. Selling price is reduced to 
$38,822,020 by subtracting the $3 million 1981 payment and the $6 
million 1982 payment ($47,822,020-$9 million) and gross profit is 
reduced to $22,199,115 by subtracting the 1981 profit of $2 million and 
the 1982 profit of $3,622,905 ($27,822,020-$5,622,905), yielding a gross 
profit percentage of 57.18176% ($22,199,115/$38,822,020). Accordingly, 
of the $10 million received in 1983, A will report $1,773,000 as 
interest under section 483, and of the remaining principal component of 
$8,227,000, $4,704,343 as gain attributable to the sale 
($8,227,000x57.18176%) and $3,522,657 ($8,227,000-$4,704,343) as 
recovery of basis.
    Example (3). The facts are the same as in example (2) except that X 
is a collapsible corporation as defined in section 341(b)(1) and no 
limitation or exception under section 341 (d), (e), or (f) is 
applicable. Under section 341(a), all of A's gain on the sale will be 
ordinary income. Accordingly, section 483 will not apply to treat as 
interest any part of the payments to be received by A under his 
agreement with B. See section 483(f)(3). Therefore, the price-interest 
recomputation rule is inapplicable and the tax results to A in each year 
in which payment is received will be determined in a manner consistent 
with example (1).
    Example (4). The facts are the same as in example (2) (maximum 
amount payable under the agreement $60 million) except that the 
agreement between A and B contains the following ``payment 
recharacterization'' provision:
    ``Any payment made more than one year after the (July 1, 1981) date 
of sale shall be composed of an interest element and a principal 
element, the interest element being computed on the principal element at 
an interest rate of 9% per annum computed from the date of sale to the 
date of payment.''


The results reached in example (2), with respect to the $3 million 
initial cash payment received by A in 1981 remain the same because, 
under the payment recharacterization formula, no amount received or 
assumed to be received prior to July 1, 1982 is treated as interest. The 
1982 tax computation method described in example (2) is equally 
applicable to the $6 million payment received in 1982. However, the 
adjusted gross profit ratio determined in this example (4) will differ 
from the ratio determined in example (2). The difference is attributable 
to the difference between a 9% stated interest rate calculation (in this 
example (4)) and the compound rate of unstated interest required under 
section 483 and used in calculating the results in example (2).
    Example (5). The facts are the same as in example (1). In 1992 X is 
adjudged a bankrupt and it is determined that, in and after 1992, B will 
not be required to make any further payments under the agreement, i.e., 
B's contingent payment obligation held by A now has become worthless. 
Assume that A previously received aggregate payments (exclusive of 
interest) of $45 million and out of those payments recovered $15 million 
of A's total $20 million basis. For 1992 A will report a loss of $5 
million attributable to the sale, taken at the time determined to be 
appropriate under the rules generally applicable to worthless debts.
    Example (6). (i) C owns all of the stock of Z corporation, a 
calendar year taxpayer. On July 1, 1981, C sells the stock of Z to D 
under

[[Page 203]]

an agreement calling for payment, each year for the next ten years, of 
an amount equal to 10% of the net profits of Z earned in the immediately 
preceding calendar year beginning with the year ending December 31, 
1981. Each payment is to be made on the following April 1st, commencing 
April 1, 1982. In addition, C is to receive a payment of $5 million on 
closing. The agreement specifies that the maximum amount payable to C, 
including the $5 million cash payment at closing, is $24 million. The 
agreement does not call for the payment of any stated interest. Since 
section 483 will apply to each payment received by C more than one year 
following the date of sale (section 483 is inapplicable to the payment 
that will be received on April 1, 1982, since that date is within one 
year following the July 1, 1981 sale date), the agreement contemplates 
internal interest and the price interest recomputation rule is 
applicable. Under that rule, C must make an initial determination for 
his taxable year 1981.
    (ii) On December 31, 1981, the exact amount of Z's 1981 net profit 
is not known, since it normally takes a number of weeks to compile the 
relevant information. However, the events which will determine the 
amount of the payment C will receive on April 1, 1982 have already 
occurred, and the information (Z's 1981 financial statement) will be 
promptly calculated and verified and will be available prior to the time 
C's 1981 tax return is timely filed. On March 15, 1982, Z reports net 
income of $14 million, and on April 1, 1982 D pays C $1.4 million.
    (iii) Under the price-interest recomputation rule, C is required to 
determine the gross profit ratio for the 1981 $5 million payment on the 
basis of the events which occurred by the close of that taxable year and 
which are verifiable before the due date of the 1981 return. Because at 
the end of C's 1981 taxable year all events which will determine the 
amount of the April 1, 1982 payment have occurred and because the actual 
facts are known prior to the due date of C's return, C will take those 
facts into account when calculating the gross profit ratio. Thus, 
because C knows that the 1982 payment is $1.4 million, C knows that the 
remaining amount to be recovered under the contract is $17.6 million 
($24 million - ($5 million + $1.4 million)). For purposes of this 
paragraph C must assume that the entire $17.6 million will be paid on 
the earliest possible date, April 1, 1983. Because section 483 will 
apply to that payment, and assuming that under the tables in the 
regulations under section 483 the principal component of a payment 
received 21 months after the date of sale is considered to be .86384, 
$15,203,584 of the $17.6 million would be principal and $2,396,416 
($17,600,000 - $15,203,584) would be interest. Therefore, C must assume, 
for purposes of reporting the $5 million payment received in 1981, that 
the selling price is $21,603,584 calculated as follows:

Total selling price.....................................     $24,000,000
Interest component of the $17,600,000 payment which C         -2,396,416
 must assume will be made April 1, 1983.................
                                                         ---------------
  Adjusted selling price to be used when reporting the        21,603,584
   1981 payment.........................................
 

    (iv) Assume that on March 15, 1982, Z reports net income of $15 
million for 1982 and that on April 1, 1983 D pays C $1.5 million. 
Because section 483 will apply to that payment, and assuming that under 
the tables in the regulations under section 483 the principal component 
of a payment received 21 months after the date of sale is considered to 
be .86384, $1,295,760 of the $1,500,000 payment will be principal and 
$204,240 ($1,500,000 - $1,295,760) will be interest. Because C knows the 
amount of the 1983 payment when filing the 1982 tax return, C must 
assume that the remaining amount to be received under the contract, 
$16.1 million ($24 million - ($5 million + $1.4 million + $1.5 
million)), will be received as a lump sum on April 1, 1984. Because 
section 483 will again apply, and assuming that the principal component 
of a payment made 34 months after the date of the sale is .74622, 
$12,014,142 of the $16.1 million would be principal, and $4,085,858 
($16,100,000 - $12,014,142) would be interest. Therefore, C must assume, 
for purpose of reporting the $1.4 million payment made April 1, 1982, 
that the adjusted selling price (within the meaning of example (2)) is 
$14,709,902, calculated as follows:

Total selling price.....................................     $24,000,000
Interest component of the $1,500,000 payment made April         -204,240
 1, 1983................................................
Interest component of the $16,100,000 payment which C         -4,085,858
 must assume will be made April 1, 1984.................
Payment made in 1981....................................      -5,000,000
                                                         ---------------
  Adjusted selling price for calculations for reporting       14,709,902
   the 1982 payment.....................................
 

    (3) Fixed period--(i) In general. When a stated maximum selling 
price cannot be determined as of the close of the taxable year in which 
the sale or other disposition occurs, but the maximum period over which 
payments may be received under the contingent sale price agreement is 
fixed, the taxpayer's basis (inclusive of selling expenses) shall be 
allocated to the taxable years in which payment may be received under 
the agreement in equal annual increments. In making the allocation it is 
not relevant whether the buyer is required to pay adequate stated 
interest. However, if the terms of the agreement incorporate an 
arithmetic component that is not identical for all taxable years,

[[Page 204]]

basis shall be allocated among the taxable years to accord with that 
component unless, taking into account all of the payment terms of the 
agreement, it is inappropriate to presume that payments under the 
contract are likely to accord with the variable component. If in any 
taxable year no payment is received or the amount of payment received 
(exclusive of interest) is less than the basis allocated to that taxable 
year, no loss shall be allowed unless the taxable year is the final 
payment year under the agreement or unless it is otherwise determined in 
accordance with the rules generally applicable to worthless debts that 
the future payment obligation under the agreement has become worthless. 
When no loss is allowed, the unrecovered portion of basis allocated to 
the taxable year shall be carried forward to the next succeeding taxable 
year. If application of the foregoing rules to a particular case would 
substantially and inappropriately defer or accelerate recovery of the 
taxpayer's basis, a special rule will apply. See paragraph (c)(7) of 
this section.

    (ii) Examples. The following examples illustrate the rules for 
recovery of basis in a contingent payment sale in which stated maximum 
selling price cannot be determined but the period over which payments 
are to be received under the agreement is fixed. In each case, it is 
assumed that application of the described rules will not substantially 
and inappropriately defer or accelerate recovery of the taxpayer's 
basis.

    Example (1). A sells Blackacre to B for 10 percent of Blackacre's 
gross yield for each of the next 5 years. A's basis in Blackacre is $5 
million. Since the sales price is indefinite and the maximum selling 
price is not ascertainable from the terms of the contract, basis is 
recovered ratably over the period during which payment may be received 
under the contract. Thus, assuming A receives the payments (exclusive of 
interest) listed in the following table, A will report the following:

----------------------------------------------------------------------------------------------------------------
                                                                                                       Gain
                              Year                                    Payment          Basis       attributable
                                                                                     recovered      to the sale
----------------------------------------------------------------------------------------------------------------
1...............................................................      $1,300,000      $1,000,000        $300,000
2...............................................................       1,500,000       1,000,000         500,000
3...............................................................       1,400,000       1,000,000         400,000
4...............................................................       1,800,000       1,000,000         800,000
5...............................................................       2,100,000       1,000,000       1,100,000
----------------------------------------------------------------------------------------------------------------

    Example (2). The facts are the same as in example (1), except that 
the payment in year 1 is only $900,000. Since the installment payment is 
less than the amount of basis allocated to that year, the unrecovered 
basis, $100,000, is carried forward to year 2.

----------------------------------------------------------------------------------------------------------------
                                                                                                       Gain
                              Year                                    Payment          Basis       attributable
                                                                                     recovered      to the sale
----------------------------------------------------------------------------------------------------------------
1...............................................................        $900,000        $900,000  ..............
2...............................................................       1,500,000       1,100,000        $400,000
3...............................................................       1,400,000       1,000,000         400,000
4...............................................................       1,800,000       1,000,000         800,000
5...............................................................       2,100,000       1,000,000       1,100,000
----------------------------------------------------------------------------------------------------------------

    Example (3). C owns all of the stock of X corporation with a basis 
of $100,000 (inclusive of selling expenses). D purchases the X stock 
from C and agrees to make four payments computed in accordance with the 
following formula: 40% of the net profits of X in year 1, 30% in year 2, 
20% in year 3, and 10% in year 4. Accordingly, C's basis is allocated as 
follows: $40,000 to year 1, $30,000 to year 2, $20,000 to year 3, and 
$10,000 to year 4.
    Example (4). The facts are the same as in example (3), but the 
agreement also requires that D make fixed installment payments in 
accordance with the following schedule: no payment in year 1, $100,000 
in year 2, $200,000 in year 3, $300,000 in year 4, and $400,000 in year 
5. Thus, while it is reasonable to project that the contingent component 
of the payments will decrease each year, the fixed component of the 
payments will increase each year. Accordingly, C is required to allocate 
$20,000 of basis to each of the taxable years 1 through 5.

    (4) Neither stated maximum selling price nor fixed period. If the 
agreement neither specifies a maximum selling price nor limits payments 
to a fixed period, a question arises whether a sale realistically has 
occurred or whether, in economic effect, payments received under the 
agreement are in the nature of rent or royalty income. Arrangements of 
this sort will be closely scrutinized. If, taking into account all of 
the pertinent facts, including the nature of the property, the 
arrangement is determined to qualify as a sale, the taxpayer's basis 
(including selling expenses) shall be recovered in equal annual 
increments over a period of 15 years commencing with the date of sale. 
However, if in any taxable year no payment is received or the amount of

[[Page 205]]

payment received (exclusive of interest) is less than basis allocated to 
the year, no loss shall be allowed unless it is otherwise determined in 
accordance with the timing rules generally applicable to worthless debts 
that the future payment obligation under the agreement has become 
worthless; instead the excess basis shall be reallocated in level 
amounts over the balance of the 15 year term. Any basis not recovered at 
the end of the 15th year shall be carried forward to the next succeeding 
year, and to the extent unrecovered thereafter shall be carried forward 
from year to year until all basis has been recovered or the future 
payment obligation is determined to be worthless. The general rule 
requiring initial level allocation of basis over 15 years shall not 
apply if the taxpayer can establish to the satisfaction of the Internal 
Revenue Service that application of the general rule would substantially 
and inappropriately defer recovery of the taxpayer's basis. See 
paragraph (c)(7) of this section. If the Service determines that 
initially allocating basis in level amounts over the first 15 years will 
substantially and inappropriately accelerate recovery of the taxpayer's 
basis in early years of that 15-year term, the Service may require that 
basis be reallocated within the 15-year term but the Service will not 
require that basis initially be allocated over more than 15 years. See 
paragraph (c)(7) of this section.
    (5) Foreign currency and other fungible payment units--(i) In 
general. An installment sale may call for payment in foreign currency. 
For federal income tax purposes, foreign currency is property. Because 
the value of foreign currency will vary over time in relation to the 
United States dollar, an installment sale requiring payment in foreign 
currency is a contingent payment sale. However, when the consideration 
payable under an installment sale agreement is specified in foreign 
currency, the taxpayer's basis (including selling expenses) shall be 
recovered in the same manner as basis would have been recovered had the 
agreement called for payment in United States dollars. This rule is 
equally applicable to any installment sale in which the agreement 
specifies that payment shall be made in identified, fungible units of 
property the value of which will or may vary over time in relation to 
the dollar (e.g., bushels of wheat or ounces of gold).
    (ii) Example. The following example illustrates the provisions of 
this subparagraph:

    Example. A sells Blackacre to B for 4 million Swiss francs payable 1 
million in year 2 and 3 million in year 3, together with adequate stated 
interest. A's basis (including selling expenses) in Blackacre is 
$100,000. Twenty five thousand dollars of A's basis (\1/4\ of total 
basis) is allocable to the year 2 payment of 1 million Swiss francs and 
$75,000 of A's basis is allocable to the year 3 payment of 3 million 
Swiss francs.

    (6) Income forecast method for basis recovery--(i) In general. The 
rules for ratable recovery of basis set forth in paragraph (c) (2) 
through (4) of this section focus on the payment terms of the contingent 
selling price agreement. Except to the extent contemplated by paragraph 
(c)(7) of this section (relating to a special rule to prevent 
substantial distortion of basis recovery), the nature and productivity 
of the property sold is not independently relevant to the basis to be 
recovered in any payment year. The special rule for an income forecast 
method of basis recovery set forth in paragraph (c)(6) of this section 
recognizes that there are cases in which failure to take account of the 
nature or productivity of the property sold may be expected to result in 
distortion of the taxpayer's income over time. Specifically, when the 
property sold is depreciable property of a type normally eligible for 
depreciation on the income forecast method, or is depletable property of 
a type normally eligible for cost depletion in which total future 
production must be estimated, and payments under the contingent selling 
price agreement are based upon receipts or units produced by or from the 
property, the taxpayer's basis may appropriately be recovered by using 
an income forecast method.
    (ii) Availability of method. In lieu of applying the rules set forth 
in paragraph (c) (2) through (4) of this section, in an appropriate case 
the taxpayer may elect (on its tax return timely filed for the first 
year under the contingent payment agreement in which a payment is 
received) to recover basis

[[Page 206]]

using the income forecast method of basis recovery. No special form of 
election is prescribed. An appropriate case is one meeting the criteria 
set forth in paragraph (c)(6)(i) of this section in which the property 
sold is a mineral property, a motion picture film, a television film, or 
a taped television show. The Internal Revenue Service may from time to 
time specify other properties of a similar character which, in 
appropriate circumstances, will be eligible for recovery of basis on the 
income forecast method. In addition, a taxpayer may seek a ruling from 
the Service as to whether a specific property qualifies as property of a 
similar character eligible, in appropriate circumstances, for income 
forecast recovery of basis.
    (iii) Required calculations. The income forecast method requires 
application of a fraction, the numerator of which is the payment 
(exclusive of interest) received in the taxable year under a contingent 
payment agreement, and the denominator of which is the forecast or 
estimated total payments (exclusive of interest) to be received under 
the agreement. This fraction is multiplied by the taxpayer's basis in 
the property sold to determine the basis recovered with respect to the 
payment received in the taxable year. If in a subsequent year it is 
found that the income forecast was substantially overestimated or 
underestimated by reason of circumstances occurring in such subsequent 
year, an adjustment of the income forecast of such subsequent year shall 
be made. In such case, the formula for computing recovery of basis would 
be as follows: payment received in the taxable year (exclusive of 
interest) divided by the revised estimated total payments (exclusive of 
interest) then and thereafter to be made under the agreement (the 
current year's payment and total estimated future payments), multiplied 
by the taxpayer's unrecovered basis remaining as of the beginning of the 
taxable year. If the agreement contemplates internal interest (as 
defined in paragraph (c)(2)(ii) of this section), in making the initial 
income forecast computation and in making any required subsequent 
recomputation the amount of internal interest (which shall not be 
treated as payment under the agreement) shall be calculated by assuming 
that each future contingent selling price payment will be made in the 
amount and at the time forecast. The total forecast of estimated 
payments to be received under the agreement shall be based on the 
conditions known to exist at the end of the taxable year for which the 
return is filed. If a subsequent upward or downward revision of this 
estimate is required, the revision shall be made at the end of the 
subsequent taxable year based on additional information which became 
available after the last prior estimate. No loss shall be allowed unless 
the taxable year is the final payment year under the agreement or unless 
it is otherwise determined in accordance with the rules generally 
applicable to the time a debt becomes worthless that the future payment 
obligation under the agreement has become worthless.
    (iv) Examples. The following examples illustrate the income forecast 
method of basis recovery:

    Example (1). A sells a television film to B for 5% of annual gross 
receipts from the exploitation of the film. The film is an ordinary 
income asset in the hands of A. A reasonably forecasts that total 
payments to be received under the contingent selling price agreement 
will be $1,200,000, and that A will be paid $600,000 in year 1, $150,000 
in year 2, $300,000 in year 3, $100,000 in year 4, and $50,000 in year 
5. A reasonably anticipates no or only insignificant receipts 
thereafter. A's basis in the film is $100,000. Under the income forecast 
method, A's basis initially is allocated to the five taxable years of 
forecasted payment as follows:

------------------------------------------------------------------------
                  Year                      Percentage         Basis
------------------------------------------------------------------------
1.......................................           50.00         $50,000
2.......................................           12.50          12,500
3.......................................           25.00          25,000
4.......................................            8.33           8,333
5.......................................            4.17           4,167
------------------------------------------------------------------------


Payments are received and A reports the sale under the installment 
method as follows:

----------------------------------------------------------------------------------------------------------------
                                                                      Payment          Basis
                              Year                                   received        recovered     Gain on sale
----------------------------------------------------------------------------------------------------------------
1...............................................................        $600,000         $50,000        $550,000
2...............................................................         150,000          12,500         137,500
3...............................................................         300,000          25,000         275,000
4...............................................................         100,000           8,333          91,667
5...............................................................          50,000           4,167          45,833
----------------------------------------------------------------------------------------------------------------

    Example (2). The facts are the same as in example (1), except that 
in year 2 A receives

[[Page 207]]

no payment. In year 3 A receives a payment of $300,000 and reasonably 
estimates that in subsequent years he will receive total additional 
payments of only $100,000. In year 2 A will be allowed no loss. At the 
beginning of year 3 A's unrecovered basis is $50,000. In year 3 A must 
recompute the applicable basis recovery fraction based upon facts known 
and forecast as at the end of year 3: year 3 payment of $300,000 divided 
by estimated current and future payments of $400,000, equaling 75%. 
Thus, in year 3 A recovers $37,500 (75% of $50,000) of A's previously 
unrecovered basis.

    (7) Special rule to avoid substantial distortion--(i) In general. 
The normal basis recovery rules set forth in paragraph (c) (2) through 
(4) of this section may, with respect to a particular contingent payment 
sale, substantially and inappropriately defer or accelerate recovery of 
the taxpayer's basis.
    (ii) Substantial and inappropriate deferral. The taxpayer may use an 
alternative method of basis recovery if the taxpayer is able to 
demonstrate prior to the due date of the return including extensions for 
the taxable year in which the first payment is received, that 
application of the normal basis recovery rule will substantially and 
inappropriately defer recovery of basis. To demonstrate that application 
of the normal basis recovery rule will substantially and inappropriately 
defer recovery of basis, the taxpayer must show (A) that the alternative 
method is a reasonable method of ratably recovering basis and, (B) that, 
under that method, it is reasonable to conclude that over time the 
taxpayer likely will recover basis at a rate twice as fast as the rate 
at which basis would have been recovered under the otherwise applicable 
normal basis recovery rule. The taxpayer must receive a ruling from the 
Internal Revenue Service before using an alternative method of basis 
recovery described in paragraph (c)(7)(ii) of this section.

The request for a ruling shall be made in accordance with all applicable 
procedural rules set forth in the Statement of Procedural Rules (26 CFR 
part 601) and any applicable revenue procedures relating to submission 
of ruling requests. The request shall be submitted to the Commissioner 
of Internal Revenue, Attention: Assistant Commissioner (Technical), 
Washington, DC 20224. The taxpayer must file a request for a ruling 
prior to the due date for the return including extensions. In 
demonstrating that application of the normal basis recovery rule would 
substantially and inappropriately defer recovery of the taxpayer's 
basis, the taxpayer in appropriate circumstances may rely upon 
contemporaneous or immediate past relevant sales, profit, or other 
factual data that are subject to verification. The taxpayer ordinarily 
is not permitted to rely upon projections of future productivity, 
receipts, profits, or the like. However, in special circumstances a 
reasonable projection may be acceptable if the projection is based upon 
a specific event that already has occurred (e.g., corporate stock has 
been sold for future payments contingent on profits and an inadequately 
insured major plant facility of the corporation has been destroyed).
    (iii) Substantial and inappropriate acceleration. Notwithstanding 
the other provisions of this paragraph, the Internal Revenue Service may 
find that the normal basis recovery rule will substantially and 
inappropriately accelerate recovery of basis. In such a case, the 
Service may require an alternate method of basis recovery, unless the 
taxpayer is able to demonstrate either (A) that the method of basis 
recovery required by the Service is not a reasonable method of ratable 
recovery, or (B) that it is not reasonable to conclude that the taxpayer 
over time is likely to recover basis at a rate twice as fast under the 
normally applicable basis recovery rule as the rate at which basis would 
be recovered under the method proposed by the Service. In making such 
demonstrations the taxpayer may rely in appropriate circumstances upon 
contemporaneous or immediate past relevant sales, profit, or other 
factual data subject to verification. In special circumstances a 
reasonable projection may be acceptable, but only with the consent of 
the Service, if the projection is based upon a specific event that has 
already occurred.
    (iv) Subsequent recomputation. A contingent payment sale may 
initially and properly have been reported under the normally applicable 
basis recovery rule and, during the term of the agreement,

[[Page 208]]

circumstances may show that continued reporting on the original method 
will substantially and inappropriately defer or accelerate recovery of 
the unrecovered balance of the taxpayer's basis. In this event, the 
special rule provided in this paragraph is applicable.
    (v) Examples. The following examples illustrate the application of 
the special rule of this paragraph. In examples (1) and (2) it is 
assumed that rulings consistent with paragraph (c)(7)(ii) of this 
section have been requested.

    Example (1). A owns all of the stock of X corporation with a basis 
of $100,000. A sells the stock of X to B for a cash down payment of 
$1,800,000 and B's agreement to pay A an amount equal to 1% of the net 
profits of X in each of the next 10 years (together with adequate stated 
interest). The agreement further specifies that the maximum amount that 
may be paid to A (exclusive of interest) shall not exceed $10 million. A 
is able to demonstrate that current and recent profits of X have 
approximated $2 million annually, and that there is no reason to 
anticipate a major increase in the annual profits of X during the next 
10 years. One percent of $2 million annual profits is $20,000, a total 
of $200,000 over 10 years. Under the basis recovery rule normally 
applicable to a maximum contingent selling price agreement, in the year 
of sale A would recover $18,000 of A's total $100,000 basis, and would 
not recover more than a minor part of the balance until the final year 
under the agreement. On a $2 million selling price ($200,000 plus 
$1,800,000 down payment), A would recover $90,000 of A's total $100,000 
basis in the year of sale and 5% of each payment ($100,000/$2,000,000) 
received up to a maximum of $10,000 over the next ten years. Since the 
rate of basis recovery under the demonstrated method is more than twice 
the rate under the normal rule, A will be permitted to recover $90,000 
basis in the year of sale.
    Example (2). The facts are the same as in example (1) except that no 
maximum contingent selling price is stated in the agreement. Under the 
basis recovery rule normally applicable when no maximum amount is stated 
but the payment term is fixed, in the year of sale and in each 
subsequent year A would recover approximately $9,100 (1/11 of $100,000) 
of A's total basis. A will be permitted to recover $90,000 of A's total 
basis in the year of sale.
    Example (3). The facts are the same as in example (1) except that A 
sells the X stock to B on the following terms: 1% of the annual net 
profits of X in each of the next 10 years and a cash payment of 
$1,800,000 in the eleventh year, all payments to be made together with 
adequate stated interest. No maximum contingent selling price is stated. 
Under the normally applicable basis recovery rule, A would recover \1/
11\ of A's total $100,000 basis in each of the 11 payment years under 
the agreement. On the facts (see example (1)), A cannot demonstrate that 
application of the normal rule would not substantially and 
inappropriately accelerate recovery of A's basis. Accordingly, A will be 
allowed to recover only $1,000 of A's total basis in each of the 10 
contingent payment years under the agreement, and will recover the 
$90,000 balance of A's basis in the final year in which the large fixed 
cash payment will be made.

    (8) Coordination with regulations under section 385. (i) In general. 
The regulations under section 385 do not apply to an instrument (as 
defined in Sec. 1.385-3(c)) providing for a contingent payment of 
principal (with or without stated interest) issued in connection with a 
sale or other disposition of property to a corporation if Sec. 1.385-6 
(relating to proportionality) does not apply to such instrument (or to a 
class of instruments which includes such instrument). Thus, such 
instrument will be treated as stock or indebtedness under applicable 
principles of law without reference to the regulations under section 
385.
    (ii) Examples. The following examples illustrate the application of 
this paragraph:

    Example (1). On January 1, 1982, corporation X buys a factory from 
Y, an independent creditor (within the meaning of Sec. 1.385-6(b)). In 
exchange for the factory, Y receives $200,000 in cash on January 1, 
1982. In addition, on January 1, 1984, Y will receive a payment in the 
range of $100,000 to $300,000, plus adequate stated interest, depending 
on the factory's output. Based on these facts, Sec. 1.385-6 does not 
apply to X's obligation to Y (see Sec. 1.385-6(a)(3)(ii)) and the 
regulations under section 385 doe not apply to X's obligation to Y.
    Example (2). The facts are the same as in example (1), except that 
the contingent payment due on January 1, 1984 will be in the range of 
$50,000 to $250,000. In addition, on January 1, 1982, Y receives a 
$50,000 noninterest-bearing note due absolutely and unconditionally on 
January 1, 1984. Based on these facts, the $50,000 note is treated as 
stock or indebtedness under the regulations under section 385.

    (d) Election not to report an installment sale on the installment 
method--(1) In

[[Page 209]]

general. An installment sale is to be reported on the installment method 
unless the taxpayer elects otherwise in accordance with the rules set 
forth in paragraph (d)(3) of this section.
    (2) Treatment of an installment sale when a taxpayer elects not to 
report on the installment method--(i) In general. A taxpayer who elects 
not to report an installment sale on the installment method must 
recognize gain on the sale in accordance with the taxpayer's method of 
accounting. The fair market value of an installment obligation shall be 
determined in accordance with paragraph (d)(2) (ii) and (iii) of this 
section. In making such determination, any provision of contract or 
local law restricting the transferability of the installment obligation 
shall be disregarded. Receipt of an installment obligation shall be 
treated as a receipt of property, in an amount equal to the fair market 
value of the installment obligation, whether or not such obligation is 
the equivalent of cash. An installment obligation is considered to be 
property and is subject to valuation, as provided in paragraph (d)(2) 
(ii) and (iii) of this section, without regard to whether the obligation 
is embodied in a note, an executory contract, or any other instrument, 
or is an oral promise enforceable under local law.
    (ii) Fixed amount obligations. (A) A fixed amount obligation means 
an installment obligation the amount payable under which is fixed. 
Solely for the purpose of determining whether the amount payable under 
an installment obligation is fixed, the provisions of section 483 and 
any ``payment recharacterization'' arrangement (as defined in paragraph 
(c)(2)(ii) of this section) shall be disregarded. If the fixed amount 
payable is stated in identified, fungible units of property the value of 
which will or may vary over time in relation to the United States dollar 
(e.g., foreign currency, ounces of gold, or bushels of wheat), such 
units shall be converted to United States dollars at the rate of 
exchange or dollar value on the date the installment sale is made. A 
taxpayer using the cash receipts and disbursements methods of accounting 
shall treat as an amount realized in the year of sale the fair market 
value of the installment obligation. In no event will the fair market 
value of the installment obligation be considered to be less than the 
fair market value of the property sold (minus any other consideration 
received by the taxpayer on the sale). A taxpayer using the accrual 
method of accounting shall treat as an amount realized in the year of 
sale the total amount payable under the installment obligation. For this 
purpose, neither interest (whether stated or unstated) nor original 
issue discount is considered to be part of the amount payable. If the 
amount payable is otherwise fixed, but because the time over which 
payments may be made is contingent, a portion of the fixed amount will 
or may be treated as internal interest (as defined in paragraph 
(c)(2)(ii) of this section), the amount payable shall be determined by 
applying the price interest recomputation rule (described in paragraph 
(c)(2)(ii) of this section). Under no circumstances will an installment 
sale for a fixed amount obligation be considered an ``open'' 
transaction. For purposes of this (ii), remote or incidential 
contingencies are not to be taken into account.
    (B) The following examples illustrate the provisions of paragraph 
(d)(2) of this section.

    Example (1). A, an accrual method taxpayer, owns all of the stock of 
X corporation with a basis of $20 million. On July 1, 1981, A sells the 
stock of X corporation to B for $60 million payable on June 15, 1992. 
The agreement also provides that against this fixed amount, B shall make 
annual prepayments (on June 15) equal to 5% of the net profits of X 
earned in the immediately preceding fiscal year beginning with the 
fiscal year ending March 31, 1982. Thus the first prepayment will be 
made on June 15, 1982. No stated interest is payable under the agreement 
and thus the unstated interest provisions of section 483 are applicable. 
Under section 483, no part of any payment made on June 15, 1982 (which 
is within one year following the July 1, 1981 sale date), will be 
treated as unstated interest. Under the price interest recomputation 
rule, it is presumed that the entire $60 million fixed amount will be 
paid on June 15, 1982. Accordingly, if A elects not to report the 
transaction on the installment method, in 1981 A must report $60 million 
as the amount realized on the sale and must report $40 million as gain 
on the sale in that year.

[[Page 210]]

    Example (2). The facts are the same as in example (1) except that A 
uses the cash receipts and disbursements method of accounting. In 1981 A 
must report as an amount realized on the sale the fair market value of 
the installment obligation and must report as gain on the sale in 1981 
the excess of that amount realized over A's basis of $20 million. In no 
event will the fair market value of the installment obligation be 
considered to be less than the fair market value of the stock of X. In 
determining the fair market value of the installment obligation, any 
contractual or legal restrictions on the transferability of the 
installment obligation, and any remote or incidental contingencies 
otherwise affecting the amount payable or time of payments under the 
installment obligation, shall be disregarded.

    (iii) Contingent payment obligations. Any installment obligation 
which is not a fixed amount obligation (as defined in paragraph 
(d)(2)(ii) of this section) is a contingent payment obligation. If an 
installment obligation contains both a fixed amount component and a 
contingent payment component, the fixed amount component shall be 
treated under the rules of paragraph (d)(2)(ii) of this section and the 
contingent amount component shall be treated under the rules of this 
(iii). The fair market value of a contingent payment obligation shall be 
determined by disregarding any restrictions on transfer imposed by 
agreement or under local law. The fair market value of a contingent 
payment obligation may be ascertained from, and in no event shall be 
considered to be less than, the fair market value of the property sold 
(less the amount of any other consideration received in the sale). Only 
in those rare and extraordinary cases involving sales for a contingent 
payment obligation in which the fair market value of the obligation 
(determinable under the preceding sentences) cannot reasonably be 
ascertained will the taxpayer be entitled to assert that the transaction 
is ``open.'' Any such transaction will be carefully scrutinized to 
determine whether a sale in fact has taken place. A taxpayer using the 
cash receipts and disbursements method of accounting must report as an 
amount realized in the year of sale the fair market value of the 
contingent payment obligation. A taxpayer using the accrual method of 
accounting must report an amount realized in the year of sale determined 
in accordance with that method of accounting, but in no event less than 
the fair market value of the contingent payment obligation.
    (3) Time and manner for making election--(i) In general. An election 
under paragraph (d)(1) of this section must be made on or before the due 
date prescribed by law (including extensions) for filing the taxpayer's 
return for the taxable year in which the installment sale occurs. The 
election must be made in the manner prescribed by the appropriate forms 
for the taxpayer's return for the taxable year of the sale. A taxpayer 
who reports an amount realized equal to the selling price including the 
full face amount of any installment obligation on the tax return filed 
for the taxable year in which the installment sale occurs will be 
considered to have made an effective election under paragraph (d)(1) of 
this section. A cash method taxpayer receiving an obligation the fair 
market value of which is less than the face value must make the election 
in the manner prescribed by appropriate instructions for the return 
filed for the taxable year of the sale.
    (ii) Election made after the due date. Elections after the time 
specified in paragraph (d)(3)(i) of this section will be permitted only 
in those rare circumstances when the Internal Revenue Service concludes 
that the taxpayer had good cause for failing to make a timely election. 
A recharacterization of a transaction as a sale in a taxable year 
subsequent to the taxable year in which the transaction occurred (e.g., 
a transaction initially reported as a lease later is determined to have 
been an installment sale) will not justify a late election. No 
conditional elections will be permitted. For a special transitional rule 
relating to certain taxable years for which a return is filed prior to 
February 19, 1981, see paragraph (d)(5) of this section.
    (4) Revoking an election. Generally, an election made under 
paragraph (d)(1) is irrevocable. An election may be revoked only with 
the consent of the Internal Revenue Service. A revocation is 
retroactive. A revocation will not be permitted when one of its purposes 
is the avoidance of Federal income taxes, or when the taxable year in 
which any payment was received has closed. For a

[[Page 211]]

special transitional rule relating to certain taxable years for which a 
return is filed prior to February 19, 1981, see paragraph (d)(5) of this 
section.
    (5) Transitional rules. The following transitional rules shall apply 
with respect to any contingent payment sale made after October 19, 1980 
in a taxable year, ending after that date, for which the taxpayer has 
filed a federal income tax return prior to February 19, 1981. If in such 
tax return the taxpayer has treated the contingent payment sale under 
the installment method, consent of the Internal Revenue Service to a 
late election by the taxpayer not to report the transaction on the 
installment method will generally be granted if the request for election 
out of installment method treatment is filed by May 5, 1981. If in such 
tax return the taxpayer has elected not to report the contingent payment 
sale under the installment method, consent of the Service to revocation 
of the election by the taxpayer will generally be granted if the request 
for revocation is filed by May 5, 1981.
    (e) Purchaser evidences of indebtedness payable on demand or readily 
tradable--(1) Treatment as payment--(i) In general. A bond or other 
evidence of indebtedness (hereinafter in this section referred to as an 
obligation) issued by any person and payable on demand shall be treated 
as a payment in the year received, not as installment obligations 
payable in future years. In addition, an obligation issued by a 
corporation or a government or political subdivision thereof--
    (A) With interest coupons attached (whether or not the obligation is 
readily tradable in an established securities market),
    (B) In registered form (other than an obligation issued in 
registered form which the taxpayer establishes will not be readily 
tradable in an established securities market), or
    (C) In any other form designed to render such obligation readily 
tradable in an established securities market,

shall be treated as a payment in the year received, not as an 
installment obligation payable in future years. For purposes of this 
paragraph, an obligation is to be considered in registered form if it is 
registered as to principal, interest, or both and if its transfer must 
be effected by the surrender of the old instrument and either the 
reissuance by the corporation of the old instrument to the new holder or 
the issuance by the corporation of a new instrument to the new holder.
    (ii) Examples. The rules stated in this paragraph may be illustrated 
by the following examples:

    Example (1). On July 1, 1981, A, an individual on the cash method of 
accounting reporting on a calendar year basis, transferred all of his 
stock in corporation X (traded on an established securities market and 
having a fair market value of $1,000,000) to corporation Y in exchange 
for 250 of Y's registered bonds (which are traded in an over-the-
counter-market) each with a principal amount and fair market value of 
$1,000 (with interest payable at the rate of 12 percent per year), and 
Y's unsecured promissory note with a principal amount of $750,000. At 
the time of such exchange A's basis in the X stock is $900,000. The 
promissory note is payable at the rate of $75,000 annually, due on July 
1 of each year following 1981 until the principal balance is paid. The 
note provides for the payment of interest at the rate of 12 percent per 
year also payable on July 1 of each year. Under the rule stated in 
paragraph (e)(1)(i) of this section, the 250 registered bonds of Y are 
treated as a payment in 1981 in the amount of the value of the bonds, 
$250,000.
    Example (2). Assume the same facts as in example (1). Assume further 
that on July 1, 1982, Y makes its first installment payment to A under 
the terms of the unsecured promissory note with 75 more of its $1,000 
registered bonds. A must include $7,500 (i.e., 10 percent gross profit 
percentage times $75,000) A's gross income for calendar year 1982. In 
addition, A includes the interest payment made by Y on July 1 in A's 
gross income for 1982.

    (2) Amounts treated as payment. If under paragraph (e)(1) of this 
section an obligation is treated as a payment in the year received, the 
amount realized by reason of such payment shall be determined in 
accordance with the taxpayer's method of accounting. If the taxpayer 
uses the cash receipts and disbursements method of accounting, the 
amount realized on such payment is the fair market value of the 
obligation. If the taxpayer uses the accrual method of accounting, the 
amount realized on receipt of an obligation payable on

[[Page 212]]

demand is the face amount of the obligation, and the amount realized on 
receipt of an obligation with coupons attached or a readily tradable 
obligation is the stated redemption price at maturity less any original 
issue discount (as defined in section 1232(b)(1)) or, if there is no 
original issue discount, the amount realized is the stated redemption 
price at maturity appropriately discounted to reflect total unstated 
interest (as defined in section 483(b)), if any.
    (3) Payable on demand. An obligation shall be treated as payable on 
demand only if the obligation is treated as payable on demand under 
applicable state or local law.
    (4) Designed to be readily tradable in an established securities 
market--(i) In general. Obligations issued by a corporation or 
government or political subdivision thereof will be deemed to be in a 
form designed to render such obligations readily tradable in an 
established securities market if--
    (A) Steps necessary to create a market for them are taken at the 
time of issuance (or later, if taken pursuant to an expressed or implied 
agreement or understanding which existed at the time of issuance),
    (B) If they are treated as readily tradable in an established 
securities market under paragraph (e)(4)(ii) of this section, or
    (C) If they are convertible obligations to which paragraph (e)(5) of 
this section applies.
    (ii) Readily tradable in an established securities market. An 
obligation will be treated as readily tradable in an established 
securities market if--
    (A) The obligation is part of an issue or series of issues which are 
readily tradable in an established securities market, or
    (B) The corporation issuing the obligation has other obligations of 
a comparable character which are described in paragraph (e)(4)(ii)(A) of 
this section. For purposes of paragraph (e)(4)(ii)(B) of this section, 
the determination as to whether there exist obligations of a comparable 
character depends upon the particular facts and circumstances. Factors 
to be considered in making such determination include, but are not 
limited to, substantial similarity with respect to the presence and 
nature of security for the obligation, the number of obligations issued 
(or to be issued), the number of holders of such obligation, the 
principal amount of the obligation, and other relevant factors.
    (iii) Readily tradable. For purposes of paragraph (e)(4)(ii)(A) of 
this section, an obligation shall be treated as readily tradable if it 
is regularly quoted by brokers or dealers making a market in such 
obligation or is part of an issue a portion of which is in fact traded 
in an established securities market.
    (iv) Established securities market. For purposes of this paragraph, 
the term ``established securities market'' includes (A) a national 
securities exchange which is registered under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f), (B) an exchange which 
is exempted from registration under section 5 of the Securities Exchange 
Act of 1934 (15 U.S.C. 78e) because of the limited volume of 
transactions, and (c) any over-the-counter market. For purposes of this 
(iv), an over-the-counter market is reflected by the existence of an 
interdealer quotation system. An interdealer quotation system is any 
system of general circulation to brokers and dealers which regularly 
disseminates quotations of obligations by identified brokers or dealers, 
other than a quotation sheet prepared and distributed by a broker or 
dealer in the regular course of business and containing only quotations 
of such broker or dealer.
    (v) Examples. The rules stated in this paragraph may be illustrated 
by the following examples:

    Example (1). On June 1, 1982, 25 individuals owning equal interests 
in a tract of land with a fair market value of $1 million sell the land 
to corporation Y. The $1 million sales price is represented by 25 bonds 
issued by Y, each having a face value of $40,000. The bonds are not in 
registered form and do not have interest coupons attached, and, in 
addition, are payable in 120 equal installments, each due on the first 
business day of each month. In addition, the bonds are negotiable and 
may be assigned by the holder to any other person. However, the bonds 
are not quoted by any brokers or dealers who deal in corporate bonds, 
and, furthermore, there are no comparable obligations of Y (determined 
with reference to the characteristics set

[[Page 213]]

forth in paragraph (e)(2) of this section) which are so quoted. 
Therefore, the bonds are not treated as readily tradable in an 
established securities market. In addition, under the particular facts 
and circumstances stated, the bonds will not be considered to be in a 
form designed to render them readily tradable in an established 
securities market. The receipt of such bonds by the holder is not 
treated as a payment for purposes of section 453(f)(4), notwithstanding 
that they are freely assignable.
    Example (2). On April 1, 1981, corporation M purchases in a casual 
sale of personal property a fleet of trucks from corporation N in 
exchange for M's negotiable notes, not in registered form and without 
coupons attached. The M notes are comparable to earlier notes issued by 
M, which notes are quoted in the Eastern Bond section of the National 
Daily Quotation Sheet, which is an interdealer quotation system. Both 
issues of notes are unsecured, held by more than 100 holders, have a 
maturity date of more than 5 years, and were issued for a comparable 
principal amount. On the basis of these similar characteristics it 
appears that the latest notes will also be readily tradable. Since an 
interdealer system reflects an over-the-counter market, the earlier 
notes are treated as readily tradable in an established securities 
market. Since the later notes are obligations comparable to the earlier 
ones, which are treated as readily tradable in an established securities 
market, the later notes are also treated as readily tradable in an 
established securities market (whether or not such notes are actually 
traded).

    (5) Special rule for convertible securities--(i) General rule. If an 
obligation contains a right whereby the holder of such obligation may 
convert it directly or indirectly into another obligation which would be 
treated as a payment under paragraph (e)(1) of this section or may 
convert it directly or indirectly into stock which would be treated as 
readily tradable or designed to be readily tradable in an established 
securities market under paragraph (e)(4) of this section, the 
convertible obligation shall be considered to be in a form designed to 
render such obligation readily tradable in an established securities 
market unless such obligation is convertible only at a substantial 
discount. In determining whether the stock or obligation into which an 
obligation is convertible is readily tradable or designed to be readily 
tradable in an established securities market, the rules stated in 
paragraph (e)(4) of this section shall apply, and for purposes of such 
paragraph (e)(4) if such obligation is convertible into stock then the 
term ``stock'' shall be substituted for the term ``obligation'' wherever 
it appears in such paragraph (e)(4).
    (ii) Substantial discount rule. Whether an obligation is convertible 
at a substantial discount depends upon the particular facts and 
circumstances. A substantial discount shall be considered to exist if at 
the time the convertible obligation is issued, the fair market value of 
the stock or obligation into which the obligation is convertible is less 
than 80 percent of the fair market value of the obligation (determined 
by taking into account all relevant factors, including proper discount 
to reflect the fact that the convertible obligation is not readily 
tradable in an established securities market and any additional 
consideration required to be paid by the taxpayer). Also, if a privilege 
to convert an obligation into stock or an obligation which is readily 
tradable in an established securities market may not be exercised within 
a period of one year from the date the obligation is issued, a 
substantial discount shall be considered to exist.
    (6) Effective date. The provisions of this paragraph (e) shall apply 
to sales or other dispositions occurring after May 27, 1969, which are 
not made pursuant to a binding written contract entered into on or 
before such date. No inference shall be drawn from this section as to 
any questions of law concerning the application of section 453 to sales 
or other dispositions occurring on or before May 27, 1969.

[T.D. 7768, 46 FR 10709, Feb. 4, 1981; 46 FR 13688, Feb. 24, 1981; 46 FR 
43036, Aug. 26, 1981, as amended by T.D. 7788, 46 FR 48920, Oct. 5, 
1981; T.D. 8535, 59 FR 18751, Apr. 20, 1994]



Sec. 15a.453-2  Installment obligations received as liquidating 
distribution. [Reserved]



PART 16_TEMPORARY REGULATIONS UNDER THE REVENUE ACT OF 1962--Table of Contents



    Authority: Sec. 7805, 68 Stat. 917; 26 U.S.C. 7805.

[[Page 214]]



Sec. 16.3-1  Returns as to the creation of or transfers to certain 
foreign trusts.

    (a) Requirement of return. Every United States person who, on or 
after October 16, 1962, either creates a foreign trust or transfers 
money or property to a foreign trust, directly or indirectly, shall file 
an information return on Form 3520, except as provided in subparagraph 
(4) of paragraph (d) of this section. The return must be filed by the 
grantor or the transferor, or the fiduciary of the estate in the case of 
a testamentary trust. The return must be filed whether or not any 
beneficiary is a United States person and whether or not the grantor or 
any other person may be treated as the substantial owner of any portion 
of the trust under sections 671-678.
    (b) Meaning of terms. For purposes of this section the following 
terms shall have the meaning assigned to them in this paragraph:
    (1) Foreign trust. See section 7701(a)(31) of the Code for the 
definition of foreign trust.
    (2) United States person. See section 7701(a)(30) of the Code for 
the definition of United States person.
    (3) Grantor. The term ``grantor'' refers to any United States person 
who by an inter vivos declaration or agreement creates a foreign trust.
    (4) Transferor. The term ``transferor'' refers to any United States 
person, other than a person who is the grantor or the fiduciary (as 
defined in subparagraph (5) of this paragraph), who transfers money or 
property to or for the benefit of a foreign trust. It does not refer to 
a person who transfers money or property to a foreign trust pursuant to 
a sale or an exchange which is made for full and adequate consideration.
    (5) Fiduciary of an estate. In the case of a testamentary trust 
expressed in the will of a decedent the term ``fiduciary of an estate'' 
refers to the executor or administrator who is responsible for 
establishing a foreign trust on behalf of the decedent.
    (c) Information required. The return required by section 6048 and 
this section shall be made on Form 3520 and shall set forth the 
following information:
    (1) The name, address, and identifying number of the person (or 
persons) filing the return, a statement identifying each person named as 
either a grantor, fiduciary of an estate, or transferor, and the date of 
the transaction for which the return is being filed;
    (2) In the case of a fiduciary of an estate, the name and 
identifying number of the decedent;
    (3) The name of the trust and the name of the country under whose 
laws the foreign trust was created;
    (4) The date the foreign trust was created and the name and address 
of the person (or persons) who created it;
    (5) The date on which the trust is to terminate or a statement 
describing the conditions which will cause the trust to terminate;
    (6) The name and business address of the foreign trustee (or 
trustees);
    (7) A statement either that the trustee is required to distribute 
all of the trust's income currently (in which case the information 
required in subparagraph (c)(9) of this paragraph need not be furnished) 
or a statement that the trust may accumulate some or all of its income;
    (8) The name, address, and identifying number, if any, of each 
beneficiary who is either named in the instrument or whose identity is 
definitely ascertainable at the time the return required by this section 
is filed, and the date of birth for each beneficiary who is a United 
States person and whose rights under the trust are determined, in whole 
or in part, by reference to the beneficiary's age;
    (9) Except as provided in subparagraph (c)(7) of this paragraph, a 
statement with respect to each beneficiary setting forth his right to 
receive income or corpus, or both, from the trust, his proportionate 
interest, if any, in the income or corpus, or both, of the trust, and 
any condition governing the time when a distribution to him may be made, 
such as a specific date or age (or in lieu of such statement a copy of 
the trust instrument which must be attached to the return);
    (10) A detailed list of the property transferred to the foreign 
trust in the transaction for which the return is

[[Page 215]]

being filed, containing a complete description of each item transferred, 
its adjusted basis and its fair market value on the date transferred, 
and the consideration, if any, paid by the foreign trust for such 
transfer; and
    (11) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign trust, and the 
location of such books and records if different from such address.
    (d) Special provisions--(1) Separate return for each foreign trust 
and each transfer. If a United States person creates more than one 
foreign trust or transfers money or property to more than one foreign 
trust, then separate returns must be filed with respect to each foreign 
trust where returns are required under section 6048 and this section. If 
a United States person transfers money or property to the same foreign 
trust at different times, then separate returns must be filed with 
respect to each transfer where returns are required under section 6048 
and this section. However, where more than one transfer to the same 
foreign trust is made by a United States person during any 90-day 
period, such person may, at his election, file a single return, so long 
as the return includes the information required with respect to each 
transfer and is filed on or before the 90th day after the earliest 
transfer in any such period.
    (2) Joint returns. Where returns are required under section 6048 and 
this section by two or more persons who either jointly create a foreign 
trust or jointly transfer money or property to a foreign trust, they may 
jointly execute and file one return in lieu of filing several returns.
    (3) Actual ownership of money or property transferred. If any person 
referred to in this section is not the real party in interest as to the 
money or property transferred but is merely acting for a United States 
person, the information required under this section shall be furnished 
in the name of and by the actual owner of such money or property, except 
that a fiduciary of an estate shall file information relating to the 
decedent.
    (4) Payments to an employees' trust, etc. In the case of 
contributions made to a foreign trust under a plan which provides 
pension, profit-sharing, stock bonus, sickness, accident, unemployment, 
welfare, or similar benefits or a combination of such benefits for 
employees, neither employers nor employees shall be required to file a 
return as set forth in this section.
    (e) Time and place for filing return--(1) Time for filing. Any 
return required by section 6048 and this section shall be filed on or 
before the 90th day after either the creation of any foreign trust by a 
United States person or the transfer of any money or property to a 
foreign trust by a United States person. The Director of International 
Operations is authorized to grant reasonable extensions of time to file 
returns under section 6048 and this section in accordance with the 
applicable provisions of section 6081(a) and Sec. 1.6081-1.
    (2) Place for filing. Returns required by section 6048 and this 
section shall be filed with the Director of International Operations, 
Internal Revenue Service, Washington D.C. 20225.
    (f) Penalties--(1) Criminal. For criminal penalties for failure to 
file a return see section 7203. For criminal penalties for filing a 
false or fraudulent return, see sections 7206 and 7207.
    (2) Civil. For civil penalty for failure to file a return or failure 
to show the information required on a return under this section, see 
section 6677.

[T.D. 6632, 28 FR 277, Jan. 10, 1963]



PART 16A_TEMPORARY INCOME TAX REGULATIONS RELATING TO THE PARTIAL 
EXCLUSION FOR CERTAIN CONSERVATION COST-SHARING PAYMENTS--Table of 

Contents



Sec.
16A.126-0 Effective dates.
16A.126-1 Certain cost-sharing payments--in general.
16A.126-2 Section 126 elections.
16A.1255-1 General rule for treatment of gain from disposition of 
          section 126 property.
16A.1255-2 Special rules.

    Authority: Secs. 126 and 7805 of the Internal Revenue Code of 1954 
(92 Stat. 2888, 26 U.S.C. 126; 68A Stat. 917, 26 U.S.C. 7805).

    Source: T.D. 7778, 46 FR 27637, May 21, 1981, unless otherwise 
noted.

[[Page 216]]



Sec. 16A.126-0  Effective dates.

    These temporary regulations shall apply to any payments received 
under a contract signed by the taxpayer and the appropriate agency after 
September 30, 1979.



Sec. 16A.126-1  Certain cost-sharing payments--in general.

    (a) Introduction. In general, section 126 provides that recipients 
of payments made after September 30, 1979 under certain conservation, 
reclamation and restoration programs may exclude all or a portion of 
those payments from income if the payments do not substantially increase 
the annual income derived by the taxpayer from the affected property. 
For purposes of this section, the term ``payment'' as used in section 
126 means payment of the economic benefit, if any, conferred upon the 
taxpayer upon receipt of the improvement. An increase in annual income 
is substantial if it exceeds the greater of 10 percent of the average 
annual income derived from the affected property prior to receipt of the 
improvement or an amount equal to $2.50 times the number of affected 
acres. The amount of gross income which a taxpayer realizes upon the 
receipt of a section 126 payment is the value of the section 126 
improvement, reduced by the sum of the excludable portion and the 
taxpayer's share of the cost of the improvement (if any).
    (b) Definitions. For purposes of this section, the term:
    (1) ``Cost of the improvement'' means the sum of amounts paid by a 
government and the taxpayer, whether or not with borrowed funds, for the 
improvement.
    (2) ``Section 126 cost'' means the cost of the improvement less the 
sum of
    (i) Any government payments under a program which is not listed in 
section 126(a),
    (ii) Any portion of a government payment under a program which is 
listed in section 126(a) which the Secretary of Agriculture has not 
certified is primarily for purposes of conservation,
    (iii) Any government payment to the taxpayer which is in the nature 
of rent or compensation for services.
    (3) ``Value of the section 126 improvement'' means the fair market 
value of the improvement multiplied by a fraction, the numerator of 
which is the section 126 cost and the denominator of which is the cost 
of the improvement.
    (4) ``Affected acreage'' means the acres affected by the 
improvement.
    (5) ``Excludable portion'' means the present fair market value of 
the right to receive annual income from the affected acreage of the 
greater of 10 percent of the prior average annual income from the 
affected acreage or $2.50 times the number of affected acres.
    (6) ``Prior average annual income'' means the average of the gross 
receipts from the affected acreage for the last three taxable years 
preceding the taxable year in which installation of the improvement is 
commenced.
    (7) ``Section 126 improvement'' means the portion of the improvement 
equal to the percentage which government payments made to the taxpayer, 
which the Secretary of Agriculture has certified were made primarily for 
the purpose of conservation, bear to the cost of the improvement.
    (c) Income realized upon receipt of a section 126 improvement--(1) 
Section 126 exclusion applied. Unless a taxpayer elects not to have 
section 126 apply, the amount of gross income realized on receipt of the 
section 126 improvement is the value of the section 126 improvement less 
the sum of the taxpayer's share of the cost of the improvement and the 
excludable portion.
    (2) Section 126 exclusion not applied. If a taxpayer elects under 
section 126(c) not to have section 126 apply in whole or in part, the 
amount realized on the receipt of the section 126 improvement is the 
value of the section 126 improvement less the sum of the taxpayer's 
share of the cost of the improvement and the excludable portion that 
applies, if any.
    (d) Payments under watershed programs--(1) Programs within section 
126(a)(9). Section 126(a)(9) covers certain programs affecting small 
watersheds.

These programs must be administered by the Secretary of Agriculture and 
be determined by the Commissioner to be substantially similar to the 
type of program described in section 126(a) (1)

[[Page 217]]

through (8). The Commissioner has determined that section 126 
improvements made in connection with small watersheds are within the 
scope of section 126(a)(9) if they are made under one of the following 
programs:
    (A) The Watershed Protection and Flood Prevention Act, Pub. L. 566, 
68 Stat. 666, as amended (16 U.S.C. 1001, et seq.), as funded by the Act 
of November 9, 1979, Pub. L. 96-108, 93 Stat. 834.
    (B) Flood Prevention Projects, Pub. L. 86-468, sec. 1, 74 Stat. 131, 
as amended (16 U.S.C. 1006a); Pub. L. 78-534, sec. 2, 58 Stat. 889 (33 
U.S.C. 701a-1); Pub. L. 78-534, sec. 13, 58 Stat. 905;
    (C) Emergency Watershed Protection, Pub. L. 81-516, sec. 216, 64 
Stat. 184 (33 U.S.C. 701b-1), and
    (D) Colorado River Basin Salinity Control Act, Pub. L. 93-320, 88 
Stat. 266:
    (1) Title 1--Programs downstream from Imperial Dam, and
    (2) Title 2--Measures upstream from Imperial Dam.
    (2) Other programs. The Commissioner may announce further 
determinations under section 126(a)(9) from time to time in the Internal 
Revenue Bulletin.
    (3) Small watershed defined. A watershed is a ``small watershed'' 
under this paragraph and section 126(a)(9) if the watershed or 
subwatershed does not exceed 250,000 acres and does not include any 
single structure providing more than 12,500 acre-feet of floodwater 
detention capacity, nor more than 25,000 acre-feet of total capacity.
    (e) Basis of property not increased by reason of excludable amounts. 
Notwithstanding any provision of section 1016 (relating to adjustments 
to basis) to the contrary, basis of any property does not include any 
amount which is excludable from gross income under section 126.
    (f) Cross reference. For rules relating to the recapture as ordinary 
income of the gain from the disposition (within 20 years of the date of 
receipt) of property for which an exclusion is claimed for a section 126 
improvement, see section 1255 and the regulations thereunder.
    (g) Examples. The provisions of this section are illustrated by the 
following examples:

    Example (1). In 1981, 100 acres of the taxpayer's land is reclaimed 
under a Rural Abandoned Mine Program contract with the Soil Conservation 
Service of the U.S. Department of Agriculture. The total cost of the 
improvement is $700,000. USDA pays $690,000, the taxpayer $10,000. The 
Secretary of Agriculture certifies that 95% of the $690,000 USDA payment 
was primarily for the purpose of conservation. Therefore, $34,500 
($690,000x.05) is a nonsection 126 payment. $150,000 of USDA's payment 
is compensation for the taxpayer's service in the reclamation project 
and is includable in gross income as compensation for services. The 
taxpayer has $20,000 of allowable deductions in 1981, $15,500 of which 
are properly attributable to the USDA payment. Based on all the facts 
and circumstances, the value of the improvement is $21,000. The taxpayer 
elects not to have section 126 apply. The taxpayer computes the amount 
which is included in gross income as a result of receipt of the 
improvement as follows:

(1)
 
Cost of improvement.........................................   $700,000
  Nonsection 126 payment....................................    (34,500)
  Compensation for services.................................   (150,000)
  Current deductions........................................    (15,500)
                                                             ===========
    Section 126 cost........................................    500,000
                                                             ===========
(2)
 
Value of improvement........................................     21,000
  Multiplied by section 126 cost............................   x500,000
                                                             -----------
  Cost of improvement.......................................    700,000
                                                             ===========
    Value of section 126 improvement........................     15,000
                                                             ===========
(3)
 
Value of section 126 improvement............................     15,000
(Taxpayer's contribution)...................................     10,000
                                                             ===========
    Amount included in gross income.........................      5,000
 

    Example (2). The facts are the same as example (1) except that 
section 126 applies. Based on all the facts and circumstances, the 
present fair market value of the right to receive annual income from the 
property of 10 percent of the prior average annual income of the 
affected acreage prior to the receipt of the improvement is $1,380 and 
the present fair market value of the right to receive $250 ($2.50 x 100 
acres) is $1,550. The excludable portion is, therefore, $1,550. The 
taxpayer computes the amount included in gross income as follows:

Value of section 126 improvement............................    $15,000
(Taxpayer's contribution)...................................    (10,000)
(Excludable portion)........................................     (1,550)
                                                             -----------
   Amount included in income................................      3,450
 

    Example (3). The facts are the same as example (2) except that the 
present value of 10 percent of the prior average annual income is 
$5,600. The taxpayer realizes no income as a result of receipt of the 
section 126 project.
    (1)

Value of section 126 improvement............................    $15,000
(Taxpayer's contribution)...................................    (10,000)

[[Page 218]]

 
(Excludable portion)........................................     (5,600)
                                                             -----------
   Amount included in income................................          0
 

    Example (4). In 1983, the taxpayer signs a contract under the water 
bank program under which he will maintain 20 acres of undisturbed 
wetlands as a wildfowl preserve. In return he will receive $90 an acre 
as rent from the government. Although the payment is made under a 
program listed in section 126(a) and the Secretary of Agriculture has 
certified that the entire amount of payment was made primarily for the 
purpose of conservation, there is no income eligible for section 126 
exclusion because the full payment is rent. The rent is included in full 
in gross income.
    Example (5). In 1980, the taxpayer reforests 200 acres of 
nonindustrial private forest land by planting tree seedlings. The 
taxpayer pays the full cost of the reforestation, $15,000. Under the 
cost-sharing provisions of the forestry incentives program, the taxpayer 
receives a reimbursement from USDA of $12,000. The Secretary of 
Agriculture certifies that 100% of the USDA payment is primarily for the 
purpose of conservation. Assume that the excludable portion is $3,500 
and that based on all the facts and circumstances, the value of the 
improvement is $15,000. The amount which is includable in income is the 
value of the section 126 improvement, reduced by the excludable portion 
and the taxpayer's share of the cost of the improvement. Therefore the 
taxpayer includes $8,500 in gross income as a result of the USDA 
payment, computed as follows:

Value of the section 126 improvement....................      $15,000
(Excludable portion)....................................      (3,500)
(Taxpayer's contribution)...............................      (3,000)
                                                         ---------------
   Amount included in gross income......................        8,500
 


[T.D. 7748, 46 FR 27637, May 21, 1981; 46 FR 41043, Aug. 14, 1981]



Sec. 16A.126-2  Section 126 elections.

    (a) Election for section 126 not to apply in whole or in part. A 
taxpayer may elect under section 126(c) not to have section 126 apply to 
all or any part of an improvement described in section 126.
    (b) Application of the section 126 exclusion. To the extent the 
section 126 exclusion applies, the taxpayer should so indicate on an 
attachment to the tax return (or amended return) for the taxable year in 
which the taxpayer received the last payment made by a government for 
the improvement. The attachment should state the dollar amount of the 
section 126 cost funded by a government payment, the value of the 
section 126 improvement, and the amount that the taxpayer is excluding 
under section 126.



Sec. 16A.1255-1  General rule for treatment of gain from disposition 
of section 126 property.

    (a) Ordinary income--(1) General rule. Except as otherwise provided 
in this section and Sec. 16A.1255-2, if section 126 property is 
disposed of after September 30, 1979, then under section 1255(a)(1) 
there shall be recognized as ordinary income the lesser of--
    (i) The ``excludable portion'' under section 126, or
    (ii)(A) The excess of the amount realized (in the case of a sale, 
exchange, or involuntary conversion), or the fair market value of the 
section 126 property (in the case of any other disposi-tion), over the 
adjusted basis of the property, less
    (B) The amount recognized as ordinary income under the other 
provisions of Chapter I, Subchapter P, Part IV of the Code.
    (2) Application of section. Any gain treated as ordinary income 
under section 1255(a)(1) shall be recognized as ordinary income 
notwithstanding any other provision of subtitle A of the Code except 
that section 1255 does not apply to the extent the gain is recognized as 
ordinary income under the other provisions of Subchapter P, Part IV of 
the Code. For special rules with respect to the application of section 
1255, see Sec. 16A.1255-2. For the relation of section 1255 to other 
provisions, see paragraph (c) of this section.
    (3) Meaning of terms. For purposes of section 1255 and these 
regulations--
    (i) The term ``section 126 property'' means any property acquired, 
improved, or otherwise modified as a result of a payment listed in 
section 126(a) which has been certified by the Secretary of Agriculture 
as primarily for the purpose of conservation;
    (ii) The term ``excludable portion'' is defined in Sec. 16A.126-
1(b)(5);
    (iii) The term ``disposition'' has the same meaning as in Sec. 
1.1245-1(a)(3);
    (iv) The term ``date of receipt of the section 126 payment'' means 
the last date the government made a payment for the improvements.
    (4) Applicable percentage. If section 126 property is disposed of 
less than 10

[[Page 219]]

years after the date of receipt of the last payment which has been 
certified by the Secretary of Agriculture as primarily for the purpose 
of conservation, the ``applicable percentage'' is 100 percent; if 
section 126 property is disposed of more than 10 years after that date, 
the applicable percentage is 100 percent reduced (but not below zero) by 
10 percent for each year or part thereof in excess of 10 years such 
property was held after the date of the section 126 payment.
    (5) Portion of parcel. The amount of gain to be recognized as 
ordinary income under section 1255(a)(1) shall be determined separately 
for each parcel of section 126 property in a manner consistent with the 
principles of Sec. 1245-1(a) (4) and (5) relating to gain from 
disposition of certain depreciable property. If (i) only a portion of a 
parcel of section 126 property is disposed of in a transaction, or if 
two or more portions of a single parcel are disposed of in one 
transaction, and (ii) the aggregate of ``excludable portions'' with 
respect to any such portion cannot be established to the satisfaction of 
the Commissioner, then the aggregate of the ``excludable portions'' in 
respect of the entire parcel shall be allocated to each portion in 
proportion to the fair market value of each at the time of the 
disposition.
    (b) Instances of nonapplication--(1) In general. Section 1255 does 
not apply if a taxpayer disposes of section 126 property more than 20 
years after receipt of the last section 126 payment with respect to the 
property.
    (2) Losses. Section 1255(a)(1) does not apply to losses. Thus, 
section 1255(a)(1) does not apply if a loss is realized upon a sale, 
exchange, or involuntary conversion of property, all of which is section 
126 property, nor does the section apply to a disposition of the 
property other than by way of sale, exchange, or involuntary conversion 
if at the time of the disposition the fair market value of the property 
is not greater than its adjusted basis.
    (c) Relation of section 1255 to other provisions--(1) General. The 
provisions of section 1255 apply notwithstanding any other provisions of 
Subtitle A of the Code except that they do not apply to the extent gain 
is recognized as ordinary income under the other provisions of 
Subchapter P, Part IV of the Code. Thus, unless an exception or 
limitation under Sec. 16A.1255-2 applies, gain under section 1255(a)(1) 
is recognized notwithstanding any contrary nonrecognition provision or 
income characterizing provision. For example, since section 1255 
overrides section 1231 (relating to property used in the trade or 
business), the gain recognized under section 1255 upon a disposition of 
section 126 property will be treated as ordinary income and only the 
remaining gain, if any, from the disposition may be considered as gain 
from the sale or exchange of property to which section 1231 applies. See 
example (1) of paragraph (d) of this section.
    (2) Nonrecognition sections overridden. The nonrecognition of gain 
provisions of Subtitle A of the Code which section 1255 overrides 
include, but are not limited to, sections 267(d), 311(a), 336, 337, and 
512(b)(5). See Sec. 16A.1255-2 for the extent to which section 
1255(a)(1) overrides sections 332, 351, 361, 371(a), 374(a), 721, 731, 
1031, and 1033.
    (3) Installment method. Gain from a disposition to which section 
1255(a)(1) applies may be reported under the installment method if such 
method is otherwise available under section 453 of the Code. In such a 
case, the portion of the installment payment that is gain is treated as 
follows: first as ordinary gain under other sections of Chapter I 
Subchapter P, Part IV of the Code until all that gain has been reported; 
next as ordinary gain to which section 1255 applies until all that gain 
is reported; and finally as gain under other sections of Chapter I, 
Subchapter D, Part IV of the Code. For treatment of amounts as interest 
on certain deferred payments, see section 483.
    (4) Exempt income. With regard to exempt income, the principles of 
Sec. 1.1245-6(e) shall be applicable.
    (5) Treatment of gain not recognized under section 1255(a)(1). For 
treatment of gain not recognized under this section, the principles of 
Sec. 1.1245-6(f) shall be applicable.
    (d) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Individual A uses the calendar year as his taxable year. On 
April 10, 1995, A

[[Page 220]]

sells for $75,000 section 126 property with an adjusted basis of $52,500 
for a realized gain of $22,500. The excludable portion under section 126 
was $18,000. A received the section 126 payment on January 5, 1990. No 
gain is recognized as ordinary gain under sections 1231 through 1254. 
Because the applicable percentage, 100 percent, of the aggregate of the 
section 126 improvements ($18,000), $18,000, is lower than the gain 
realized, $22,500, the amount of gain recognized as ordinary income 
under section 1255(a)(1) is $18,000. The remaining $4,500 of the gain 
may be treated as gain from the sale or exchange of property described 
in section 1231.



Sec. 16A.1255-2  Special rules.

    (a) Exception for gifts--(1) General rule. In general, no gain shall 
be recognized under section 1255(a)(1) upon a disposition of section 126 
property by gift. For purposes of section 1255 and this paragraph, the 
term ``gift'' shall have the same meaning as in Sec. 1.1245-4(a) and, 
with respect to the application of this paragraph, principles 
illustrated by the examples of Sec. 1.1245-4(a)(2) shall apply.
    (2) Disposition in part a sale or exchange and in part a gift. Where 
a disposition of section 126 property is in part a sale or exchange and 
in part a gift, the amount of gain which shall be recognized as ordinary 
income under section 1255(a)(1) shall be computed under Sec. 16A.1255-
1(a)(1), applied by treating the gain realized (for purposes of Sec. 
16A.1255-1(a)(1)(ii)), as the excess of the amount realized over the 
adjusted basis of the section 126 property.
    (3) Treatment of section 126 property in hands of transferee. See 
paragraph (d) of this section for treatment of the transferee in the 
case of a disposition to which this paragraph applies.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). On March 2, 1986, A makes a gift to B of a parcel of 
land having an adjusted basis of $40,000 and fair market value of 
$65,000. On the date of that gift, the aggregate of excludable portions 
under section 126 was $24,000. The section 126 payments were all 
received on January 15, 1981. Upon making the gift, A recognizes no gain 
under section 1255(a)(1). See paragraph (a)(1) of this section. For 
treatment of the property in the hands of B, see example (1) of 
paragraph (d)(3) of this section.
    Example (2). (i) Assume the same facts as in example (1), except 
that A transfers the land to B for $50,000. Assume further that no gain 
is recognized as ordinary income under any other provision of Chapter I, 
Subchapter P, Part IV of the Code. Thus, the gain realized is $10,000 
(amount realized, $50,000, minus adjusted basis, $40,000), and A has 
made a gift of $15,000 (fair market value, $65,000, minus amount 
realized, $50,000).
    (ii) Upon the transfer of the land to B, A recognizes $10,000 as 
ordinary income under section 1255(a)(1), computed under paragraph 
(a)(2) of this section as follows:

(1) Aggregate of excludable portions under section 126.....      $24,000
(2) Multiply: Applicable percentage for land disposed if             100
 within sixth year after section 126 payments were received
(3) Amount in Sec. 16A.1255-1(a)(1)(i)...................      $24,000
                                                            ============
(4) Gain realized (see (i) of this example)................       10,000
(5) Amount in Sec. 16A.1255-1(a)(1)(ii) applied in              10,000
 accordance with paragraph (a)(2) of this section..........
                                                            ============
(6) Lower of line (3) or line (5)..........................       10,000
 

    Thus, the entire gain realized on the transfer, $10,000, is 
recognized as ordinary income.
    For treatment of the farm land in the hands of B, see example (2) of 
paragraph (d)(3) of this section.

    (b) Exception for transfer at death--(1) In general. Except as 
provided in section 691 (relating to income in respect of a decedent), 
no gain shall be recognized under section 1255(a)(1) upon a transfer at 
death. For purposes of section 1255 and this paragraph, the term 
``transfer at death'' shall have the same meaning as in Sec. 1.1245-
4(b) and, with respect to the application of this paragraph, principles 
illustrated by the examples of Sec. 1.1245-4(b)(2) shall apply.
    (2) Treatment of section 126 property in hands of transferee. If, as 
of the date a person acquires section 126 property from a decedent, the 
person's basis is determined by reason of the application of section 
1014(a), solely by reference to the fair market value of the property on 
the date of the decedent's death, or on the applicable date provided in 
section 2032 (relating to alternative valuation date), then on that date 
the aggregate of excludable portions under section 126 in the hands of 
such transferee is zero.
    (c) Limitation for certain tax-free transactions--(1) Limitation on 
amount of gain. Upon a transfer of section 126 property described in 
paragraph (c)(2) of this section, the amount of gain recognized as 
ordinary income under section 1255(a)(1) shall not exceed an amount 
equal to the excess (if any) of

[[Page 221]]

(i) the amount of gain recognized to the transferor on the transfer 
(determined without regard to section 1255) over (ii) the amount (if 
any) of gain recognized as ordinary income under the other provisions of 
Chapter I, Subchapter P, Part IV of the Code. For purposes of paragraph 
(c)(1) of this section, the principles of Sec. 1.1245-4(c)(1) shall 
apply. Thus, in the case of a transfer of section 126 property and other 
property in one transaction, the amount realized from the disposition of 
the section 126 property (as determined in a manner consistent with the 
principles of Sec. 1.1245-1(a)(5)) shall consist of that portion of the 
fair market value of each property acquired which bears the same ratio 
to the fair market value of the acquired property as the amount realized 
from the disposition of the section 126 property bears to the total 
amount realized. The preceding sentence shall be applied solely for 
purposes of computing the portion of the total gain (determined without 
regard to section 1255) which is eligible to be recognized as ordinary 
income under section 1255(a)(1). The provisions of this paragraph do not 
apply to a disposition of property to an organization (other than a 
cooperative described in section 521) which is exempt from the tax 
imposed by Chapter I of the Code.
    (2) Transfers covered. The transfers referred to in paragraph (c)(1) 
of this section are transfers of section 126 property in which the basis 
of the property in the hands of the transferee is determined by 
reference to its basis in the hands of the transferor by reason of the 
application of any of the following provisions:
    (i) Section 332 (relating to distributions in complete liquidation 
of an 80-percent-or-more controlled subsidiary corporation). For 
application of paragraph (c)(1) of this section to such a complete 
liquidation, the principles of Sec. 1.1245-4(c)(3) shall apply. Thus, 
for example, the provisions of paragraph (c)(1) of this section do not 
apply to a liquidating distribution of section 126 property by an 80-
percent-or-more controlled subsidiary to its parent if the parent's 
basis for the property is determined, under section 334(b)(2), by 
reference to its basis for the stock of the subsidiary.
    (ii) Section 351 (relating to transfer to a corporation controlled 
by the transferor).
    (iii) Section 361 (relating to exchanges pursuant to certain 
corporate reorganizations).
    (iv) Section 371(a) (relating to exchanges pursuant to certain 
receivership and bankruptcy proceedings).
    (v) Section 374(a) (relating to exchanges pursuant to certain 
railroad reorganizations).
    (vi) Section 721 (relating to transfers to a partnership in exchange 
for a partnership interest). See paragraph (e) of this section.
    (vii) Section 731 (relating to distributions by a partnership to a 
partner). For special carryover of basis rule, see paragraph (e) of this 
section.
    (viii) Section 1031 (relating to like kind exchanges).
    (ix) Section 1034 (relating to rollover of gain on the sale of a 
principal residence).
    (3) Treatment of section 126 property in the hands of transferee. 
See paragraph (d) of this section for treatment of the transferee in the 
case of a disposition to which this paragraph applies.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). On January 4, 1986, A holds a parcel of property that 
is section 126 property having an adjusted basis of $15,000 and a fair 
market value of $40,000. On that date he transfers the parcel to 
corporation M in exchange for stock in the corporation worth $40,000 in 
a transaction qualifying under section 351. On the date of the transfer, 
the aggregate of excludable portions under section 126 with respect to 
the transferred property is $18,000 and all of such amount was received 
on March 25, 1981. With regard to section 1255, A would recognize no 
gain under section 351 upon the transfer and M's basis for the land 
would be determined under section 362(a) by reference to its basis in 
the hands of A. Thus, as a result of the disposition, no gain is 
recognized as ordinary income under section 1255 by A since the amount 
of gain recognized under that section is limited to the amount of gain 
which is recognized under section 351 (determined without regard to 
section 1255). See paragraph (c)(1) of this section. For treatment of 
the section 126 property in the hands of B, see paragraph (d)(1) of this 
section.
    Example (2). Assume the same facts in example (1), except that A 
transferred the property to M for stock in the corporation

[[Page 222]]

worth $32,000 and $8,000 cash. The gain realized is $25,000 (amount 
realized, $40,000, minus adjusted basis, $15,000). Without regard to 
section 1255, A would recognize $8,000 of gain under section 351(b). 
Assume further that no gain is recognized as ordinary income under the 
other provisions of Chapter I, Subchapter P, Part IV of the Code. 
Therefore, since the applicable percentage, 100 percent of the aggregate 
excludable portions under section 126, $18,000, is lower than the gain 
realized, $25,000, the amount of gain to be recognized as ordinary 
income under section 1255(a)(1) would be $18,000 if the provisions of 
paragraph (c)(1) of this section do not apply. Since under section 
351(b) gain in the amount of $8,000 would be recognized to the 
transferor without regard to section 1255, the limitation provided in 
paragraph (c)(1) of this section limits the gain taken into account by A 
under section 1255(a)(1) to $8,000.
    Example (3). Assume the same facts as in example (2), except that 
$5,000 of gain is recognized as ordinary income under section 
1251(c)(1). The amount of gain recognized as ordinary income under 
section 1255(a)(1) is $3,000 computed as follows:

(1) Amount of gain under section 1255(a)(1) (determined
 without regard to paragraph (c)(1) of this section):
  (a) Aggregate of excludable portions under section 126.....    $18,000
  (b) Multiply: Applicable percentage for property disposed          100
   of within the fifth year after section 126 payments were
   received (percent)........................................
  (c) Amount in Sec. 16A.1255-1(a)(1)(i)...................    $18,000
                                                              ==========
  (d) Gain realized (amount realized $40,000 less adjusted       $25,000
   basis, $15,000)...........................................
  (e) Lower of line (c) or line (d)..........................    $18,000
                                                              ==========
(2) Limitation in paragraph (c)(1) of this section:
  (a) Gain recognized (determined without regard to section       $8,000
   1255).....................................................
  (b) Minus: Gain recognized as ordinary income under section     $5,000
   1251(c)(1)................................................
                                                              ----------
  (c) Difference.............................................     $3,000
(3) Lower of line (1)(e) or line (2)(c)......................     $3,000
 


Thus, the entire gain recognized under section 351(b) (determined 
without regard to sections 1251 and 1255), $8,000, is recognized as 
ordinary income since that amount is equal to the sum of the gain 
recognized as ordinary income under section 1251(c)(1), $5,000, and 
under section 1255(a)(1), $3,000.

    (d) Treatment of section 126 property received by a transferee in a 
disposition by gift and certain tax-free transactions--(1) General rule. 
If section 126 property is disposed of in a transaction which is either 
a gift to which paragraph (a)(1) of this section applies, or a 
completely tax-free transfer to which paragraph (c)(1) of this section 
applies, then for purposes of section 1255--
    (i) The aggregate of the excludable portions under section 126 in 
respect of the land in the hands of the transferee immediately after the 
disposition shall be an amount equal to the amount of such aggregate in 
the hands of the transferor immediately before the disposition, and
    (ii) For purposes of applying section 1255 upon a subsequent 
disposition by the transferee (including a computation of the applicable 
percentage), the dates of receipt of section 126 payments shall not be 
affected by the dispositions.
    (2) Certain partially tax-free transfers. If section 126 property is 
disposed of in a transaction which either is in part a sale or exchange 
and in part a gift to which paragraph (a)(2) of this section applies, or 
is a partially tax-free transfer to which paragraph (c)(1) of this 
section applies, then for purposes of section 1255 the amount determined 
under paragraph (d)(1) of this section shall be reduced by the amount of 
gain taken into account under section 1255 by the transferor upon the 
disposition. Upon a subsequent disposition by the transferee, the dates 
of receipt of section 126 payments remain the same in the hands of the 
transferee as they were in the hands of the transferor. With respect to 
the 175 and 182 deductions taken by the transferee, the holding period 
shall not include the holding period of the transferor.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). Assume the same facts as in example (1) of paragraph 
(a)(4) of this section. Therefore, on the date B receives the land in 
the gift transaction, under paragraph (d)(1) of this section the 
aggregate of excludable portions under section 126 in respect of the 
land in the hands of B is the amount in the hands of A, $24,000, and for 
purposes of applying section 1255 upon a subsequent disposition by B 
(including a computation of the applicable percentage) the date the 
section 126 payments were received is the same as it was when the 
property was in A's hands (January 15, 1981).
    Example (2). Assume the same facts as in example (2) of paragraph 
(a)(4) of this section. Under paragraph (d)(2) of this section, the 
aggregate of excludable portions under section 126 which pass over to B 
for purposes of section 1255 is $14,000 ($24,000 excluded

[[Page 223]]

under section 126 minus $10,000 gain recognized under section 1255(d)(1) 
in accordance with example (2) of paragraph (a)(4) of this section). The 
date the section 126 payments were received is the same as when the 
property was in B's hands (January 15, 1981).

    (e) Disposition of section 126 property not specifically covered. If 
section 126 property is disposed of in a transaction not specifically 
covered under Sec. 16A.1255-1, and this section, then the principles of 
section 1245 shall apply.



PART 18_TEMPORARY INCOME TAX REGULATIONS UNDER THE SUBCHAPTER S 
REVISION ACT OF 1982--Table of Contents



Sec.
18.0 Effective date of temporary regulations under the Subchapter S 
          Revision Act of 1982.
18.1371-1 Election to treat distributions as dividends during certain 
          post-termination transition periods.
18.1379-1 Transitional rules on enactment.
18.1379-2 Special rules for all elections, consents, and refusals.

    Authority: 26 U.S.C. 7805.

    Source: T.D. 7872, 48 FR 3590, Jan. 26, 1983, unless otherwise 
noted.



Sec. 18.0  Effective date of temporary regulations under the Subchapter
S Revision Act of 1982.

    The temporary regulations provided under Sec. 18.1377-1, 18.1379-1, 
and 18.1379-2 are effective with respect to taxable years beginning 
after 1982, and the temporary regulations provided under Sec. 18.1378-1 
are effective with respect to elections made after October 19, 1982.

[T.D. 8600, 60 FR 37588, July 21, 1995]



Sec. 18.1371-1  Election to treat distributions as dividends during 
certain post-termination transition periods.

    A corporation may make an election under section 1371(e) (as amended 
by section 721(o) of the Act) to treat all distributions of money made 
during the post-termination transition period described in section 
1377(b)(1)(A) as coming out of the corporation's earnings and profits 
(after earnings and profits have been eliminated, the distributions are 
applied against and reduce the adjusted basis of the stock). The 
election may be made only with the consent of each shareholder to whom 
the corporation makes a distribution (whether or not it is a cash 
distribution) during such post-termination transition period. Any such 
election shall be made by the corporation by attaching to its income tax 
return for the C year in which such post-termination transition period 
ends a statement which clearly indicates that the corporation elects to 
have section 1371(e)(1) not apply to all distributions made during such 
post-termination transition period. The election shall not be effective 
unless such statement is signed by a person authorized to sign the 
return required to be filed under section 6012 and by each shareholder 
required to consent to the election.

[T.D. 7976, 49 FR 35493, Sept. 10, 1984]



Sec. 18.1379-1  Transitional rules on enactment.

    (a) Prior elections. Any election that was made under section 
1372(a) (as in effect before the enactment of the Subchapter S Revision 
Act of 1982), and that is still in effect as of the first day of a 
taxable year beginning in 1983, shall be treated as being an election 
made under section 1362(a). In addition, any election that was made 
under section 1371(g)(2) (as in effect before the enactment of that 
Act), and that is still in effect as of the first day of a taxable year 
beginning in 1983, shall be treated as being an election made under 
section 1362(d)(2).
    (b) Prior terminations. For purposes of section 1362(g), any 
termination under section 1372(e) (as in effect before the enactment of 
the Subchapter S Revision Act of 1982) shall not be taken into account.
    (c) Time and manner of making an election under section 6(c)(3)(B) 
of the Subchapter S Revision Act of 1982. In the case of a qualified oil 
corporation (as defined in section 6(c)(3)(B) of the Subchapter S 
Revision Act of 1982), the corporation may elect under that section of 
the Act to have the amendments made by the Act not apply and to have 
Subchapter S (as in effect on July 1, 1982), Chapter I of the Internal 
Revenue Code of 1954 apply. The election shall be made by the 
corporation by filing a statement that--

[[Page 224]]

    (1) Contains the name, address, and taxpayer identification number 
of the corporation and of each shareholder,
    (2) Identifies the election as an election under section 6(c)(3)(B) 
of the Subchapter S Revision Act of 1982, and
    (3) Provides all information necessary in the judgment of the 
district director to show that the corporation meets the requirements 
(other than the requirement of making this election) of a qualified oil 
corporation.

The statement shall be signed by any person authorized to sign the 
return required to be filed under section 6037 and by each person who is 
or was a shareholder in the corporation at any time during the taxable 
year beginning in 1983 and shall be filed with the return for that 
taxable year.



Sec. 18.1379-2  Special rules for all elections, consents, and 
refusals.

    (a) Additional information required. If later regulations issued 
under the section of the Code or of the Subchapter S Revision Act of 
1982 under which the election, consent, or refusal was made require the 
furnishing of information in addition to that which was furnished with 
the statement of election, consent, or refusal as provided by part 18 of 
this title, and if an office of the Internal Revenue Service requests 
the taxpayer to provide the additional information, the taxpayer shall 
furnish the additional information in a statement filed with that office 
of the Internal Revenue Service within 60 days after the date on which 
the request is made. This statement shall also--
    (1) Contain the name, address, and taxpayer identification number of 
each party identified in connection with the election, consent, or 
refusal,
    (2) Identify the election, consent, or refusal by reference to the 
section of the Code or Act under which the election, consent, or refusal 
was made, and
    (3) Specify the scope of the election, consent, or refusal.

If the additional information is not provided within 60 days after the 
date on which the request is made, the election, consent, or refusal 
may, at the discretion of the Commissioner, be held invalid.
    (b) State law incorporator. For purposes of any election, consent, 
or refusal provided in part 18 of this title, any person who is 
considered to be a shareholder for state law purposes solely by virtue 
of his or her status as an incorporator shall not be treated as a 
shareholder.



PART 19_TEMPORARY REGULATIONS UNDER THE REVENUE ACT OF 1964--Table of 
Contents



    Authority: 26 U.S.C. 7805.



Sec. 19.3-1  Interest on certain deferred payments; interest rate 
for use in determining whether there is total unstated interest 

under a contract.

    (a) In general. Section 224(a) of the Revenue Act of 1964 adds a new 
section 483 to the Internal Revenue Code of 1954. Section 483(a) 
provides, generally, that in the case of any contract for the sale or 
exchange of property (which is a capital asset or section 1231 property) 
there shall be treated as interest that part of a payment to which 
section 483 applies which bears the same ratio to the amount of such 
payment as the total unstated interest under such contract bears to the 
total of the payments to which such section applies which are due under 
the contract. Section 483(b) defines the term ``total unstated 
interest'', with respect to a contract for the sale or exchange of 
property, as an amount equal to the excess of--
    (1) The sum of the payments to which section 483 applies which are 
due under the contract, over
    (2) The sum of the present values of such payments and the present 
values of any interest payments due under the contract.

Section 483(b) further provides that, for purposes of section 483(b)(2), 
the present value of a payment shall be determined, as of the date of 
the sale or exchange, by discounting such payment at the rate, and in 
the manner, provided in regulations prescribed by the Secretary or his 
delegate, and that such regulations shall provide for discounting on the 
basis of 6-month brackets and shall provide that the present value of 
any interest payment due not more than 6 months after the date of the 
sale or exchange is an

[[Page 225]]

amount equal to 100 percent of such payment. Section 483(c) provides 
that, except as provided in section 483(f) (relating to exceptions and 
limitations), section 483 shall apply to any payment on account of the 
sale or exchange of property which constitutes part or all of the sales 
price and which is due more than 6 months after the date of such sale or 
exchange under a contract under which some or all of the payments are 
due more than one year after the date of such sale or exchange, and 
under which, using a rate provided by regulations (for purposes of 
section 483(c)(1)(B)), there is total unstated interest. Section 483(c) 
further provides that any rate prescribed for determining whether there 
is total unstated interest for purposes of section 483(c)(1)(B) shall be 
at least one percentage point lower than the rate prescribed for 
purposes of section 483(b)(2).
    (b) Rate of interest and table of present values for purposes of 
section 483(c)(1)(B). For purposes of determining under section 
483(c)(1)(B) whether there is total unstated interest under a contract 
(other than a contract of sale or exchange under which the purchaser is 
the United States, a State, or any other purchaser described in section 
103) which provides for the payment of some interest, a rate of 4 
percent per annum simple interest shall be used. As an illustration of 
the meaning of simple interest, if a contract provides for payments of 
$6,000 in 3 equal installments of $2,000 plus 4 percent per annum simple 
interest, such installments of principal and interest being due 1, 2, 
and 3 years, respectively, from the date of the sale, the amount of 
interest due with the first installment is $80 ($2,000x0.04x1), the 
amount of interest due with the second installment is $160 
($2,000x0.04x2), and the amount of interest due with the third 
installment is $240 ($2,000x0.04x3). Section 483 shall not apply if the 
interest payments specified in a contract are at a rate of at least 4 
percent per annum, whether simple or compounded. In all other cases, for 
purposes of determining, under section 483(c)(1)(B), whether there is 
total unstated interest, under a contract (not involving a purchaser 
described in section 103), the following table, which provides for 
discounting payments at a 4 percent per annum simple interest rate, 
shall be used for computing the present value of a payment to which 
section 483 applies which is due under the contract, and the present 
value of any interest payment due under the contract:

 Present Value of Deferred Payment (4 Percent Per Annum Simple Interest)
------------------------------------------------------------------------
          Number of months deferred
---------------------------------------------  Present value of $1 at 4%
       At least            But less than            simple interest
------------------------------------------------------------------------
              0                      6                     1.00000
              6                      9                      .98039
              9                     15                      .96154
             15                     21                      .94340
             21                     27                      .92593
 
             27                     33                      .90909
             33                     39                      .89286
             39                     45                      .87719
             45                     51                      .86207
             51                     57                      .84746
 
             57                     63                      .83333
             63                     69                      .81967
             69                     75                      .80645
             75                     81                      .79365
             81                     87                      .78125
 
             87                     93                      .76923
             93                     99                      .75758
             99                    105                      .74627
            105                    111                      .73529
            111                    117                      .72464
 
            117                    123                      .71429
            123                    129                      .70423
            129                    135                      .69444
            135                    141                      .68493
            141                    147                      .67568
 
            147                    153                      .66667
            153                    159                      .65789
            159                    165                      .64935
            165                    171                      .64103
            171                    177                      .63291
 
            177                    183                      .62500
            183                    189                      .61728
            189                    195                      .60976
            195                    201                      .60241
            201                    207                      .59524
 
            207                    213                      .58824
            213                    219                      .58140
            219                    225                      .57471
            225                    231                      .56818
            231                    237                      .56180
 
            237                    243                      .55556
            243                    249                      .54945
            249                    255                      .54348
            255                    261                      .53763
            261                    267                      .53191
 
            267                    273                      .52632
            273                    279                      .52083
            279                    285                      .51546
            285                    291                      .51020
            291                    297                      .50505
 
            297                    303                      .50000
            303                    309                      .49505
            309                    315                      .49020
            315                    321                      .48544
            321                    327                      .48077
 
            327                    333                      .47619

[[Page 226]]

 
            333                    339                      .47170
            339                    345                      .46729
            345                    351                      .46296
            351                    357                      .45872
 
            357                    363                      .45455
            363                    369                      .45045
            369                    375                      .44643
            375                    381                      .44248
            381                    387                      .43860
 
            387                    393                      .43478
            393                    399                      .43103
            399                    405                      .42735
            405                    411                      .42373
            411                    417                      .42017
 
            417                    423                      .41667
            423                    429                      .41322
            429                    435                      .40984
            435                    441                      .40650
            441                    447                      .40323
 
            447                    453                      .40000
            453                    459                      .39683
            459                    465                      .39370
            465                    471                      .39063
            471                    477                      .38760
 
            477                    483                      .38462
            483                    489                      .38168
            489                    495                      .37879
            495                    501                      .37594
            501                    507                      .37313
 
            507                    513                      .37037
            513                    519                      .36765
            519                    525                      .36496
            525                    531                      .36232
            531                    537                      .35971
 
            537                    543                      .35714
            543                    549                      .35461
            549                    555                      .35211
            555                    561                      .34965
            561                    567                      .34722
 
            567                    573                      .34483
            573                    579                      .34247
            579                    585                      .34014
            585                    591                      .33784
            591                    597                      .33557
 
            597                    603                      .33333
            603                    609                      .33113
            609                    615                      .32895
            615                    621                      .32680
            621                    627                      .32468
 
            627                    633                      .32258
            633                    639                      .32051
            639                    645                      .31847
            645                    651                      .31646
            651                    657                      .31447
 
            657                    663                      .31250
            663                    669                      .31056
            669                    675                      .30864
            675                    681                      .30675
            681                    687                      .30488
 
            687                    693                      .30303
            693                    699                      .30120
            699                    705                      .29940
            705                    711                      .29762
            711                    717                      .29586
            717                    723                      .29412
------------------------------------------------------------------------


To compute the present value of a payment, multiply the amount of the 
payment by the factor contained in the present value column for the 
appropriate number of months the payment is deferred. For example, the 
present value of an installment payment of $5,000 due 2 years (24 
months) from the date of the sale would be $4,629.65 ($5,000x0.92593).
    (c) Effective date. The provisions of section 483 and these 
temporary regulations shall apply to payments made after December 31, 
1963, on account of sales or exchanges of property occurring after June 
30, 1963, other than any sale or exchange made pursuant to a binding 
written contract (including an irrevocable written option) entered into 
before July 1, 1963.

[T.D. 6720, 29 FR 4882, Apr. 7, 1964]

[[Page 227]]



                   SUBCHAPTER B_ESTATE AND GIFT TAXES





PART 20_ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954--Table of Contents



                              Introduction

Sec.
20.0-1 Introduction.
20.0-2 General description of tax.

                    Estates of Citizens or Residents

                               Tax Imposed

20.2001-1 Valuation of adjusted taxable gifts and section 2701(d) 
          taxable events.
20.2001-2T Valuation of adjusted taxable gifts for purposes of 
          determining the deceased spousal unused exclusion amount of 
          last deceased spouse (temporary).
20.2002-1 Liability for payment of tax.
20.2010-0T Table of contents (temporary).
20.2010-1T Unified credit against estate tax; in general (temporary).
20.2010-2T Portability provisions applicable to estate of a decedent 
          survived by a spouse (temporary).
20.2010-3T Portability provisions applicable to the surviving spouse's 
          estate (temporary).

                           Credits Against Tax

20.2011-1 Credit for State death taxes.
20.2011-2 Limitation on credit if a deduction for State death taxes is 
          allowed under section 2053(d).
20.2012-1 Credit for gift tax.
20.2013-1 Credit for tax on prior transfers.
20.2013-2 ``First limitation''.
20.2013-3 ``Second limitation''.
20.2013-4 Valuation of property transferred.
20.2013-5 ``Property'' and ``transfer'' defined.
20.2013-6 Examples.
20.2014-1 Credit for foreign death taxes.
20.2014-2 ``First limitation''.
20.2014-3 ``Second limitation''.
20.2014-4 Application of credit in cases involving a death tax 
          convention.
20.2014-5 Proof of credit.
20.2014-6 Period of limitations on credit.
20.2014-7 Limitation on credit if a deduction for foreign death taxes is 
          allowed under section 2053(d).
20.2015-1 Credit for death taxes on remainders.
20.2016-1 Recovery of death taxes claimed as credit.

                              Gross Estate

20.2031-0 Table of contents.
20.2031-1 Definition of gross estate; valuation of property.
20.2031-2 Valuation of stocks and bonds.
20.2031-3 Valuation of interests in businesses.
20.2031-4 Valuation of notes.
20.2031-5 Valuation of cash on hand or on deposit.
20.2031-6 Valuation of household and personal effects.
20.2031-7 Valuation of annuities, interests for life or term of years, 
          and remainder or reversionary interests.
20.2031-8 Valuation of certain life insurance and annuity contracts; 
          valuation of shares in an open-end investment company.
20.2031-9 Valuation of other property.
20.2032-1 Alternate valuation.
20.2032-1T Alternate valuation (temporary).
20.2032A-3 Material participation requirements for valuation of certain 
          farm and closely-held business real property.
20.2032A-4 Method of valuing farm real property.
20.2032A-8 Election and agreement to have certain property valued under 
          section 2032A for estate tax purposes.
20.2033-1 Property in which the decedent had an interest.
20.2034-1 Dower or curtesy interests.
20.2036-1 Transfers with retained life estate.
20.2037-1 Transfers taking effect at death.
20.2038-1 Revocable transfers.
20.2039-1 Annuities.
20.2039-1T Limitations and repeal of estate tax exclusion for qualified 
          plans and individual retirement plans (IRAs) (temporary).
20.2039-2 Annuities under ``qualified plans'' and section 403(b) annuity 
          contracts.
20.2039-3 Lump sum distributions under ``qualified plans;'' decedents 
          dying after December 31, 1976, and before January 1, 1979.
20.2039-4 Lump sum distributions from ``qualified plans;'' decedents 
          dying after December 31, 1978.
20.2039-5 Annuities under individual retirement plans.
20.2040-1 Joint interests.
20.2041-1 Powers of appointment; in general.
20.2041-2 Powers of appointment created on or before October 21, 1942.
20.2041-3 Powers of appointment created after October 21, 1942.
20.2042-1 Proceeds of life insurance.
20.2043-1 Transfers for insufficient consideration.
20.2044-1 Certain property for which marital deduction was previously 
          allowed.
20.2044-2 Effective dates.
20.2045-1 Applicability to pre-existing transfers or interests.
20.2046-1 Disclaimed property.

[[Page 228]]

             Actuarial Tables Applicable Before May 1, 2009

20.2031-7A Valuation of annuities, interests for life or term of years, 
          and remainder or reversionary interests for estates of 
          decedents for which the valuation date of the gross estate is 
          before May 1, 2009.

                             Taxable Estate

20.2051-1 Definition of taxable estate.
20.2052-1 Exemption.
20.2053-1 Deductions for expenses, indebtedness, and taxes; in general.
20.2053-2 Deduction for funeral expenses.
20.2053-3 Deduction for expenses of administering estate.
20.2053-4 Deduction for claims against the estate.
20.2053-5 Deductions for charitable, etc., pledges or subscriptions.
20.2053-6 Deduction for taxes.
20.2053-7 Deduction for unpaid mortgages.
20.2053-8 Deduction for expenses in administering property not subject 
          to claims.
20.2053-9 Deduction for certain State death taxes.
20.2053-10 Deduction for certain foreign death taxes.
20.2054-1 Deduction for losses from casualties or theft.
20.2055-1 Deduction for transfers for public, charitable, and religious 
          uses; in general.
20.2055-2 Transfers not exclusively for charitable purposes.
20.2055-3 Effect of death taxes and administration expenses.
20.2055-4 Disallowance of charitable, etc., deductions because of 
          ``prohibited transactions'' in the case of decedents dying 
          before January 1, 1970.
20.2055-5 Disallowance of charitable, etc., deductions in the case of 
          decedents dying after December 31, 1969.
20.2055-6 Disallowance of double deduction in the case of qualified 
          terminable interest property.
20.2056-0 Table of contents.
20.2056(a)-1 Marital deduction; in general.
20.2056(a)-2 Marital deduction; ``deductible interests'' and 
          ``nondeductible interests''.
20.2056(b)-1 Marital deduction; limitation in case of life estate or 
          other ``terminable interest''.
20.2056(b)-2 Marital deduction; interest in unidentified assets.
20.2056(b)-3 Marital deduction; interest of spouse conditioned on 
          survival for limited period.
20.2056(b)-4 Marital deduction; valuation of interest passing to 
          surviving spouse.
20.2056(b)-5 Marital deduction; life estate with power of appointment in 
          surviving spouse.
20.2056(b)-6 Marital deduction; life insurance or annuity payments with 
          power of appointment in surviving spouse.
20.2056(b)-7 Election with respect to life estate for surviving spouse.
20.2056(b)-8 Special rule for charitable remainder trusts.
20.2056(b)-9 Denial of double deduction.
20.2056(b)-10 Effective dates.
20.2056(c)-1 Marital deduction; definition of ``passed from the 
          decedent.''
20.2056(c)-2 Marital deduction; definition of ``passed from the decedent 
          to his surviving spouse.''
20.2056(c)-3 Marital deduction; definition of ``passed from the decedent 
          to a person other than his surviving spouse''.
20.2056(d)-1 Marital deduction; special rules for marital deduction if 
          surviving spouse is not a United States citizen.
20.2056(d)-2 Marital deduction; effect of disclaimers of post-December 
          31, 1976 transfers.
20.2056(d)-3 Marital deduction; effect of disclaimers of pre-January 1, 
          1977 transfers.
20.2056A-0 Table of contents.
20.2056A-1 Restrictions on allowance of marital deduction if surviving 
          spouse is not a United States citizen.
20.2056A-2 Requirements for qualified domestic trust.
20.2056A-3 QDOT election.
20.2056A-4 Procedures for conforming marital trusts and nontrust marital 
          transfers to the requirements of a qualified domestic trust.
20.2056A-5 Imposition of section 2056A estate tax.
20.2056A-6 Amount of tax.
20.2056A-7 Allowance of prior transfer credit under section 2013.
20.2056A-8 Special rules for joint property.
20.2056A-9 Designated Filer.
20.2056A-10 Surviving spouse becomes citizen after QDOT established.
20.2056A-11 Filing requirements and payment of the section 2056A estate 
          tax.
20.2056A-12 Increased basis for section 2056A estate tax paid with 
          respect to distribution from a QDOT.
20.2056A-13 Effective dates.

                  Estates of Nonresidents Not Citizens

20.2101-1 Estates of nonresidents not citizens; tax imposed.
20.2102-1 Estates of nonresidents not citizens; credits against tax.
20.2103-1 Estates of nonresidents not citizens; ``entire gross estate''.
20.2104-1 Estates of nonresidents not citizens; property within the 
          United States.
20.2105-1 Estates of nonresidents not citizens; property without the 
          United States.
20.2106-1 Estates of nonresidents not citizens; taxable estate; 
          deductions in general.

[[Page 229]]

20.2106-2 Estates of nonresidents not citizens; deductions for expenses, 
          losses, etc.
20.2107-1 Expatriation to avoid tax.

                              Miscellaneous

20.2201-1 Members of the Armed Forces dying during an induction period.
20.2202-1 Missionaries in foreign service.
20.2203-1 Definition of executor.
20.2204-1 Discharge of executor from personal liability.
20.2204-2 Discharge of fiduciary other than executor from personal 
          liability.
20.2204-3 Special rules for estates of decedents dying after December 
          31, 1976; special lien under section 6324A.
20.2205-1 Reimbursement out of estate.
20.2206-1 Liability of life insurance beneficiaries.
20.2207-1 Liability of recipient of property over which decedent had 
          power of appointment.
20.2207A-1 Right of recovery of estate taxes in the case of certain 
          marital deduction property.
20.2207A-2 Effective date.
20.2208-1 Certain residents of possessions considered citizens of the 
          United States.
20.2209-1 Certain residents of possessions considered nonresidents not 
          citizens of the United States.

                      Procedure and Administration

20.6001-1 Persons required to keep records, and render statements.
20.6011-1 General requirement of return, statement, or list.
20.6011-4 Requirement of statement disclosing participation in certain 
          transactions by taxpayers.
20.6018-1 Returns.
20.6018-2 Returns; person required to file return.
20.6018-3 Returns; contents of returns.
20.6018-4 Returns; documents to accompany the return.
20.6036-1 Notice of qualification as executor of estate of decedent 
          dying before 1971.
20.6036-2 Notice of qualification as executor of estate of decedent 
          dying after 1970.
20.6060-1 Reporting requirements for tax return preparers.
20.6061-1 Signing of returns and other documents.
20.6065-1 Verification of returns.
20.6071-1 Time for filing preliminary notice required by Sec. 20.6036-
          1.
20.6075-1 Returns; time for filing estate tax return.
20.6081-1 Extension of time for filing the return.
20.6091-1 Place for filing returns or other documents.
20.6091-2 Exceptional cases.
20.6107-1 Tax return preparer must furnish copy of return to taxpayer 
          and must retain a copy or record.
20.6109-1 Tax return preparers furnishing identifying numbers for 
          returns or claims for refund.
20.6151-1 Time and place for paying tax shown on the return.
20.6161-1 Extension of time for paying tax shown on the return.
20.6161-2 Extension of time for paying deficiency in tax.
20.6163-1 Extension of time for payment of estate tax on value of 
          reversionary or remainder interest in property.
20.6165-1 Bonds where time to pay tax or deficiency has been extended.
20.6166-1 Election of alternate extension of time for payment of estate 
          tax where estate consists largely of interest in closely held 
          business.
20.6166A-1 Extension of time for payment of estate tax where estate 
          consists largely of interest in closely held business.
20.6166A-2 Definition of an interest in a closely held business.
20.6166A-3 Acceleration of payment.
20.6166A-4 Special rules applicable where due date of return was before 
          September 3, 1958.
20.6302-1 Voluntary payments of estate taxes by electronic funds 
          transfer.
20.6314-1 Duplicate receipts for payment of estate taxes.
20.6321 Statutory provisions; lien for taxes.
20.6321-1 Lien for taxes.
20.6323-1 Validity and priority against certain persons.
20.6324-1 Special lien for estate tax.
20.6324A-1 Special lien for estate tax deferred under section 6166 or 
          6166A.
20.6324B-1 Special lien for additional estate tax attributable to farm, 
          etc., valuation.
20.6325-1 Release of lien or partial discharge of property; transfer 
          certificates in nonresident estates.
20.6601-1 Interest on underpayment, nonpayment, or extensions of time 
          for payment, of tax.
20.6694-1 Section 6694 penalties applicable to tax return preparer.
20.6694-2 Penalties for understatement due to an unreasonable position.
20.6694-3 Penalty for understatement due to willful, reckless, or 
          intentional conduct.
20.6694-4 Extension of period of collection when preparer pays 15 
          percent of a penalty for understatement of taxpayer's 
          liability and certain other procedural matters.
20.6695-1 Other assessable penalties with respect to the preparation of 
          tax returns for other persons.
20.6696-1 Claims for credit or refund by tax return preparers or 
          appraisers.
20.6905-1 Discharge of executor from personal liability for decedent's 
          income and gift taxes.
20.7101-1 Form of bonds.

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                      General Actuarial Valuations

20.7520-1 Valuation of annuities, unitrust interests, interests for life 
          or terms of years, and remainder or reversionary interests.
20.7520-2 Valuation of charitable interests.
20.7520-3 Limitation on the application of section 7520.
20.7520-4 Transitional rules.
20.7701-1 Tax return preparer.

    Authority: 26 U.S.C. 7805.
    Section 20.2010-0T also issued under 26 U.S.C. 2010(c)(6).
    Section 20.2010-1T also issued under 26 U.S.C. 2010(c)(6).
    Section 20.2010-2T also issued under 26 U.S.C. 2010(c)(6).
    Section 20.2010-3T also issued under 26 U.S.C. 2010(c)(6).
    Section 20.2031-7 also issued under 26 U.S.C. 7520(c)(2).
    Section 20.2031-7A also issued under 26 U.S.C. 7520(c)(2).
    Section 20.6060-1 also issued under 26 U.S.C. 6060(a).
    Section 20.6081-1 also issued under 26 U.S.C. 6081(a).
    Section 20.6109-1 also issued under 26 U.S.C. 6109(a).
    Section 20.6109-2 also issued under 26 U.S.C. 6109(a).
    Section 20.6302-1 also issued under 26 U.S.C. 6302(a) and (h).
    Section 20.6695-1 also issued under 26 U.S.C. 6695(b).
    Section 20.7520-1 also issued under 26 U.S.C. 7520(c)(2).
    Section 20.7520-2 also issued under 26 U.S.C. 7520(c)(2).
    Section 20.7520-3 also issued under 26 U.S.C. 7520(c)(2).
    Section 20.7520-4 also issued under 26 U.S.C. 7520(c)(2).

    Source: T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 
1960, unless otherwise noted.

                              Introduction



Sec. 20.0-1  Introduction.

    (a) In general. (1) The regulations in this part (part 20, 
subchapter B, chapter I, title 26, Code of Federal Regulations) are 
designated ``Estate Tax Regulations.'' These regulations pertain to (i) 
the Federal estate tax imposed by chapter 11 of subtitle B of the 
Internal Revenue Code on the transfer of estates of decedents dying 
after August 16, 1954, and (ii) certain related administrative 
provisions of subtitle F of the Code. It should be noted that the 
application of many of the provisions of these regulations may be 
affected by the provisions of an applicable death tax convention with a 
foreign country. Unless otherwise indicated, references in the 
regulations to the ``Internal Revenue Code'' or the ``Code'' are 
references to the Internal Revenue Code of 1954, as amended, and 
references to a section or other provision of law are references to a 
section or other provision of the Internal Revenue Code of 1954, as 
amended. Unless otherwise provided, the Estate Tax Regulations are 
applicable to the estates of decedents dying after August 16, 1954, and 
supersede the regulations contained in part 81, subchapter B, chapter I, 
title 26, Code of Federal Regulations (1939) (Regulations 105, Estate 
Tax), as prescribed and made applicable to the Internal Revenue Code of 
1954 by Treasury Decision 6091, signed August 16, 1954 (19 FR 5167, Aug. 
17, 1954). The regulations in this part do not reflect the amendments 
made by the Foreign Investors Tax Act of 1966 (80 Stat. 1539).
    (2) Section 2208 makes the provisions of chapter 11 of the Code 
apply to the transfer of the estates of certain decedents dying after 
September 2, 1958, who were citizens of the United States and residents 
of a possession thereof at the time of death. Section 2209 makes the 
provisions of chapter 11 apply to the transfer of the estates of certain 
other decedents dying after September 14, 1960, who were citizens of the 
United States and residents of a possession thereof at the time of 
death. See Sec. Sec. 20.2208-1 and 20.2209-1. Except as otherwise 
provided in Sec. Sec. 20.2208-1 and 20.2209-1, the provisions of these 
regulations do not apply to the estates of such decedents.
    (b) Scope of regulations--(1) Estates of citizens or residents. 
Subchapter A of Chapter 11 of the Code pertains to the taxation of the 
estate of a person who was a citizen or a resident of the United States 
at the time of his death. A ``resident'' decedent is a decedent who, at 
the time of his death, had his domicile in the United States. The term 
``United States'', as used in the estate tax regulations, includes only 
the States and the District of Columbia. The term also includes the 
Territories of Alaska and Hawaii prior to their admission as States. See 
section

[[Page 231]]

7701(a)(9). A person acquires a domicile in a place by living there, for 
even a brief period of time, with no definite present intention of later 
removing therefrom. Residence without the requisite intention to remain 
indefinitely will not suffice to constitute domicile, nor will intention 
to change domicile effect such a change unless accompanied by actual 
removal. For the meaning of the term ``citizen of the United States'' as 
applied in a case where the decedent was a resident of a possession of 
the United States, see Sec. 20.2208-1. The regulations pursuant to 
subchapter A are set forth in Sec. Sec. 20.2001-1 to 20.2056(d)-1.
    (2) Estates of nonresidents not citizens. Subchapter B of Chapter 11 
of the Code pertains to the taxation of the estate of a person who was a 
nonresident not a citizen of the United States at the time of his death. 
A ``nonresident'' decedent is a decedent who, at the time of his death, 
had his domicile outside the United States under the principles set 
forth in subparagraph (1) of this paragraph. (See, however, section 2202 
with respect to missionaries in foreign service.) The regulations 
pursuant to subchapter B are set forth in Sec. Sec. 20.2101-1 to 
20.2107-1.
    (3) Miscellaneous substantive provisions. Subchapter C of Chapter 11 
of the Code contains a number of miscellaneous substantive provisions. 
The regulations pursuant to subchapter C are set forth in Sec. Sec. 
20.2201-1 to 20.2209-1.
    (4) Procedure and administration provisions. Subtitle F of the 
Internal Revenue Code contains some sections which are applicable to the 
Federal estate tax. The regulations pursuant to those sections are set 
forth in Sec. Sec. 20.6001-1 to 20.7101-1. Such regulations do not 
purport to be all the regulations on procedure and administration which 
are pertinent to estate tax matters. For the remainder of the 
regulations on procedure and administration which are pertinent to 
estate tax matters, see part 301 (Regulations on Procedure and 
Administration) of this chapter.
    (c) Arrangement and numbering. Each section of the regulations in 
this part (other than this section and Sec. 20.0-2) is designated by a 
number composed of the part number followed by a decimal point (20.); 
the section of the Internal Revenue Code which it interprets; a hyphen 
(-); and a number identifying the section. By use of these designations 
one can ascertain the sections of the regulations relating to a 
provision of the Code. For example, the regulations pertaining to 
section 2012 of the Code are designated Sec. 20.2012-1.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6526, 26 FR 
414, Jan. 19, 1961; T.D. 7238, 37 FR 28717, Dec. 29, 1972; T.D. 7296, 38 
FR 34191, Dec. 12, 1973; T.D. 7665, 45 FR 6089, Jan. 25, 1980; T.D. 
8522, 59 FR 9646, Mar. 1, 1994]



Sec. 20.0-2  General description of tax.

    (a) Nature of tax. The Federal estate tax is neither a property tax 
nor an inheritance tax. It is a tax imposed upon the transfer of the 
entire taxable estate and not upon any particular legacy, devise, or 
distributive share. Escheat of a decedent's property to the State for 
lack of heirs is a transfer which causes the property to be included in 
the decedent's gross estate.
    (b) Method of determining tax; estate of citizen or resident--(1) In 
general. Subparagraphs (2) to (5) of this paragraph contain a general 
description of the method to be used in determining the Federal estate 
tax imposed upon the transfer of the estate of a decedent who was a 
citizen or resident of the United States at the time of his death.
    (2) Gross estate. The first step in determining the tax is to 
ascertain the total value of the decedent's gross estate. The value of 
the gross estate includes the value of all property to the extent of the 
interest therein of the decedent at the time of his death. (For certain 
exceptions in the case of real property situated outside the United 
States, see paragraphs (a) and (c) of Sec. 20.2031-1.) In addition, the 
gross estate may include property in which the decedent did not have an 
interest at the time of his death. A decedent's gross estate for Federal 
estate tax purposes may therefore be very different from the same 
decedent's estate for local probate purposes. Examples of items which 
may be included in a decedent's gross estate and not in his probate 
estate are the following: certain property transferred by the decedent 
during his

[[Page 232]]

lifetime without adequate consideration; property held jointly by the 
decedent and others; property over which the decedent had a general 
power of appointment; proceeds of certain policies of insurance on the 
decedent's life; annuities; and dower or curtesy of a surviving spouse 
or a statutory estate in lieu thereof. For a detailed explanation of the 
method of ascertaining the value of the gross estate, see sections 2031 
through 2044, and the regulations thereunder.
    (3) Taxable estate. The second step in determining the tax is to 
ascertain the value of the decedent's taxable estate. The value of the 
taxable estate is determined by subtracting from the value of the gross 
estate the authorized exemption and deductions. Under various conditions 
and limitations, deductions are allowable for expenses, indebtedness, 
taxes, losses, charitable transfers, and transfers to a surviving 
spouse. For a detailed explanation of the method of ascertaining the 
value of the taxable estate, see sections 2051 through 2056, and the 
regulations thereunder.
    (4) Gross estate tax. The third step is the determination of the 
gross estate tax. This is accomplished by the application of certain 
rates to the value of the decedent's taxable estate. In this connection, 
see section 2001 and the regulations thereunder.
    (5) Net estate tax payable. The final step is the determination of 
the net estate tax payable. This is done by subtracting from the gross 
estate tax the authorized credits against tax. Under certain conditions 
and limitations, credits are allowable for the following (computed in 
the order stated below):
    (i) State death taxes paid in connection with the decedent's estate 
(section 2011);
    (ii) Gift taxes paid on inter-vivos transfers by the decedent of 
property included in his gross estate (section 2012);
    (iii) Foreign death taxes paid in connection with the decedent's 
estate (section 2014); and
    (iv) Federal estate taxes paid on transfers of property to the 
decedent (section 2013).

Sections 25.2701-5 and 25.2702-6 of this chapter contain rules that 
provide additional adjustments to mitigate double taxation in cases 
where the amount of the decedent's gift was previously determined under 
the special valuation provisions of sections 2701 and 2702. For a 
detailed explanation of the credits against tax, see sections 201l 
through 2016 and the regulations thereunder.
    (c) Method of determining tax; estate of nonresident not a citizen. 
In general, the method to be used in determining the Federal estate tax 
imposed upon the transfer of an estate of a decedent who was a 
nonresident not a citizen of the United States is similar to that 
described in paragraph (b) of this section with respect to the estate of 
a citizen or resident. Briefly stated, the steps are as follows: First, 
ascertain the sum of the value of that part of the decedent's ``entire 
gross estate'' which at the time of his death was situated in the United 
States (see Sec. Sec. 20.2103-1 and 20.2014-1) and, in the case of an 
estate of an expatriate to which section 2107 applies, any amounts 
includible in his gross estate under section 2107(b) (see paragraph (b) 
of Sec. 20.2107-1); second, determine the value of the taxable estate 
by subtracting from the amount determined under the first step the 
amount of the allowable deductions (see Sec. 20.2106-1); third, compute 
the gross estate tax on the taxable estate (see Sec. 20.2106-1); and 
fourth, subtract from the gross estate tax the total amount of any 
allowable credits in order to arrive at the net estate tax payable (see 
Sec. 20.2102-1 and paragraph (c) of Sec. 20.2107-1).

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6684, 28 FR 
11408, Oct. 24, 1963; T.D. 7296, 38 FR 34191, Dec. 12, 1973; T.D. 8395, 
57 FR 4254, Feb. 4, 1992]

                    Estates of Citizens or Residents

                               Tax Imposed



Sec. 20.2001-1  Valuation of adjusted taxable gifts and section 2701(d) 
taxable events.

    (a) Adjusted taxable gifts made prior to August 6, 1997. For 
purposes of determining the value of adjusted taxable gifts as defined 
in section 2001(b), if the gift was made prior to August 6, 1997, the 
value of the gift may be adjusted at any time, even if the time within 
which a gift tax may be assessed has

[[Page 233]]

expired under section 6501. This paragraph (a) also applies to 
adjustments involving issues other than valuation for gifts made prior 
to August 6, 1997.
    (b) Adjusted taxable gifts and section 2701(d) taxable events 
occurring after August 5, 1997. For purposes of determining the amount 
of adjusted taxable gifts as defined in section 2001(b), if, under 
section 6501, the time has expired within which a gift tax may be 
assessed under chapter 12 of the Internal Revenue Code (or under 
corresponding provisions of prior laws) with respect to a gift made 
after August 5, 1997, or with respect to an increase in taxable gifts 
required under section 2701(d) and Sec. 25.2701-4 of this chapter, then 
the amount of the taxable gift will be the amount as finally determined 
for gift tax purposes under chapter 12 of the Internal Revenue Code and 
the amount of the taxable gift may not thereafter be adjusted. The rule 
of this paragraph (b) applies to adjustments involving all issues 
relating to the gift, including valuation issues and legal issues 
involving the interpretation of the gift tax law.
    (c) Finally determined. For purposes of paragraph (b) of this 
section, the amount of a taxable gift as finally determined for gift tax 
purposes is--
    (1) The amount of the taxable gift as shown on a gift tax return, or 
on a statement attached to the return, if the Internal Revenue Service 
does not contest such amount before the time has expired under section 
6501 within which gift taxes may be assessed;
    (2) The amount as specified by the Internal Revenue Service before 
the time has expired under section 6501 within which gift taxes may be 
assessed on the gift, if such specified amount is not timely contested 
by the taxpayer;
    (3) The amount as finally determined by a court of competent 
jurisdiction; or
    (4) The amount as determined pursuant to a settlement agreement 
entered into between the taxpayer and the Internal Revenue Service.
    (d) Definitions. For purposes of paragraph (b) of this section, the 
amount is finally determined by a court of competent jurisdiction when 
the court enters a final decision, judgment, decree or other order with 
respect to the amount of the taxable gift that is not subject to appeal. 
See, for example, section 7481 regarding the finality of a decision by 
the U.S. Tax Court. Also, for purposes of paragraph (b) of this section, 
a settlement agreement means any agreement entered into by the Internal 
Revenue Service and the taxpayer that is binding on both. The term 
includes a closing agreement under section 7121, a compromise under 
section 7122, and an agreement entered into in settlement of litigation 
involving the amount of the taxable gift.
    (e) Expiration of period of assessment. For purposes of determining 
if the time has expired within which a tax may be assessed under chapter 
12 of the Internal Revenue Code, see Sec. 301.6501(c)-1(e) and (f) of 
this chapter.
    (f) Effective dates. Paragraph (a) of this section applies to 
transfers of property by gift made prior to August 6, 1997, if the 
estate tax return for the donor/decedent's estate is filed after 
December 3, 1999. Paragraphs (b) through (e) of this section apply to 
transfers of property by gift made after August 5, 1997, if the gift tax 
return for the calendar period in which the gift is made is filed after 
December 3, 1999.

[T.D. 8845, 64 FR 67769, Dec. 3, 1999]



Sec. 20.2001-2T  Valuation of adjusted taxable gifts for purposes of 
determining the deceased spousal unused exclusion amount of last 

deceased spouse (temporary).

    (a) General rule. Notwithstanding Sec. 20.2001-1(b), see Sec. Sec. 
20.2010-2T(d) and 20.2010-3T(d) for additional rules regarding the 
authority of the Internal Revenue Service to examine any gift or other 
tax return(s), even if the time within which a tax may be assessed under 
section 6501 has expired, for the purpose of determining the deceased 
spousal unused exclusion (DSUE) amount available under section 2010(c) 
of the Internal Revenue Code (Code).
    (b) Effective/applicability date. Paragraph (a) of this section 
applies to the estates of decedents dying in calendar year 2011 or a 
subsequent year in which the applicable exclusion amount is determined 
under section 2010(c) of the Code by adding the basic exclusion amount 
and, in the case of a surviving spouse, the DSUE amount.

[T.D. 9593, 77 FR 36156, June 18, 2012]

[[Page 234]]



Sec. 20.2002-1  Liability for payment of tax.

    The Federal estate tax imposed both with respect to the estates of 
citizens or residents and with respect to estates of nonresidents not 
citizens is payable by the executor or administrator of the decedent's 
estate. This duty applies to the entire tax, regardless of the fact that 
the gross estate consists in part of property which does not come within 
the possession of the executor or administrator. If there is no executor 
or administrator appointed, qualified and acting in the United States, 
any person in actual or constructive possession of any property of the 
decedent is required to pay the entire tax to the extent of the value of 
the property in his possession. See section 2203, defining the term 
``executor''. The personal liability of the executor or such other 
person is described in section 3467 of the Revised Statutes (31 U.S.C. 
192) as follows:

    Every executor, administrator, or assignee, or other person, who 
pays, in whole or in part, any debt due by the person or estate for whom 
or for which he acts before he satisfies and pays the debts due to the 
United States from such person or estate, shall become answerable in his 
own person and estate to the extent of such payments for the debts so 
due to the United States, or for so much thereof as may remain due and 
unpaid.


As used in said section, the word ``debt'' includes a beneficiary's 
distributive share of an estate. Thus, if the executor pays a debt due 
by the decedent's estate or distributes any portion of the estate before 
all the estate tax is paid, he is personally liable, to the extent of 
the payment or distribution, for so much of the estate tax as remains 
due and unpaid. In addition, section 6324(a)(2) provides that if the 
estate tax is not paid when due, then the spouse, transferee, trustee 
(except the trustee of an employee's trust which meets the requirements 
of section 401(a)), surviving tenant, person in possession of the 
property by reason of the exercise, nonexercise, or release of a power 
of appointment, or beneficiary, who receives, or has on the date of the 
decedent's death, property included in the gross estate under section 
2034 through 2042, is personally liable for the tax to the extent of the 
value, at the time of the decedent's death, of such property. See also 
the following related sections of the Internal Revenue Code: Section 
2204, discharge of executor from personal liability; section 2205, 
reimbursement out of estate; sections 2206 and 2207, liability of life 
insurance beneficiaries and recipients of property over which decedent 
had power of appointment; sections 6321 through 6325, concerning liens 
for taxes; and section 6901(a)(1), concerning the liabilities of 
transferees and fiduciaries.



Sec. 20.2010-0T  Table of contents (temporary).

    This section lists the table of contents for Sec. Sec. 20.2010-1T 
through 20.2010-3T.

Sec. 20.2010-1T Unified credit against estate tax; in general 
          (temporary).

    (a) General rule.
    (b) Special rule in case of certain gifts made before 1977.
    (c) Credit limitation.
    (d) Explanation of terms.
    (1) Applicable credit amount.
    (2) Applicable exclusion amount.
    (3) Basic exclusion amount.
    (4) Deceased spousal unused exclusion (DSUE) amount.
    (5) Last deceased spouse.
    (e) Effective/applicability date.
    (f) Expiration date.

Sec. 20.2010-2T Portability provisions applicable to estate of a 
          decedent survived by a spouse (temporary).

    (a) Election required for portability.
    (1) Timely filing required.
    (2) Portability election upon filing of estate tax return.
    (3) Portability election not made; requirements for election not to 
apply.
    (4) Election irrevocable.
    (5) Estates eligible to make the election.
    (6) Persons permitted to make the election.
    (7) Requirements of return.
    (b) Computation required for portability election.
    (1) General rule.
    (2) Transitional rule.
    (c) Computation of the DSUE amount.
    (1) General rule.
    (2) Special rule to consider gift taxes paid by decedent.
    (3) [Reserved]
    (4) Special rule in case of property passing to qualified domestic 
trust.
    (5) Examples.
    (d) Authority to examine returns of decedent.
    (e) Effective/applicability date.

[[Page 235]]

    (f) Expiration date.

Sec. 20.2010-3T Portability provisions applicable to the surviving 
          spouse's estate (temporary).

    (a) Surviving spouse's estate limited to DSUE amount of last 
deceased spouse.
    (1) In general.
    (2) No DSUE amount available from last deceased spouse.
    (3) Identity of last deceased spouse unchanged by subsequent 
marriage or divorce.
    (b) Special rule in case of multiple deceased spouses and a 
previously-applied DSUE amount.
    (1) In general.
    (2) Example.
    (c) Date DSUE amount taken into consideration by surviving spouse's 
estate.
    (1) General rule.
    (2) Special rule when property passes to surviving spouse in a 
qualified domestic trust.
    (d) Authority to examine returns of deceased spouses.
    (e) Availability of DSUE amount for estates of nonresidents who are 
not citizens.
    (f) Effective/applicability date.
    (g) Expiration date.

[T.D. 9593, 77 FR 36156, June 18, 2012]



Sec. 20.2010-1T  Unified credit against estate tax; in general (temporary).

    (a) General rule. Section 2010(a) allows the estate of every 
decedent a credit against the estate tax imposed by section 2001. The 
allowable credit is the applicable credit amount. See paragraph (d)(1) 
of this section for an explanation of the term applicable credit amount.
    (b) Special rule in case of certain gifts made before 1977. The 
applicable credit amount allowable under paragraph (a) of this section 
must be reduced by an amount equal to 20 percent of the aggregate amount 
allowed as a specific exemption under section 2521 (as in effect before 
its repeal by the Tax Reform Act of 1976) for gifts made by the decedent 
after September 8, 1976, and before January 1, 1977.
    (c) Credit limitation. The applicable credit amount allowed under 
paragraph (a) of this section cannot exceed the amount of the estate tax 
imposed by section 2001.
    (d) Explanation of terms. The explanation of terms in this section 
applies to this section and to Sec. Sec. 20.2010-2T and 20.2010-3T.
    (1) Applicable credit amount. The term applicable credit amount 
refers to the allowable credit against estate tax imposed by section 
2001 and gift tax imposed by section 2501. The applicable credit amount 
equals the amount of the tentative tax that would be determined under 
section 2001(c) if the amount on which such tentative tax is to be 
computed were equal to the applicable exclusion amount. The applicable 
credit amount is determined by applying the unified rate schedule in 
section 2001(c) to the applicable exclusion amount.
    (2) Applicable exclusion amount. The applicable exclusion amount 
equals the sum of the basic exclusion amount and, in the case of a 
surviving spouse, the deceased spousal unused exclusion (DSUE) amount.
    (3) Basic exclusion amount. The basic exclusion amount is the sum 
of--
    (i) For any decedent dying in calendar year 2011, $5,000,000; and
    (ii) For any decedent dying after calendar year 2011, $5,000,000 
multiplied by the cost-of-living adjustment determined under section 
1(f)(3) for that calendar year by substituting ``calendar year 2010'' 
for ``calendar year 1992'' in section 1(f)(3)(B) and by rounding to the 
nearest multiple of $10,000.
    (4) Deceased spousal unused exclusion (DSUE) amount. The term DSUE 
amount refers, generally, to the unused portion of a decedent's 
applicable exclusion amount to the extent this amount does not exceed 
the basic exclusion amount in effect in the year of the decedent's 
death. For rules on computing the DSUE amount, see Sec. Sec. 20.2010-
2T(c) and 20.2010-3T(b).
    (5) Last deceased spouse. The term last deceased spouse means the 
most recently deceased individual who, at that individual's death after 
December 31, 2010, was married to the surviving spouse. See Sec. Sec. 
20.2010-3T(a) and 25.2505-2T(a) of this chapter for additional rules 
pertaining to the identity of the last deceased spouse for purposes of 
determining the applicable exclusion amount of the surviving spouse.
    (e) Effective/applicability date. Paragraphs (d)(2), (d)(3), (d)(4), 
and (d)(5) of this section apply to the estates of decedents dying in 
calendar year 2011 or a subsequent year in which the applicable 
exclusion amount is determined under section 2010(c) of the Internal

[[Page 236]]

Revenue Code by adding the basic exclusion amount and, in the case of a 
surviving spouse, the DSUE amount. Paragraphs (a), (b), (c), and (d)(1) 
of this section apply to the estates of decedents dying on or after June 
15, 2012.
    (f) Expiration date. The applicability of this section expires on or 
before June 15, 2015.

[T.D. 9593, 77 FR 36157, June 18, 2012]



Sec. 20.2010-2T  Portability provisions applicable to estate of a 
decedent survived by a spouse (temporary).

    (a) Election required for portability. To allow a decedent's 
surviving spouse to take into account that decedent's deceased spousal 
unused exclusion (DSUE) amount, the executor of the decedent's estate 
must elect portability of the DSUE amount on a timely-filed Form 706, 
``United States Estate (and Generation-Skipping Transfer) Tax Return'' 
(estate tax return). This election is referred to in this section and in 
Sec. 20.2010-3T as the portability election.
    (1) Timely filing required. An estate that elects portability will 
be considered, for purposes of Subtitle B and Subtitle F of the Internal 
Revenue Code (Code), to be required to file a return under section 
6018(a). Accordingly, the due date of an estate tax return required to 
elect portability is 9 months after the decedent's date of death or the 
last day of the period covered by an extension (if an extension of time 
for filing has been obtained). See Sec. Sec. 20.6075-1 and 20.6081-1 
for additional rules relating to the time for filing estate tax returns.
    (2) Portability election upon filing of estate tax return. Upon the 
timely filing of a complete and properly-prepared estate tax return, an 
executor of an estate of a decedent (survived by a spouse) will have 
elected portability of the decedent's DSUE amount unless the executor 
chooses not to elect portability and satisfies the requirement in 
paragraph (a)(3)(i) of this section. See paragraph (a)(7) of this 
section for the return requirements related to the portability election.
    (3) Portability election not made; requirements for election not to 
apply. The executor of the estate of a decedent (survived by a spouse) 
will not make or be considered to make the portability election if 
either of the following applies:
    (i) The executor states affirmatively on a timely-filed estate tax 
return, or in an attachment to that estate tax return, that the estate 
is not electing portability under section 2010(c)(5). The manner in 
which the executor may make this affirmative statement on the estate tax 
return will be as set forth in the instructions issued with respect to 
such form (``Instructions for Form 706'').
    (ii) The executor does not timely file an estate tax return in 
accordance with paragraph (a)(1) of this section.
    (4) Election irrevocable. An executor of the estate of a decedent 
(survived by a spouse) who timely files an estate tax return may make 
and may supersede a portability election previously made, provided that 
the estate tax return reporting the decision not to make a portability 
election is filed on or before the due date of the return, including 
extensions actually granted. However, see paragraph (a)(6) of this 
section when contrary elections are made by more than one person 
permitted to make the election. The portability election, once made, 
becomes irrevocable once the due date of the estate tax return, 
including extensions actually granted, has passed.
    (5) Estates eligible to make the election. An executor may elect 
portability on behalf of the estate of a decedent (survived by a spouse) 
if the decedent dies in calendar year 2011 or during a subsequent period 
in which portability of a DSUE amount is in effect. However, an executor 
of the estate of a nonresident decedent who was not a citizen of the 
United States at the time of death may not elect portability on behalf 
of that decedent, and the timely filing of such a decedent's estate tax 
return will not constitute the making of a portability election.
    (6) Persons permitted to make the election--(i) Appointed executor. 
An executor or administrator of the estate of a decedent (survived by a 
spouse) that is appointed, qualified, and acting within the United 
States, within the meaning of section 2203 (an appointed executor), may 
file the estate tax return on behalf of the estate of the decedent and, 
in so

[[Page 237]]

doing, elect portability of the decedent's DSUE amount. An appointed 
executor also may elect not to have portability apply pursuant to 
paragraph (a)(3) of this section.
    (ii) Non-appointed executor. If there is no appointed executor, any 
person in actual or constructive possession of any property of the 
decedent (a non-appointed executor) may file the estate tax return on 
behalf of the estate of the decedent and, in so doing, elect portability 
of the decedent's DSUE amount, or, by complying with paragraph (a)(3) of 
this section, may elect not to have portability apply. A portability 
election made by a non-appointed executor cannot be superseded by a 
contrary election made by another non-appointed executor of that same 
decedent's estate (unless such other non-appointed executor is the 
successor of the non-appointed executor who made the election). See 
Sec. 20.6018-2 for additional rules relating to persons permitted to 
file the estate tax return.
    (7) Requirements of return--(i) General rule. An estate tax return 
will be considered complete and properly-prepared for purposes of this 
section if it is prepared in accordance with the instructions issued for 
the estate tax return (Instructions for Form 706) and if the 
requirements of Sec. Sec. 20.6018-2, 20.6018-3, and 20.6018-4 are 
satisfied. However, see paragraph (a)(7)(ii) of this section for reduced 
requirements applicable to certain property of certain estates.
    (ii) Reporting of value not required for certain property--(A) In 
general. A special rule applies with respect to certain property of 
estates in which the executor is not required to file an estate tax 
return under section 6018(a), as determined without regard to paragraph 
(a)(1) of this section. With respect to such an estate, for bequests, 
devises, or transfers of property included in the gross estate, the 
value of which is deductible under section 2056 or 2056A (marital 
deduction property) or under section 2055(a) (charitable deduction 
property), an executor is not required to report a value for such 
property on the estate tax return (except to the extent provided in this 
paragraph (a)(7)(ii)(A)) and will be required to report only the 
description, ownership, and/or beneficiary of such property, along with 
all other information necessary to establish the right of the estate to 
the deduction in accordance with Sec. Sec. 20.2056(a)-1(b)(i) through 
(iii) and 20.2055-1(c), as applicable. However, this rule does not apply 
to marital deduction property or charitable deduction property if--
    (1) The value of such property relates to, affects, or is needed to 
determine, the value passing from the decedent to another recipient;
    (2) The value of such property is needed to determine the estate's 
eligibility for the provisions of sections 2032, 2032A, 6166, or another 
provision of the Code;
    (3) Less than the entire value of an interest in property includible 
in the decedent's gross estate is marital deduction property or 
charitable deduction property; or
    (4) A partial disclaimer or partial qualified terminable interest 
property (QTIP) election is made with respect to a bequest, devise, or 
transfer of property includible in the gross estate, part of which is 
marital deduction property or charitable deduction property.
    (B) Statement required on the return. Paragraph (a)(7)(ii)(A) of 
this section applies only if the executor exercises due diligence to 
estimate the fair market value of the gross estate, including the 
property described in paragraph (a)(7)(ii)(A) of this section. The 
Instructions for Form 706 will provide ranges of dollar values, and the 
executor must identify on the estate tax return an amount corresponding 
to the particular range within which falls the executor's best estimate 
of the total gross estate. Until such time as the prescribed form for 
the estate tax return expressly includes this estimate in the manner 
described in the preceding sentence, the executor must include the 
executor's best estimate, rounded to the nearest $250,000, on or 
attached to the estate tax return, signed under penalties of perjury.
    (C) Examples. The following examples illustrate the application of 
paragraph (a)(7)(ii) of this section. In each example, assume that 
Husband (H) dies in 2011, survived by his wife (W), that both H and W 
are US citizens, that H's gross estate does not exceed the excess of the 
applicable exclusion amount for the

[[Page 238]]

year of his death over the total amount of H's adjusted taxable gifts 
and any specific exemption under section 2521, and that H's executor (E) 
timely files Form 706 solely to make the portability election.

    Example 1. (i) Facts. The assets includible in H's gross estate 
consist of a parcel of real property and bank accounts held jointly with 
W with rights of survivorship, a life insurance policy payable to W, and 
a survivor annuity payable to W for her life. H made no taxable gifts 
during his lifetime.
    (ii) Application. E files an estate tax return on which these assets 
are identified on the proper schedule, but E provides no information on 
the return with regard to the date of death value of these assets in 
accordance with paragraph (a)(7)(ii)(A) of this section. To establish 
the estate's entitlement to the marital deduction in accordance with 
Sec. 20.2056(a)-1(b) (except with regard to establishing the value of 
the property) and the instructions for the estate tax return, E includes 
with the estate tax return evidence to verify the title of each jointly 
held asset, to confirm that W is the sole beneficiary of both the life 
insurance policy and the survivor annuity, and to verify that the 
annuity is exclusively for W's life. Finally, E certifies on the estate 
return E's best estimate, determined by exercising due diligence, of the 
fair market value of the gross estate in accordance with paragraph 
(a)(7)(ii)(B) of this section. The estate tax return is considered 
complete and properly prepared and E has elected portability.
    Example 2. (i) Facts. H's will, duly admitted to probate and not 
subject to any proceeding to challenge its validity, provides that H's 
entire estate is to be distributed to a QTIP trust for W. The non-
probate assets includible in H's gross estate consist of a life 
insurance policy payable to H's children from a prior marriage, and H's 
individual retirement account (IRA) payable to W. H made no taxable 
gifts during his lifetime.
    (ii) Application. E files an estate tax return on which all of the 
assets includible in the gross estate are identified on the proper 
schedule. In the case of the probate assets and the IRA, no information 
is provided with regard to date of death value in accordance with 
paragraph (a)(7)(ii)(A) of this section. However, E makes a QTIP 
election and attaches a copy of H's will creating the QTIP, and 
describes each such asset and its ownership to establish the estate's 
entitlement to the marital deduction in accordance with the instructions 
for the estate tax return and Sec. 20.2056(a)-1(b) (except with regard 
to establishing the value of the property). In the case of the life 
insurance policy payable to H's children, all of the regular return 
requirements, including reporting and establishing the fair market value 
of such asset, apply. Finally, E certifies on the estate return E's best 
estimate, determined by exercising due diligence, of the fair market 
value of the gross estate in accordance with paragraph (a)(7)(ii)(B) of 
this section. The estate tax return is considered complete and properly 
prepared and E has elected portability.
    (iii) Variation. The facts are the same except that there are no 
non-probate assets, and E elects to make only a partial QTIP election. 
In this case, the regular return requirements apply to all of the 
property includible in the gross estate and the provisions of paragraph 
(a)(7)(ii) of this section do not apply.
    Example 3. (i) Facts. H's will, duly admitted to probate and not 
subject to any proceeding to challenge its validity, provides that 50 
percent of the property passing under the terms of H's will is to be 
paid to a marital trust for W and 50 percent is to be paid to a trust 
for W and their descendants.
    (ii) Application. The amount passing to the non-marital trust cannot 
be verified without knowledge of the full value of the property passing 
under the will. Therefore, the value of the property of the marital 
trust relates to or affects the value passing to the trust for W and the 
descendants of H and W. Accordingly, the general return requirements 
apply to all of the property includible in the gross estate and the 
provisions of paragraph (a)(7)(ii) of this section do not apply.

    (b) Computation required for portability election--(1) General rule. 
In addition to the requirements described in paragraph (a) of this 
section, an executor of a decedent's estate must include a computation 
of the DSUE amount on the estate tax return to elect portability and 
thereby allow the decedent's surviving spouse to take into account that 
decedent's DSUE amount. See paragraph (b)(2) of this section for a 
transitional rule when the estate tax return form prescribed by the 
Internal Revenue Service (IRS) does not show expressly the computation 
of the DSUE amount. See paragraph (c) of this section for rules on 
computing the DSUE amount.
    (2) Transitional rule. Until such time as the prescribed form for 
the estate tax return expressly includes a computation of the DSUE 
amount, a complete and properly-prepared estate tax return will be 
deemed to include the computation of the DSUE amount. See paragraph 
(a)(7) of this section for the requirements for a return to be 
considered complete and properly-prepared. Once the IRS revises the 
prescribed

[[Page 239]]

form for the estate tax return to include expressly the computation of 
the DSUE amount, executors that previously filed an estate tax return 
pursuant to this transitional rule will not be required to file a 
supplemental estate tax return using the revised form.
    (c) Computation of the DSUE amount--(1) General rule. Subject to 
paragraphs (c)(2) through (c)(4) of this section, the DSUE amount of a 
decedent with a surviving spouse is the lesser of the following 
amounts--
    (i) The basic exclusion amount in effect in the year of the death of 
the decedent; or
    (ii) The excess of--
    (A) The decedent's applicable exclusion amount; over
    (B) The sum of the amount of the taxable estate and the amount of 
the adjusted taxable gifts of the decedent, which together is the amount 
on which the tentative tax on the decedent's estate is determined under 
section 2001(b)(1).
    (2) Special rule to consider gift taxes paid by decedent. Solely for 
purposes of computing the decedent's DSUE amount, the amount of the 
adjusted taxable gifts of the decedent referred to in paragraph 
(c)(1)(ii)(B) of this section is reduced by the amount, if any, on which 
gift taxes were paid for the calendar year of the gift(s).
    (3) [Reserved]
    (4) Special rule in case of property passing to qualified domestic 
trust. When property passes for the benefit of a surviving spouse in a 
qualified domestic trust (QDOT) as defined in section 2056A(a), the DSUE 
amount of the decedent is computed on the decedent's estate tax return 
for the purpose of electing portability in the same manner as this 
amount is computed under paragraph (c)(1) of this section, but this DSUE 
amount is subject to subsequent adjustments. The DSUE amount of the 
decedent must be redetermined upon the occurrence of the final 
distribution or other event (generally the death of the surviving spouse 
or the earlier termination of all QDOTs for that surviving spouse) on 
which estate tax is imposed under section 2056A. See Sec. 20.2056A-6 
for rules on determining the estate tax under section 2056A. See Sec. 
20.2010-3T(c)(2) regarding the timing of the availability of the 
decedent's DSUE amount to the surviving spouse.
    (5) Examples. The following examples illustrate the application of 
this paragraph (c):

    Example 1. Computation of DSUE amount. (i) Facts. In 2002, having 
made no prior taxable gift, Husband (H) makes a taxable gift valued at 
$1,000,000 and reports the gift on a timely-filed gift tax return. 
Because the amount of the gift is equal to the applicable exclusion 
amount for that year ($1,000,000), $345,800 is allowed as a credit 
against the tax, reducing the gift tax liability to zero. H dies on 
September 29, 2011, survived by Wife (W). H and W are US citizens and 
neither has any prior marriage. H's taxable estate is $1,000,000. The 
executor of H's estate timely files H's estate tax return and elects 
portability, thereby allowing W to benefit from H's DSUE amount.
    (ii) Application. The executor of H's estate computes H's DSUE 
amount to be $3,000,000 (the lesser of the $5,000,000 basic exclusion 
amount in 2011, or the excess of H's $5,000,000 applicable exclusion 
amount over the sum of the $1,000,000 taxable estate and the $1,000,000 
amount of adjusted taxable gifts).
    Example 2. Computation of DSUE amount when gift tax paid. (i) Facts. 
The facts are the same as in Example 1 except that the value of H's 
taxable gift in 2002 is $2,000,000. After application of the applicable 
credit amount, H owes gift tax on $1,000,000, the amount of the gift in 
excess of the applicable exclusion amount for that year. H pays the gift 
tax owed on the transfer in 2002.
    (ii) Application. On H's death, the executor of H's estate computes 
the DSUE amount to be $3,000,000 (the lesser of the $5,000,000 basic 
exclusion amount in 2011, or the excess of H's $5,000,000 applicable 
exclusion amount over the sum of the $1,000,000 taxable estate and 
$1,000,000 adjusted taxable gifts). H's adjusted taxable gifts of 
$2,000,000 were reduced for purposes of this computation by $1,000,000, 
the amount of taxable gifts on which gift taxes were paid.
    Example 3. Computation of DSUE amount when QDOT created. (i) Facts. 
Husband (H), a US citizen, makes his first taxable gift in 2002, valued 
at $1,000,000, and reports the gift on a timely-filed gift tax return. 
No gift tax is due because the applicable exclusion amount for that year 
($1,000,000) equals the fair market value of the gift. H dies in 2011 
with a gross estate of $2,000,000. H's wife (W) is a US resident but not 
a citizen of the United States and, under H's will, a pecuniary bequest 
of $1,500,000 passes to a QDOT for the benefit of W. H's executor timely 
files an estate tax return and makes the QDOT election for the property 
passing to the QDOT, and H's estate is allowed a marital deduction of 
$1,500,000 under section 2056(d) for the value of that property. H's 
taxable estate is $500,000. On H's estate tax return, H's

[[Page 240]]

executor computes H's preliminary DSUE amount to be $3,500,000 (the 
lesser of the $5,000,000 basic exclusion amount in 2011, or the excess 
of H's $5,000,000 applicable exclusion amount over the sum of the 
$500,000 taxable estate and the $1,000,000 adjusted taxable gifts). No 
taxable events within the meaning of section 2056A occur during W's 
lifetime with respect to the QDOT, and W makes no taxable gifts. In 
2012, W dies and the value of the assets of the QDOT is $1,800,000.
    (ii) Application. H's DSUE amount is redetermined to be $1,700,000 
(the lesser of the $5,000,000 basic exclusion amount in 2011, or the 
excess of H's $5,000,000 applicable exclusion amount over $3,300,000 
(the sum of the $500,000 taxable estate augmented by the $1,800,000 of 
QDOT assets and the $1,000,000 adjusted taxable gifts)).

    (d) Authority to examine returns of decedent. The IRS may examine 
returns of a decedent in determining the decedent's DSUE amount, 
regardless of whether the period of limitations on assessment has 
expired for that return. See Sec. 20.2010-3T(d) for additional rules 
relating to the IRS's authority to examine returns. See also section 
7602 for the IRS's authority, when ascertaining the correctness of any 
return, to examine any returns that may be relevant or material to such 
inquiry.
    (e) Effective/applicability date. This section applies to the 
estates of decedents dying in calendar year 2011 or a subsequent year in 
which the applicable exclusion amount is determined under section 
2010(c) of the Code by adding the basic exclusion amount and, in the 
case of a surviving spouse, the DSUE amount.
    (f) Expiration date. The applicability of this section expires on or 
before June 15, 2015.

[T.D. 9593, 77 FR 36157, June 18, 2012]



Sec. 20.2010-3T  Portability provisions applicable to the surviving 
spouse's estate (temporary).

    (a) Surviving spouse's estate limited to DSUE amount of last 
deceased spouse--(1) In general. A deceased spousal unused exclusion 
(DSUE) amount of a decedent, computed under Sec. 20.2010-2T(c), is 
included in determining a surviving spouse's applicable exclusion amount 
under section 2010(c)(2), provided--
    (i) Such decedent is the last deceased spouse of such surviving 
spouse within the meaning of Sec. 20.2010-1T(d)(5) on the date of the 
death of the surviving spouse; and
    (ii) The executor of the decedent's estate elected portability (see 
Sec. 20.2010-2T(a) and (b) for applicable requirements).
    (2) No DSUE amount available from last deceased spouse. If the last 
deceased spouse of such surviving spouse had no DSUE amount, or if the 
executor of such a decedent's estate did not make a portability 
election, the surviving spouse's estate has no DSUE amount (except as 
provided in paragraph (b)(1)(ii) of this section) to be included in 
determining the applicable exclusion amount, even if the surviving 
spouse previously had a DSUE amount available from another decedent who, 
prior to the death of the last deceased spouse, was the last deceased 
spouse of such surviving spouse. See paragraph (b) of this section for a 
special rule in the case of multiple deceased spouses and a previously-
applied DSUE amount.
    (3) Identity of last deceased spouse unchanged by subsequent 
marriage or divorce. A decedent is the last deceased spouse (as defined 
in Sec. 20.2010-1T(d)(5)) of a surviving spouse even if, on the date of 
the death of the surviving spouse, the surviving spouse is married to 
another (then-living) individual. If a surviving spouse marries again 
and that marriage ends in divorce or an annulment, the subsequent death 
of the divorced spouse does not end the status of the prior deceased 
spouse as the last deceased spouse of the surviving spouse. The divorced 
spouse, not being married to the surviving spouse at death, is not the 
last deceased spouse as that term is defined in Sec. 20.2010-1T(d)(5).
    (b) Special rule in case of multiple deceased spouses and 
previously-applied DSUE amount--(1) In general. A special rule applies 
to compute the DSUE amount included in the applicable exclusion amount 
of a surviving spouse who previously has applied the DSUE amount of one 
or more deceased spouses to taxable gifts in accordance with Sec. 
25.2505-2T(b) and (c) of this chapter. If a surviving spouse has applied 
the DSUE amount of one or more last deceased spouses to the surviving 
spouse's transfers during life, and if

[[Page 241]]

any of those last deceased spouses is different from the surviving 
spouse's last deceased spouse as defined in Sec. 20.2010-1T(d)(5) at 
the time of the surviving spouse's death, then the DSUE amount to be 
included in determining the applicable exclusion amount of the surviving 
spouse at the time of the surviving spouse's death is the sum of--
    (i) The DSUE amount of the surviving spouse's last deceased spouse 
as described in paragraph (a)(1) of this section; and
    (ii) The DSUE amount of each other deceased spouse of the surviving 
spouse, to the extent that such amount was applied to one or more 
taxable gifts of the surviving spouse.
    (2) Example. The following example, in which all described 
individuals are US citizens, illustrates the application of this 
paragraph (b):

    Example. (i) Facts. Husband 1 (H1) dies on January 15, 2011, 
survived by Wife (W). Neither has made any taxable gifts during H1's 
lifetime. H1's executor elects portability of H1's DSUE amount. The DSUE 
amount of H1 as computed on the estate tax return filed on behalf of 
H1's estate is $5,000,000. On December 31, 2011, W makes taxable gifts 
to her children valued at $2,000,000. W reports the gifts on a timely-
filed gift tax return. W is considered to have applied $2,000,000 of 
H1's DSUE amount to the amount of taxable gifts, in accordance with 
Sec. 25.2505-2T(c), and, therefore, W owes no gift tax. W has an 
applicable exclusion amount remaining in the amount of $8,000,000 
($3,000,000 of H1's remaining DSUE amount plus W's own $5,000,000 basic 
exclusion amount). After the death of H1, W marries Husband 2 (H2). H2 
dies in June 2012. H2's executor elects portability of H2's DSUE amount, 
which is properly computed on H2's estate tax return to be $2,000,000. W 
dies in October 2012.
    (ii) Application. The DSUE amount to be included in determining the 
applicable exclusion amount available to W's estate is $4,000,000, 
determined by adding the $2,000,000 DSUE amount of H2 and the $2,000,000 
DSUE amount of H1 that was applied by W to W's 2011 taxable gifts. Thus, 
W's applicable exclusion amount is $9,000,000.

    (c) Date DSUE amount taken into consideration by surviving spouse's 
estate--(1) General rule. A portability election made by an executor of 
a decedent's estate (see Sec. 20.2010-2T(a) and (b) for applicable 
requirements) applies as of the date of the decedent's death. Thus, the 
decedent's DSUE amount is included in the applicable exclusion amount of 
the decedent's surviving spouse under section 2010(c)(2) and will be 
applicable to transfers made by the surviving spouse after the 
decedent's death. However, such decedent's DSUE amount will not be 
included in the applicable exclusion amount of the surviving spouse, 
even if the surviving spouse had made a transfer in reliance on the 
availability or computation of the decedent's DSUE amount:
    (i) If the executor of the decedent's estate supersedes the 
portability election by filing a subsequent estate tax return in 
accordance with Sec. 20.2010-2T(a)(4);
    (ii) To the extent that the DSUE amount subsequently is reduced by a 
valuation adjustment or the correction of an error in calculation; or
    (iii) To the extent that the surviving spouse cannot substantiate 
the DSUE amount claimed on the surviving spouse's return.
    (2) Special rule when property passes to surviving spouse in a 
qualified domestic trust. When property passes from a decedent for the 
benefit of a surviving spouse in one or more qualified domestic trusts 
(QDOT) as defined in section 2056A(a) and the decedent's executor elects 
portability, the DSUE amount available to be included in the applicable 
exclusion amount of the surviving spouse under section 2010(c)(2) is the 
DSUE amount of the decedent as redetermined in accordance with Sec. 
20.2010-2T(c)(4). The earliest date on which the decedent's DSUE amount 
may be included in the applicable exclusion amount of the surviving 
spouse under section 2010(c)(2) is the date of the occurrence of the 
final QDOT distribution or final other event (generally, the death of 
the surviving spouse or the earlier termination of all QDOTs for that 
surviving spouse) on which tax under section 2056A is imposed. However, 
the decedent's DSUE amount as redetermined in accordance with Sec. 
20.2010-2T(c)(4) may be applied to certain taxable gifts of the 
surviving spouse. See Sec. 25.2505-2T(d)(2)(i) of this chapter.
    (d) Authority to examine returns of deceased spouses. For the 
purpose of determining the DSUE amount to be included in the applicable 
exclusion

[[Page 242]]

amount of the surviving spouse, the Internal Revenue Service (IRS) may 
examine returns of each of the surviving spouse's deceased spouses whose 
DSUE amount is claimed to be included in the surviving spouse's 
applicable exclusion amount, regardless of whether the period of 
limitations on assessment has expired for any such return. The IRS's 
authority to examine returns of a deceased spouse applies with respect 
to each transfer by the surviving spouse to which a DSUE amount is or 
has been applied. Upon examination, the IRS may adjust or eliminate the 
DSUE amount reported on such a return; however, the IRS may assess 
additional tax on that return only if that tax is assessed within the 
period of limitations on assessment under section 6501 applicable to the 
tax shown on that return. See also section 7602 for the IRS's authority, 
when ascertaining the correctness of any return, to examine any returns 
that may be relevant or material to such inquiry. For purposes of these 
examinations to determine the DSUE amount, the surviving spouse is 
considered to have a material interest that is affected by the return 
information of the deceased spouse within the meaning of section 
6103(e)(3).
    (e) Availability of DSUE amount for estates of nonresidents who are 
not citizens. The estate of a nonresident surviving spouse who is not a 
citizen of the United States at the time of such surviving spouse's 
death shall not take into account the DSUE amount of any deceased spouse 
of such surviving spouse within the meaning of Sec. 20.2010-1T(d)(5) 
except to the extent allowed under any applicable treaty obligation of 
the United States. See section 2102(b)(3).
    (f) Effective/applicability date. This section applies to the 
estates of decedents dying in calendar year 2011 or a subsequent year in 
which the applicable exclusion amount is determined under section 
2010(c) of the Code by adding the basic exclusion amount and, in the 
case of a surviving spouse, the DSUE amount.
    (g) Expiration date. The applicability of this section expires on or 
before June 15, 2015.

[T.D. 9593, 77 FR 36160, June 18, 2012]

                           Credits Against Tax



Sec. 20.2011-1  Credit for State death taxes.

    (a) In general. A credit is allowed under section 2011 against the 
Federal estate tax for estate, inheritance, legacy or succession taxes 
actually paid to any State, Territory, or the District of Columbia, or, 
in the case of decedents dying before September 3, 1958, any possession 
of the United States (hereinafter referred to as ``State death taxes''). 
The credit, however, is allowed only for State death taxes paid (1) with 
respect to property included in the decedent's gross estate, and (2) 
with respect to the decedent's estate. The amount of the credit is 
subject to the limitation described in paragraph (b) of this section. It 
is subject to further limitations described in Sec. 20.2011-2 if a 
deduction is allowed under section 2053(d) for State death taxes paid 
with respect to a charitable gift. See paragraph (a) of Sec. 20.2014-1 
as to the allowance of a credit for death taxes paid to a possession of 
the United States in a case where the decedent died after September 2, 
1958.
    (b) Amount of credit. (1) If the decedent's taxable estate does not 
exceed $40,000, the credit for State death taxes is zero. If the 
decedent's taxable estate does exceed $40,000, the credit for State 
death taxes is limited to an amount computed in accordance with the 
following table:

      Table for Computation of Maximum Credit for State Death Taxes
------------------------------------------------------------------------
                                                          (D)--Rates of
                                                            credit on
   (A)--Taxable        (B)--Taxable     (C)--Credit on     excess over
estate equal to or  estate less than-- amount in column     amount in
    more than--                               (A)           column (A)
                                                            (percent)
------------------------------------------------------------------------
       $40,000             $90,000     ................            0.8
        90,000             140,000              $400               1.6
       140,000             240,000             1,200               2.4
       240,000             440,000             3,600               3.2
       440,000             640,000            10,000               4.0
       640,000             840,000            18,000               4.8
       840,000           1,040,000            27,600               5.6
     1,040,000           1,540,000            38,800               6.4
     1,540,000           2,040,000            70,800               7.2
     2,040,000           2,540,000           106,800               8.0
     2,540,000           3,040,000           146,800               8.8
     3,040,000           3,540,000           190,800               9.6
     3,540,000           4,040,000           238,800              10.4
     4,040,000           5,040,000           290,800              11.2
     5,040,000           6,040,000           402,800              12.0
     6,040,000           7,040,000           522,800              12.8
     7,040,000           8,040,000           650,800              13.6

[[Page 243]]

 
     8,040,000           9,040,000           786,800              14.4
     9,040,000          10,040,000           930,800              15.2
    10,040,000      .................      1,082,800              16.0
------------------------------------------------------------------------

    (2) Subparagraph (1) of this paragraph may be illustrated by the 
following example:

    Example. (i) The decedent died January 1, 1955, leaving a taxable 
estate of $150,000. On January 1, 1956, inheritance taxes totaling 
$2,500 were actually paid to a State with respect to property included 
in the decedent's gross estate. Reference to the table discloses that 
the specified amount in column (A) nearest to but less than the value of 
the decedent's taxable estate is $140,000. The maximum credit in respect 
of this amount, as indicated in column (C), is $1,200. The amount by 
which the taxable estate exceeds the same specified amount is $10,000. 
The maximum credit in respect of this amount, computed at the rate of 
2.4 percent indicated in column (D), is $240. Thus, the maximum credit 
in respect of the decedent's taxable estate of $150,000 is $1,440, even 
though $2,500 in inheritance taxes was actually paid to the State.
    (ii) If, in subdivision (i) of this example, the amount actually 
paid to the State was $950, the credit for State death taxes would be 
limited to $950. If, in subdivision (i) of this example, the decedent's 
taxable estate was $35,000, no credit for State death taxes would be 
allowed.

    (c) Miscellaneous limitations and conditions to credit--(1) Period 
of limitations. The credit for State death taxes is limited under 
section 2011(c) to those taxes which were actually paid and for which a 
credit was claimed within four years after the filing of the estate tax 
return for the decedent's estate. If, however, a petition has been filed 
with the Tax Court of the United States for the redetermination of a 
deficiency within the time prescribed in section 6213(a), the credit is 
limited to those taxes which were actually paid and for which a credit 
was claimed within four years after the filing of the return or within 
60 days after the decision of the Tax Court becomes final, whichever 
period is the last to expire. Similarly, if an extension of time has 
been granted under section 6161 for payment of the tax shown on the 
return, or of a deficiency, the credit is limited to those taxes which 
were actually paid and for which a credit was claimed within four years 
after the filing of the return, or before the date of the expiration of 
the period of the extension, whichever period is last to expire. If a 
claim for refund or credit of an overpayment of the Federal estate tax 
is filed within the time prescribed in section 6511, the credit for 
State death taxes is limited to such taxes as were actually paid and 
credit therefor claimed within four years after the filing of the return 
or before the expiration of 60 days from the date of mailing by 
certified or registered mail by the district director to the taxpayer of 
a notice of disallowance of any part of the claim, or before the 
expiration of 60 days after a decision by any court of competent 
jurisdiction becomes final with respect to a timely suit instituted upon 
the claim, whichever period is the last to expire. See section 2015 for 
the applicable period of limitations for credit for State death taxes on 
reversionary or remainder interests if an election is made under section 
6163(a) to postpone payment of the estate tax attributable to 
reversionary or remainder interests. If a claim for refund based on the 
credit for State death taxes is filed within the applicable period 
described in this subparagraph, a refund may be made despite the general 
limitation provisions of sections 6511 and 6512. Any refund based on the 
credit described in this section shall be made without interest.
    (2) Submission of evidence. Before the credit for State death taxes 
is allowed, evidence that such taxes have been paid must be submitted to 
the district director. The district director may require the submission 
of a certificate from the proper officer of the taxing State, Territory, 
or possession of the United States, or the District of Columbia, 
showing: (i) The total amount of tax imposed (before adding interest and 
penalties and before allowing discount); (ii) the amount of any discount 
allowed; (iii) the amount of any penalties and interest imposed or 
charged; (iv) the total amount actually paid in cash; and (v) the date 
or dates of payment. If the amount of these taxes has been redetermined, 
the amount finally

[[Page 244]]

determined should be stated. The required evidence should be filed with 
the return, but if that is not convenient or possible, then it should be 
submitted as soon thereafter as practicable. The district director may 
require the submission of such additional proof as is deemed necessary 
to establish the right to the credit. For example, he may require the 
submission of a certificate of the proper officer of the taxing 
jurisdiction showing (vi) whether a claim for refund of any part of the 
State death tax is pending and (vii) whether a refund of any part 
thereof has been authorized, and if a refund has been made, its date and 
amount, and a description of the property or interest in respect of 
which the refund was made. The district director may also require an 
itemized list of the property in respect of which State death taxes were 
imposed certified by the officer having custody of the records 
pertaining to those taxes. In addition, he may require the executor to 
submit a written statement (containing a declaration that it is made 
under penalties of perjury) stating whether, to his knowledge, any 
person has instituted litigation or taken an appeal (or contemplates 
doing so), the final determination of which may affect the amount of 
those taxes. See section 2016 concerning the redetermination of the 
estate tax if State death taxes claimed as credit are refunded.
    (d) Definition of ``basic estate tax''. Section 2011(d) provides 
definitions of the terms ``basic estate tax'' and ``additional estate 
tax'', used in the Internal Revenue Code of 1939, and ``estate tax 
imposed by the Revenue Act of 1926'', for the purpose of supplying a 
means of computing State death taxes under local statutes using those 
terms, and for use in determining the exemption provided for in section 
2201 for estates of certain members of the Armed Forces. See section 
2011(e)(3) for a modification of these definitions if a deduction is 
allowed under section 2053(d) for State death taxes paid with respect to 
a charitable gift.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6526, 26 FR 
414, Jan. 19, 1961]



Sec. 20.2011-2  Limitation on credit if a deduction for State death 
taxes is allowed under section 2053(d).

    If a deduction is allowed under section 2053(d) for State death 
taxes paid with respect to a charitable gift, the credit for State death 
taxes is subject to special limitations. Under these limitations, the 
credit cannot exceed the least of the following:
    (a) The amount of State death taxes paid other than those for which 
a deduction is allowed under section 2053(d);
    (b) The amount indicated in section 2011(b) to be the maximum credit 
allowable with respect to the decedent's taxable estate; or
    (c) An amount, A, which bears the same ratio to B (the amount which 
would be the maximum credit allowable under section 2011(b) if the 
deduction under section 2053(d) for State death taxes were not allowed 
in computing the decedent's taxable estate) as C (the amount of State 
death taxes paid other than those for which a deduction is allowed under 
section 2053(d)) bears to D (the total amount of State death taxes 
paid). For the purpose of this computation, in determining what the 
decedent's taxable estate would be if the deduction for State death 
taxes under section 2053(d) were not allowed, adjustment must be made 
for the decrease in the deduction for charitable gifts under section 
2055 or 2106(a)(2) (for estates of nonresidents not citizens) by reason 
of any increase in Federal estate tax which would be charged against the 
charitable gifts.

The application of this section may be illustrated by the following 
example:

    Example. The decedent died January 1, 1955, leaving a gross estate 
of $925,000. Expenses, indebtedness, etc., amounted to $25,000. The 
decedent bequeathed $400,000 to his son with the direction that the son 
bear the State death taxes on the bequest. The residuary estate was left 
to a charitable organization. Except as noted above, all Federal and 
State death taxes were payable out of the residuary estate. The State 
imposed death taxes of $60,000 on the son's bequest and death taxes of 
$75,000 on the bequest to charity. No death taxes were imposed by a 
foreign country with respect to any property in the gross

[[Page 245]]

estate. The decedent's taxable estate (determined without regard to the 
limitation imposed by section 2011(e)(2)(B) is computed as follows:

Gross estate................................................  ...........  ...........  ...........  $925,000.00
Expenses, indebtedness, etc.................................  ...........  ...........   $25,000.00
Exemption...................................................  ...........  ...........    60,000.00
Deduction under section 2053(d).............................  ...........  ...........    75,000.00
Charitable deduction:
  Gross estate..............................................  ...........  $925,000.00
  Expenses, etc.............................................   $25,000.00
  Bequest to son............................................   400,000.00
  State death tax paid from residue.........................    75,000.00
  Federal estate tax paid from residue......................   122,916.67   622,916.67   302,083.33   462,083.33
                                                             ---------------------------------------------------
Taxable estate..............................................  ...........  ...........  ...........   462,916.67
                                                                                                    ============
 

    If the deduction under section 2053(d) were not allowed, the 
decedent's taxable estate would be computed as follows:

Gross estate................................................  ...........  ...........  ...........  $925,000.00
Expenses, indebtedness, etc.................................  ...........  ...........   $25,000.00
Exemption...................................................  ...........  ...........    60,000.00
Charitable deduction:
  Gross estate..............................................  ...........  $925,000.00
  Expenses, etc.............................................   $25,000.00
  Bequest to son............................................   400,000.00
  State death tax paid from residue.........................    75,000.00
  Federal estate tax paid from residue......................   155,000.00   655,000.00   270,000.00   355,000.00
                                                             ---------------------------------------------------
Taxable estate..............................................  ...........  ...........  ...........   570,000.00
                                                                                                    ============
 

    On a taxable estate of $570,000, the maximum credit allowable under 
section 2011(b) would be $15,200. Under these facts, the credit for 
State death taxes is determined as follows:

(1) Amount of State death taxes paid other than those for     $60,000.00
 which a deduction is allowed under section 2053(d)
 ($135,000-$75,000)........................................
(2) Amount indicated in section 2011(b) to be the maximum      10,916.67
 credit allowable with respect to the decedent's taxable
 estate of $462,916.67.....................................
(3) Amount determined by use of the ratio described in          6,755.56
 paragraph (c) above [($60,000/$135,000)x$15,200]..........
(4) Credit for State death taxes (least of subparagraphs        6,755.56
 (1) through (3) above)....................................
 


[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6600, 27 FR 
4983, May 29, 1962]



Sec. 20.2012-1  Credit for gift tax.

    (a) In general. With respect to gifts made before 1977, a credit is 
allowed under section 2012 against the Federal estate tax for gift tax 
paid under chapter 12 of the Internal Revenue Code, or corresponding 
provisions of prior law, on a gift by the decedent of property 
subsequently included in the decedent's gross estate. The credit is 
allowable even though the gift tax is paid after the decedent's death 
and the amount of the gift tax is deductible from the gross estate as a 
debt of the decedent.
    (b) Limitations on credit. The credit for gift tax is limited to the 
smaller of the following amounts:
    (1) The amount of gift tax paid on the gift computed as set forth in 
paragraph (c) of this section, or
    (2) The amount of the estate tax attributable to the inclusion of 
the gift in the gross estate, computed as set forth in paragraph (d) of 
this section.

When more than one gift is included in the gross estate, a separate 
computation of the two limitations on the credit is to be made for each 
gift.
    (c) ``First limitation''. The amount of the gift tax paid on the 
gift is the ``first limitation''. Thus, if only one gift was made during 
a certain calendar quarter, or calendar year if the gift was made before 
January 1, 1971,

[[Page 246]]

and the gift is wholly included in the decedent's gross estate for the 
purpose of the estate tax, the credit with respect to the gift is 
limited to the amount of the gift tax paid for that calendar quarter or 
calendar year. On the other hand, if more than one gift was made during 
a certain calendar quarter or calendar year, the credit with respect to 
any such gift which is included in the decedent's gross estate is 
limited under section 2012(d) to an amount, A, which bears the same 
ratio to B (the total gift tax paid for that calendar quarter or 
calendar year) as C (the ``amount of the gift,'' computed as described 
below) bears to D (the total taxable gifts for the calendar quarter or 
the calendar year, computed without deduction of the gift tax specific 
exemption). Stated algebraically, the ``first limitation'' (A) equals:

    ``Amount of the gift'' (C) / Total taxable gifts, plus specific 
exemption allowed (D) x Total gift tax paid (B).


For purposes of the ratio stated above, the ``amount of the gift'' 
referred to as factor ``C'' is the value of the gift reduced by any 
portion excluded or deducted under sections 2503(b) (annual exclusion), 
2522 (charitable deduction), or 2523 (marital deduction) of the Internal 
Revenue Code or corresponding provisions of prior law. In making the 
computations described in this paragraph, the values to be used are 
those finally determined for the purpose of the gift tax, irrespective 
of the values determined for the purpose of the estate tax. A similar 
computation is made in case only a portion of any gift is included in 
the decedent's gross estate. The application of this paragraph may be 
illustrated by the following example:

    Example. The donor made gifts during the calendar year 1955 on which 
a gift tax was determined as shown below:

Gift of property to son on February 1.........................   $13,000
Gift of property to wife on May 1.............................    86,000
Gift of property to charitable organization on May 15.........    10,000
                                                     -----------
  Total gifts.................................................   109,000
Less exclusions ($3,000 for each gift)........................     9,000
                                                     -----------
  Total included amount of gifts..............................   100,000
Marital deduction (for gift to wife)................   $43,000
Charitable deduction................................     7,000
Specific exemption ($30,000 less $20,000 used in        10,000
 prior years).......................................
                                                     ----------
  Total deductions............................................    60,000
                                                     -----------
  Taxable gifts...............................................    40,000
Total gift tax paid for calendar year 1955....................     3,600
 


The donor's gift to his wife was made in contemplation of death and was 
thereafter included in his gross estate. Under the ``first limitation'', 
the credit with respect to that gift cannot exceed:

[$86,000 - $3,000 - $43,000 (gift to wife, less annual exclusion and 
          marital deduction)] / [$40,000 + $10,000 (taxable gifts, plus 
          specific exemption allowed)] x $3,600 (total gift tax paid) = 
          $2,880.

    (d) ``Second limitation''. (1) The amount of the estate tax 
attributable to the inclusion of the gift in the gross estate is the 
``second limitation''. Thus, the credit with respect to any gift of 
property included in the gross estate is limited to an amount, E, which 
bears the same ratio to F (the gross estate tax, reduced by any credit 
for State death taxes under section 2011) as G (the ``value of the 
gift'', computed as described in subparagraph (2) of this paragraph) 
bears to H (the value of entire gross estate, reduced by the total 
deductions allowed under sections 2055 or 2106(a)(2) (charitable 
deduction) and 2056 (marital deduction)). Stated algebraically, the 
``second limitation'' (E) equals:

    ``Value of the gift'' (G) / Value of gross estate, less marital and 
charitable deductions (H) x Gross estate tax, less credit for State 
death taxes (F).

    (2) For purposes of the ratio stated in subparagraph (1) of this 
paragraph, the ``value of the gift'' referred to as factor ``G'' is the 
value of the property transferred by gift and included in the gross 
estate, as determined for the purpose of the gift tax or for the purpose 
of the estate tax, whichever is lower, and adjusted as follows:
    (i) The appropriate value is reduced by all or a portion of any 
annual exclusion allowed for gift tax purposes under section 2503(b) of 
the Internal Revenue Code or corresponding provisions of prior law. If 
the gift tax value is lower than the estate tax value, it is reduced by 
the entire amount of the exclusion. If the estate tax value is lower 
than the gift tax value, it is reduced by an amount which bears the same 
ratio to the estate tax value as the annual exclusion bears to the total 
value of the

[[Page 247]]

property as determined for gift tax purposes. To illustrate: In 1955, a 
donor, in contemplation of death, transferred certain property to his 
five children which was valued at $300,000, for the purpose of the gift 
tax. Thereafter, the same property was included in his gross estate at a 
value of $270,000. In computing his gift tax, the donor was allowed 
annual exclusions totalling $15,000. The reduction provided for in this 
subdivision is:

    $15,000 (annual exclusions allowed) / $300,000 (value of transferred 
property for the purpose of the gift tax) x $270,000 (value of 
transferred property for the purpose of the estate tax) = $13,500.

    (ii) The appropriate value is further reduced if any portion of the 
value of the property is allowed as a marital deduction under section 
2056 or as a charitable deduction under section 2055 or section 
2106(a)(2) (for estates of nonresidents not citizens). The amount of the 
reduction is an amount which bears the same ratio to the value 
determined under subdivision (i) of this subparagraph as the portion of 
the property allowed as a marital deduction or as a charitable deduction 
bears to the total value of the property as determined for the purpose 
of the estate tax. Thus, if a gift is made solely to the decedent's 
surviving spouse and is subsequently included in the decedent's gross 
estate as having been made in contemplation of death, but a marital 
deduction is allowed under section 2056 for the full value of the gift, 
no credit for gift tax on the gift will be allowed since the reduction 
under this subdivision together with the reduction under subdivision (i) 
of this subparagraph will have the effect of reducing the factor ``G'' 
of the ratio in subparagraph (1) of this paragraph to zero.
    (e) Credit for ``split gifts''. If a decedent made a gift of 
property which is thereafter included in his gross estate, and, under 
the provisions of section 2513 of the Internal Revenue Code of 1954 or 
section 1000(f) of the Internal Revenue Code of 1939, the gift was 
considered as made one-half by the decedent and one-half by his spouse, 
credit against the estate tax is allowed for the gift tax paid with 
respect to both halves of the gift. The ``first limitation'' is to be 
separately computed with respect to each half of the gift in accordance 
with the principles stated in paragraph (c) of this section. The 
``second limitation'' is to be computed with respect to the entire gift 
in accordance with the principles stated in paragraph (d) of this 
section. To illustrate: A donor, in contemplation of death, transferred 
property valued at $106,000 to his son on January 1, 1955, and he and 
his wife consented that the gift should be considered as made one-half 
by him and one-half by her. The property was thereafter included in the 
donor's gross estate. Under the ``first limitation'', the amount of the 
gift tax of the donor paid with respect to the one-half of the gift 
considered as made by him is determined to be $11,250, and the amount of 
the gift tax of his wife paid with respect to the one-half of the gift 
considered as made by her is determined to be $1,200. Under the ``second 
limitation'', the amount of the estate tax attributable to the property 
is determined to be $28,914. Therefore, the credit for gift tax allowed 
is $12,450 ($11,250 plus $1,200).

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7238, 37 FR 
28718, Dec. 29, 1972; T.D. 8522, 59 FR 9646, Mar. 1, 1994]



Sec. 20.2013-1  Credit for tax on prior transfers.

    (a) In general. A credit is allowed under section 2013 against the 
Federal estate tax imposed on the present decedent's estate for Federal 
estate tax paid on the transfer of property to the present decedent from 
a transferor who died within ten years before, or within two years 
after, the present decedent's death. See Sec. 20.2013-5 for definition 
of the terms ``property'' and ``transfer''. There is no requirement that 
the transferred property be identified in the estate of the present 
decedent or that the property be in existence at the time of the 
decedent's death. It is sufficient that the transfer of the property was 
subjected to Federal estate tax in the estate of the transferor and that 
the transferor died within the prescribed period of time. The executor 
must submit such proof as may be requested by the district director in 
order to establish the right of the estate to the credit.

[[Page 248]]

    (b) Limitations on credit. The credit for tax on prior transfers is 
limited to the smaller of the following amounts:
    (1) The amount of the Federal estate tax attributable to the 
transferred property in the transferor's estate, computed as set forth 
in Sec. 20.2013-2; or
    (2) The amount of the Federal estate tax attributable to the 
transferred property in the decedent's estate, computed as set forth in 
Sec. 20.2013-3.

Rules for valuing property for purposes of the credit are contained in 
Sec. 20.2013-4.
    (c) Percentage reduction. If the transferor died within the two 
years before, or within the two years after, the present decedent's 
death, the credit is the smaller of the two limitations described in 
paragraph (b) of this section. If the transferor predeceased the present 
decedent by more than two years, the credit is a certain percentage of 
the smaller of the two limitations described in paragraph (b) of this 
section, determined as follows:
    (1) 80 percent, if the transferor died within the third or fourth 
years preceding the present decedent's death;
    (2) 40 percent, if the transferor died within the fifth or sixth 
years preceding the present decedent's death;
    (3) 40 percent, if the transferor died within the seventh or eighth 
years preceding the present decedent's death; and
    (4) 20 percent, if the transferor died within the ninth or tenth 
years preceding the present decedent's death.

The word ``within'' as used in this paragraph means ``during''. 
Therefore, if a death occurs on the second anniversary of another death, 
the first death is considered to have occurred within the two years 
before the second death. If the credit for tax on prior transfers 
relates to property received from two or more transferors, the 
provisions of this paragraph are to be applied separately with respect 
to the property received from each transferor. See paragraph (d) of 
example (2) in Sec. 20.2013-6.
    (d) Examples. For illustrations of the application of this section, 
see examples (1) and (2) set forth in Sec. 20.2013-6.



Sec. 20.2013-2  ``First limitation''.

    (a) The amount of the Federal estate tax attributable to the 
transferred property in the transferor's estate is the ``first 
limitation.'' Thus, the credit is limited to an amount, A, which bears 
the same ratio to B (the ``transferor's adjusted Federal estate tax'', 
computed as described in paragraph (b) of this section) as C (the value 
of the property transferred (see Sec. 20.2013-4)) bears to D (the 
``transferor's adjusted taxable estate'', computed as described in 
paragraph (c) of this section). Stated algebraically, the ``first 
limitation'' (A) equals:

    Value of transferred property (C) / ``Transferor's adjusted taxable 
estate'' (D) x ``Transferor's adjusted Federal estate tax'' (B).

    (b) For purposes of the ratio stated in paragraph (a) of this 
section, the ``transferor's adjusted Federal estate tax'' referred to as 
factor ``B'' is the amount of the Federal estate tax paid with respect 
to the transferor's estate plus:
    (1) Any credit allowed the transferor's estate for gift tax under 
section 2012, or the corresponding provisions of prior law; and
    (2) Any credit allowed the transferor's estate, under section 2013, 
for tax on prior transfers, but only if the transferor acquired property 
from a person who died within 10 years before the death of the present 
decedent.
    (c)(1) For purposes of the ratio stated in paragraph (a) of this 
section, the ``transferor's adjusted taxable estate'' referred to as 
factor ``D'' is the amount of the transferor's taxable estate (or net 
estate) decreased by the amount of any ``death taxes'' paid with respect 
to his gross estate and increased by the amount of the exemption allowed 
in computing his taxable estate (or net estate). The amount of the 
transferor's taxable estate (or net estate) is determined in accordance 
with the provisions of Sec. 20.2051-1 in the case of a citizen or 
resident of the United States or of Sec. 20.2106-1 in the case of a 
nonresident not a citizen of the United States (or the corresponding 
provisions of prior regulations). The term ``death taxes'' means the 
Federal estate tax plus all other estate, inheritance, legacy, 
succession, or similar death taxes imposed by, and paid to, any taxing 
authority, whether within or without the United States. However, only 
the net

[[Page 249]]

amount of such taxes paid is taken into consideration.
    (2) The amount of the exemption depends upon the citizenship and 
residence of the transferor at the time of his death. Except in the case 
of a decedent described in section 2209 (relating to certain residents 
of possessions of the United States who are considered nonresidents not 
citizens), if the decedent was a citizen or resident of the United 
States, the exemption is the $60,000 authorized by section 2052 (or the 
corresponding provisions of prior law). If the decedent was a 
nonresident not a citizen of the United States, or is considered under 
section 2209 to have been such a nonresident, the exemption is the 
$30,000 or $2,000, as the case may be, authorized by section 2106(a)(3) 
(or the corresponding provisions of prior law), or such larger amount as 
is authorized by section 2106(a)(3)(B) or may have been allowed as an 
exemption pursuant to the prorated exemption provisions of an applicable 
death tax convention. See Sec. 20.2052-1 and paragraph (a)(3) of Sec. 
20.2106-1.
    (d) If the credit for tax on prior transfers relates to property 
received from two or more transferors, the provisions of this section 
are to be applied separately with respect to the property received from 
each transferor. See paragraph (b) of example (2) in Sec. 20.2013-6.
    (e) For illustrations of the application of this section, see 
examples (1) and (2) set forth in Sec. 20.2013-6.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7296, 38 FR 34191, Dec. 12, 1973]



Sec. 20.2013-3  ``Second limitation''.

    (a) The amount of the Federal estate tax attributable to the 
transferred property in the present decedent's estate is the ``second 
limitation''. Thus, the credit is limited to the difference between--
    (1) The net estate tax payable (see paragraph (b)(5) or (c), as the 
case may be, of Sec. 20.0-2) with respect to the present decedent's 
estate, determined without regard to any credit for tax on prior 
transfers under section 2013 or any credit for foreign death taxes 
claimed under the provisions of a death tax convention, and
    (2) The net estate tax determined as provided in subparagraph (1) of 
this paragraph but computed by subtracting from the present decedent's 
gross estate the value of the property transferred (see Sec. 20.2013-
4), and by making only the adjustment indicated in paragraph (b) of this 
section if a charitable deduction is allowable to the estate of the 
present decedent.
    (b) If a charitable deduction is allowable to the estate of the 
present decedent under the provisions of section 2055 or section 2106 
(a)(2) (for estates of nonresidents not citizens), for purposes of 
determining the tax described in paragraph (a)(2) of this section, the 
charitable deduction otherwise allowable is reduced by an amount, E, 
which bears the same ratio to F (the charitable deduction otherwise 
allowable) as G (the value of the transferred property (see Sec. 
20.2013-4)) bears to H (the value of the present decedent's gross estate 
reduced by the amount of the deductions for expenses, indebtedness, 
taxes, losses, etc., allowed under the provisions of sections 2053 and 
2054 or section 2106(a)(1) (for estates of nonresidents not citizens)). 
See paragraph (c)(2) of example (1) and paragraph (c)(2) of example (2) 
in Sec. 20.2013-6.
    (c) If the credit for tax on prior transfers relates to property 
received from two or more transferors, the property received from all 
transferors is aggregated in determining the limitation on credit under 
this section (the ``second limitation''). However, the limitation so 
determined is apportioned to the property received from each transferor 
in the ratio that the property received from each transferor bears to 
the total property received from all transferors. See paragraph (c) of 
example (2) in Sec. 20.2013-6.
    (d) For illustrations of the application of this section, see 
examples (1) and (2) set forth in Sec. 20.2013-6.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7296, 38 FR 34191, Dec. 12, 1973]



Sec. 20.2013-4  Valuation of property transferred.

    (a) For purposes of section 2013 and Sec. Sec. 20.2013-1 to 
20.2013-6, the value of the property transferred to the decedent is

[[Page 250]]

the value at which the property was included in the transferor's gross 
estate for the purpose of the Federal estate tax (see sections 2031, 
2032, 2103, and 2107, and the regulations thereunder) reduced as 
indicated in paragraph (b) of this section. If the decedent received a 
life estate or a remainder or other limited interest in property that 
was included in a transferor decedent's gross estate, the value of the 
interest is determined as of the date of the transferor's death on the 
basis of recognized valuation principles (see Sec. Sec. 20.2031-7 (or, 
for certain prior periods, Sec. 20.2031-7A) and 20.7520-1 through 
20.7520-4). The application of this paragraph may be illustrated by the 
following examples:

    Example (1). A died on January 1, 1953, leaving Blackacre to B. The 
property was included in A's gross estate at a value of $100,000. On 
January 1, 1955, B sold Blackacre to C for $150,000. B died on February 
1, 1955. For purposes of computing the credit against the tax imposed on 
B's estate, the value of the property transferred to B is $100,000.
    Example (2). A died on January 1, 1953, leaving Blackacre to B for 
life and, upon B's death, remainder to C. At the time of A's death, B 
was 56 years of age. The property was included in A's gross estate at a 
value of $100,000. The part of that value attributable to the life 
estate is $44,688 and the part of that value attributable to the 
remainder is $55,312 (see Sec. 20.2031-7A(b)). B died on January 1, 
1955, and C died on January 1, 1956. For purposes of computing the 
credit against the tax imposed on B's estate, the value of the property 
transferred to B is $44,688. For purposes of computing the credit 
against the tax imposed on C's estate, the value of the property 
transferred to C is $55,312.

    (b) In arriving at the value of the property transferred to the 
decedent, the value at which the property was included in the 
transferor's gross estate (see paragraph (a) of this section) is reduced 
as follows:
    (1) By the amount of the Federal estate tax and any other estate, 
inheritance, legacy, or succession taxes which were payable out of the 
property transferred to the decedent or which were payable by the 
decedent in connection with the property transferred to him. For 
example, if under the transferor's will or local law all death taxes are 
to be paid out of other property with the result that the decedent 
receives a bequest free and clear of all death taxes, no reduction is to 
be made under this subparagraph;
    (2) By the amount of any marital deduction allowed the transferor's 
estate under section 2056 (or under section 812(e) of the Internal 
Revenue Code of 1939) if the decedent was the spouse of the transferor 
at the time of the transferor's death;
    (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
    (4)(i) By the amount of any encumbrance on the property or by the 
amount of any obligation imposed by the transferor and incurred by the 
decedent with respect to the property, to the extent such charges would 
be taken into account if the amount of a gift to the decedent of such 
property were being determined.
    (ii) For purposes of this subparagraph, an obligation imposed by the 
transferor and incurred by the decedent with respect to the property 
includes a bequest, etc., in lieu of the interest of the surviving 
spouse under community property laws, unless the interest was, 
immediately prior to the transferor's death, a mere expectancy. However, 
an obligation imposed by the transferor and incurred by the decedent 
with respect to the property does not include a bequest, devise, or 
other transfer in lieu of dower, curtesy, or of a statutory estate 
created in lieu of dower or curtesy, or of other marital rights in the 
transferor's property or estate.
    (iii) The application of this subparagraph may be illustrated by the 
following examples:

    Example (1). The transferor devised to the decedent real estate 
subject to a mortgage. The value of the property transferred to the 
decedent does not include the amount of the mortgage. If, however, the 
transferor by his will directs the executor to pay off the mortgage, 
such payment constitutes an additional amount transferred to the 
decedent.
    Example (2). The transferor bequeathed certain property to the 
decedent with a direction that the decedent pay $1,000 to X. The value 
of the property transferred to the decedent is the value of the property 
reduced by $1,000.

[[Page 251]]

    Example (3). The transferor bequeathed certain property to his wife, 
the decedent, in lieu of her interest in property held by them as 
community property under the law of the State of their residence. The 
wife elected to relinquish her community property interest and to take 
the bequest. The value of the property transferred to the decedent is 
the value of the property reduced by the value of the community property 
interest relinquished by the wife.
    Example (4). The transferor bequeathed to the decedent his entire 
residuary estate, out of which certain claims were to be satisfied. The 
entire distributable income of the transferor's estate (during the 
period of its administration) was applied toward the satisfaction of 
these claims and the remaining portion of the claims was satisfied by 
the decedent out of his own funds. Thus, the decedent received a larger 
sum upon settlement of the transferor's estate than he was actually 
bequeathed. The value of the property transferred to the decedent is the 
value at which such property was included in the transferor's gross 
estate, reduced by the amount of the estate income and the decedent's 
own funds paid out in satisfaction of the claims.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7077, 35 FR 
18461, Dec. 4, 1970; T.D. 7296, 38 FR 34191, Dec. 12, 1973; T.D. 8522, 
59 FR 9646, Mar. 1, 1994; T.D. 8540, 59 FR 30151, June 10, 1994; T.D. 
8846, 64 FR 67764, Dec. 3, 1999]



Sec. 20.2013-5  ``Property'' and ``transfer'' defined.

    (a) For purposes of section 2013 and Sec. Sec. 20.2013-1 to 
20.2013-6, the term ``property'' means any beneficial interest in 
property, including a general power of appointment (as defined in 
section 2041) over property. Thus, the term does not include an interest 
in property consisting merely of a bare legal title, such as that of a 
trustee. Nor does the term include a power of appointment over property 
which is not a general power of appointment (as defined in section 
2041). Examples of property, as described in this paragraph, are 
annuities, life estates, estates for terms of years, vested or 
contingent remainders and other future interests.
    (b) In order to obtain the credit for tax on prior transfers, there 
must be a transfer of property described in paragraph (a) of this 
section by or from the transferor to the decedent. The term ``transfer'' 
of property by or from a transferor means any passing of property or an 
interest in property under circumstances which were such that the 
property or interest was included in the gross estate of the transferor. 
In this connection, if the decedent receives property as a result of the 
exercise or nonexercise of a power of appointment, the donee of the 
power (and not the creator) is deemed to be the transferor of the 
property if the property subject to the power is includible in the 
donee's gross estate under section 2041 (relating to powers of 
appointment). Thus, notwithstanding the designation by local law of the 
capacity in which the decedent takes, property received from the 
transferor includes interests in property held by or devolving upon the 
decedent: (1) As spouse under dower or curtesy laws or laws creating an 
estate in lieu of dower or curtesy; (2) as surviving tenant of a tenancy 
by the entirety or joint tenancy with survivorship rights; (3) as 
beneficiary of the proceeds of life insurance; (4) as survivor under an 
annuity contract; (5) as donee (possessor) of a general power of 
appointment (as defined in section 2041); (6) as appointee under the 
exercise of a general power of appointment (as defined in section 2041); 
or (7) as remainderman under the release or nonexercise of a power of 
appointment by reason of which the property is included in the gross 
estate of the donee of the power under section 2041.
    (c) The application of this section may be illustrated by the 
following example:

    Example: A devises Blackacre to B, as trustee, with directions to 
pay the income therefore to C, his son, for life. Upon C's death. 
Blackacre is to be sold. C is given a general testamentary power, to 
appoint one-third of the proceeds, and a testamentary power, which is 
not a general power, to appoint the remaining two-thirds of the 
proceeds, to such of the issue of his sister D as he should choose. D 
has a daughter, E, and a son, F. Upon his death, C exercised his general 
power by appointing one-third of the proceeds to D and his special power 
by appointing two-thirds of the proceeds to E. Since B's interest in 
Blackacre as a trustee is not a beneficial interest, no part of it is 
``property'' for purpose of the credit in B's estate. On the other hand, 
C's life estate and his testamentary power over the one-third interest 
in the remainder constitute ``property'' received from A for purpose of 
the credit in C's estate. Likewise, D's one-third interest in the 
remainder received through

[[Page 252]]

the exercise of C's general power of appointment is ``property'' 
received from C for purpose of the credit in D's estate. No credit is 
allowed E's estate for the property which passed to her from C since the 
property was not included in C's gross estate. On the other hand, no 
credit is allowed in E's estate for property passing to her from A since 
her interest was not susceptible of valuation at the time of A's death 
(see Sec. 20.2013-4).



Sec. 20.2013-6  Examples.

    The application of Sec. Sec. 20.2013-1 to 20.2013-5 may be further 
illustrated by the following examples:

    Example (1). (a) A died December 1, 1953, leaving a gross estate of 
$1,000,000. Expenses, indebtedness, etc., amounted to $90,000. A 
bequeathed $200,000 to B, his wife, $100,000 of which qualified for the 
marital deduction. B died November 1, 1954, leaving a gross estate of 
$500,000. Expenses, indebtedness, etc., amounted to $40,000. B 
bequeathed $150,000 to charity. A and B were both citizens of the United 
States. The estates of A and B both paid State death taxes equal to the 
maximum credit allowable for State death taxes. Death taxes were not a 
charge on the bequest to B.
    (b) ``First limitation'' on credit for B's estate (Sec. 20.2013-2):

A's gross estate.......................................    $1,000,000.00
Expenses, indebtedness, etc............................        90,000.00
                                       ------------------
   A's adjusted gross estate...........................       910,000.00
Marital deduction.....................      $100,000.00
Exemption.............................        60,000.00
                                       -----------------
                                        ...............       160,000.00
                                       ------------------
   A's taxable estate..................................       750,000.00
                                       ==================
   A's gross estate tax................................       233,200.00
Credit for State death taxes...........................        23,280.00
                                       ------------------
   A's net estate tax payable..........................       209,920.00
                                                        ================
``First limitation'' = $209,920.00      ...............       $36,393.90
 (Sec. 20.2013-2(b)) x [($200,000.00
 - $100,000.00) (Sec. 20.2013-4) /
 ($750,000.00 - $209,920.00 -
 $23,280.00 + $60,000.00) (Sec.
 20.2013-2(c))].......................
 

    (c) ``Second limitation'' on credit for B's estate (Sec. 20.2013-
3):
    (1) B's net estate tax payable as described in Sec. 20.2013-3(a)(1) 
(previously taxed transfer included):

B's gross estate..............................  $500,000.00
Expenses, indebtedness, etc...................   $40,000.00
Charitable deduction..........................   150,000.00
Exemption.....................................    60,000.00
                                               -------------
                                                ...........   250,000.00
                                                            ------------
   B's taxable estate.........................  ...........   250,000.00
                                                            ============
B's gross estate tax.......................................   $65,700.00
Credit for State death taxes...............................     3,920.00
                                               --------------
   B's net estate tax payable..............................    61,780.00
 

    (2) B's net estate tax payable as described in Sec. 20.2013-3(a)(2) 
(previously taxed transfer excluded):

B's gross estate..............................  ...........  $400,000.00
Expenses, indebtedness, etc...................   $40,000.00
Charitable deduction (Sec. 20.2013-            117,391.30
 3(b))=$150,000.00 - [$150,000.00 x
 ($200,000.00 - $100,000.00 / $500,000.00 -
 $40,000.00)].................................
Exemption.....................................    60,000.00
                                               -------------
                                                ...........   217,391.30
                                                            ------------
B's taxable estate.........................................   182,608.70
                                               ==============
B's gross estate tax.......................................    45,482.61
Credit for State death taxes...............................     2,221.61
                                               --------------
   B's net estate tax payable..............................    43,260.00
                                                            ============
 

    (3) ``Second limitation'':

Subparagraph (1)..............................   $61,780.00
Less: Subparagraph (2)........................    43,260.00
                                               -------------
                                                ...........   $18,520.00
 

    (d) Credit of B's estate for tax on prior transfers (Sec. 20.2013-
1(c)):

Credit for tax on prior transfers=$18,520.00 (lower of        $18,520.00
 paragraphs (b) and (c))x100 percent (percentage to be taken
 into account under Sec. 20.2013-1(c))....................
 

    Example (2). (a) The facts are the same as those contained in 
example (1) of this paragraph with the following additions. C died 
December 1, 1950, leaving a gross estate of $250,000. Expenses, 
indebtedness, etc., amounted to $50,000. C bequeathed $50,000 to B. C 
was a citizen of the United States. His estate paid State death taxes 
equal to the maximum credit allowable for State death taxes. Death taxes 
were not a charge on the bequest to B.
    (b) ``First limitation'' on credit for B's estate (Sec. 20.2013-
2(d))-
    (1) With respect to the property received from A:
    ``First limitation''=$36,393.90 (this computation is identical with 
the one contained in paragraph (b) of example (1) of this section).
    (2) With respect to the property received from C:

C's gross estate..............................  ...........  $250,000.00
Expenses, indebtedness, etc...................   $50,000.00
Exemption.....................................   $60,000.00
                                               -------------
                                                ...........  $110,000.00
                                                            ------------
   C's taxable estate.........................  ...........   140,000.00
                                                            ============

[[Page 253]]

 
C's gross estate tax..........................  ...........    32,700.00
Credit for State death taxes..................  ...........     1,200.00
                                                            ------------
   C's net estate tax payable.................  ...........    31,500.00
                                                            ============
``First limitation'' = $31,500.00 (Sec. 20.2013-2(b)) x      $9,414.23
 [$50,000.00 (Sec. 20.2013-4) / ($140,000.00 - $31,500.00
 - $1,200.00 + $60,000.00) (Sec. 20.2013-2(c))]..........
 

    (c) ``Second limitation'' on credit for B's estate (Sec. 20.2013-
3(c)):
    (1) B's net estate tax payable as described in Sec. 20.2013-3(a)(1) 
(previously taxed transfers included)=$61,780.00 (this computation is 
identical with the one contained in paragraph (c)(1) of example (1) of 
this section).
    (2) B's net estate tax payable as described in Sec. 20.2013-3(a)(2) 
(previously taxed transfers excluded):

B's gross estate...........................................  $350,000.00
Expenses, indebtedness, etc...................   $40,000.00
Charitable deduction (Sec. 20.2013-3(b)) =     101,086.96
 $150,000.00 - [$150,000.00 x ($200,000.00 -
 $100,000.00 + $50,000.00) / ($500,000.00 -
 $40,000.00)].................................
Exemption.....................................    60,000.00
                                               -------------
                                                              201,086.96
                                                            ------------
   B's taxable estate.........................  ...........   148,913.04
                                                            ------------
B's gross estate tax..........................  ...........    35,373.91
Credit for State death taxes..................  ...........     1,413.91
                                                            ------------
   B's net estate tax payable.................  ...........    33,960.00
                                                            ============
 

    (3) ``Second limitation'':

Subparagraph (1)..............................   $61,780.00
Less: Subparagraph (2)........................    33,960.00
                                               -------------
                                                ...........   $27,820.00
 

    (4) Apportionment of ``second limitation'' on credit:

Transfer from A (Sec. 20.2013-4).........................  $100,000.00
Transfer from C (Sec. 20.2013-4).........................    50,000.00
                                                            ------------
   Total...................................................   150,000.00
Portion of ``second limitation'' attributable to transfer      18,546.67
 from A (100/150 of $27,820.00)............................
Portion of ``second limitation'' attributable to transfer       9,273.33
 from C (50/150 of $27,820.00).............................
 

    (d) Credit of B's estate for tax on prior transfers (Sec. 20.2013-
1(c)):

Credit for tax on transfer from A=
  $18,546.67 (lower of ``first limitation'' computed in       $18,546.67
   paragraph (b)(1) and ``second limitation'' apportioned to
   A's transfer in paragraph (c)(4)) x 100 percent
   (percentage to be taken into account under Sec. 20.2013-
   1(c))....................................................
Credit for tax on transfer from C=
  $9,273.33 (lower of ``first limitation'' computed in          7,418.66
   paragraph (b)(2) and ``second limitation'' apportioned to
   B's transfer in paragraph (c)(4)) x 80 percent
   (percentage to be taken into account under Sec. 20.2013-
   1(c))....................................................
                                                             -----------
  Total credit for tax on prior transfers...................   25,965.33
 



Sec. 20.2014-1  Credit for foreign death taxes.

    (a) In general. (1) A credit is allowed under section 2014 against 
the Federal estate tax for any estate, inheritance, legacy, or 
succession taxes actually paid to any foreign country (hereinafter 
referred to as ``foreign death taxes''). The credit is allowed only for 
foreign death taxes paid (i) with respect to property situated within 
the country to which the tax is paid, (ii) with respect to property 
included in the decedent's gross estate, and (iii) with respect to the 
decedent's estate. The credit is allowable to the estate of a decedent 
who was a citizen of the United States at the time of his death. The 
credit is also allowable, as provided in paragraph (c) of this section, 
to the estate of a decedent who was a resident but not a citizen of the 
United States at the time of his death. The credit is not allowable to 
the estate of a decedent who was neither a citizen nor a resident of the 
United States at the time of his death. See paragraph (b)(1) of Sec. 
20.0-1 for the meaning of the term ``resident'' as applied to a 
decedent. The credit is allowable not only for death taxes paid to 
foreign countries which are states in the international sense, but also 
for death taxes paid to possessions or political subdivisions of foreign 
states. With respect to the estate of a decedent dying after September 
2, 1958, the term ``foreign country'', as used in this section and 
Sec. Sec. 20.2014-2 to 20.2014-6, includes a possession of the United 
States. See Sec. Sec. 20.2011-1 and 20.2011-2 for the allowance of a 
credit for death taxes paid to a possession of the United States in the 
case of a decedent dying before September 3, 1958. No credit is 
allowable for interest or penalties paid in connection with foreign 
death taxes.
    (2) In addition to the credit for foreign death taxes under section 
2014, similar credits are allowed under death tax conventions with 
certain foreign

[[Page 254]]

countries. If credits against the Federal estate tax are allowable under 
section 2014, or under section 2014 and one or more death tax 
conventions, for death taxes paid to more than one country, the credits 
are combined and the aggregate amount is credited against the Federal 
estate tax, subject to the limitation provided for in paragraph (c) of 
Sec. 20.2014-4. For application of the credit in cases involving a 
death tax convention, see Sec. 20.2014-4.
    (3) No credit is allowable under section 2014 in connection with 
property situated outside of the foreign country imposing the tax for 
which credit is claimed. However, such a credit may be allowable under 
certain death tax conventions. In the case of a tax imposed by a 
political subdivision of a foreign country, credit for the tax shall be 
allowed with respect to property having a situs in that foreign country, 
even though, under the principles described in this subparagraph, the 
property has a situs in a political subdivision different from the one 
imposing the tax. Whether or not particular property of a decedent is 
situated in the foreign country imposing the tax is determined in 
accordance with the same principles that would be applied in determining 
whether or not similar property of a nonresident decedent not a citizen 
of the United States is situated within the United States for Federal 
estate tax purposes. See Sec. Sec. 20.2104-1 and 20.2105-1. For 
example, under Sec. 20.2104-1 shares of stock are deemed to be situated 
in the United States only if issued by a domestic corporation. Thus, a 
share of corporate stock is regarded as situated in the foreign country 
imposing the tax only if the issuing corporation is incorporated in that 
country. Further, under Sec. 20.2105-1 amounts receivable as insurance 
on the life of a nonresident not a citizen of the United States at the 
time of his death are not deemed situated in the United States. 
Therefore, in determining the credit under section 2014 in the case of a 
decedent who was a citizen or resident of the United States, amounts 
receivable as insurance on the life of the decedent and payable under a 
policy issued by a corporation incorporated in a foreign country are not 
deemed situated in such foreign country. In addition, under Sec. 
20.2105-1 in the case of an estate of a nonresident not a citizen of the 
United States who died on or after November 14, 1966, a debt obligation 
of a domestic corporation is not considered to be situated in the United 
States if any interest thereon would be treated under section 862(a)(1) 
as income from sources without the United States by reason of section 
861(a)(1)(B) (relating to interest received from a domestic corporation 
less than 20 percent of whose gross income for a 3-year period was 
derived from sources within the United States). Accordingly, a debt 
obligation the primary obligor on which is a corporation incorporated in 
the foreign country imposing the tax is not considered to be situated in 
that country if, under circumstances corresponding to those described in 
Sec. 20.2105-1 less than 20 percent of the gross income of the 
corporation for the 3-year period was derived from sources within that 
country. Further, under Sec. 20.2104-1 in the case of an estate of a 
nonresident not a citizen of the United States who died before November 
14, 1966, a bond for the payment of money is not situated within the 
United States unless it is physically located in the United States. 
Accordingly, in the case of the estate of a decedent dying before 
November 14, 1966, a bond is deemed situated in the foreign country 
imposing the tax only if it is physically located in that country. 
Finally, under Sec. 20.2105-1 moneys deposited in the United States 
with any person carrying on the banking business by or for a nonresident 
not a citizen of the United States who died before November 14, 1966, 
and who was not engaged in business in the United States at the time of 
death are not deemed situated in the United States. Therefore, an 
account with a foreign bank in the foreign country imposing the tax is 
not considered to be situated in that country under corresponding 
circumstances.
    (4) Where a deduction is allowed under section 2053(d) for foreign 
death taxes paid with respect to a charitable gift, the credit for 
foreign death taxes is subject to further limitations as explained in 
Sec. 20.2014-7.
    (b) Limitations on credit. The credit for foreign death taxes is 
limited to the smaller of the following amounts:

[[Page 255]]

    (1) The amount of a particular foreign death tax attributable to 
property situated in the country imposing the tax and included in the 
decedent's gross estate for Federal estate tax purposes, computed as set 
forth in Sec. 20.2014-2; or
    (2) The amount of the Federal estate tax attributable to particular 
property situated in a foreign country, subjected to foreign death tax 
in that country, and included in the decedent's gross estate for Federal 
estate tax purposes, computed as set forth in Sec. 20.2014-3.
    (c) Credit allowable to estate of resident not a citizen. (1) In the 
case of an estate of a decedent dying before November 14, 1966, who was 
a resident but not a citizen of the United States, a credit is allowed 
to the estate under section 2014 only if the foreign country of which 
the decedent was a citizen or subject, in imposing foreign death taxes, 
allows a similar credit to the estates of citizens of the United States 
who were resident in that foreign country at the time of death.
    (2) In the case of an estate of a decedent dying on or after 
November 14, 1966, who was a resident but not a citizen of the United 
States, a credit is allowed to the estate under section 2014 without 
regard to the similar credit requirement of subparagraph (1) of this 
paragraph unless the decedent was a citizen or subject of a foreign 
country with respect to which there is in effect at the time of the 
decedent's death a Presidential proclamation, as authorized by section 
2014(h), reinstating the similar credit requirement. In the case of an 
estate of a decedent who was a resident of the United States and a 
citizen or subject of a foreign country with respect to which such a 
proclamation has been made, and who dies while the proclamation is in 
effect, a credit is allowed under section 2014 only if that foreign 
country, in imposing foreign death taxes, allows a similar credit to the 
estates of citizens of the United States who were resident in that 
foreign country at the time of death. The proclamation authorized by 
section 2014(h) for the reinstatement of the similar credit requirement 
with respect to the estates of citizens or subjects of a specific 
foreign country may be made by the President whenever he finds that--
    (i) The foreign country, in imposing foreign death taxes, does not 
allow a similar credit to the estates of citizens of the United States 
who were resident in the foreign country at the time of death,
    (ii) The foreign country, after having been requested to do so, has 
not acted to provide a similar credit to the estates of such citizens, 
and
    (iii) It is in the public interest to allow the credit under section 
2014 to the estates of citizens or subjects of the foreign country only 
if the foreign country allows a similar credit to the estates of 
citizens of the United States who were resident in the foreign country 
at the time of death.

The proclamation for the reinstatement of the similar credit requirement 
with respect to the estates of citizens or subjects of a specific 
foreign country may be revoked by the President. In that case, a credit 
is allowed under section 2014, to the estate of a decedent who was a 
citizen or subject of that foreign country and a resident of the United 
States at the time of death, without regard to the similar credit 
requirement if the decedent dies after the proclamation reinstating the 
similar credit requirement has been revoked.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6526, 26 FR 
415, Jan. 19, 1961; T.D. 6600, 27 FR 4983, May 29, 1962; T.D. 7296, 38 
FR 34192, Dec. 12, 1973]



Sec. 20.2014-2  ``First limitation''.

    (a) The amount of a particular foreign death tax attributable to 
property situated in the country imposing the tax and included in the 
decedent's gross estate for Federal estate tax purposes is the ``first 
limitation.'' Thus, the credit for any foreign death tax is limited to 
an amount, A, which bears the same ratio to B (the amount of the foreign 
death tax without allowance of credit, if any, for Federal estate tax), 
as C (the value of the property situated in the country imposing the 
foreign death tax, subjected to the foreign death tax, included in the 
gross estate and for which a deduction is not allowed under section 
2053(d)) bears to D (the value of all property subjected to

[[Page 256]]

the foreign death tax). Stated algebraically, the ``first limitation'' 
(A) equals--

    Value of property in foreign country subjected to foreign death tax, 
included in gross estate and for which a deduction is not allowed under 
section 2053(d)(C) / Value of all property subjected to foreign death 
tax (D) x Amount of foreign death tax (B)


The values used in this proportion are the values determined for the 
purpose of the foreign death tax. The amount of the foreign death tax 
for which credit is allowable must be converted into United States 
money. The application of this paragraph may be illustrated by the 
following example:

    Example. At the time of his death on June 1, 1966, the decedent, a 
citizen of the United States, owned stock in X Corporation (a 
corporation organized under the laws of Country Y) valued at $80,000. In 
addition, he owned bonds issued by Country Y valued at $80,000. The 
stock and bond certificates were in the United States. Decedent left by 
will $20,000 of the stock and $50,000 of the Country Y bonds to his 
surviving spouse. He left the rest of the stock and bonds to his son. 
Under the situs rules referred to in paragraph (a)(3) of Sec. 20.2014-1 
the stock is deemed situated in Country Y while the bonds are deemed to 
have their situs in the United States. (The bonds would be deemed to 
have their situs in Country Y if the decedent had died on or after 
November 14, 1966.) There is not death tax convention in existence 
between the United States and Country Y. The laws of Country Y provide 
for inheritance taxes computed as follows:

Inheritance tax of surviving spouse:
  Value of stock..............................................   $20,000
  Value of bonds..............................................    50,000
                                                               ---------
  Total value.................................................    70,000
                                                               ---------
  Tax (16 percent rate).......................................    11,200
                                                               =========
Inheritance tax of son:
  Value of stock..............................................    60,000
Value of bonds................................................   $30,000
                                                               ---------
   Total value................................................    90,000
                                                               ---------
Tax (16 percent rate).........................................    14,400
                                                               =========
 


The ``first limitation'' on the credit for foreign death taxes is:

$20,000 + $60,000 (factor C of the ratio stated at Sec. 20.2014-2(a)) / 
          $70,000+ $90,000 (factor D of the ratio stated at Sec. 
          20.2014-2(a)) x ($11,200+$14,400) (factor B of the ratio 
          stated at Sec. 20.2014-2(a)) = $12,800

    (b) If a foreign country imposes more than one kind of death tax or 
imposes taxes at different rates upon the several shares of an estate, 
or if a foreign country and a political subdivision or possession 
thereof each imposes a death tax, a ``first limitation'' is to be 
computed separately for each tax or rate and the results added in order 
to determine the total ``first limitation.'' The application of this 
paragraph may be illustrated by the following example:

    Example. The facts are the same as those contained in the example 
set forth in paragraph (a) of this section, except that the tax of the 
surviving spouse was computed at a 10 percent rate and amounted to 
$7,000, and the tax of the son was computed at a 20 percent rate and 
amounted to $18,000. In this case, the ``first limitation'' on the 
credit for foreign death taxes is computed as follows:

``First limitation'' with respect to inheritance tax of
 surviving spouse:
  [$20,000 (factor C of the ratio stated at Sec. 20.2014-      $2,000.
   2(a)) / $70,000 (factor D of the ratio stated at Sec.
   20.2014-2(a))] x$7,000 (factor B of the ratio stated at
   Sec. 20.2014-2(a))=......................................
``First limitation'' with respect to inheritance tax of son:
  [$60,000 (factor C of the ratio stated at Sec. 20.2014-      12,000.
   2(a)) / $90,000 (factor D of the ratio stated at Sec.
   20.2014-2(a))] x$18,000 (factor B of the ratio stated at
   Sec. 20.2014-2(a))=......................................
                                                               ---------
   Total ``first limitation'' on the credit for foreign death     14,000
   taxes......................................................
 


[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6600, 27 FR 
4984, May 29, 1962; T.D. 6684, 28 FR 11408, Oct. 24, 1963; T.D. 7296, 38 
FR 34193, Dec. 12, 1973; 39 FR 2090, Jan. 17, 1974]



Sec. 20.2014-3  ``Second limitation''.

    (a) The amount of the Federal estate tax attributable to particular 
property situated in a foreign country, subjected to foreign death tax 
in that country, and included in the decedent's gross estate for Federal 
estate tax purposes is the ``second limitation.'' Thus, the credit is 
limited to an amount, E, which bears the same ratio to F (the gross 
Federal estate tax, reduced by any credit for State death taxes under 
section 2011 and by any credit for gift tax under section 2012) as G 
(the ``adjusted value of the property situated in the foreign country, 
subjected to foreign death tax, and included in the gross estate'', 
computed as described in paragraph (b) of this section) bears to H (the 
value of the entire gross estate,

[[Page 257]]

reduced by the total amount of the deductions allowed under sections 
2055 (charitable deduction) and 2056 (marital deduction)). Stated 
algebraically, the ``second limitation'' (E) equals:

``Adjusted value of the property situated in the foreign country, 
          subjected to foreign death taxes, and included in the gross 
          estate'' (G) / Value of entire gross estate, less charitable 
          and marital deductions (H) x Gross Federal estate tax, less 
          credits for State death taxes and gift tax (F)


The values used in this proportion are the values determined for the 
purpose of the Federal estate tax.
    (b) Adjustment is required to factor ``G'' of the ratio stated in 
paragraph (a) of this section if a deduction for foreign death taxes 
under section 2053(d), a charitable deduction under section 2055, or a 
marital deduction under section 2056 is allowed with respect to the 
foreign property. If a deduction for foreign death taxes is allowed, the 
value of the property situated in the foreign country, subjected to 
foreign death tax, and included in the gross estate does not include the 
value of any property in respect of which the deduction for foreign 
death taxes is allowed. See Sec. 20.2014-7. If a charitable deduction 
or a marital deduction is allowed, the value of such foreign property 
(after exclusion of the value of any property in respect of which the 
deduction for foreign death taxes is allowed) is reduced as follows:
    (1) If a charitable deduction or a marital deduction is allowed to a 
decedent's estate with respect to any part of the foreign property, 
except foreign property in respect of which a deduction for foreign 
death taxes is allowed, specifically bequeathed, devised, or otherwise 
specifically passing to a charitable organization or to the decedent's 
spouse, the value of the foreign property is reduced by the amount of 
the charitable deduction or marital deduction allowed with respect to 
such specific transfer. See example (1) of paragraph (c) of this 
section.
    (2) If a charitable deduction or a marital deduction is allowed to a 
decedent's estate with respect to a bequest, devise or other transfer of 
an interest in a group of assets including both the foreign property and 
other property, the value of the foreign property is reduced by an 
amount, I, which bears the same ratio to J (the amount of the charitable 
deduction or marital deduction allowed with respect to such transfer of 
an interest in a group of assets) as K (the value of the foreign 
property, except foreign property in respect of which a deduction for 
foreign death taxes is allowed, included in the group of assets) bears 
to L (the value of the entire group of assets). As used in this 
subparagraph, the term ``group of assets'' has reference to those assets 
which, under applicable law, are chargeable with the charitable or 
marital transfer. See example (2) of paragraph (c) of this section.

Any reduction described in paragraph (b)(1) or (b)(2) of this section on 
account of the marital deduction must proportionately take into account, 
if applicable, the limitation on the aggregate amount of the marital 
deduction contained in Sec. 20.2056(a)-1(c). See Sec. 20.2014-3(c), 
Example 3.
    (c) The application of paragraphs (a) and (b) of this section may be 
illustrated by the following examples. In each case, the computations 
relate to the amount of credit under section 2014 without regard to the 
amount of credit which may be allowable under an applicable death tax 
convention.

    Example (1). (i) Decedent, a citizen and resident of the United 
States at the time of his death on February 1, 1967, left a gross estate 
of $1,000,000 which includes the following: shares of stock issued by a 
domestic corporation, valued at $750,000; bonds issued in 1960 by the 
United States and physically located in foreign Country X, valued at 
$50,000; and shares of stock issued by a Country X corporation, valued 
at $200,000, with respect to which death taxes were paid to Country X. 
Expenses, indebtedness, etc., amounted to $60,000. Decedent specifically 
bequeathed $40,000 of the stock issued by the Country X corporation to a 
U.S. charity and left the residue of his estate, in equal shares, to his 
son and daughter. The gross Federal estate tax is $266,500, and the 
credit for State death taxes is $27,600. Under the situs rules referred 
to in paragraph (a)(3) of Sec. 20.2014-1, the shares of stock issued by 
the Country X corporation comprise the only property deemed to be 
situated in Country X. (The bonds also would be deemed to have their 
situs in Country X if the decedent had died before November 14, 1966.)

    (ii) The ``second limitation'' on the credit for foreign death taxes 
is:


[[Page 258]]


[($200,000 - $40,000 (factor G of the ratio stated at Sec. 20.2014-
          3(a); see also Sec. 20.2014-3(b)(1))) / ($1,000,000 - $40,000 
          (factor H of the ratio stated at Sec. 20.2014-3(a)))] x 
          ($266,500 - $27,600) (factor F of the ratio stated at Sec. 
          20.2014-3(a)) = $39,816.67.


The lesser of this amount and the amount of the ``first limitation'' 
(computed under Sec. 20.2014-2) is the credit for foreign death taxes.
    Example (2). (i) Decedent, a citizen and resident of the United 
States at the time of his death, left a gross estate of $1,000,000 which 
includes: shares of stock issued by a United States corporation, valued 
at $650,000; shares of stock issued by a Country X corporation, valued 
at $200,000; and life insurance, in the amount of $150,000, payable to a 
son. Expenses, indebtedness, etc., amounted to $40,000. The decedent 
made a specific bequest of $25,000 of the Country X corporation stock to 
Charity A and a general bequest of $100,000 to Charity B. The residue of 
his estate was left to his daughter. The gross Federal estate tax is 
$242,450 and the credit for State death taxes is $24,480. Under these 
facts and applicable law, neither the stock of the Country X corporation 
specifically bequeathed to Charity A nor the insurance payable to the 
son could be charged with satisfying the bequest to Charity B. 
Therefore, the ``group of assets'' which could be so charged is limited 
to stock of the Country X corporation valued at $175,000 and stock of 
the United States corporation valued at $650,000.
    (ii) Factor ``G'' of the ratio which is used in determining the 
``second limitation'' is computed as follows:

Value of property situated in Country X....................  $200,000.00
Less:
  Reduction described in Sec. 20.2014-3(b)(1)  $25,000.00
  Reduction described in Sec. 20.2014-3(b)(2)   21,212.12
   = [$175,000 (factor K of the ratio stated at
   Sec. 20.2014-3 (b)(2)) / ($175,000 +
   $650,000 (factor L of the ratio stated at
   Sec. 20.2014-3 (b)(2)))] x $100,000
   (factor J of the ratio stated at Sec.
   20.2014-3(b)(2)) =..........................
                                                ------------
                                                 ..........    46,212.12
                                                            ------------
   Factor ``G'' of the ratio...................  ..........   153,787.88
 

    (iii) In this case, the ``second limitation'' on the credit for 
foreign death taxes is:

[$153,787.88 (factor G of the ratio stated at Sec. 20.2014-3(a); see 
          also subdivision (ii) above) / ($1,000,000 - $125,000 (factor 
          H of the ratio stated at Sec. 20.2014-3(a)))] x ($242,450 - 
          $24,480) (factor F of the ratio stated at Sec. 20.2014-3(a)) 
          = $38,309.88.
    Example (3). (i) Decedent, a citizen and resident of the United 
States at the time of his death, left a gross estate of $850,000 which 
includes: shares of stock issued by United States corporations, valued 
at $440,000; real estate located in the United States, valued at 
$110,000; and shares of stock issued by Country X corporations, valued 
at $300,000. Expenses, indebtedness, etc., amounted to $50,000. Decedent 
devised $40,000 in real estate to a United States charity. In addition, 
he bequeathed to his wife $200,000 in United States stocks and $300,000 
in Country X stocks. The residue of his estate passed to his children. 
The gross Federal estate tax is $81,700 and the credit for State death 
taxes is $5,520.
    (ii) Decedent's adjusted gross estate is $800,000 (i.e., the 
$850,000, gross estate less $50,000, expenses, indebtedness, etc.). 
Assume that the limitation imposed by section 2056(c), as in effect 
before 1982, is applicable so that the aggregate allowable marital 
deduction is limited to one-half the adjusted gross estate, or $400,000 
(which is 50 percent of $800,000). Factor ``G'' of the ratio which is 
used in determining the ``second limitation'' is computed as follows:

Value of property situated in Country X....................     $300,000
Less: Reduction described in Sec. 20.2014-3
 (b)(1) determined as follows (see also end of
 Sec. 20.2014-3(b))--
    Total amount of bequests which qualify for
     the marital deduction:
    Specific bequest of Country X stock........    $300,000
    Specific bequest of United States stock....     200,000
                                                ------------
                                                    500,000
Limitation on aggregate marital deduction under    400,000
 section 2056(c)...............................
Part of specific bequest of Country X stock with respect to      240,000
 which the marital deduction is allowed--($400,000 /
 $500,000 x $300,000)......................................
                                                -------------
   Factor ``G'' of the ratio...............................       60,000
 

    (iii) Thus, the ``second limitation'' on the credit for foreign 
death taxes is:

[$60,000 (factor G of the ratio stated at Sec. 20.2014-3(a); see also 
          subdivision (ii) above) / ($850,000 - $40,000 - $400,000 
          (factor H of the ratio stated at Sec. 20.2014-3(a)))] x 
          ($81,700 - $5,520) (factor F of the ratio stated at Sec. 
          20.2014-3(a)) = $11,148.29.

    (d) If the foreign country imposes more than one kind of death tax 
or imposes taxes at different rates upon the several shares of an 
estate, or if the foreign country and a political subdivision or 
possession thereof each imposes a death tax, the ``second limitation'' 
is still computed by applying the ratio set forth in paragraph (a) of 
this section. Factor ``G'' of the ratio is determined by taking into 
consideration the

[[Page 259]]

combined value of the foreign property which is subjected to each 
different tax or different rate. The combined value, however, cannot 
exceed the value at which such property was included in the gross estate 
for Federal estate tax purposes. Thus, if Country X imposes a tax on the 
inheritance of a surviving spouse at a 10-percent rate and on the 
inheritance of a son at a 20-percent rate, the combined value of their 
inheritances is taken into consideration in determining factor ``G'' of 
the ratio, which is then used in computing the ``second limitation.'' 
However, the ``first limitation'' is computed as provided in paragraph 
(b) of Sec. 20.2014-2. The lesser of the ``first limitation'' and the 
``second limitation'' is the credit for foreign death taxes.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6600, 27 FR 
4984, May 29, 1962; T.D. 7296, 38 FR 34193, Dec. 12, 1973; T.D. 8522, 59 
FR 9646, Mar. 1, 1994]



Sec. 20.2014-4  Application of credit in cases involving a death tax 
convention.

    (a) In general. (1) If credit for a particular foreign death tax is 
authorized by a death tax convention, there is allowed either the credit 
provided for by the convention or the credit provided for by section 
2014, whichever is the more beneficial to the estate. For cases where 
credit may be taken under both the death tax convention and section 
2014, see paragraph (b) of this section. The application of this 
paragraph may be illustrated by the following example:

    Example. (i) Decedent, a citizen of the United States and a 
domiciliary of foreign Country X at the time of his death on December 1, 
1966, left a gross estate of $1 million which includes the following: 
Shares of stock issued by a Country X corporation, valued at $400,000; 
bonds issued in 1962 by the United States and physically located in 
Country X, valued at $350,000; and real estate located in the United 
States, valued at $250,000. Expenses, indebtedness, etc., amounted to 
$50,000. Decedent left his entire estate to his son. There is in effect 
a death tax convention between the United States and Country X which 
provides for the allowance of credit by the United States for succession 
duties imposed by the national government of Country X. The gross 
Federal estate tax is $307,200, and the credit for State death taxes is 
$33,760. Country X imposed a net succession duty on the stocks and bonds 
of $180,000. Under the situs rules referred to in paragraph (a)(3) of 
Sec. 20.2014-1, the shares of stock comprise the only property deemed 
to be situated in Country X. (If the decedent has died before November 
14, 1966, the bonds also would be deemed to have their situs in Country 
X.) Under the convention, both the stocks and the bonds are deemed to be 
situated in Country X. In this example all figures are rounded to the 
nearest dollar.
    (ii)(a) The credit authorized by the convention for death taxes 
imposed by Country X is computed as follows:

(1) Country X tax attributable to property situated in          $180,000
 Country X and subjected to tax by both countries ($750,000/
 $750,000x$180,000)..........................................
(2) Federal estate tax attributable to property situated in      205,080
 Country X and subjected to tax by both countries--($750,000 /
  $1,000,000 x $273,440).....................................
(3) Credit (subdivision (1) or (2), whichever is less).......    180,000
 

    (b) The credit authorized by section 2014 for death taxes imposed by 
Country X is computed as follows:

(1) ``First limitation'' computed under Sec. 20.2014-2         $96,000
 ($400,000/$750,000x$180,000).................................
(2) ``Second limitation'' computed under Sec. 20.2014-3        109,376
 ($400,000/$1,000,000x$273,440)...............................
(3) Credit (subdivision (1) or (2), whichever is less)........    96,000
 

    (iii) On the basis of the facts contained in this example, the 
credit of $180,000 authorized by the convention is the more beneficial 
to the estate.

    (2) It should be noted that the greater of the treaty credit and the 
statutory credit is not necessarily the more beneficial to the estate. 
Such is the situation, for example, in those cases which involve both a 
foreign death tax credit and a credit under section 2013 for tax on 
prior transfers. The reason is that the amount of the credit for tax on 
prior transfers may differ depending upon whether the credit for foreign 
death tax is taken under the treaty or under the statute. Therefore, 
under certain circumstances, the advantage of taking the greater of the 
treaty credit and the statutory credit may be more than offset by a 
resultant smaller credit for tax on prior transfers. The solution is to 
compute the net estate tax payable first on the assumption that the 
treaty credit will be taken and then on the assumption that the 
statutory credit will be taken. Such computations will indicate whether 
the treaty credit or the statutory credit is in fact the more beneficial 
to the estate.

[[Page 260]]

    (b) Taxes imposed by both a foreign country and a political 
subdivision thereof. If death taxes are imposed by both a foreign 
country with which the United States has entered into a death tax 
convention and one or more of its possessions or political subdivisions, 
there is allowed, against the tax imposed by section 2001--
    (1) A credit for the combined death taxes paid to the foreign 
country and its political subdivisions or possessions as provided for by 
the convention, or
    (2) A credit for the combined death taxes paid to the foreign 
country and its political subdivisions or possessions as determined 
under section 2014, or
    (3)(i) A credit for that amount of the combined death taxes paid to 
the foreign country and its political subdivisions or possessions as is 
allowable under the convention, and
    (ii) A credit under section 2014 for the death taxes paid to each 
political subdivision or possession, but only to the extent such death 
taxes are not directly or indirectly creditable under the convention.

whichever is the most beneficial to the estate. The application of this 
paragraph may be illustrated by the following example:

    Example. (1) Decedent, a citizen of the United States and a 
domiciliary of Province Y of foreign Country X at the time of his death 
on February 1, 1966, left a gross estate of $250,000 which includes the 
following: Bonds issued by Country X physically located in Province Y, 
valued at $75,000; bonds issued by Province Z of Country X and 
physically located in the United States, valued at $50,000; and shares 
of stock issued by a domestic corporation, valued at $125,000. Decedent 
left his entire estate to his son. Expenses, indebtedness etc., amounted 
to $26,000. The Federal estate tax after allowance of the credit for 
State death taxes is $38,124. Province Y imposed a death tax of 8 
percent on the Country X bonds located therein which amounted to $6,000. 
No death tax was imposed by Province Z. Country X imposed a death tax of 
15 percent on the Country X bonds and the Province Z bonds which 
amounted to $18,750 before allowance of any credit for the death tax of 
Province Y. Country X allows against its death taxes a credit for death 
taxes paid to any of its provinces on property which it also taxes, but 
only to the extent of one-half of the Country X death tax attributable 
to the property, or the amount of death taxes paid to its province, 
whichever is less. Country X, therefore, allowed a credit of $5,625 for 
the death taxes paid to Province Y. There is in effect a death tax 
convention between the United States and Country X which provides for 
allowance of credit by the United States for death taxes imposed by the 
national government of Country X. The death tax convention provides that 
in computing the ``first limitation'' for the credit under the 
convention, the tax of Country X is not to be reduced by the amount of 
the credit allowed for provincial taxes. Under the situs rules described 
in paragraph (a)(3) of Sec. 20.2014-1, only the Country X bonds located 
in Province Y are deemed situated in Country X. (The bonds issued by 
Province Z also would be deemed to have their situs in Country X if the 
decedent had died on or after November 14, 1966.) Under the convention, 
both the Country X bonds and the Province Z bonds are deemed to be 
situated in Country X. In this example all figures are rounded to the 
nearest dollar.
    (2)(i) The credit authorized by section 2014 for death taxes imposed 
by Country X (which includes death taxes imposed by Province Y according 
to Sec. 20.2014-1(a)(1)) is computed as follows:

(a) ``First limitation'' with respect to tax imposed by
 national government of Country X (computed under paragraph
 (b) of Sec. 20.2014-2)
  (1) Gross Country X death tax attributable to Country X        $11,250
   bonds (before allowance of provincial death taxes) (75,000/
   $125,000x$18,750)..........................................
  (2) Less credit for Province Y death taxes on such bonds....     5,625
                                                               ---------
  (3) Net Country X death tax attributable to such bonds......     5,625
(b) ``First limitation'' with respect to tax imposed by            6,000
 Province Y (computed under paragraph (b) of Sec. 20.2014-2)
 ($75,000/$75,000x$6,000)
                                                               ---------
(c) Total ``first limitation''................................    11,625
(d) ``Second limitation'' (computed under paragraph (d) of        11,437
 Sec. 20.2014-3) ($75,000/$250,000x$38,124).................
$(e) Credit (subdivision (c) or (d), whichever is less).......    11,437
 

    (ii) The credit authorized under the death tax convention between 
the United States and Country X is computed as follows:

(a) Country X tax attributable to property situated in Country   $18,750
 X and subject to tax by both countries ($125,000/
 $125,000x$18,750)............................................
(b) Federal estate tax attributable to property situated in       19,062
 Country X and subjected to tax by both countries ($125,000/
 $250,000x$38,124)............................................
(c) Credit (subdivision (a) or (b), whichever is less)........    18,750
 

    (3) If the estate takes a credit for death taxes under the 
convention, it would receive a credit of $18,750 which would include an 
indirect credit of $5,625 for death taxes paid to Province Y. The death 
tax of Province Y which was not directly or indirectly creditable under 
the convention is $375 ($6,000- $5,625). A credit for this tax would 
also be allowed under section 2014 but only to the extent of $187, as 
the amount of credit for the

[[Page 261]]

combined foreign death taxes is limited to the amount of Federal estate 
tax attributable to the property, determined in accordance with the 
rules prescribed for computing the ``second limitation'' under section 
2014. In this case, the ``second limitation'' under section 2014 on the 
taxes attributable to the Country X bonds is $11,437 (see computation 
set forth in (2)(i)(d) of this example). The amount of credit under the 
convention for taxes attributable to Country X bonds is $11,250-
($75,000/$125,000x $18,750). Inasmuch as the ``second limitation'' under 
section 2014 in respect of the Country X bonds ($11,437) exceeds the 
amount of the credit allowed under the convention in respect of the 
Country X bonds ($11,250) by $187, the additional credit allowable under 
section 2014 for the death taxes paid to Province Y not directly or 
indirectly creditable under the convention is limited to $187.

    (c) Taxes imposed by two foreign countries with respect to the same 
property. It is stated as a general rule in paragraph (a)(2) of Sec. 
20.2014-1 that if credits against the Federal estate tax are allowable 
under section 2014, or under section 2014 and one or more death tax 
conventions, for death taxes paid to more than one country, the credits 
are combined and the aggregate amount is credited against the Federal 
estate tax. This rule may result in credit being allowed for taxes 
imposed by two different countries upon the same item of property. If 
such is the case, the total amount of the credits with respect to such 
property is limited to the amount of the Federal estate tax attributable 
to the property, determined in accordance with the rules prescribed for 
computing the ``second limitation'' set forth in Sec. 20.2014-3. The 
application of this section may be illustrated by the following example:

    Example. The decedent, a citizen of the United States and a 
domiciliary of Country X at the time of his death on May 1, 1967, left a 
taxable estate which included bonds issued by Country Z and physically 
located in Country X. Each of the three countries involved imposed death 
taxes on the Country Z bonds. Assume that under the provisions of a 
treaty between the United States and Country X the estate is entitled to 
a credit against the Federal estate tax for death taxes imposed by 
Country X on the bonds in the maximum amount of $20,000. Assume, also, 
that since the decedent died after November 13, 1966, so that under the 
situs rules referred to in paragraph (a)(3) of Sec. 20.2014-1 the bonds 
are deemed to have their situs in Country Z, the estate is entitled to a 
credit against the Federal estate tax for death taxes imposed by Country 
Z on the bonds in the maximum amount of $10,000. Finally, assume that 
the Federal estate tax attributable to the bonds is $25,000. Under these 
circumstances, the credit allowed the estate with respect to the bonds 
would be limited to $25,000.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6742, 29 FR 
7928, June 23, 1964; T.D. 7296, 38 FR 34193, Dec. 12, 1973]



Sec. 20.2014-5  Proof of credit.

    (a) If the foreign death tax has not been determined and paid by the 
time the Federal estate tax return required by section 6018 is filed, 
credit may be claimed on the return in an estimated amount. However, 
before credit for the foreign death tax is finally allowed, satisfactory 
evidence, such as a statement by an authorized official of each country, 
possession or political subdivision thereof imposing the tax, must be 
submitted on Form 706CE certifying:
    (1) The full amount of the tax (exclusive of any interest or 
penalties), as computed before allowance of any credit, remission, or 
relief;
    (2) The amount of any credit, allowance, remission, or relief, and 
other pertinent information, including the nature of the allowance and a 
description of the property to which it pertains;
    (3) The net foreign death tax payable after any such allowance;
    (4) The date on which the death tax was paid, or if not all paid at 
one time, the date and amount of each partial payment; and
    (5) A list of the property situated in the foreign country and 
subjected to its tax, showing a description and the value of the 
property.

Satisfactory evidence must also be submitted showing that no refund of 
the death tax is pending and none is authorized or, if any refund is 
pending or has been authorized, its amount and other pertinent 
information. See also section 2016 and Sec. 20.2016-1 for requirements 
if foreign death taxes claimed as a credit are subsequently recovered.
    (b) The following information must also be submitted whenever 
applicable:
    (1) If any of the property subjected to the foreign death tax was 
situated outside of the country imposing the tax,

[[Page 262]]

the description of each item of such property and its value.
    (2) If more than one inheritance or succession is involved with 
respect to which credit is claimed, or if the foreign country, 
possession or political subdivision thereof imposes more than one kind 
of death tax, or if both the foreign country and a possession or 
political subdivision thereof each imposes a death tax, a separate 
computation with respect to each inheritance or succession tax.
    (c) In addition to the information required under paragraphs (a) and 
(b) of this section, the district director may require the submission of 
any further proof deemed necessary to establish the right to the credit.



Sec. 20.2014-6  Period of limitations on credit.

    The credit for foreign death taxes under section 2014 is limited to 
those taxes which were actually paid and for which a credit was claimed 
within four years after the filing of the estate tax return for the 
decedent's estate. If, however, a petition has been filed with the Tax 
Court of the United States for the redetermination of a deficiency 
within the time prescribed in section 6213(a), the credit is limited to 
those taxes which were actually paid and for which a credit was claimed 
within four years after the filing of the return, or before the 
expiration of 60 days after the decision of the Tax Court becomes final, 
whichever period is the last to expire. Similarly, if an extension of 
time has been granted under section 6161 for payment of the tax shown on 
the return, or of a deficiency, the credit is limited to those taxes 
which were actually paid and for which a credit was claimed within four 
years after the filing of the return, or before the date of the 
expiration of the period of the extension, whichever period is the last 
to expire. See section 2015 for the applicable period of limitations for 
credit for foreign death taxes on reversionary or remainder interests if 
an election is made under section 6163(a) to postpone payment of the 
estate tax attributable to reversionary or remainder interests. If a 
claim for refund based on the credit for foreign death taxes is filed 
within the applicable period described in this section, a refund may be 
made despite the general limitation provisions of sections 6511 and 
6512. Any refund based on the credit for foreign death taxes shall be 
made without interest.



Sec. 20.2014-7  Limitation on credit if a deduction for foreign death
taxes is allowed under section 2053(d).

    If a deduction is allowed under section 2053(d) for foreign death 
taxes paid with respect to a charitable gift, the credit for foreign 
death taxes is subject to special limitations. In such a case the 
property described in subparagraphs (A), (B), and (C) of paragraphs (1) 
and (2) of section 2014(b) shall not include any property with respect 
to which a deduction is allowed under section 2053(d). The application 
of this section may be illustrated by the following example:

    Example. The decedent, a citizen of the United States, died July 1, 
1955, leaving a gross estate of $1,200,000 consisting of: Shares of 
stock issued by United States corporations, valued at $600,000; bonds 
issued by the United States Government physically located in the United 
States, valued at $300,000; and shares of stock issued by a Country X 
corporation, valued at $300,000. Expenses, indebtedness, etc., amounted 
to $40,000. The decedent made specific bequests of $400,000 of the 
United States corporation stock to a niece and $100,000 of the Country X 
corporation stock to a nephew. The residue of his estate was left to 
charity. There is no death tax convention in existence between the 
United States and Country X. The Country X tax imposed was at a 50-
percent rate on all beneficiaries. A State inheritance tax of $20,000 
was imposed on the niece and nephew. The decedent did not provide in his 
will for the payment of the death taxes, and under local law the Federal 
estate tax is payable from the general estate, the same as 
administration expenses.

                       Distribution of the Estate
Gross estate...............................  ...........   $1,200,000.00
Debts and charges..........................   $40,000.00
Bequest of U.S. corporation stock to niece.   400,000.00
Bequest of country X corporation stock to     100,000.00
 nephew....................................
Net Federal estate tax.....................   136,917.88
                                            -------------
                                             ...........      676,917.88
                                                         ---------------
   Residue before country X tax.........................      523,082.12
Country X succession tax on charity.....................      100,000.00
                                                         ---------------
   Charitable deduction....................  ...........      423,082.12
 
                  Taxable Estate and Federal Estate Tax
 
Gross estate...............................  ...........    1,200,000.00
Debts and charges..........................    40,000.00

[[Page 263]]

 
Deduction of foreign death tax under          100,000.00
 section 2053(d)...........................
Charitable deduction.......................   423,082.12
Exemption..................................    60,000.00
                                            -------------
                                             ...........      623,082.12
   Taxable estate.......................................      576,917.88
Gross estate tax........................................      172,621.26
Credit for State death taxes............................       15,476.72
                                            --------------
   Gross estate tax less credit for State death taxes...      157,144.54
Credit for foreign death taxes..........................       20,226.66
   Net Federal estate tax..................  ...........      136,917.88
 
                     Credit for Foreign Death Taxes
 
                              country x tax
 
Succession tax on nephew:
  Value of stock of country X corporation..  ...........         100,000
  Tax (50% rate)...........................  ...........         $50,000
Succession tax on charity:
  Value of stock of country X corporation..  ...........         200,000
  Tax (50% rate)...........................  ...........         100,000
 
             computation of exclusion under section 2014(b)
 
Value of situated in country X.............  ...........         300,000
Value of property in respect of which a      ...........         200,000
 deduction is allowed under section 2053(d)
                                            --------------
  Value of property situated within country  ...........         100,000
   X, subjected to tax, and included in
   gross estate as limited by section
   2014(f).................................
 

                  First Limitation, Sec. 28.2014-2(a)

$100,000 (factor C of the ratio stated at Sec. 20.2014-2(a)) / $100,000 
          + $200,000 (factor D of the ratio stated at Sec. 20.2014 2(a) 
          x $50,000 + $100,000) (factor B of the ratio stated at Sec. 
          20.2014-2(a)) = $50,000.00

                  Second Limitation, Sec. 28.2014-3(a)

$100,000 (factor G of the ratio stated at Sec. 20.2014-3(a)) (as 
          limited by section 2014(f)) / $1,200,000 - $423,082.12 (factor 
          H of the ratio stated at Sec. 20.2014 3(a) x $172,621.26 - 
          $15,476.72) (factor F of the ratio stated at Sec. 20.2014-
          3(a)) = $20,226.66Z

[T.D. 6600, 27 FR 4984, May 27, 1962]



Sec. 20.2015-1  Credit for death taxes on remainders.

    (a) If the executor of an estate elects under section 6163(a) to 
postpone the time for payment of any portion of the Federal estate tax 
attributable to a reversionary or remainder interest in property, credit 
is allowed under sections 2011 and 2014 against that portion of the 
Federal estate tax for State death taxes and foreign death taxes 
attributable to the reversionary or remainder interest if the State 
death taxes or foreign death taxes are paid and if credit therefor is 
claimed either--
    (1) Within the time provided for in sections 2011 and 2014, or
    (2) Within the time for payment of the tax imposed by section 2001 
or 2101 as postponed under section 6163(a) and as extended under section 
6163(b) (on account of undue hardship) or, if the precedent interest 
terminated before July 5, 1958, within 60 days after the termination of 
the preceding interest or interests in the property.

The allowance of credit, however, is subject to the other limitations 
contained in sections 2011 and 2014 and, in the case of the estate of a 
decedent who was a nonresident not a citizen of the United States, in 
section 2102(b).
    (b) In applying the rule stated in paragraph (a) of this section, 
credit for State death taxes or foreign death taxes paid within the time 
provided in sections 2011 and 2014 is applied first to the portion of 
the Federal estate tax payment of which is not postponed, and any excess 
is applied to the balance of the Federal estate tax. However, credit for 
State death taxes or foreign death taxes not paid within the time 
provided in section 2011 and 2014 is allowable only against the portion 
of the Federal estate tax attributable to the reversionary or remainder 
interest, and only for State or foreign death taxes attributable to that 
interest. If a State death tax or a foreign death tax is imposed upon 
both a reversionary or remainder interest and upon other property, 
without a definite apportionment of the tax, the amount of the tax 
deemed attributable to the reversionary or remainder interest is an 
amount which bears the same ratio to the total tax as the value of the 
reversionary or remainder interest bears to the value of the entire 
property with respect to which the tax was imposed. In applying this 
ratio, adjustments consistent with those required under paragraph (c) of 
Sec. 20.6163-1 must be made.
    (c) The application of this section may be illustrated by the 
following examples:

    Example (1). One-third of the Federal estate tax was attributable to 
a remainder interest in real property located in State Y, and two-thirds 
of the Federal estate tax was attributable to other property located in 
State X.

[[Page 264]]

The payment of the tax attributable to the remainder interest was 
postponed under the provisions of section 6163(a). The maximum credit 
allowable for State death taxes under the provisions of section 2011 is 
$12,000. Therefore, of the maximum credit allowable, $4,000 is 
attributable to the remainder interest and $8,000 is attributable to the 
other property. Within the 4-year period provided for in section 2011, 
inheritance tax in the amount of $9,000 was paid to State X in 
connection with the other property. With respect to this $9,000, $8,000 
(the maximum amount allowable) is allowed as a credit against the 
Federal estate tax attributable to the other property, and $1,000 is 
allowed as a credit against the postponed tax. The life estate or other 
precedent interest expired after July 4, 1958. After the expiration of 
the 4-year period but before the expiration of the period of postponment 
elected under section 6163(a) and of the period of extension granted 
under section 6163(b) for payment of the tax, inheritance tax in the 
amount of $5,000 was paid to State Y in connection with the remainder 
interest. As the maximum credit allowable with respect to the remainder 
interest is $4,000 and $1,000 has already been allowed as a credit, an 
additional $3,000 will be credited against the Federal estate tax 
attributable to the remainder interest. It should be noted that if the 
life estate or other precedent interest had expired after the expiration 
of the 4-year period but before July 5, 1958, the same result would be 
reached only if the inheritance tax had been paid to State Y before the 
expiration of 60 days after the termination of the life estate or other 
precedent interest.
    Example (2). The facts are the same as in example (1), except that 
within the 4-year period inheritance tax in the amount of $2,500 was 
paid to State Y with respect to the remainder interest and inheritance 
tax in the amount of $7,500 was paid to State X with respect to the 
other property. The amount of $8,000 is allowed as a credit against the 
Federal estate tax attributable to the other property and the amount of 
$2,000 is allowed as a credit against the postponed tax. The life estate 
or other precedent interest expired after July 4, 1958. After the 
expiration of the 4-year period but before the expiration of the period 
of postponement elected under section 6163(a) and of the period of 
extension granted under section 6163(b) for payment of the tax, 
inheritance tax in the amount of $5,000 was paid to State Y in 
connection with the remainder interest. As the maximum credit allowable 
with respect to the remainder interest is $4,000 and $2,000 already has 
been allowed as a credit, an additional $2,000 will be credited against 
the Federal estate tax attributable to the remainder interest. It should 
be noted that if the life estate or other precedent interest had expired 
after the expiration of the 4-year period but before July 5, 1958, the 
same result would be reached only if the inheritance tax had been paid 
to State Y before the expiration of 60 days after the termination of the 
life estate or other precedent interest.
    Example (3). The facts are the same as in example (2), except that 
no payment was made to State Y within the 4-year period. The amount of 
$7,500 is allowed as a credit against the Federal estate tax 
attributable to the other property. After termination of the life 
interest additional credit will be allowed in the amount of $4,000 
against the Federal estate tax attributable to the remainder interest. 
Since the payment of $5,000 was made to State Y following the expiration 
of the 4-year period, no part of the payment may be allowed as a credit 
against the Federal estate tax attributable to the other property.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6526, 26 FR 
415, Jan. 19, 1961; T.D. 7296, 38 FR 34194, Dec. 12, 1973]



Sec. 20.2016-1  Recovery of death taxes claimed as credit.

    In accordance with the provisions of section 2016, the executor (or 
any other person) receiving a refund of any State death taxes or foreign 
death taxes claimed as a credit under section 2011 or section 2014 shall 
notify the district director of the refund within 30 days of its 
receipt. The notice shall contain the following information:
    (a) The name of the decedent;
    (b) The date of the decedent's death;
    (c) The property with respect to which the refund was made;
    (d) The amount of the refund, exclusive of interest;
    (e) The date of the refund; and
    (f) The name and address of the person receiving the refund.

If the refund was in connection with foreign death taxes claimed as a 
credit under section 2014, the notice shall also contain a statement 
showing the amount of interest, if any, paid by the foreign country on 
the refund. Finally, the person filing the notice shall furnish the 
district director such additional information as he may request. Any 
Federal estate tax found to be due by reason of the refund is payable by 
the person or persons receiving it, upon notice and demand, even though 
the refund is received after the expiration of the period of limitations 
set forth in section 6501 (see section 6501(c)(5)). If the tax found to 
be due results from a

[[Page 265]]

refund of foreign death tax claimed as a credit under section 2014, such 
tax shall not bear interest for any period before the receipt of the 
refund, except to the extent that interest was paid by the foreign 
country on the refund.

                              Gross Estate



Sec. 20.2031-0  Table of contents.

    This section lists the section headings and undesignated center 
headings that appear in the regulations under section 2031.

Sec. 20.2031-1 Definition of gross estate; valuation of property.
Sec. 20.2031-2 Valuation of stocks and bonds.
Sec. 20.2031-3 Valuation of interests in businesses.
Sec. 20.2031-4 Valuation of notes.
Sec. 20.2031-5 Valuation of cash on hand or on deposit.
Sec. 20.2031-6 Valuation of household and personal effects.
Sec. 20.2031-7 Valuation of annuities, interests for life or term of 
          years, and remainder or reversionary interests.
Sec. 20.2031-8 Valuation of certain life insurance and annuity 
          contracts; valuation of shares in an open-end investment 
          company.
Sec. 20.2031-9 Valuation of other property.

             Actuarial Tables Applicable Before May 1, 2009

Sec. 20.2031-7A Valuation of annuities, interests for life or term of 
          years, and remainder or reversionary interests for estates of 
          decedents for which the valuation date of the gross estate is 
          before May 1, 2009.

[T.D. 9448, 74 FR 21484, May 7, 2009, as amended at T.D. 9540, 76 FR 
49612, Aug. 10, 2011]



Sec. 20.2031-1  Definition of gross estate; valuation of property.

    (a) Definition of gross estate. Except as otherwise provided in this 
paragraph the value of the gross estate of a decedent who was a citizen 
or resident of the United States at the time of his death is the total 
value of the interests described in sections 2033 through 2044. The 
gross estate of a decedent who died before October 17, 1962, does not 
include real property situated outside the United States (as defined in 
paragraph (b)(1) of Sec. 20.0-1). Except as provided in paragraph (c) 
of this section (relating to the estates of decedents dying after 
October 16, 1962, and before July 1, 1964), in the case of a decedent 
dying after October 16, 1962, real property situated outside the United 
States which comes within the scope of sections 2033 through 2044 is 
included in the gross estate to the same extent as any other property 
coming within the scope of those sections. In arriving at the value of 
the gross estate the interests described in sections 2033 through 2044 
are valued as described in this section, Sec. Sec. 20.2031-2 through 
20.2031-9 and Sec. 20.2032-1. The contents of sections 2033 through 
2044 are, in general, as follows:
    (1) Sections 2033 and 2034 are concerned mainly with interests in 
property passing through the decedent's probate estate. Section 2033 
includes in the decedent's gross estate any interest that the decedent 
had in property at the time of his death. Section 2034 provides that any 
interest of the decedent's surviving spouse in the decedent's property, 
such as dower or curtesy, does not prevent the inclusion of such 
property in the decedent's gross estate.
    (2) Sections 2035 through 2038 deal with interests in property 
transferred by the decedent during his life under such circumstances as 
to bring the interests within the decedent's gross estate. Section 2035 
includes in the decedent's gross estate property transferred in 
contemplation of death, even though the decedent had not interest in, or 
control over, the property at the time of his death. Section 2036 
provides for the inclusion of transferred property with respect to which 
the decedent retained the income or the power to designate who shall 
enjoy the income. Section 2037 includes in the decedent's gross estate 
certain transfers under which the beneficial enjoyment of the property 
could be obtained only by surviving the decedent. Section 2038 provides 
for the inclusion of transferred property if the decedent had at the 
time of his death the power to change the beneficial enjoyment of the 
property. It should be noted that there is considerable overlap in the 
application of sections 2036 through 2038 with respect to reserved 
powers, so that transferred property may be includible in the decedent's 
gross estate in varying degrees under more than one of those sections.

[[Page 266]]

    (3) Sections 2039 through 2042 deal with special kinds of property 
and powers. Sections 2039 and 2040 concern annuities and jointly held 
property respectively. Section 2041 deals with powers held by the 
decedent over the beneficial enjoyment of property not originating with 
the decedent. Section 2042 concerns insurance under policies on the life 
of the decedent.
    (4) Section 2043 concerns the sufficiency of consideration for 
transfers made by the decedent during his life. This has a bearing on 
the amount to be included in the decedent's gross estate under sections 
2035 through 2038, and 2041. Section 2044 deals with retroactivity.
    (b) Valuation of property in general. The value of every item of 
property includible in a decedent's gross estate under sections 2031 
through 2044 is its fair market value at the time of the decedent's 
death, except that if the executor elects the alternate valuation method 
under section 2032, it is the fair market value thereof at the date, and 
with the adjustments, prescribed in that section. The fair market value 
is the price at which the property would change hands between a willing 
buyer and a willing seller, neither being under any compulsion to buy or 
to sell and both having reasonable knowledge of relevant facts. The fair 
market value of a particular item of property includible in the 
decedent's gross estate is not to be determined by a forced sale price. 
Nor is the fair market value of an item of property to be determined by 
the sale price of the item in a market other than that in which such 
item is most commonly sold to the public, taking into account the 
location of the item wherever appropriate. Thus, in the case of an item 
of property includible in the decedent's gross estate, which is 
generally obtained by the public in the retail market, the fair market 
value of such an item of property is the price at which the item or a 
comparable item would be sold at retail. For example, the fair market 
value of an automobile (an article generally obtained by the public in 
the retail market) includible in the decedent's gross estate is the 
price for which an automobile of the same or approximately the same 
description, make, model, age, condition, etc., could be purchased by a 
member of the general public and not the price for which the particular 
automobile of the decedent would be purchased by a dealer in used 
automobiles. Examples of items of property which are generally sold to 
the public at retail may be found in Sec. Sec. 20.2031-6 and 20.2031-8. 
The value is generally to be determined by ascertaining as a basis the 
fair market value as of the applicable valuation date of each unit of 
property. For example, in the case of shares of stock or bonds, such 
unit of property is generally a share of stock or a bond. Livestock, 
farm machinery, harvested and growing crops must generally be itemized 
and the value of each item separately returned. Property shall not be 
returned at the value at which it is assessed for local tax purposes 
unless that value represents the fair market value as of the applicable 
valuation date. All relevant facts and elements of value as of the 
applicable valuation date shall be considered in every case. The value 
of items of property which were held by the decedent for sale in the 
course of a business generally should be reflected in the value of the 
business. For valuation of interests in businesses, see Sec. 20.2031-3. 
See Sec. 20.2031-2 and Sec. Sec. 20.2031-4 through 20.2031-8 for 
further information concerning the valuation of other particular kinds 
of property. For certain circumstances under which the sale of an item 
of property at a price below its fair market value may result in a 
deduction for the estate, see paragraph (d)(2) of Sec. 20.2053-3.
    (c) Real property situated outside the United States; gross estate 
of decedent dying after October 16, 1962, and before July 1, 1964--(1) 
In general. In the case of decedent dying after October 16, 1962, and 
before July 1, 1964, the value of real property situated outside the 
United States (as defined in paragraph (b)(1) of Sec. 20.0-1) is not 
included in the gross estate of the decedent--
    (i) Under section 2033, 2034, 2035(a), 2036(a), 2037(a), or 2038(a) 
to the extent the real property, or the decedent's interest in it, was 
acquired by the decedent before February 1, 1962;
    (ii) Under section 2040 to the extent such property or interest was 
acquired by the decedent before February 1, 1962,

[[Page 267]]

or was held by the decedent and the survivor in a joint tenancy or 
tenancy by the entirety before February 1, 1962; or
    (iii) Under section 2041(a) to the extent that before February 1, 
1962, such property or interest was subject to a general power of 
appointment (as defined in section 2041) possessed by the decedent.
    (2) Certain property treated as acquired before February 1, 1962. 
For purposes of this paragraph real property situated outside the United 
States (including property held by the decedent and the survivor in a 
joint tenancy or tenancy by the entirety), or an interest in such 
property or a general power of appointment in respect of such property, 
which was acquired by the decedent after January 31, 1962, is treated as 
acquired by the decedent before February 1, 1962, if
    (i) Such property, interest, or power was acquired by the decedent 
by gift within the meaning of section 2511, or from a prior decedent by 
devise or inheritance, or by reason of death, form of ownership, or 
other conditions (including the exercise or nonexercise of a power of 
appointment); and
    (ii) Before February 1, 1962, the donor or prior decedent had 
acquired the property or his interest therein or had possessed a power 
of appointment in respect thereof.
    (3) Certain property treated as acquired after January 31, 1962. For 
purposes of this paragraph that portion of capital additions or 
improvements made after January 31, 1962, to real property situated 
outside the United States is, to the extent that it materially increases 
the value of the property, treated as real property acquired after 
January 31, 1962. Accordingly, the gross estate may include the value of 
improvements on unimproved real property, such as office buildings, 
factories, houses, fences, drainage ditches, and other capital items, 
and the value of capital additions and improvements to existing 
improvements, placed on real property after January 31, 1962, whether or 
not the value of such real property or existing improvements is included 
in the gross estate.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6684, 28 FR 
11408, Oct. 24, 1963; T.D. 6826, 30 FR 7708, June 15, 1965]



Sec. 20.2031-2  Valuation of stocks and bonds.

    (a) In general. The value of stocks and bonds is the fair market 
value per share or bond on the applicable valuation date.
    (b) Based on selling prices. (1) In general, if there is a market 
for stocks or bonds, on a stock exchange, in an over-the-counter market, 
or otherwise, the mean between the highest and lowest quoted selling 
prices on the valuation date is the fair market value per share or bond. 
If there were no sales on the valuation date but there were sales on 
dates within a reasonable period both before and after the valuation 
date, the fair market value is determined by taking a weighted average 
of the means between the highest and lowest sales on the nearest date 
before and the nearest date after the valuation date. The average is to 
be weighted inversely by the respective numbers of trading days between 
the selling dates and the valuation date. If the stocks or bonds are 
listed on more than one exchange, the records of the exchange where the 
stocks or bonds are principally dealt in should be employed if such 
records are available in a generally available listing or publication of 
general circulation. In the event that such records are not so available 
and such stocks or bonds are listed on a composite listing of combined 
exchanges available in a generally available listing or publication of 
general circulation, the records of such combined exchanges should be 
employed. In valuing listed securities, the executor should be careful 
to consult accurate records to obtain values as of the applicable 
valuation date. If quotations of unlisted securities are obtained from 
brokers, or evidence as to their sale is obtained from officers of the 
issuing companies, copies of the letters furnishing such quotations or 
evidence of sale should be attached to the return.
    (2) If it is established with respect to bonds for which there is a 
market on a stock exchange, that the highest and

[[Page 268]]

lowest selling prices are not available for the valuation date in a 
generally available listing or publication of general circulation but 
that closing selling prices are so available, the fair market value per 
bond is the mean between the quoted closing selling price on the 
valuation date and the quoted closing selling price on the trading day 
before the valuation date. If there were no sales on the trading day 
before the valuation date but there were sales on a date within a 
reasonable period before the valuation date, the fair market value is 
determined by taking a weighted average of the quoted closing selling 
price on the valuation date and the quoted closing selling price on the 
nearest date before the valuation date. The closing selling price for 
the valuation date is to be weighted by the number of trading days 
between the previous selling date and the valuation date. If there were 
no sales within a reasonable period before the valuation date but there 
were sales on the valuation date, the fair market value is the closing 
selling price on such valuation date. If there were no sales on the 
valuation date but there were sales on dates within a reasonable period 
both before and after the valuation date, the fair market value is 
determined by taking a weighted average of the quoted closing selling 
prices on the nearest date before and the nearest date after the 
valuation date. The average is to be weighted inversely by the 
respective numbers of trading days between the selling dates and the 
valuation date. If the bonds are listed on more than one exchange, the 
records of the exchange where the bonds are principally dealt in should 
be employed. In valuing listed securities, the executor should be 
careful to consult accurate records to obtain values as of the 
applicable valuation date.
    (3) The application of this paragraph may be illustrated by the 
following examples:

    Example (1). Assume that sales of X Company common stock nearest the 
valuation date (Friday, June 15) occurred two trading days before 
(Wednesday, June 13) and three trading days after (Wednesday, June 20) 
and on these days the mean sale prices per share were $10 and $15, 
respectively. The price of $12 is taken as representing the fair market 
value of a share of X Company common stock as of the valuation date
[GRAPHIC] [TIFF OMITTED] TC15NO91.217

    Example (2). Assume the same facts as in example (1) except that the 
mean sale prices per share on June 13, and June 20 were $15 and $10, 
respectively. The price of $13 is taken as representing the fair market 
value of a share of X Company common stock as of the valuation date
[GRAPHIC] [TIFF OMITTED] TR13JA06.003

    Example (3). Assume the decedent died on Sunday, October 7, and that 
Saturday and Sunday were not trading days. If sales of X Company common 
stock occurred on Friday, October 5, at mean sale prices per share of 
$20 and on Monday, October 8, at mean sale prices per share of $23, the 
price of $21.50 is taken as representing the fair market value of a 
share of X Company common stock as of the valuation date
[GRAPHIC] [TIFF OMITTED] TC16OC91.008

    Example (4). Assume that on the valuation date (Tuesday, April 3, 
1973) the closing selling price of a listed bond was $25 per bond and 
that the highest and lowest selling prices are not available in a 
generally available listing or publication of general circulation for 
that date. Assume further, that the closing selling price of the same 
listed bond was $21 per bond on the day before the valuation date 
(Monday, April 2, 1973). Thus, under paragraph (b)(2) of this section 
the price of $23 is taken as representing the fair market value per bond 
as of the valuation date
[GRAPHIC] [TIFF OMITTED] TC16OC91.009

    Example (5). Assume the same facts as in example (4) except that 
there were no sales on the day before the valuation date. Assume 
further, that there were sales on Thursday, March 29, 1973, and that the 
closing selling price on that day was $23. The price of $24.50 is taken 
as representing the fair market value per bond as of the valuation date
[GRAPHIC] [TIFF OMITTED] TC16OC91.010

    Example (6). Assume that no bonds were traded on the valuation date 
(Friday, April 20). Assume further, that sales of bonds nearest the 
valuation date occurred two trading days before (Wednesday, April 18) 
and three trading days after (Wednesday, April 25) the valuation date 
and that on these two days the closing selling prices per bond were $29 
and $22, respectively. The highest and lowest selling prices are not 
available for these

[[Page 269]]

dates in a generally available listing or publication of general 
circulation. Thus, under paragraph (b)(2) of this section, the price of 
$26.20 is taken as representing the fair market value of a bond as of 
the valuation date
[GRAPHIC] [TIFF OMITTED] TC16OC91.011

    (c) Based on bid and asked prices. If the provisions of paragraph 
(b) of this section are inapplicable because actual sales are not 
available during a reasonable period beginning before and ending after 
the valuation date, the fair market value may be determined by taking 
the mean between the bona fide bid and asked prices on the valuation 
date, or if none, by taking a weighted average of the means between the 
bona fide bid and asked prices on the nearest trading date before and 
the nearest trading date after the valuation date, if both such nearest 
dates are within a reasonable period. The average is to be determined in 
the manner described in paragraph (b) of this section.
    (d) Based on incomplete selling prices or bid and asked prices. If 
the provisions of paragraphs (b) and (c) of this section are 
inapplicable because no actual sale prices or bona fide bid and asked 
prices are available on a date within a reasonable period before the 
valuation date, but such prices are available on a date within a 
reasonable period after the valuation date, or vice versa, then the mean 
between the highest and lowest available sale prices or bid and asked 
prices may be taken as the value.
    (e) Where selling prices or bid and asked prices do not reflect fair 
market value. If it is established that the value of any bond or share 
of stock determined on the basis of selling or bid and asked prices as 
provided under paragraphs (b), (c), and (d) of this section does not 
reflect the fair market value thereof, then some reasonable modification 
of that basis or other relevant facts and elements of value are 
considered in determining the fair market value. Where sales at or near 
the date of death are few or of a sporadic nature, such sales alone may 
not indicate fair market value. In certain exceptional cases, the size 
of the block of stock to be valued in relation to the number of shares 
changing hands in sales may be relevant in determining whether selling 
prices reflect the fair market value of the block of stock to be valued. 
If the executor can show that the block of stock to be valued is so 
large in relation to the actual sales on the existing market that it 
could not be liquidated in a reasonable time without depressing the 
market, the price at which the block could be sold as such outside the 
usual market, as through an underwriter, may be a more accurate 
indication of value than market quotations. Complete data in support of 
any allowance claimed due to the size of the block of stock being valued 
shall be submitted with the return. On the other hand, if the block of 
stock to be valued represents a controlling interest, either actual or 
effective, in a going business, the price at which other lots change 
hands may have little relation to its true value.
    (f) Where selling prices or bid and asked prices are unavailable. If 
the provisions of paragraphs (b), (c), and (d) of this section are 
inapplicable because actual sale prices and bona fide bid and asked 
prices are lacking, then the fair market value is to be determined by 
taking the following factors into consideration:
    (1) In the case of corporate or other bonds, the soundness of the 
security, the interest yield, the date of maturity, and other relevant 
factors; and
    (2) In the case of shares of stock, the company's net worth, 
prospective earning power and dividend-paying capacity, and other 
relevant factors.

Some of the ``other relevant factors'' referred to in subparagraphs (1) 
and (2) of this paragraph are: The good will of the business; the 
economic outlook in the particular industry; the company's position in 
the industry and its management; the degree of control of the business 
represented by the block of stock to be valued; and the values of 
securities of corporations engaged in the same or similar lines of 
business which are listed on a stock exchange. However, the weight to be 
accorded such comparisons or any other evidentiary factors considered in 
the determination of a value depends upon the facts of each case. In 
addition to the relevant factors described above, consideration shall 
also be given to nonoperating assets, including proceeds of life 
insurance policies payable

[[Page 270]]

to or for the benefit of the company, to the extent such nonoperating 
assets have not been taken into account in the determination of net 
worth, prospective earning power and dividend-earning capacity. Complete 
financial and other data upon which the valuation is based should be 
submitted with the return, including copies of reports of any 
examinations of the company made by accountants, engineers, or any 
technical experts as of or near the applicable valuation date.
    (g) Pledged securities. The full value of securities pledged to 
secure an indebtedness of the decedent is included in the gross estate. 
If the decedent had a trading account with a broker, all securities 
belonging to the decedent and held by the broker at the date of death 
must be included at their fair market value as of the applicable 
valuation date. Securities purchased on margin for the decedent's 
account and held by a broker must also be returned at their fair market 
value as of the applicable valuation date. The amount of the decedent's 
indebtedness to a broker or other person with whom securities were 
pledged is allowed as a deduction from the gross estate in accordance 
with the provisions of Sec. 20.2053-1 or Sec. 20.2106-1 (for estates 
of nonresidents not citizens).
    (h) Securities subject to an option or contract to purchase. Another 
person may hold an option or a contract to purchase securities owned by 
a decedent at the time of his death. The effect, if any, that is given 
to the option or contract price in determining the value of the 
securities for estate tax purposes depends upon the circumstances of the 
particular case. Little weight will be accorded a price contained in an 
option or contract under which the decedent is free to dispose of the 
underlying securities at any price he chooses during his lifetime. Such 
is the effect, for example, of an agreement on the part of a shareholder 
to purchase whatever shares of stock the decedent may own at the time of 
his death. Even if the decedent is not free to dispose of the underlying 
securities at other than the option or contract price, such price will 
be disregarded in determining the value of the securities unless it is 
determined under the circumstances of the particular case that the 
agreement represents a bona fide business arrangement and not a device 
to pass the decedent's shares to the natural objects of his bounty for 
less than an adequate and full consideration in money or money's worth. 
See section 2703 and the regulations at Sec. 25.2703 of this chapter 
for special rules involving options and agreements (including contracts 
to purchase) entered into (or substantially modified after) October 8, 
1990.
    (i) Stock sold ``ex-dividend.'' In any case where a dividend is 
declared on a share of stock before the decedent's death but payable to 
stock holders of record on a date after his death and the stock is 
selling ``ex-dividend'' on the date of the decedent's death, the amount 
of the dividend is added to the ex-dividend quotation in determining the 
fair market value of the stock as of the date of the decedent's death.
    (j) Application of chapter 14. See section 2701 and the regulations 
at Sec. 25.2701 of this chapter for special rules for valuing the 
transfer of an interest in a corporation and for the treatment of unpaid 
qualified payments at the death of the transferor or an applicable 
family member. See section 2704(b) and the regulations at Sec. 25.2704-
2 of this chapter for special valuation rules involving certain 
restrictions on liquidation rights created after October 8, 1990.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7312, 39 FR 14948, Apr. 29, 1974; T.D. 7327, 39 FR 
35354, Oct. 1, 1974; T.D. 7432, 41 FR 38769, Sept. 13, 1976; T.D. 8395, 
57 FR 4254, Feb. 4, 1992]



Sec. 20.2031-3  Valuation of interests in businesses.

    The fair market value of any interest of a decedent in a business, 
whether a partnership or a proprietorship, is the net amount which a 
willing purchaser whether an individual or a corporation, would pay for 
the interest to a willing seller, neither being under any compulsion to 
buy or to sell and both having reasonable knowledge of relevant facts. 
The net value is determined on the basis of all relevant factors 
including--
    (a) A fair appraisal as of the applicable valuation date of all the 
assets of the business, tangible and intangible, including good will;

[[Page 271]]

    (b) The demonstrated earning capacity of the business; and
    (c) The other factors set forth in paragraphs (f) and (h) of Sec. 
20.2031-2 relating to the valuation of corporate stock, to the extent 
applicable.

Special attention should be given to determining an adequate value of 
the good will of the business in all cases in which the decedent has not 
agreed, for an adequate and full consideration in money or money's 
worth, that his interest passes at his death to, for example, his 
surviving partner or partners. Complete financial and other data upon 
which the valuation is based should be submitted with the return, 
including copies of reports of examinations of the business made by 
accountants, engineers, or any technical experts as of or near the 
applicable valuation date. See section 2701 and the regulations at Sec. 
25.2701 of this chapter for special rules for valuing the transfer of an 
interest in a partnership and for the treatment of unpaid qualified 
payments at the death of the transferor or an applicable family member. 
See section 2703 and the regulations at Sec. 25.2703 of this chapter 
for special rules involving options and agreements (including contracts 
to purchase) entered into (or substantially modified after) October 8, 
1990. See section 2704(b) and the regulations at Sec. 25.2704-2 of this 
chapter for special valuation rules involving certain restrictions on 
liquidation rights created after October 8, 1990.

[T.D. 8395, 57 FR 4254, Feb. 4, 1992]



Sec. 20.2031-4  Valuation of notes.

    The fair market value of notes, secured or unsecured, is presumed to 
be the amount of unpaid principal, plus interest accrued to the date of 
death, unless the executor establishes that the value is lower or that 
the notes are worthless. However, items of interest shall be separately 
stated on the estate tax return. If not returned at face value, plus 
accrued interest, satisfactory evidence must be submitted that the note 
is worth less than the unpaid amount (because of the interest rate, date 
of maturity, or other cause), or that the note is uncollectible, either 
in whole or in part (by reason of the insolvency of the party or parties 
liable, or for other cause), and that any property pledged or mortgaged 
as security is insufficient to satisfy the obligation.



Sec. 20.2031-5  Valuation of cash on hand or on deposit.

    The amount of cash belonging to the decedent at the date of his 
death, whether in his possession or in the possession of another, or 
deposited with a bank, is included in the decedent's gross estate. If 
bank checks outstanding at the time of the decedent's death and given in 
discharge of bona fide legal obligations of the decedent incurred for an 
adequate and full consideration in money or money's worth are 
subsequently honored by the bank and charged to the decedent's account, 
the balance remaining in the account may be returned, but only if the 
obligations are not claimed as deductions from the gross estate.



Sec. 20.2031-6  Valuation of household and personal effects.

    (a) General rule. The fair market value of the decedent's household 
and personal effects is the price which a willing buyer would pay to a 
willing seller, neither being under any compulsion to buy or to sell and 
both having reasonable knowledge of relevant facts. A room by room 
itemization of household and personal effects is desirable. All the 
articles should be named specifically, except that a number of articles 
contained in the same room, none of which has a value in excess of $100, 
may be grouped. A separate value should be given for each article named. 
In lieu of an itemized list, the executor may furnish a written 
statement, containing a declaration that it is made under penalties of 
perjury, setting forth the aggregate value as appraised by a competent 
appraiser or appraisers of recognized standing and ability, or by a 
dealer or dealers in the class of personalty involved.
    (b) Special rule in cases involving a substantial amount of valuable 
articles. Notwithstanding the provisions of paragraph (a) of this 
section, if there are included among the household and personal effects 
articles having marked artistic or intrinsic value of a total value in 
excess of $3,000 (e.g., jewelry, furs, silverware, paintings, etchings, 
engravings, antiques, books, statuary,

[[Page 272]]

vases, oriental rugs, coin or stamp collections), the appraisal of an 
expert or experts, under oath, shall be filed with the return. The 
appraisal shall be accompanied by a written statement of the executor 
containing a declaration that it is made under the penalties of perjury 
as to the completeness of the itemized list of such property and as to 
the disinterested character and the qualifications of the appraiser or 
appraisers.
    (c) Disposition of household effects prior to investigation. If it 
is desired to effect distribution or sale of any portion of the 
household or personal effects of the decedent in advance of an 
investigation by an officer of the Internal Revenue Service, information 
to that effect shall be given to the district director. The statement to 
the district director shall be accompanied by an appraisal of such 
property, under oath, and by a written statement of the executor, 
containing a declaration that it is made under the penalties of perjury, 
regarding the completeness of the list of such property and the 
qualifications of the appraiser, as heretofore described. If a personal 
inspection by an officer of the Internal Revenue Service is not deemed 
necessary, the executor will be so advised. This procedure is designed 
to facilitate disposition of such property and to obviate future expense 
and inconvenience to the estate by affording the district director an 
opportunity to make an investigation should one be deemed necessary 
prior to sale or distribution.
    (d) Additional rules if an appraisal involved. If, pursuant to 
paragraphs (a), (b), and (c) of this section, expert appraisers are 
employed, care should be taken to see that they are reputable and of 
recognized competency to appraise the particular class of property 
involved. In the appraisal, books in sets by standard authors should be 
listed in separate groups. In listing paintings having artistic value, 
the size, subject, and artist's name should be stated. In the case of 
oriental rugs, the size, make, and general condition should be given. 
Sets of silverware should be listed in separate groups. Groups or 
individuals pieces of silverware should be weighed and the weights given 
in troy ounces. In arriving at the value of silverware, the appraisers 
should take into consideration its antiquity, utility, desirability, 
condition, and obsolescence.



Sec. 20.2031-7  Valuation of annuities, interests for life or term of
years, and remainder or reversionary interests.

    (a) In general. Except as otherwise provided in paragraph (b) of 
this section and Sec. 20.7520-3(b) (pertaining to certain limitations 
on the use of prescribed tables), the fair market value of annuities, 
life estates, terms of years, remainders, and reversionary interests for 
estates of decedents is the present value of such interests, determined 
under paragraph (d) of this section. The regulations in this and in 
related sections provide tables with standard actuarial factors and 
examples that illustrate how to use the tables to compute the present 
value of ordinary annuity, life, and remainder interests in property. 
These sections also refer to standard and special actuarial factors that 
may be necessary to compute the present value of similar interests in 
more unusual fact situations.
    (b) Commercial annuities and insurance contracts. The value of 
annuities issued by companies regularly engaged in their sale, and of 
insurance policies on the lives of persons other than the decedent, is 
determined under Sec. 20.2031-8. See Sec. 20.2042-1 with respect to 
insurance policies on the decedent's life.
    (c) Actuarial valuations. The present value of annuities, life 
estates, terms of years, remainders, and reversions for estates of 
decedents for which the valuation date of the gross estate is on or 
after May 1, 2009, is determined under paragraph (d) of this section. 
The present value of annuities, life estates, terms of years, 
remainders, and reversions for estates of decedents for which the 
valuation date of the gross estate is before May 1, 2009, is determined 
under the following sections:

------------------------------------------------------------------------
                   Valuation date
-----------------------------------------------------     Applicable
              After                     Before            regulations
------------------------------------------------------------------------
--..............................  01-01-52..........  20.2031-7A(a).
12-31-51........................  01-01-71..........  20.2031-7A(b).
12-31-70........................  12-01-83..........  20.2031-7A(c).
11-30-83........................  05-01-89..........  20.2031-7A(d).
04-30-89........................  05-01-99..........  20.2031-7A(e).

[[Page 273]]

 
04-30-99........................  05-01-09..........  20.2031-7A(f).
------------------------------------------------------------------------

    (d) Actuarial valuations on or after May 1, 2009--(1) In general. 
Except as otherwise provided in paragraph (b) of this section and Sec. 
20.7520-3(b) (pertaining to certain limitations on the use of prescribed 
tables), if the valuation date for the gross estate of the decedent is 
on or after May 1, 2009, the fair market value of annuities, life 
estates, terms of years, remainders, and reversionary interests is the 
present value determined by use of standard or special section 7520 
actuarial factors. These factors are derived by using the appropriate 
section 7520 interest rate and, if applicable, the mortality component 
for the valuation date of the interest that is being valued. For 
purposes of the computations described in this section, the age of an 
individual is the age of that individual at the individual's nearest 
birthday. See Sec. Sec. 20.7520-1 through 20.7520-4.
    (2) Specific interests--(i) Charitable remainder trusts. The fair 
market value of a remainder interest in a pooled income fund, as defined 
in Sec. 1.642(c)-5 of this chapter, is its value determined under Sec. 
1.642(c)-6(e). The fair market value of a remainder interest in a 
charitable remainder annuity trust, as defined in Sec. 1.664-2(a), is 
the present value determined under Sec. 1.664-2(c). The fair market 
value of a remainder interest in a charitable remainder unitrust, as 
defined in Sec. 1.664-3, is its present value determined under Sec. 
1.664-4(e). The fair market value of a life interest or term of years in 
a charitable remainder unitrust is the fair market value of the property 
as of the date of valuation less the fair market value of the remainder 
interest on that date determined under Sec. 1.664-4(e)(4) and (5).
    (ii) Ordinary remainder and reversionary interests. If the interest 
to be valued is to take effect after a definite number of years or after 
the death of one individual, the present value of the interest is 
computed by multiplying the value of the property by the appropriate 
remainder interest actuarial factor (that corresponds to the applicable 
section 7520 interest rate and remainder interest period) in Table B 
(for a term certain) or in Table S (for one measuring life), as the case 
may be. Table B is contained in paragraph (d)(6) of this section and 
Table S (for one measuring life when the valuation date is on or after 
May 1, 2009) is contained in paragraph (d)(7) of this section and in 
Internal Revenue Service Publication 1457. See Sec. 20.2031-7A 
containing Table S for valuation of interests before May 1, 2009. For 
information about obtaining actuarial factors for other types of 
remainder interests, see paragraph (d)(4) of this section.
    (iii) Ordinary term-of-years and life interests. If the interest to 
be valued is the right of a person to receive the income of certain 
property, or to use certain nonincome-producing property, for a term of 
years or for the life of one individual, the present value of the 
interest is computed by multiplying the value of the property by the 
appropriate term-of-years or life interest actuarial factor (that 
corresponds to the applicable section 7520 interest rate and term-of-
years or life interest period). Internal Revenue Service Publication 
1457 includes actuarial factors for a remainder interest after a term of 
years in Table B and after the life of one individual in Table S (for 
one measuring life when the valuation date is on or after May 1, 2009). 
However, term-of-years and life interest actuarial factors are not 
included in Table B in paragraph (d)(6) of this section or Table S in 
paragraph (d)(7) of this section (or in Sec. 20.2031-7A). If Internal 
Revenue Service Publication 1457 (or any other reliable source of term-
of-years and life interest actuarial factors) is not conveniently 
available, an actuarial factor for the interest may be derived 
mathematically. This actuarial factor may be derived by subtracting the 
correlative remainder factor (that corresponds to the applicable section 
7520 interest rate and the term of years or the life) in Table B (for a 
term of years) in paragraph (d)(6) of this section or in Table S (for 
the life of one individual) in paragraph (d)(7) of this section, as the 
case may be, from 1.000000. For information about obtaining actuarial 
factors for other types of term-of-years and life interests, see 
paragraph (d)(4) of this section.

[[Page 274]]

    (iv) Annuities. (A) If the interest to be valued is the right of a 
person to receive an annuity that is payable at the end of each year for 
a term of years or for the life of one individual, the present value of 
the interest is computed by multiplying the aggregate amount payable 
annually by the appropriate annuity actuarial factor (that corresponds 
to the applicable section 7520 interest rate and annuity period). 
Internal Revenue Publication 1457 includes actuarial factors for a 
remainder interest in Table B (after an annuity payable for a term of 
years) and in Table S (after an annuity payable for the life of one 
individual when the valuation date is on or after May 1, 2009). However, 
annuity actuarial factors are not included in Table B in paragraph 
(d)(6) of this section or Table S in paragraph (d)(7) of this section 
(or in Sec. 20.2031-7A). If Internal Revenue Service Publication 1457 
(or any other reliable source of annuity actuarial factors) is not 
conveniently available, a required annuity factor for a term of years or 
for one life may be mathematically derived. This annuity factor may be 
derived by subtracting the applicable remainder factor (that corresponds 
to the applicable section 7520 interest rate and annuity period) in 
Table B (in the case of a term-of-years annuity) in paragraph (d)(6) of 
this section or in Table S (in the case of a one-life annuity when the 
valuation date is on or after May 1, 2009) in paragraph (d)(7) of this 
section, as the case may be, from 1.000000 and then dividing the result 
by the applicable section 7520 interest rate expressed as a decimal 
number.
    (B) If the annuity is payable at the end of semiannual, quarterly, 
monthly, or weekly periods, the product obtained by multiplying the 
annuity factor by the aggregate amount payable annually is then 
multiplied by the applicable adjustment factor as contained in Table K 
in paragraph (d)(6) of this section for payments made at the end of the 
specified periods. The provisions of this paragraph (d)(2)(iv)(B) are 
illustrated by the following example:

    Example. At the time of the decedent's death, the survivor/
annuitant, age 72, is entitled to receive an annuity of $15,000 a year 
for life payable in equal monthly installments at the end of each 
period. The section 7520 rate for the month in which the decedent died 
is 5.6 percent. Under Table S in paragraph (d)(7) of this section, the 
remainder factor at 5.6 percent for an individual aged 72 is .53243. By 
converting the remainder factor to an annuity factor, as described 
above, the annuity factor at 5.6 percent for an individual aged 72 is 
8.3495 (1.000000 minus .53243, divided by .056). Under Table K in 
paragraph (d)(6) of this section, the adjustment factor under the column 
for payments made at the end of each monthly period at the rate of 5.6 
percent is 1.0254. The aggregate annual amount, $15,000, is multiplied 
by the factor 8.3495 and the product is multiplied by 1.0254. The 
present value of the annuity at the date of the decedent's death is, 
therefore, $128,423.66 ($15,000 x 8.3495 x 1.0254).

    (C) If an annuity is payable at the beginning of annual, semiannual, 
quarterly, monthly, or weekly periods for a term of years, the value of 
the annuity is computed by multiplying the aggregate amount payable 
annually by the annuity factor described in paragraph (d)(2)(iv)(A) of 
this section, and the product so obtained is then multiplied by the 
adjustment factor in Table J in paragraph (d)(6) of this section at the 
appropriate interest rate component for payments made at the beginning 
of specified periods. If an annuity is payable at the beginning of 
annual, semiannual, quarterly, monthly, or weekly periods for one or 
more lives, the value of the annuity is the sum of the first payment 
plus the present value of a similar annuity, the first payment of which 
is not to be made until the end of the payment period, determined as 
provided in this paragraph (d)(2)(iv).
    (v) Annuity and unitrust interests for a term of years or until the 
prior death of an individual. See Sec. 25.2512-5(d)(2)(v) of this 
chapter for examples explaining how to compute the present value of an 
annuity or unitrust interest that is payable until the earlier of the 
lapse of a specific number of years or the death of an individual.
    (3) Transitional rule. (i) If a decedent dies on or after May 1, 
2009, and if on May 1, 2009, the decedent was mentally incompetent so 
that the disposition of the decedent's property could not be changed, 
and the decedent dies without having regained competency to dispose of 
the decedent's property or dies within 90 days of the date on which the 
decedent first regains competency, the

[[Page 275]]

fair market value of annuities, life estates, terms for years, 
remainders, and reversions included in the gross estate of the decedent 
is their present value determined either under this section or under the 
corresponding section applicable at the time the decedent became 
mentally incompetent, at the option of the decedent's executor. For 
examples, see Sec. 20.2031-7A(d).
    (ii) If a decedent dies on or after May 1, 2009, and before July 1, 
2009, the fair market value of annuities, life estates, remainders, and 
reversions based on one or more measuring lives included in the gross 
estate of the decedent is their present value determined under this 
section by use of the section 7520 interest rate for the month in which 
the valuation date occurs (see Sec. Sec. 20.7520-1(b) and 20.7520-
2(a)(2)) and the appropriate actuarial tables under either paragraph 
(d)(7) of this section or Sec. 20.2031-7A(f)(4), at the option of the 
decedent's executor.
    (iii) For purposes of paragraphs (d)(3)(i) and (d)(3)(ii) of this 
section, where the decedent's executor is given the option to use the 
appropriate actuarial tables under either paragraph (d)(7) of this 
section or Sec. 20.2031-7A(f)(4), the decedent's executor must use the 
same actuarial table with respect to each individual transaction and 
with respect to all transfers occurring on the valuation date. For 
example, gift and income tax charitable deductions with respect to the 
same transfer must be determined based on the same tables, and all 
assets includible in the gross estate and/or estate tax deductions 
claimed must be valued based on the same tables.
    (4) Publications and actuarial computations by the Internal Revenue 
Service. Many standard actuarial factors not included in paragraph 
(d)(6) or (d)(7) of this section are included in Internal Revenue 
Service Publication 1457, ``Actuarial Valuations Version 3A'' (2009). 
Publication 1457 also includes examples that illustrate how to compute 
many special factors for more unusual situations. This publication is 
available, at no charge, electronically via the Internal Revenue Service 
Internet site at http://www.irs.gov. If a special factor is required in 
the case of an actual decedent, the Internal Revenue Service may furnish 
the factor to the executor upon a request for a ruling. The request for 
a ruling must be accompanied by a recitation of the facts including a 
statement of the date of birth for each measuring life, the date of the 
decedent's death, any other applicable dates, and a copy of the will, 
trust, or other relevant documents. A request for a ruling must comply 
with the instructions for requesting a ruling published periodically in 
the Internal Revenue Bulletin (see Sec. Sec. 601.201 and 
601.601(d)(2)(ii)(b) of this chapter) and must include payment of the 
required user fee.
    (5) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Remainder payable at an individual's death. The decedent, 
or the decedent's estate, was entitled to receive certain property worth 
$50,000 upon the death of A, to whom the income was bequeathed for life. 
At the time of the decedent's death, A was 47 years and 5 months old. In 
the month in which the decedent died, the section 7520 rate was 6.2 
percent. Under Table S in paragraph (d)(7) of this section, the 
remainder factor at 6.2 percent for determining the present value of the 
remainder interest due at the death of a person aged 47, the number of 
years nearest A's actual age at the decedent's death, is .18672. The 
present value of the remainder interest at the date of the decedent's 
death is, therefore, $9,336.00 ($50,000 x .18672).
    Example 2. Income payable for an individual's life. A's parent 
bequeathed an income interest in property to A for life, with the 
remainder interest passing to B at A's death. At the time of the 
parent's death, the value of the property was $50,000 and A was 30 years 
and 10 months old. The section 7520 rate at the time of the parent's 
death was 6.2 percent. Under Table S in paragraph (d)(7) of this 
section, the remainder factor at 6.2 percent for determining the present 
value of the remainder interest due at the death of a person aged 31, 
the number of years closest to A's age at the decedent's death, is 
.08697. Converting this remainder factor to an income factor, as 
described in paragraph (d)(2)(iii) of this section, the factor for 
determining the present value of an income interest for the life of a 
person aged 31 is .91303. The present value of A's interest at the time 
of the parent's death is, therefore, $45,651.50 ($50,000 x .91303).
    Example 3. Annuity payable for an individual's life. A purchased an 
annuity for the benefit of both A and B. Under the terms of the annuity 
contract, at A's death, a survivor annuity of $10,000 per year payable 
in equal semiannual installments made at the end of

[[Page 276]]

each interval is payable to B for life. At A's death, B was 45 years and 
7 months old. Also, at A's death, the section 7520 rate was 4.8 percent. 
Under Table S in paragraph (d)(7) of this section, the factor at 4.8 
percent for determining the present value of the remainder interest at 
the death of a person age 46 (the number of years nearest B's actual 
age) is .24774. By converting the factor to an annuity factor, as 
described in paragraph (d)(2)(iv)(A) of this section, the factor for the 
present value of an annuity payable until the death of a person age 46 
is 15.6721 (1.000000 minus .24774, divided by .048). The adjustment 
factor from Table K in paragraph (d)(6) of this section at an interest 
rate of 4.8 percent for semiannual annuity payments made at the end of 
the period is 1.0119. The present value of the annuity at the date of 
A's death is, therefore, $158,585.98 ($10,000 x 15.6721 x 1.0119).
    Example 4. Annuity payable for a term of years. The decedent, or the 
decedent's estate, was entitled to receive an annuity of $10,000 per 
year payable in equal quarterly installments at the end of each quarter 
throughout a term certain. At the time of the decedent's death, the 
section 7520 rate was 9.8 percent. A quarterly payment had been made 
immediately prior to the decedent's death and payments were to continue 
for 5 more years. Under Table B in paragraph (d)(6) of this section for 
the interest rate of 9.8 percent, the factor for the present value of a 
remainder interest due after a term of 5 years is .626597. Converting 
the factor to an annuity factor, as described in paragraph (d)(2)(iv)(A) 
of this section, the factor for the present value of an annuity for a 
term of 5 years is 3.8102 (1.000000 minus .626597, divided by .098). The 
adjustment factor from Table K in paragraph (d)(6) of this section at an 
interest rate of 9.8 percent for quarterly annuity payments made at the 
end of the period is 1.0360. The present value of the annuity is, 
therefore, $39,473.67 ($10,000 x 3.8102 x 1.0360).
    (6) Actuarial Table B, Table J, and Table K where the valuation date 
is after April 30, 1989. Except as provided in Sec. 20.7520-3(b) 
(pertaining to certain limitations on prescribed tables), for 
determination of the present value of an interest that is dependent on a 
term of years, the tables in this paragraph (d)(6) must be used in the 
application of the provisions of this section when the section 7520 
interest rate component is between 4.2 and 14 percent.

                                         Table B--Term Certain Remainder Factors Applicable After April 30, 1989
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                        Years                        ---------------------------------------------------------------------------------------------------
                                                        4.2%      4.4%      4.6%      4.8%      5.0%      5.2%      5.4%      5.6%      5.8%      6.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................   .959693   .957854   .956023   .954198   .952381   .950570   .948767   .946970   .945180   .943396
2...................................................   .921010   .917485   .913980   .910495   .907029   .903584   .900158   .896752   .893364   .889996
3...................................................   .883887   .878817   .873786   .868793   .863838   .858920   .854040   .849197   .844390   .839619
4...................................................   .848260   .841779   .835359   .829001   .822702   .816464   .810285   .804163   .798100   .792094
5...................................................   .814069   .806302   .798623   .791031   .783526   .776106   .768771   .761518   .754348   .747258
6...................................................   .781257   .772320   .763501   .754801   .746215   .737744   .729384   .721135   .712994   .704961
7...................................................   .749766   .739770   .729925   .720230   .710681   .701277   .692015   .682893   .673908   .665057
8...................................................   .719545   .708592   .697825   .687242   .676839   .666613   .656561   .646679   .636964   .627412
9...................................................   .690543   .678728   .667137   .655765   .644609   .633663   .622923   .612385   .602045   .591898
10..................................................   .662709   .650122   .637798   .625730   .613913   .602341   .591009   .579910   .569041   .558395
11..................................................   .635997   .622722   .609750   .597071   .584679   .572568   .560729   .549157   .537846   .526788
12..................................................   .610362   .596477   .582935   .569724   .556837   .544266   .532001   .520035   .508361   .496969
13..................................................   .585760   .571339   .557299   .543630   .530321   .517363   .504745   .492458   .480492   .468839
14..................................................   .562150   .547259   .532790   .518731   .505068   .491790   .478885   .466343   .454151   .442301
15..................................................   .539491   .524195   .509360   .494972   .481017   .467481   .454350   .441612   .429255   .417265
16..................................................   .517746   .502102   .486960   .472302   .458112   .444374   .431072   .418194   .405723   .393646
17..................................................   .496877   .480941   .465545   .450670   .436297   .422408   .408987   .396017   .383481   .371364
18..................................................   .476849   .460671   .445071   .430028   .415521   .401529   .388033   .375016   .362458   .350344
19..................................................   .457629   .441256   .425498   .410332   .395734   .381681   .368153   .355129   .342588   .330513
20..................................................   .439183   .422659   .406786   .391538   .376889   .362815   .349291   .336296   .323807   .311805
21..................................................   .421481   .404846   .388897   .373605   .358942   .344881   .331396   .318462   .306056   .294155
22..................................................   .404492   .387783   .371794   .356494   .341850   .327834   .314417   .301574   .289278   .277505
23..................................................   .388188   .371440   .355444   .340166   .325571   .311629   .298309   .285581   .273420   .261797
24..................................................   .372542   .355785   .339813   .324586   .310068   .296225   .283025   .270437   .258431   .246979
25..................................................   .357526   .340791   .324869   .309719   .295303   .281583   .268525   .256096   .244263   .232999
26..................................................   .343115   .326428   .310582   .295533   .281241   .267664   .254768   .242515   .230873   .219810
27..................................................   .329285   .312670   .296923   .281998   .267848   .254434   .241715   .229654   .218216   .207368
28..................................................   .316012   .299493   .283866   .269082   .255094   .241857   .229331   .217475   .206253   .195630
29..................................................   .303275   .286870   .271382   .256757   .242946   .229902   .217582   .205943   .194947   .184557
30..................................................   .291051   .274780   .259447   .244997   .231377   .218538   .206434   .195021   .184260   .174110
31..................................................   .279319   .263199   .248038   .233776   .220359   .207736   .195858   .184679   .174158   .164255
32..................................................   .268061   .252106   .237130   .223069   .209866   .197468   .185823   .174886   .164611   .154957
33..................................................   .257256   .241481   .226702   .212852   .199873   .187707   .176303   .165612   .155587   .146186
34..................................................   .246887   .231304   .216732   .203103   .190355   .178429   .167270   .156829   .147058   .137912
35..................................................   .236935   .221556   .207201   .193801   .181290   .169609   .158701   .148512   .138996   .130105
36..................................................   .227385   .212218   .198089   .184924   .172657   .161225   .150570   .140637   .131376   .122741

[[Page 277]]

 
37..................................................   .218220   .203274   .189377   .176454   .164436   .153256   .142856   .133179   .124174   .115793
38..................................................   .209424   .194707   .181049   .168373   .156605   .145681   .135537   .126116   .117367   .109239
39..................................................   .200983   .186501   .173087   .160661   .149148   .138480   .128593   .119428   .110933   .103056
40..................................................   .192882   .178641   .165475   .153302   .142046   .131635   .122004   .113095   .104851   .097222
41..................................................   .185107   .171112   .158198   .146281   .135282   .125128   .115754   .107098   .099103   .091719
42..................................................   .177646   .163900   .151241   .139581   .128840   .118943   .109823   .101418   .093670   .086527
43..................................................   .170486   .156992   .144590   .133188   .122704   .113064   .104197   .096040   .088535   .081630
44..................................................   .163614   .150376   .138231   .127088   .116861   .107475   .098858   .090947   .083682   .077009
45..................................................   .157019   .144038   .132152   .121267   .111297   .102163   .093793   .086124   .079094   .072650
46..................................................   .150690   .137968   .126340   .115713   .105997   .097113   .088988   .081557   .074758   .068538
47..................................................   .144616   .132153   .120784   .110413   .100949   .092312   .084429   .077232   .070660   .064658
48..................................................   .138787   .126583   .115473   .105356   .096142   .087749   .080103   .073136   .066786   .060998
49..................................................   .133193   .121248   .110395   .100530   .091564   .083412   .075999   .069258   .063125   .057546
50..................................................   .127824   .116138   .105540   .095926   .087204   .079289   .072106   .065585   .059665   .054288
51..................................................   .122672   .111243   .100898   .091532   .083051   .075370   .068411   .062107   .056394   .051215
52..................................................   .117728   .106555   .096461   .087340   .079096   .071644   .064907   .058813   .053302   .048316
53..................................................   .112982   .102064   .092219   .083340   .075330   .068103   .061581   .055695   .050380   .045582
54..................................................   .108428   .097763   .088164   .079523   .071743   .064737   .058426   .052741   .047618   .043001
55..................................................   .104058   .093642   .084286   .075880   .068326   .061537   .055433   .049944   .045008   .040567
56..................................................   .099864   .089696   .080580   .072405   .065073   .058495   .052593   .047296   .042541   .038271
57..................................................   .095839   .085916   .077036   .069089   .061974   .055604   .049898   .044787   .040208   .036105
58..................................................   .091976   .082295   .073648   .065924   .059023   .052855   .047342   .042412   .038004   .034061
59..................................................   .088268   .078826   .070409   .062905   .056212   .050243   .044916   .040163   .035921   .032133
60..................................................   .084710   .075504   .067313   .060024   .053536   .047759   .042615   .038033   .033952   .030314
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                         Table B--Term Certain Remainder Factors Applicable After April 30, 1989
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                        Years                        ---------------------------------------------------------------------------------------------------
                                                        6.2%      6.4%      6.6%      6.8%      7.0%      7.2%      7.4%      7.6%      7.8%      8.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................   .941620   .939850   .938086   .936330   .934579   .932836   .931099   .929368   .927644   .925926
2...................................................   .886647   .883317   .880006   .876713   .873439   .870183   .866945   .863725   .860523   .857339
3...................................................   .834885   .830185   .825521   .820892   .816298   .811738   .807211   .802718   .798259   .793832
4...................................................   .786144   .780249   .774410   .768626   .762895   .757218   .751593   .746021   .740500   .735030
5...................................................   .740248   .733317   .726464   .719687   .712986   .706360   .699808   .693328   .686920   .680583
6...................................................   .697032   .689208   .681486   .673864   .666342   .658918   .651590   .644357   .637217   .630170
7...................................................   .656339   .647752   .639292   .630959   .622750   .614662   .606694   .598845   .591111   .583490
8...................................................   .618022   .608789   .599711   .590786   .582009   .573379   .564892   .556547   .548340   .540269
9...................................................   .581942   .572170   .562581   .553170   .543934   .534868   .525971   .517237   .508664   .500249
10..................................................   .547968   .537754   .527750   .517950   .508349   .498944   .489731   .480704   .471859   .463193
11..................................................   .515977   .505408   .495075   .484972   .475093   .465433   .455987   .446750   .437717   .428883
12..................................................   .485854   .475007   .464423   .454093   .444012   .434173   .424569   .415196   .406046   .397114
13..................................................   .457490   .446436   .435669   .425181   .414964   .405012   .395316   .385870   .376666   .367698
14..................................................   .430781   .419582   .408695   .398109   .387817   .377810   .368078   .358615   .349412   .340461
15..................................................   .405632   .394344   .383391   .372762   .362446   .352434   .342717   .333285   .324130   .315242
16..................................................   .381951   .370624   .359654   .349028   .338735   .328763   .319103   .309745   .300677   .291890
17..................................................   .359653   .348331   .337386   .326805   .316574   .306682   .297117   .287867   .278921   .270269
18..................................................   .338656   .327379   .316498   .305997   .295864   .286084   .276645   .267534   .258739   .250249
19..................................................   .318885   .307687   .296902   .286514   .276508   .266870   .257584   .248638   .240018   .231712
20..................................................   .300268   .289179   .278520   .268272   .258419   .248946   .239836   .231076   .222651   .214548
21..................................................   .282739   .271785   .261276   .251191   .241513   .232225   .223311   .214755   .206541   .198656
22..................................................   .266232   .255437   .245099   .235197   .225713   .216628   .207925   .199586   .191596   .183941
23..................................................   .250689   .240073   .229924   .220222   .210947   .202078   .193598   .185489   .177733   .170315
24..................................................   .236054   .225632   .215689   .206201   .197147   .188506   .180259   .172387   .164873   .157699
25..................................................   .222273   .212060   .202334   .193072   .184249   .175845   .167839   .160211   .152943   .146018
26..................................................   .209297   .199305   .189807   .180779   .172195   .164035   .156275   .148895   .141877   .135202
27..................................................   .197078   .187317   .178056   .169269   .160930   .153017   .145507   .138379   .131611   .125187
28..................................................   .185572   .176049   .167031   .158491   .150402   .142740   .135482   .128605   .122088   .115914
29..................................................   .174739   .165460   .156690   .148400   .140563   .133153   .126147   .119521   .113255   .107328
30..................................................   .164537   .155507   .146989   .138951   .131367   .124210   .117455   .111079   .105060   .099377
31..................................................   .154932   .146154   .137888   .130104   .122773   .115868   .109362   .103233   .097458   .092016
32..................................................   .145887   .137362   .129351   .121820   .114741   .108085   .101827   .095942   .090406   .085200
33..................................................   .137370   .129100   .121342   .114064   .107235   .100826   .094811   .089165   .083865   .078889
34..................................................   .129350   .121335   .113830   .106802   .100219   .094054   .088278   .082867   .077797   .073045
35..................................................   .121798   .114036   .106782   .100001   .093663   .087737   .082196   .077014   .072168   .067635
36..................................................   .114688   .107177   .100171   .093634   .087535   .081844   .076532   .071574   .066946   .062625
37..................................................   .107992   .100730   .093969   .087673   .081809   .076347   .071259   .066519   .062102   .057986
38..................................................   .101688   .094671   .088151   .082090   .076457   .071219   .066349   .061821   .057609   .053690
39..................................................   .095751   .088977   .082693   .076864   .071455   .066436   .061778   .057454   .053440   .049713

[[Page 278]]

 
40..................................................   .090161   .083625   .077573   .071970   .066780   .061974   .057521   .053396   .049573   .046031
41..................................................   .084897   .078595   .072770   .067387   .062412   .057811   .053558   .049625   .045987   .042621
42..................................................   .079941   .073867   .068265   .063097   .058329   .053929   .049868   .046120   .042659   .039464
43..................................................   .075274   .069424   .064038   .059079   .054513   .050307   .046432   .042862   .039572   .036541
44..................................................   .070880   .065248   .060074   .055318   .050946   .046928   .043233   .039835   .036709   .033834
45..................................................   .066742   .061323   .056354   .051796   .047613   .043776   .040254   .037021   .034053   .031328
46..................................................   .062845   .057635   .052865   .048498   .044499   .040836   .037480   .034406   .031589   .029007
47..................................................   .059176   .054168   .049592   .045410   .041587   .038093   .034898   .031976   .029303   .026859
48..................................................   .055722   .050910   .046522   .042519   .038867   .035535   .032493   .029717   .027183   .024869
49..................................................   .052469   .047848   .043641   .039812   .036324   .033148   .030255   .027618   .025216   .023027
50..................................................   .049405   .044970   .040939   .037277   .033948   .030922   .028170   .025668   .023392   .021321
51..................................................   .046521   .042265   .038405   .034903   .031727   .028845   .026229   .023855   .021699   .019742
52..................................................   .043805   .039722   .036027   .032681   .029651   .026907   .024422   .022170   .020129   .018280
53..................................................   .041248   .037333   .033796   .030600   .027711   .025100   .022739   .020604   .018673   .016925
54..................................................   .038840   .035087   .031704   .028652   .025899   .023414   .021172   .019149   .017322   .015672
55..................................................   .036572   .032977   .029741   .026828   .024204   .021842   .019714   .017796   .016068   .014511
56..................................................   .034437   .030993   .027900   .025119   .022621   .020375   .018355   .016539   .014906   .013436
57..................................................   .032427   .029129   .026172   .023520   .021141   .019006   .017091   .015371   .013827   .012441
58..................................................   .030534   .027377   .024552   .022023   .019758   .017730   .015913   .014285   .012827   .011519
59..................................................   .028751   .025730   .023032   .020620   .018465   .016539   .014817   .013276   .011899   .010666
60..................................................   .027073   .024183   .021606   .019307   .017257   .015428   .013796   .012339   .011038   .009876
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                         Table B--Term Certain Remainder Factors Applicable After April 30, 1989
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                        Years                        ---------------------------------------------------------------------------------------------------
                                                        8.2%      8.4%      8.6%      8.8%      9.0%      9.2%      9.4%      9.6%      9.8%      10.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................   .924214   .922509   .920810   .919118   .917431   .915751   .914077   .912409   .910747   .909091
2...................................................   .854172   .851023   .847892   .844777   .841680   .838600   .835536   .832490   .829460   .826446
3...................................................   .789438   .785077   .780747   .776450   .772183   .767948   .763744   .759571   .755428   .751315
4...................................................   .729610   .724241   .718920   .713649   .708425   .703250   .698121   .693039   .688003   .683013
5...................................................   .674316   .668119   .661989   .655927   .649931   .644001   .638136   .632335   .626597   .620921
6...................................................   .623213   .616346   .609566   .602874   .596267   .589745   .583305   .576948   .570671   .564474
7...................................................   .575982   .568585   .561295   .554112   .547034   .540059   .533186   .526412   .519737   .513158
8...................................................   .532331   .524524   .516846   .509294   .501866   .494560   .487373   .480303   .473349   .466507
9...................................................   .491988   .483879   .475917   .468101   .460428   .452894   .445496   .438233   .431101   .424098
10..................................................   .454703   .446383   .438230   .430240   .422411   .414738   .407218   .399848   .392624   .385543
11..................................................   .420243   .411792   .403526   .395441   .387533   .379797   .372228   .364824   .357581   .350494
12..................................................   .388394   .379882   .371571   .363457   .355535   .347799   .340245   .332869   .325666   .318631
13..................................................   .358960   .350445   .342147   .334060   .326179   .318497   .311010   .303713   .296599   .289664
14..................................................   .331756   .323288   .315052   .307040   .299246   .291664   .284287   .277110   .270127   .263331
15..................................................   .306613   .298236   .290103   .282206   .274538   .267092   .259860   .252838   .246017   .239392
16..................................................   .283376   .275126   .267130   .259381   .251870   .244589   .237532   .230691   .224059   .217629
17..................................................   .261901   .253806   .245976   .238401   .231073   .223983   .217123   .210485   .204061   .197845
18..................................................   .242052   .234139   .226497   .219119   .211994   .205113   .198467   .192048   .185848   .179859
19..................................................   .223708   .215995   .208561   .201396   .194490   .187832   .181414   .175226   .169260   .163508
20..................................................   .206754   .199257   .192045   .185107   .178431   .172007   .165826   .159878   .154153   .148644
21..................................................   .191085   .183817   .176837   .170135   .163698   .157516   .151578   .145874   .140395   .135131
22..................................................   .176604   .169573   .162834   .156374   .150182   .144245   .138554   .133097   .127864   .122846
23..................................................   .163220   .156432   .149939   .143726   .137781   .132093   .126649   .121439   .116452   .111678
24..................................................   .150850   .144310   .138065   .132101   .126405   .120964   .115767   .110802   .106058   .101526
25..................................................   .139418   .133128   .127132   .121416   .115968   .110773   .105820   .101097   .096592   .092296
26..................................................   .128852   .122811   .117064   .111596   .106393   .101441   .096727   .092241   .087971   .083905
27..................................................   .119087   .113295   .107794   .102570   .097608   .092894   .088416   .084162   .080119   .076278
28..................................................   .110062   .104515   .099258   .094274   .089548   .085068   .080819   .076790   .072968   .069343
29..................................................   .101721   .096416   .091398   .086649   .082155   .077901   .073875   .070064   .066456   .063039
30..................................................   .094012   .088945   .084160   .079640   .075371   .071338   .067527   .063927   .060524   .057309
31..................................................   .086887   .082053   .077495   .073199   .069148   .065328   .061725   .058327   .055122   .052099
32..................................................   .080302   .075694   .071358   .067278   .063438   .059824   .056422   .053218   .050202   .047362
33..................................................   .074216   .069829   .065708   .061837   .058200   .054784   .051574   .048557   .045722   .043057
34..................................................   .068592   .064418   .060504   .056835   .053395   .050168   .047142   .044304   .041641   .039143
35..................................................   .063394   .059426   .055713   .052238   .048986   .045942   .043092   .040423   .037924   .035584
36..................................................   .058589   .054821   .051301   .048013   .044941   .042071   .039389   .036882   .034539   .032349
37..................................................   .054149   .050573   .047239   .044130   .041231   .038527   .036005   .033652   .031457   .029408
38..................................................   .050045   .046654   .043498   .040560   .037826   .035281   .032911   .030704   .028649   .026735
39..................................................   .046253   .043039   .040053   .037280   .034703   .032309   .030083   .028015   .026092   .024304
40..................................................   .042747   .039703   .036881   .034264   .031838   .029587   .027498   .025561   .023763   .022095
41..................................................   .039508   .036627   .033961   .031493   .029209   .027094   .025136   .023322   .021642   .020086
42..................................................   .036514   .033789   .031271   .028946   .026797   .024811   .022976   .021279   .019711   .018260

[[Page 279]]

 
43..................................................   .033746   .031170   .028795   .026605   .024584   .022721   .021002   .019415   .017951   .016600
44..................................................   .031189   .028755   .026515   .024453   .022555   .020807   .019197   .017715   .016349   .015091
45..................................................   .028825   .026527   .024415   .022475   .020692   .019054   .017548   .016163   .014890   .013719
46..................................................   .026641   .024471   .022482   .020657   .018984   .017449   .016040   .014747   .013561   .012472
47..................................................   .024622   .022575   .020701   .018986   .017416   .015978   .014662   .013456   .012351   .011338
48..................................................   .022756   .020825   .019062   .017451   .015978   .014632   .013402   .012277   .011248   .010307
49..................................................   .021031   .019212   .017552   .016039   .014659   .013400   .012250   .011202   .010244   .009370
50..................................................   .019437   .017723   .016163   .014742   .013449   .012271   .011198   .010221   .009330   .008519
51..................................................   .017964   .016350   .014883   .013550   .012338   .011237   .010236   .009325   .008497   .007744
52..................................................   .016603   .015083   .013704   .012454   .011319   .010290   .009356   .008508   .007739   .007040
53..................................................   .015345   .013914   .012619   .011446   .010385   .009423   .008552   .007763   .007048   .006400
54..................................................   .014182   .012836   .011620   .010521   .009527   .008629   .007817   .007083   .006419   .005818
55..................................................   .013107   .011841   .010699   .009670   .008741   .007902   .007146   .006463   .005846   .005289
56..................................................   .012114   .010923   .009852   .008888   .008019   .007237   .006532   .005897   .005324   .004809
57..................................................   .011196   .010077   .009072   .008169   .007357   .006627   .005971   .005380   .004849   .004371
58..................................................   .010347   .009296   .008354   .007508   .006749   .006069   .005458   .004909   .004416   .003974
59..................................................   .009563   .008576   .007692   .006901   .006192   .005557   .004989   .004479   .004022   .003613
60..................................................   .008838   .007911   .007083   .006343   .005681   .005089   .004560   .004087   .003663   .003284
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                         Table B--Term Certain Remainder Factors Applicable After April 30, 1989
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                        Years                        ---------------------------------------------------------------------------------------------------
                                                        10.2%     10.4%     10.6%     10.8%     11.0%     11.2%     11.4%     11.6%     11.8%     12.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................   .907441   .905797   .904159   .902527   .900901   .899281   .897666   .896057   .894454   .892857
2...................................................   .823449   .820468   .817504   .814555   .811622   .808706   .805804   .802919   .800049   .797194
3...................................................   .747232   .743178   .739153   .735158   .731191   .727253   .723343   .719461   .715607   .711780
4...................................................   .678069   .673168   .668312   .663500   .658731   .654005   .649321   .644679   .640078   .635518
5...................................................   .615307   .609754   .604261   .598827   .593451   .588134   .582873   .577669   .572520   .567427
6...................................................   .558355   .552313   .546348   .540457   .534641   .528897   .523225   .517625   .512093   .506631
7...................................................   .506674   .500284   .493985   .487777   .481658   .475627   .469682   .463821   .458044   .452349
8...................................................   .459777   .453156   .446641   .440232   .433926   .427722   .421617   .415610   .409700   .403883
9...................................................   .417221   .410467   .403835   .397322   .390925   .384642   .378472   .372411   .366458   .360610
10..................................................   .378603   .371800   .365131   .358593   .352184   .345901   .339741   .333701   .327780   .321973
11..................................................   .343560   .336775   .330137   .323640   .317283   .311062   .304974   .299016   .293184   .287476
12..................................................   .311760   .305050   .298496   .292094   .285841   .279732   .273765   .267935   .262240   .256675
13..................................................   .282904   .276313   .269888   .263623   .257514   .251558   .245749   .240085   .234561   .229174
14..................................................   .256719   .250284   .244022   .237927   .231995   .226221   .220601   .215130   .209804   .204620
15..................................................   .232957   .226706   .220634   .214735   .209004   .203436   .198026   .192769   .187661   .182696
16..................................................   .211395   .205350   .199489   .193804   .188292   .182946   .177761   .172732   .167854   .163122
17..................................................   .191828   .186005   .180369   .174914   .169633   .164520   .159570   .154778   .150138   .145644
18..................................................   .174073   .168483   .163083   .157864   .152822   .147950   .143241   .138690   .134291   .130040
19..................................................   .157961   .152612   .147453   .142477   .137678   .133048   .128582   .124274   .120117   .116107
20..................................................   .143340   .138235   .133321   .128589   .124034   .119648   .115424   .111357   .107439   .103667
21..................................................   .130073   .125213   .120543   .116055   .111742   .107597   .103612   .099782   .096100   .092560
22..................................................   .118033   .113418   .108990   .104743   .100669   .096760   .093009   .089410   .085957   .082643
23..................................................   .107108   .102733   .098544   .094533   .090693   .087014   .083491   .080117   .076884   .073788
24..................................................   .097195   .093056   .089100   .085319   .081705   .078250   .074947   .071789   .068770   .065882
25..................................................   .088198   .084289   .080560   .077003   .073608   .070369   .067278   .064327   .061511   .058823
26..................................................   .080035   .076349   .072839   .069497   .066314   .063281   .060393   .057641   .055019   .052521
27..................................................   .072627   .069157   .065858   .062723   .059742   .056908   .054213   .051650   .049212   .046894
28..................................................   .065905   .062642   .059547   .056609   .053822   .051176   .048665   .046281   .044018   .041869
29..................................................   .059804   .056741   .053840   .051091   .048488   .046022   .043685   .041470   .039372   .037383
30..................................................   .054269   .051396   .048680   .046111   .043683   .041386   .039214   .037160   .035216   .033378
31..................................................   .049246   .046554   .044014   .041617   .039354   .037218   .035201   .033297   .031500   .029802
32..................................................   .044688   .042169   .039796   .037560   .035454   .033469   .031599   .029836   .028175   .026609
33..................................................   .040552   .038196   .035982   .033899   .031940   .030098   .028365   .026735   .025201   .023758
34..................................................   .036798   .034598   .032533   .030595   .028775   .027067   .025463   .023956   .022541   .021212
35..................................................   .033392   .031339   .029415   .027613   .025924   .024341   .022857   .021466   .020162   .018940
36..................................................   .030301   .028387   .026596   .024921   .023355   .021889   .020518   .019235   .018034   .016910
37..................................................   .027497   .025712   .024047   .022492   .021040   .019684   .018418   .017236   .016131   .015098
38..................................................   .024952   .023290   .021742   .020300   .018955   .017702   .016533   .015444   .014428   .013481
39..................................................   .022642   .021096   .019658   .018321   .017077   .015919   .014841   .013839   .012905   .012036
40..................................................   .020546   .019109   .017774   .016535   .015384   .014316   .013323   .012400   .011543   .010747
41..................................................   .018645   .017309   .016071   .014923   .013860   .012874   .011959   .011111   .010325   .009595
42..................................................   .016919   .015678   .014531   .013469   .012486   .011577   .010735   .009956   .009235   .008567
43..................................................   .015353   .014201   .013138   .012156   .011249   .010411   .009637   .008922   .008260   .007649
44..................................................   .013932   .012864   .011879   .010971   .010134   .009362   .008651   .007994   .007389   .006830
45..................................................   .012642   .011652   .010740   .009902   .009130   .008419   .007765   .007163   .006609   .006098

[[Page 280]]

 
46..................................................   .011472   .010554   .009711   .008937   .008225   .007571   .006971   .006419   .005911   .005445
47..................................................   .010410   .009560   .008780   .008065   .007410   .006809   .006257   .005752   .005287   .004861
48..................................................   .009447   .008659   .007939   .007279   .006676   .006123   .005617   .005154   .004729   .004340
49..................................................   .008572   .007844   .007178   .006570   .006014   .005506   .005042   .004618   .004230   .003875
50..................................................   .007779   .007105   .006490   .005929   .005418   .004952   .004526   .004138   .003784   .003460
51..................................................   .007059   .006435   .005868   .005351   .004881   .004453   .004063   .003708   .003384   .003089
52..................................................   .006406   .005829   .005306   .004830   .004397   .004005   .003647   .003322   .003027   .002758
53..................................................   .005813   .005280   .004797   .004359   .003962   .003601   .003274   .002977   .002708   .002463
54..................................................   .005275   .004783   .004337   .003934   .003569   .003238   .002939   .002668   .002422   .002199
55..................................................   .004786   .004332   .003922   .003551   .003215   .002912   .002638   .002390   .002166   .001963
56..................................................   .004343   .003924   .003546   .003205   .002897   .002619   .002368   .002142   .001938   .001753
57..................................................   .003941   .003554   .003206   .002892   .002610   .002355   .002126   .001919   .001733   .001565
58..................................................   .003577   .003220   .002899   .002610   .002351   .002118   .001908   .001720   .001550   .001398
59..................................................   .003246   .002916   .002621   .002356   .002118   .001905   .001713   .001541   .001387   .001248
60..................................................   .002945   .002642   .002370   .002126   .001908   .001713   .001538   .001381   .001240   .001114
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                         Table B--Term Certain Remainder Factors Applicable After April 30, 1989
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                        Years                        ---------------------------------------------------------------------------------------------------
                                                        12.2%     12.4%     12.6%     12.8%     13.0%     13.2%     13.4%     13.6%     13.8%     14.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................   .891266   .889680   .888099   .886525   .884956   .883392   .881834   .880282   .878735   .877193
2...................................................   .794354   .791530   .788721   .785926   .783147   .780382   .777632   .774896   .772175   .769468
3...................................................   .707981   .704208   .700462   .696743   .693050   .689383   .685742   .682127   .678536   .674972
4...................................................   .630999   .626520   .622080   .617680   .613319   .608996   .604711   .600464   .596254   .592080
5...................................................   .562388   .557402   .552469   .547589   .542760   .537982   .533255   .528577   .523949   .519369
6...................................................   .501237   .495909   .490648   .485451   .480319   .475249   .470242   .465297   .460412   .455587
7...................................................   .446735   .441200   .435744   .430364   .425061   .419831   .414676   .409592   .404580   .399637
8...................................................   .398160   .392527   .386984   .381529   .376160   .370876   .365675   .360557   .355518   .350559
9...................................................   .354866   .349223   .343680   .338235   .332885   .327629   .322465   .317391   .312406   .307508
10..................................................   .316280   .310697   .305222   .299853   .294588   .289425   .284361   .279394   .274522   .269744
11..................................................   .281889   .276421   .271068   .265827   .260698   .255676   .250759   .245945   .241232   .236617
12..................................................   .251238   .245926   .240735   .235663   .230706   .225862   .221128   .216501   .211979   .207559
13..................................................   .223920   .218795   .213797   .208921   .204165   .199525   .194998   .190582   .186273   .182069
14..................................................   .199572   .194658   .189873   .185213   .180677   .176258   .171956   .167766   .163685   .159710
15..................................................   .177872   .173183   .168626   .164196   .159891   .155705   .151637   .147681   .143835   .140096
16..................................................   .158531   .154077   .149757   .145564   .141496   .137549   .133718   .130001   .126393   .122892
17..................................................   .141293   .137080   .132999   .129046   .125218   .121510   .117917   .114438   .111066   .107800
18..................................................   .125930   .121957   .118116   .114403   .110812   .107341   .103984   .100737   .097598   .094561
19..................................................   .112237   .108503   .104899   .101421   .098064   .094824   .091696   .088677   .085762   .082948
20..................................................   .100033   .096533   .093161   .089912   .086782   .083767   .080861   .078061   .075362   .072762
21..................................................   .089156   .085883   .082736   .079709   .076798   .073999   .071306   .068716   .066224   .063826
22..................................................   .079462   .076408   .073478   .070664   .067963   .065370   .062880   .060489   .058193   .055988
23..................................................   .070821   .067979   .065255   .062646   .060144   .057747   .055450   .053247   .051136   .049112
24..................................................   .063121   .060480   .057953   .055537   .053225   .051014   .048898   .046873   .044935   .043081
25..................................................   .056257   .053807   .051468   .049235   .047102   .045065   .043119   .041261   .039486   .037790
26..................................................   .050140   .047871   .045709   .043648   .041683   .039810   .038024   .036321   .034698   .033149
27..................................................   .044688   .042590   .040594   .038695   .036888   .035168   .033531   .031973   .030490   .029078
28..................................................   .039829   .037892   .036052   .034304   .032644   .031067   .029569   .028145   .026793   .025507
29..................................................   .035498   .033711   .032017   .030411   .028889   .027444   .026075   .024776   .023544   .022375
30..................................................   .031638   .029992   .028435   .026960   .025565   .024244   .022994   .021810   .020689   .019627
31..................................................   .028198   .026684   .025253   .023901   .022624   .021417   .020277   .019199   .018180   .017217
32..................................................   .025132   .023740   .022427   .021189   .020021   .018920   .017881   .016900   .015975   .015102
33..................................................   .022399   .021121   .019917   .018785   .017718   .016714   .015768   .014877   .014038   .013248
34..................................................   .019964   .018791   .017689   .016653   .015680   .014765   .013905   .013096   .012336   .011621
35..................................................   .017793   .016718   .015709   .014763   .013876   .013043   .012261   .011528   .010840   .010194
36..................................................   .015858   .014873   .013951   .013088   .012279   .011522   .010813   .010148   .009525   .008942
37..................................................   .014134   .013233   .012390   .011603   .010867   .010178   .009535   .008933   .008370   .007844
38..................................................   .012597   .011773   .011004   .010286   .009617   .008992   .008408   .007864   .007355   .006880
39..................................................   .011227   .010474   .009772   .009119   .008510   .007943   .007415   .006922   .006463   .006035
40..................................................   .010007   .009319   .008679   .008084   .007531   .007017   .006538   .006093   .005679   .005294
41..................................................   .008919   .008291   .007708   .007167   .006665   .006199   .005766   .005364   .004991   .004644
42..................................................   .007949   .007376   .006845   .006354   .005898   .005476   .005085   .004722   .004386   .004074
43..................................................   .007084   .006562   .006079   .005633   .005219   .004837   .004484   .004157   .003854   .003573
44..................................................   .006314   .005838   .005399   .004993   .004619   .004273   .003954   .003659   .003386   .003135
45..................................................   .005628   .005194   .004795   .004427   .004088   .003775   .003487   .003221   .002976   .002750
46..................................................   .005016   .004621   .004258   .003924   .003617   .003335   .003075   .002835   .002615   .002412
47..................................................   .004470   .004111   .003782   .003479   .003201   .002946   .002711   .002496   .002298   .002116
48..................................................   .003984   .003658   .003359   .003084   .002833   .002602   .002391   .002197   .002019   .001856

[[Page 281]]

 
49..................................................   .003551   .003254   .002983   .002734   .002507   .002299   .002108   .001934   .001774   .001628
50..................................................   .003165   .002895   .002649   .002424   .002219   .002031   .001859   .001702   .001559   .001428
51..................................................   .002821   .002576   .002353   .002149   .001963   .001794   .001640   .001499   .001370   .001253
52..................................................   .002514   .002292   .002089   .001905   .001737   .001585   .001446   .001319   .001204   .001099
53..................................................   .002241   .002039   .001856   .001689   .001538   .001400   .001275   .001161   .001058   .000964
54..................................................   .001997   .001814   .001648   .001497   .001361   .001237   .001124   .001022   .000930   .000846
55..................................................   .001780   .001614   .001463   .001327   .001204   .001093   .000991   .000900   .000817   .000742
56..................................................   .001586   .001436   .001300   .001177   .001066   .000965   .000874   .000792   .000718   .000651
57..................................................   .001414   .001277   .001154   .001043   .000943   .000853   .000771   .000697   .000631   .000571
58..................................................   .001260   .001136   .001025   .000925   .000835   .000753   .000680   .000614   .000554   .000501
59..................................................   .001123   .001011   .000910   .000820   .000739   .000665   .000600   .000540   .000487   .000439
60..................................................   .001001   .000900   .000809   .000727   .000654   .000588   .000529   .000476   .000428   .000385
--------------------------------------------------------------------------------------------------------------------------------------------------------


   Table J--Adjustment Factors for Term Certain Annuities Payable at the Beginning of Each Interval Applicable
                                              After April 30, 1989
                                             [Frequency of payments]
----------------------------------------------------------------------------------------------------------------
                                                                  Semi
                 Interest rate                     Annually     annually    Quarterly     Monthly       Weekly
----------------------------------------------------------------------------------------------------------------
4.2............................................       1.0420       1.0314       1.0261       1.0226       1.0213
4.4............................................       1.0440       1.0329       1.0274       1.0237       1.0223
4.6............................................       1.0460       1.0344       1.0286       1.0247       1.0233
4.8............................................       1.0480       1.0359       1.0298       1.0258       1.0243
5.0............................................       1.0500       1.0373       1.0311       1.0269       1.0253
5.2............................................       1.0520       1.0388       1.0323       1.0279       1.0263
5.4............................................       1.0540       1.0403       1.0335       1.0290       1.0273
5.6............................................       1.0560       1.0418       1.0348       1.0301       1.0283
5.8............................................       1.0580       1.0433       1.0360       1.0311       1.0293
6.0............................................       1.0600       1.0448       1.0372       1.0322       1.0303
6.2............................................       1.0620       1.0463       1.0385       1.0333       1.0313
6.4............................................       1.0640       1.0478       1.0397       1.0343       1.0323
6.6............................................       1.0660       1.0492       1.0409       1.0354       1.0333
6.8............................................       1.0680       1.0507       1.0422       1.0365       1.0343
7.0............................................       1.0700       1.0522       1.0434       1.0375       1.0353
7.2............................................       1.0720       1.0537       1.0446       1.0386       1.0363
7.4............................................       1.0740       1.0552       1.0458       1.0396       1.0373
7.6............................................       1.0760       1.0567       1.0471       1.0407       1.0383
7.8............................................       1.0780       1.0581       1.0483       1.0418       1.0393
8.0............................................       1.0800       1.0596       1.0495       1.0428       1.0403
8.2............................................       1.0820       1.0611       1.0507       1.0439       1.0413
8.4............................................       1.0840       1.0626       1.0520       1.0449       1.0422
8.6............................................       1.0860       1.0641       1.0532       1.0460       1.0432
8.8............................................       1.0880       1.0655       1.0544       1.0471       1.0442
9.0............................................       1.0900       1.0670       1.0556       1.0481       1.0452
9.2............................................       1.0920       1.0685       1.0569       1.0492       1.0462
9.4............................................       1.0940       1.0700       1.0581       1.0502       1.0472
9.6............................................       1.0960       1.0715       1.0593       1.0513       1.0482
9.8............................................       1.0980       1.0729       1.0605       1.0523       1.0492
10.0...........................................       1.1000       1.0744       1.0618       1.0534       1.0502
10.2...........................................       1.1020       1.0759       1.0630       1.0544       1.0512
10.4...........................................       1.1040       1.0774       1.0642       1.0555       1.0521
10.6...........................................       1.1060       1.0788       1.0654       1.0565       1.0531
10.8...........................................       1.1080       1.0803       1.0666       1.0576       1.0541
11.0...........................................       1.1100       1.0818       1.0679       1.0586       1.0551
11.2...........................................       1.1120       1.0833       1.0691       1.0597       1.0561
11.4...........................................       1.1140       1.0847       1.0703       1.0607       1.0571
11.6...........................................       1.1160       1.0862       1.0715       1.0618       1.0581
11.8...........................................       1.1180       1.0877       1.0727       1.0628       1.0590
12.0...........................................       1.1200       1.0892       1.0739       1.0639       1.0600
12.2...........................................       1.1220       1.0906       1.0752       1.0649       1.0610
12.4...........................................       1.1240       1.0921       1.0764       1.0660       1.0620
12.6...........................................       1.1260       1.0936       1.0776       1.0670       1.0630
12.8...........................................       1.1280       1.0950       1.0788       1.0681       1.0639
13.0...........................................       1.1300       1.0965       1.0800       1.0691       1.0649
13.2...........................................       1.1320       1.0980       1.0812       1.0701       1.0659
13.4...........................................       1.1340       1.0994       1.0824       1.0712       1.0669
13.6...........................................       1.1360       1.1009       1.0836       1.0722       1.0679
13.8...........................................       1.1380       1.1024       1.0849       1.0733       1.0688

[[Page 282]]

 
14.0...........................................       1.1400       1.1039       1.0861       1.0743       1.0698
----------------------------------------------------------------------------------------------------------------


  Table K--Adjustment Factors For Annuities Payable At The End Of Each Interval Applicable After April 30, 1989
                                             [Frequency of Payments]
----------------------------------------------------------------------------------------------------------------
                                                                  Semi
                 Interest Rate                     Annually     annually    Quarterly     Monthly       Weekly
----------------------------------------------------------------------------------------------------------------
4.2............................................       1.0000       1.0104       1.0156       1.0191       1.0205
4.4............................................       1.0000       1.0109       1.0164       1.0200       1.0214
4.6............................................       1.0000       1.0114       1.0171       1.0209       1.0224
4.8............................................       1.0000       1.0119       1.0178       1.0218       1.0234
5.0............................................       1.0000       1.0123       1.0186       1.0227       1.0243
5.2............................................       1.0000       1.0128       1.0193       1.0236       1.0253
5.4............................................       1.0000       1.0133       1.0200       1.0245       1.0262
5.6............................................       1.0000       1.0138       1.0208       1.0254       1.0272
5.8............................................       1.0000       1.0143       1.0215       1.0263       1.0282
6.0............................................       1.0000       1.0148       1.0222       1.0272       1.0291
6.2............................................       1.0000       1.0153       1.0230       1.0281       1.0301
6.4............................................       1.0000       1.0158       1.0237       1.0290       1.0311
6.6............................................       1.0000       1.0162       1.0244       1.0299       1.0320
6.8............................................       1.0000       1.0167       1.0252       1.0308       1.0330
7.0............................................       1.0000       1.0172       1.0259       1.0317       1.0339
7.2............................................       1.0000       1.0177       1.0266       1.0326       1.0349
7.4............................................       1.0000       1.0182       1.0273       1.0335       1.0358
7.6............................................       1.0000       1.0187       1.0281       1.0344       1.0368
7.8............................................       1.0000       1.0191       1.0288       1.0353       1.0378
8.0............................................       1.0000       1.0196       1.0295       1.0362       1.0387
8.2............................................       1.0000       1.0201       1.0302       1.0370       1.0397
8.4............................................       1.0000       1.0206       1.0310       1.0379       1.0406
8.6............................................       1.0000       1.0211       1.0317       1.0388       1.0416
8.8............................................       1.0000       1.0215       1.0324       1.0397       1.0425
9.0............................................       1.0000       1.0220       1.0331       1.0406       1.0435
9.2............................................       1.0000       1.0225       1.0339       1.0415       1.0444
9.4............................................       1.0000       1.0230       1.0346       1.0424       1.0454
9.6............................................       1.0000       1.0235       1.0353       1.0433       1.0463
9.8............................................       1.0000       1.0239       1.0360       1.0442       1.0473
10.0...........................................       1.0000       1.0244       1.0368       1.0450       1.0482
10.2...........................................       1.0000       1.0249       1.0375       1.0459       1.0492
10.4...........................................       1.0000       1.0254       1.0382       1.0468       1.0501
10.6...........................................       1.0000       1.0258       1.0389       1.0477       1.0511
10.8...........................................       1.0000       1.0263       1.0396       1.0486       1.0520
11.0...........................................       1.0000       1.0268       1.0404       1.0495       1.0530
11.2...........................................       1.0000       1.0273       1.0411       1.0503       1.0539
11.4...........................................       1.0000       1.0277       1.0418       1.0512       1.0549
11.6...........................................       1.0000       1.0282       1.0425       1.0521       1.0558
11.8...........................................       1.0000       1.0287       1.0432       1.0530       1.0568
12.0...........................................       1.0000       1.0292       1.0439       1.0539       1.0577
12.2...........................................       1.0000       1.0296       1.0447       1.0548       1.0587
12.4...........................................       1.0000       1.0301       1.0454       1.0556       1.0596
12.6...........................................       1.0000       1.0306       1.0461       1.0565       1.0605
12.8...........................................       1.0000       1.0310       1.0468       1.0574       1.0615
13.0...........................................       1.0000       1.0315       1.0475       1.0583       1.0624
13.2...........................................       1.0000       1.0320       1.0482       1.0591       1.0634
13.4...........................................       1.0000       1.0324       1.0489       1.0600       1.0643
13.6...........................................       1.0000       1.0329       1.0496       1.0609       1.0652
13.8...........................................       1.0000       1.0334       1.0504       1.0618       1.0662
14.0...........................................       1.0000       1.0339       1.0511       1.0626       1.0671
----------------------------------------------------------------------------------------------------------------

    (7) Actuarial Table S and Table 2000CM where the valuation date is 
on or after May 1, 2009. Except as provided in Sec. 20.7520-2(b) 
(pertaining to certain limitations on the use of prescribed tables), for 
determination of the present

[[Page 283]]

value of an interest that is dependent on the termination of a life 
interest, Table 2000CM and Table S (single life remainder factors 
applicable where the valuation date is on or after May 1, 2009) 
contained in this paragraph (d)(7) and Table J and Table K contained in 
paragraph (d)(6) of this section, must be used in the application of the 
provisions of this section when the section 7520 interest rate component 
is between 0.2 and 14 percent.
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    (e) Effective/applicability dates. This section applies after April 
30, 1999, and before May 1, 2009.

[T.D. 8540, 59 FR 30152, June 10, 1994, as amended by T.D. 8819, 64 FR 
23212, Apr. 30, 1999; T.D. 8886, 65 FR 36929, June 12, 2000; T.D. 9448, 
74 FR 21484, May 7, 2009; T.D. 9540, 76 FR 49612, Aug. 10, 2011]



Sec. 20.2031-8  Valuation of certain life insurance and annuity 
contracts; valuation of shares in an open-end investment company.

    (a) Valuation of certain life insurance and annuity contracts. (1) 
The value of a contract for the payment of an annuity, or an insurance 
policy on the life of a person other than the decedent, issued by a 
company regularly engaged in the selling of contracts of that character 
is established through the sale by that company of comparable contracts. 
An annuity payable under a combination annuity contract and life 
insurance policy on the decedent's life (e.g., a ``retirement income'' 
policy with death benefit) under which there was no insurance element at 
the time of the decedent's death (see paragraph (d) of Sec. 20.2039-1) 
is treated like a contract for the payment of an annuity for purposes of 
this section.
    (2) As valuation of an insurance policy through sale of comparable 
contracts is not readily ascertainable when, at the date of the 
decedent's death, the contract has been in force for some time and 
further premium payments are to be made, the value may be approximated 
by adding to the interpolated terminal reserve at the date of the 
decedent's death the proportionate part of the gross premium last paid 
before the date of the decedent's death which covers the period 
extending beyond that date. If, however, because of the unusual nature 
of the contract such an approximation is not reasonably close to the 
full value of the contract, this method may not be used.
    (3) The application of this section may be illustrated by the 
following examples. In each case involving an insurance contract, it is 
assumed that there are no accrued dividends or outstanding indebtedness 
on the contract.

    Example (1). X purchased from a life insurance company a joint and 
survivor annuity contract under the terms of which X was to receive 
payments of $1,200 annually for his life and, upon X's death, his wife 
was to receive payments of $1,200 annually for her life. Five years 
after such purchase, when his wife was 50 years of age, X died. The 
value of the annuity contract at the date of X's death is the amount 
which the company would charge for an annuity providing for the payment 
of $1,200 annually for the life of a female 50 years of age.
    Example (2). Y died holding the incidents of ownership in a life 
insurance policy on the life of his wife. The policy was one on which no 
further payments were to be made to the company (e.g., a single premium 
policy or a paid-up policy). The value of the insurance policy at the 
date of Y's death is the amount which the company would charge for a 
single premium contract of the same specified amount on the life of a 
person of the age of the insured.
    Example (3). Z died holding the incidents of ownership in a life 
insurance policy on the life of his wife. The policy was an ordinary 
life policy issued nine years and four months prior to Z's death and at 
a time when Z's wife was 35 years of age. The gross annual premium is 
$2,811 and the decedent died four months after the last premium due 
date. The value of the insurance policy at the date of Z's death is 
computed as follows:

Terminal reserve at end of tenth year.......................  $14,601.00
Terminal reserve at end of ninth year.......................   12,965.00
                                                             -----------
   Increase.................................................    1,636.00
                                                             ===========
One-third of such increase (Z having died four months             545.33
 following the last preceding premium date) is..............
Terminal reserve at end of ninth year.......................   12,965.00
                                                             -----------
Interpolated terminal reserve at date of Z's death..........   13,510.33
Two-thirds of gross premium (\2/3\x$2,811)..................    1,874.00
                                                             -----------
   Value of the insurance policy............................   15,384.33
 

    (b) Valuation of shares in an open-end investment company. (1) The 
fair market value of a share in an open-end investment company (commonly 
known as a ``mutual fund'') is the public redemption price of a share. 
In the absence of an affirmative showing of the public redemption price 
in effect at the time of death, the last public redemption price quoted 
by the company for the date of death shall be presumed to be the 
applicable public redemption price. If the alternate valuation method 
under 2032 is elected, the last public redemption price quoted by the 
company for the alternate valuation date shall be the applicable 
redemption price. If there is no public redemption price quoted by the 
company for the applicable valuation

[[Page 306]]

date (e.g., the valuation date is a Saturday, Sunday, or holiday), the 
fair market value of the mutual fund share is the last public redemption 
price quoted by the company for the first day preceding the applicable 
valuation date for which there is a quotation. In any case where a 
dividend is declared on a share in an open-end investment company before 
the decedent's death but payable to shareholders of record on a date 
after his death and the share is quoted ``exdividend'' on the date of 
the decedent's death, the amount of the dividend is added to the ex-
dividend quotation in determining the fair market value of the share as 
of the date of the decedent's death. As used in this paragraph, the term 
``open-end investment company'' includes only a company which on the 
applicable valuation date was engaged in offering its shares to the 
public in the capacity of an open-end investment company.
    (2) The provisions of this paragraph shall apply with respect to 
estates of decedents dying after August 16, 1954.

[T.D. 6680, 28 FR 10872, Oct. 10, 1963, as amended by T.D. 7319, 39 FR 
26723, July 23, 1974]



Sec. 20.2031-9  Valuation of other property.

    The valuation of any property not specifically described in 
Sec. Sec. 20.2031-2 to 20.2031-8 is made in accordance with the general 
principles set forth in Sec. 20.2031-1. For example, a future interest 
in property not subject to valuation in accordance with the actuarial 
principles set forth in Sec. 20.2031-7 is to be valued in accordance 
with the general principles set forth in Sec. 20.2031-1.



Sec. 20.2032-1  Alternate valuation.

    (a) In general. In general, section 2032 provides for the valuation 
of a decedent's gross estate at a date other than the date of the 
decedent's death. More specifically, if an executor elects the alternate 
valuation method under section 2032, the property included in the 
decedent's gross estate on the date of his death is valued as of 
whichever of the following dates is applicable:
    (1) Any property distributed, sold, exchanged, or otherwise disposed 
of within 6 months (1 year, if the decedent died on or before December 
31, 1970) after the decedent's death is valued as of the date on which 
it is first distributed, sold, exchanged, or otherwise disposed of;
    (2) Any property not distributed, sold, exchanged, or otherwise 
disposed of within 6 months (1 year, if the decedent died on or before 
December 31, 1970) after the decedent's death is valued as of the date 6 
months (1 year, if the decedent died on or before December 31, 1970) 
after the date of the decedent's death;
    (3) Any property, interest, or estate which is affected by mere 
lapse of time is valued as of the date of the decedent's death, but 
adjusted for any difference in its value not due to mere lapse of time 
as of the date 6 months (1 year, if the decedent died on or before 
December 31, 1970) after the decedent's death, or as of the date of its 
distribution, sale, exchange, or other disposition, whichever date first 
occurs.
    (b) Method and effect of election--(1) In general. The election to 
use the alternate valuation method is made on the return of tax imposed 
by section 2001. For purposes of this paragraph (b), the term return of 
tax imposed by section 2001 means the last estate tax return filed by 
the executor on or before the due date of the return (including 
extensions of time to file actually granted) or, if a timely return is 
not filed, the first estate tax return filed by the executor after the 
due date, provided the return is filed no later than 1 year after the 
due date (including extensions of time to file actually granted). Once 
the election is made, it is irrevocable, provided that an election may 
be revoked on a subsequent return filed on or before the due date of the 
return (including extensions of time to file actually granted). The 
election may be made only if it will decrease both the value of the 
gross estate and the sum (reduced by allowable credits) of the estate 
tax and the generation-skipping transfer tax payable by reason of the 
decedent's death with respect to the property includible in the 
decedent's gross estate. If the election is made, the alternate 
valuation method applies to all property included in the gross estate 
and cannot be applied to only a portion of the property.

[[Page 307]]

    (2) Protective election. If, based on the return of tax as filed, 
use of the alternate valuation method would not result in a decrease in 
both the value of the gross estate and the sum (reduced by allowable 
credits) of the estate tax and the generation-skipping transfer tax 
liability payable by reason of the decedent's death with respect to the 
property includible in the decedent's gross estate, a protective 
election may be made to use the alternate valuation method if it is 
subsequently determined that such a decrease would occur. A protective 
election is made on the return of tax imposed by section 2001. The 
protective election is irrevocable as of the due date of the return 
(including extensions of time actually granted). The protective election 
becomes effective on the date on which it is determined that use of the 
alternate valuation method would result in a decrease in both the value 
of the gross estate and in the sum (reduced by allowable credits) of the 
estate tax and generation-skipping transfer tax liability payable by 
reason of the decedent's death with respect to the property includible 
in the decedent's gross estate.
    (3) Requests for extension of time to make the election. A request 
for an extension of time to make the election or protective election 
pursuant to Sec. Sec. 301.9100-1 and 301.9100-3 of this chapter will 
not be granted unless the return of tax imposed by section 2001 is filed 
no later than 1 year after the due date of the return (including 
extensions of time actually granted).
    (c) Meaning of ``distributed, sold, exchanged, or otherwise disposed 
of''. (1) The phrase ``distributed, sold, exchanged, or otherwise 
disposed of'' comprehends all possible ways by which property ceases to 
form a part of the gross estate. For example, money on hand at the date 
of the decedent's death which is thereafter used in the payment of 
funeral expenses, or which is thereafter invested, falls within the term 
``otherwise disposed of.'' The term also includes the surrender of a 
stock certificate for corporate assets in complete or partial 
liquidation of a corporation pursuant to section 331. The term does not, 
however, extend to transactions which are mere changes in form. Thus, it 
does not include a transfer of assets to a corporation in exchange for 
its stock in a transaction with respect to which no gain or loss would 
be recognizable for income tax purposes under section 351. Nor does it 
include an exchange of stock or securities in a corporation for stock or 
securities in the same corporation or another corporation in a 
transaction, such as a merger, recapitalization, reorganization or other 
transaction described in section 368 (a) or 355, with respect to which 
no gain or loss is recognizable for income tax purposes under section 
354 or 355.
    (2) Property may be ``distributed'' either by the executor, or by a 
trustee of property included in the gross estate under section 2035 
through 2038, or section 2041. Property is considered as ``distributed'' 
upon the first to occur of the following:
    (i) The entry of an order or decree of distribution, if the order or 
decree subsequently becomes final;
    (ii) The segregation or separation of the property from the estate 
or trust so that it becomes unqualifiedly subject to the demand or 
disposition of the distributee; or
    (iii) The actual paying over or delivery of the property to the 
distributee.
    (3) Property may be ``sold, exchanged, or otherwise disposed of'' 
by:
    (i) The executor;
    (ii) A trustee or other donee to whom the decedent during his 
lifetime transferred property included in his gross estate under 
sections 2035 through 2038, or section 2041;
    (iii) An heir or devisee to whom title to property passes directly 
under local law;
    (iv) A surviving joint tenant or tenant by the entirety; or
    (v) Any other person.

If a binding contract for the sale, exchange, or other disposition of 
property is entered into, the property is considered as sold, exchanged, 
or otherwise disposed of on the effective date of the contract, unless 
the contract is not subsequently carried out substantially in accordance 
with its terms. The effective date of a contract is normally the date it 
is entered into (and not the date it is consummated, or the date

[[Page 308]]

legal title to the property passes) unless the contract specifies a 
different effective date.
    (d) ``Included property'' and ``excluded property''. If the executor 
elects the alternate valuation method under section 2432, all property 
interests existing at the date of decedent's death which form a part of 
his gross estate as determined under sections 2033 through 2044 are 
valued in accordance with the provisions of this section. Such property 
interests are referred to in this section as ``included property''. 
Furthermore, such property interests remain ``included property'' for 
the purpose of valuing the gross estate under the alternate valuation 
method even though they change in form during the alternate valuation 
period by being actually received, or disposed of, in whole or in part, 
by the estate. On the other hand, property earned or accrued (whether 
received or not) after the date of the decedent's death and during the 
alternate valuation period with respect to any property interest 
existing at the date of the decedent's death, which does not represent a 
form of ``included property'' itself or the receipt of ``included 
property'' is excluded in valuing the gross estate under the alternate 
valuation method. Such property is referred to in this section as 
``excluded property''. Illustrations of ``included property'' and 
``excluded property'' are contained in the subparagraphs (1) to (4) of 
this paragraph:
    (1) Interest-bearing obligations. Interest-bearing obligations, such 
as bonds or notes, may comprise two elements of ``included property'' at 
the date of the decedent's death, namely, (i) the principal of the 
obligation itself, and (ii) interest accrued to the date of death. Each 
of these elements is to be separately valued as of the applicable 
valuation date. Interest accrued after the date of death and before the 
subsequent valuation date constitutes ``excluded property''. However, 
any part payment or principal made between the date of death and the 
subsequent valuation date, or any advance payment of interest for a 
period after the subsequent valuation date made during the alternate 
valuation period which has the effect of reducing the value of the 
principal obligation as of the subsequent valuation date, will be 
included in the gross estate, and valued as of the date of such payment.
    (2) Leased property. The principles set forth in subparagraph (1) of 
this paragraph with respect to interest- bearing obligations also apply 
to leased realty or personalty which is included in the gross estate and 
with respect to which an obligation to pay rent has been reserved. Both 
the realty or personalty itself and the rents accrued to the date of 
death constitute ``included property'', and each is to be separately 
valued as of the applicable valuation date. Any rent accrued after the 
date of death and before the subsequent valuation date is ``excluded 
property''. Similarly, the principle applicable with respect to interest 
paid in advance is equally applicable with respect to advance payments 
of rent.
    (3) Noninterest-bearing obligations. In the case of noninterest-
bearing obligations sold at a discount, such as savings bonds, the 
principal obligation and the discount amortized to the date of death are 
property interests existing at the date of death and constitute 
``included property''. The obligation itself is to be valued at the 
subsequent valuation date without regard to any further increase in 
value due to amortized discount. The additional discount amortized after 
death and during the alternate valuation period is the equivalent of 
interest accruing during that period and is, therefore, not to be 
included in the gross estate under the alternate valuation method.
    (4) Stock of a corporation. Shares of stock in a corporation and 
dividends declared to stockholders of record on or before the date of 
the decedent's death and not collected at the date of death constitute 
``included property'' of the estate. On the other hand, ordinary 
dividends out of earnings and profits (whether in cash, shares of the 
corporation, or other property) declared to stockholders of record after 
the date of the decedent's death are ``excluded property'' and are not 
to be valued under the alternate valuation method. If, however, 
dividends are declared to stockholders of record after the date of the 
decedent's death with the effect that the shares of stock at the 
subsequent valuation date do not

[[Page 309]]

reasonably represent the same ``included property'' of the gross estate 
as existed at the date of the decedent's death, the dividends are 
``included property'', except to the extent that they are out of 
earnings of the corporation after the date of the decedent's death. For 
example, if a corporation makes a distribution in partial liquidation to 
stockholders of record during the alternate valuation period which is 
not accompanied by a surrender of a stock certificate for cancellation, 
the amount of the distribution received on stock included in the gross 
estate is itself ``included property'', except to the extent that the 
distribution was out of earnings and profits since the date of the 
decedent's death. Similarly, if a corporation, in which the decedent 
owned a substantial interest and which possessed at the date of the 
decedent's death accumulated earnings and profits equal to its paid-in 
capital, distributed all of its accumulated earnings and profits as a 
cash dividend to shareholders of record during the alternate valuation 
period, the amount of the dividends received on stock includible in the 
gross estate will be included in the gross estate under the alternate 
valuation method. Likewise, a stock dividend distributed under such 
circumstances is ``included property''.
    (e) Illustrations of ``included property'' and ``excluded 
property''. The application of paragraph (d) of this section may be 
further illustrated by the following example in which it is assumed that 
the decedent died on January 1, 1955:

------------------------------------------------------------------------
                                                                Value at
           Description               Subsequent     Alternate   date of
                                   valuation date     value      death
------------------------------------------------------------------------
Bond, par value $1,000, bearing   Mar. 1, 1955      $1,000.00  $1,000.00
 interest at 4 percent payable
 quarterly on Feb. 1, May 1,
 Aug. 1, and Nov. 1. Bond
 distributed to legatee on Mar.
 1, 1955.
Interest coupon of $10 attached   Feb. 1, 1955          10.00      10.00
 to bond and not cashed at date
 of death although due and
 payable Nov. 1, 1954. Cashed by
 executor on Feb. 1, 1955.
Interest accrued from Nov. 1,     Feb. 1, 1955           6.67       6.67
 1954, to Jan. 1, 1955,
 collected on Feb. 1, 1955.
Real estate, not disposed of      Jan. 1, 1956      11,000.00  12,000.00
 within year following death.
 Rent of $300 due at the end of
 each quarter, Feb. 1, May 1,
 Aug. 1, and Nov. 1.
Rent due for quarter ending Nov.  Feb. 1, 1955         300.00     300.00
 1, 1954, but not collected
 until Feb. 1, 1955.
Rent accrued for November and     Feb. 1, 1955         200.00     200.00
 December 1954, collected on
 Feb. 1, 1955.
Common stock, X Corporation, 500  Jan. 1, 1956      47,500.00  50,000.00
 shares, not disposed of within
 year following decedent's death.
Dividend of $2 per share          Jan. 10, 1955      1,000.00   1,000.00
 declared Dec. 10, 1954, and
 paid on Jan. 10, 1955, to
 holders of record on Dec. 30,
 1954.
------------------------------------------------------------------------

    (f) Mere lapse of time. In order to eliminate changes in value due 
only to mere lapse of time, section 2032(a)(3) provides that any 
interest or estate ``affected by mere lapse of time'' is included in a 
decedent's gross estate under the alternate valuation method at its 
value as of the date of the decedent's death, but with adjustment for 
any difference in its value as of the subsequent valuation date not due 
to mere lapse of time. Properties, interests, or estates which are 
``affected by mere lapse of time'' include patents, estates for the life 
of a person other than the decedent, remainders, reversions, and other 
like properties, interests, or estates. The phrase ``affected by mere 
lapse of time'' has no reference to obligations for the payment of 
money, whether or not interest-bearing, the value of which changes with 
the passing of time. However, such an obligation, like any other 
property, may become affected by lapse of time when made the subject of 
a bequest or transfer which itself is creative of an interest or estate 
so affected. The application of this paragraph is illustrated in 
subparagraphs (1) and (2) of this paragraph:
    (1) [Reserved] Further guidance, see Sec. 20.2032-1T(f)(1).
    (2) Patents. To illustrate the alternate valuation of a patent, 
assume that the decedent owned a patent which, on the date of the 
decedent's death, had an unexpired term of ten years and a value of 
$78,000. Six months after the date of the decedent's death, the patent 
was sold, because of lapse of time and other causes, for $60,000. The 
alternate

[[Page 310]]

value thereof would be obtained by dividing $60,000 by 0.95 (ratio of 
the remaining life of the patent at the alternate date to the remaining 
life of the patent at the date of the decedent's death), and would, 
therefore, be $63,157.89.
    (g) Effect of election on deductions. If the executor elects the 
alternate valuation method under section 2032, any deduction for 
administration expenses under section 2053(b) (pertaining to property 
not subject to claims) or losses under section 2054 (or section 
2106(a)(1), relating to estates of nonresidents not citizens) is allowed 
only to the extent that it is not otherwise in effect allowed in 
determining the value of the gross estate. Furthermore, the amount of 
any charitable deduction under section 2055 (or section 2106(a)(2), 
relating to the estates of nonresidents not citizens) or the amount of 
any marital deduction under section 2056 is determined by the value of 
the property with respect to which the deduction is allowed as of the 
date of the decedent's death, adjusted, however, for any difference in 
its value as of the date 6 months (1 year, if the decedent died on or 
before December 31, 1970) after death, or as of the date of its 
distribution, sale, exchange, or other disposition, whichever first 
occurs. However, no such adjustment may take into account any difference 
in value due to lapse of time or to the occurrence or nonoccurrence of a 
contingency.
    (h) Effective date. Paragraph (b) of this section is applicable to 
decedents dying on or after January 4, 2005. However, pursuant to 
section 7805(b)(7), taxpayers may elect to apply paragraph (b) of this 
section retroactively if the period of limitations for filing a claim 
for a credit or refund of Federal estate or generation-skipping transfer 
tax under section 6511 has not expired.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7238, 37 FR 
28718, Dec. 29, 1972; T.D. 7955, 49 FR 19995, May 11, 1984; T.D. 8540, 
59 FR 30103, June 10, 1994; T.D. 8819, 64 FR 23229, Apr. 30, 1999; T.D. 
9172, 70 FR 296, Jan. 4, 2005; 74 FR 27080, June 8, 2009]



Sec. 20.2032-1T  Alternate valuation (temporary).

    (a) through (e) [Reserved] For further guidance, see Sec. 20.2032-
1(a) through (e).
    (f) [Reserved] For further guidance, see Sec. 20.2032-1(f).
    (1) Life estates, remainders, and similar interests. The values of 
life estates, remainders, and similar interests are to be obtained by 
applying the methods prescribed in Sec. 20.2031-7, using (i) the age of 
each person, the duration of whose life may affect the value of the 
interest, as of the date of the decedent's death, and (ii) the value of 
the property as of the alternate valuation date. For example, assume 
that the decedent, or the decedent's estate, was entitled to receive 
certain property worth $50,000 upon the death of A, who was entitled to 
the income for life. At the time of the decedent's death, on or after 
May 1, 2009, A was 47 years and 5 months old. In the month in which the 
decedent died, the section 7520 rate was 6.2 percent. The value of the 
decedent's remainder interest at the date of the decedent's death would, 
as illustrated in Example 1 of Sec. 20.2031-7T(d)(5), be $9,336.00 
($50,000 x .18672). If, because of economic conditions, the property 
declined in value and was worth only $40,000 on the date that was 6 
months after the date of the decedent's death, the value of the 
remainder interest would be $7,468.80 ($40,000 x .18672), even though A 
would be 48 years old on the alternate valuation date.
    (f)(2) through (g) [Reserved] For further guidance, see Sec. 
20.2032-1(f)(2) through (g).
    (h) Effective/applicability date. Paragraph (f)(1) applies on or 
after May 1, 2009.
    (i) Expiration date. Paragraph (f)(1) expires on or before May 1, 
2012.

[T.D. 9448, 74 FR 21509, May 7, 2009]



Sec. 20.2032A-3  Material participation requirements for valuation of
certain farm and closely-held business real property.

    (a) In general. Under section 2032A, an executor may, for estate tax 
purposes, make a special election concerning valuation of qualified real 
property (as defined in section 2032A(b)) used as a farm for farming 
purposes or in another trade or business. If this election is made, the 
property will be valued on the basis of its value for its qualified use 
in farming or the other trade or business, rather than its fair market

[[Page 311]]

value determined on the basis of highest and best use (irrespective of 
whether its highest and best use is the use in farming or other 
business). For the special valuation rules of section 2032A to apply, 
the deceased owner and/or a member of the owner's family (as defined in 
section 2032A (e) (2)) must materially participate in the operation of 
the farm or other business. Whether the required material participation 
occurs is a factual determination, and the types of activities and 
financial risks which will support such a finding will vary with the 
mode of ownership of both the property itself and of any business in 
which it is used. Passively collecting rents, salaries, draws, 
dividends, or other income from the farm or other business is not 
sufficient for material participation, nor is merely advancing capital 
and reviewing a crop plan or other business proposal and financial 
reports each season or business year.
    (b) Types of qualified property--(1) In general. Real property 
valued under section 2032A must pass from the decendent to a qualified 
heir or be acquired from the decedent by a qualified heir. The real 
property may be owned directly or may be owned indirectly through 
ownership of an interest in a corporation, a partnership, or a trust. 
Where the ownership is indirect, however, the decedent's interest in the 
business must, in addition to meeting the tests for qualification under 
section 2032A, qualify under the tests of section 6166 (b) (1) as an 
interest in a closely-held business on the date of the decedent's death 
and for sufficient other time (combined with periods of direct 
ownership) to equal at least 5 years of the 8 year period preceding the 
death. All specially valued property must be used in a trade or 
business. Directly owned real property that is leased by a decedent to a 
separate closely held business is considered to be qualified real 
property, but only if the separate business qualifies as a closely held 
business under section 6166 (b) (1) with respect to the decedent on the 
date of his or her death and for sufficient other time (combined with 
periods during which the property was operated as a proprietorship) to 
equal at least 5 years of the 8 year period preceding the death. For 
example, real property owned by the decedent and leased to a farming 
corporation or partnership owned and operated entirely by the decedent 
and fewer than 15 members of the decedent's family is eligible for 
special use valuation. Under section 2032A, the term trade or business 
applies only to an active business such as a manufacturing, mercantile, 
or service enterprise, or to the raising of agricultural or 
horticultural commodities, as distinguished from passive investment 
activities. The mere passive rental of property to a party other than a 
member of the decedent's family will not qualify. The decedent or a 
member of the decedent's family must own an equity interest in the farm 
operation. A trade or business is not necessarily present even though an 
office and regular hours are maintained for management of income 
producing assets, as the term ``business'' is not as broad under section 
2032A as under section 162. Additionally, no trade or business is 
present in the case of activities not engaged in for profit. See section 
183.
    (2) Structures and other real property improvements. Qualified real 
property includes residential buildings and other structures and real 
property improvements occupied or used on a regular basis by the owner 
or lessee of real property (or by employees of the owner or lessee) for 
the purpose of operating the farm or other closely held business. A farm 
residence occupied by the decedent owner of the specially valued 
property is considered to be occupied for the purpose of operating the 
farm even though a family member (not the decedent) was the person 
materially participating in the operation of the farm as required under 
section 2032A (b) (1) (C).
    (c) Period material participation must last. The required 
participation must last--
    (1) For periods totalling 5 years or more during the 8 years 
immediately preceding the date of the decedent's death; and
    (2) For periods totalling 5 years or more during any 8 year period 
ending after the date of the decedent's death

[[Page 312]]

(up to a maximum of 15 years after decedent's death, when the additional 
estate tax provisions of section 2032A(c) cease to apply).

In determining whether the material participation requirement is 
satisfied, no exception is made for periods during which real property 
is held by the decedent's estate. Additionally, contemporaneous material 
participation by 2 or more family members during a period totalling a 
year will not result in that year being counted as 2 or more years for 
purposes of satisfying the requirements of this paragraph (c). Death of 
a qualified heir (as defined in section 2032A(e)(1)) before the 
requisite time has passed ends any material participation requirement 
for that heir's portion of the property as to the origninal decedent's 
estate if the heir received a separate, joint or other undivided 
property interest from the decedent. If qualified heirs receive 
successive interests in specially valued property (e.g. life estate and 
remainder interests) from the decedent, the material participation 
requirement does not end with respect to any part of the property until 
the death of the last qualified heir (or, if earlier, the expiration of 
15 years from the date of the decedent's death). The requirements of 
section 2032A will fully apply to an heir's estate if an election under 
this section is made for the same property by the heir's executor. In 
general, to determine whether the required participation has occurred, 
brief periods (e.g., periods of 30 days or less) during which there was 
no material participation may be disregarded. This is so only if these 
periods were both preceded and followed by substantial periods (e.g. 
periods of more than 120 days) in which there was uninterrupted material 
participation. See paragraph (e)(1) of this section which provides a 
special rule for periods when little or no activity is necessary to 
manage fully a farm.
    (d) Period property must be owned by decedent and family members. 
Only real property which is actually owned by any combination of the 
decedent, members of the decedent's family, and qualified closely held 
businesses for periods totalling at least 5 of the 8 years preceding the 
date of decedent's death may be valued under section 2032A. For example, 
replacement property acquired in like-kind exchange under section 1031 
is considered to be owned only from the date on which the replacement 
property is actually acquired. On the other hand, replacement property 
acquired as a result of an involuntary conversion in a transfer that 
would meet the requirements of section 2032A(h) if it occurred after the 
date of the decedent's death is considered to have been owned from the 
date in which the involuntarily converted property was acquired. 
Property transferred from a proprietorship to a corporation or a 
partnership during the 8-year period ending on the date of the 
decedent's death is considered to be continuously owned to the extent of 
the decedent's equity interest in the corporation or partnership if, (1) 
the transfer meets the requirements of section 351 or 721, respectively, 
and (2) the decedent's interest in the corporation or partnership meets 
the requirements for indirectly held property contained in paragraph 
(b)(1) of this section. Likewise, property transferred to a trust is 
considered to be continuously owned if the beneficial ownership of the 
trust property is such that the requirements of section 6166(b)(1)(C) 
would be so satisfied if the property were owned by a corporation and 
all beneficiaries having vested interests in the trust were shareholders 
in the corporation. Any periods following the transfer during which the 
interest in the corporation, partnership, or trust does not meet the 
requirements of section 6166(b)(1) may not be counted for purposes of 
satisfying the ownership requirements of this paragraph (d).
    (e) Required activities--(1) In general. Actual employment of the 
decedent (or of a member of the decedent's family) on a substantially 
full-time basis (35 hours a week or more) or to any lesser extent 
necessay personally to manage fully the farm or business in which the 
real property to be valued under section 2032A is used constitutes 
material participation. For example, many farming operations require 
only seasonal activity. Material participation is present as long as all 
necessary functions are performed even though little or no actual 
activity occurs during nonproducing seasons. In the absence

[[Page 313]]

of this direct involvement in the farm or other business, the activities 
of either the decedent or family members must meet the standards 
prescribed in this paragraph and those prescribed in the regulations 
issued under section 1402(a)(1). Therefore, if the participant (or 
participants) is self-employed with respect to the farm or other trade 
or business, his or her income from the farm or other business must be 
earned income for purposes of the tax on self-employment income before 
the participant is considered to be materially participating under 
section 2032A. Payment of the self-employment tax is not conclusive as 
to the presence of material participation. If no self-employment taxes 
have been paid, however, material participation is presumed not to have 
occurred unless the executor demonstrates to the satisfaction of the 
Internal Revenue Service that material participation did in fact occur 
and informs the Service of the reason no such tax was paid. In addition, 
all such taxes (including interest and penalties) determined to be due 
must be paid. In determining whether the material participation 
requirement is satisfied, the activities of each participant are viewed 
separately from the activities of all other participants, and at any 
given time, the activities of at least one participant must be material. 
If the involvement is less than full-time, it must be pursuant to an 
arrangement providing for actual participation in the production or 
management of production where the land is used by any nonfamily member, 
or any trust or business entity, in farming or another business. The 
arrangement may be oral or written, but must be formalized in some 
manner capable of proof. Activities not contemplated by the arrangement 
will not support a finding of material participation under section 
2032A, and activities of any agent or employee other than a family 
member may not be considered in determining the presence of material 
participation. Activities of family members are considered only if the 
family relationship existed at the time the activities occurred.
    (2) Factors considered. No single factor is determinative of the 
presence of material participation, but physical work and participation 
in management decisions are the principal factors to be considered. As a 
minimum, the decedent and/or a family member must regularly advise or 
consult with the other managing party on the operation of the business. 
While they need not make all final management decisions alone, the 
decedent and/or family members must participate in making a substantial 
number of these decisions. Additionally, production activities on the 
land should be inspected regularly by the family participant, and funds 
should be advanced and financial responsibility assumed for a 
substantial portion of the expense involved in the operation of the farm 
or other business in which the real property is used. In the case of a 
farm, the furnishing by the owner or other family members of a 
substantial portion of the machinery, implements, and livestock used in 
the production activities is an important factor to consider in finding 
material participation. With farms, hotels, or apartment buildings, the 
operation of which qualifies as a trade or business, the participating 
decedent or heir's maintaining his or her principal place of residence 
on the premises is a factor to consider in determining whether the 
overall participation is material. Retention of a professional farm 
manager will not by itself prevent satisfaction of the material 
participation requirement by the decedent and family members. However, 
the decedent and/or a family member must personally materially 
participate under the terms of arrangement with the professional farm 
manager to satisfy this requirement.
    (f) Special rules for corporations, partnerships, and trusts--(1) 
Required arrangement. With indirectly owned property as with property 
that is directly owned, there must be an arrangement calling for 
material participation in the business by the decedent owner or a family 
member. Where the real property is indirectly owned, however, even full-
time involvement must be pursuant to an arrangement between the entity 
and the decedent or family member specifying the services to be 
performed. Holding an office in which certain material functions are 
inherent may constitute the necessary arrangement for material 
participation. Where

[[Page 314]]

property is owned by a trust, the arrangement will generally be found in 
one or more of four situations. First, the arrangement may result from 
appointment as a trustee. Second, the arrangement may result from an 
employer-employee relationship in which the participant is employed by a 
qualified closely held business owned by the trust in a position 
requiring his or her material participation in its activities. Third, 
the participants may enter into a contract with the trustees to manage, 
or take part in managing, the real property for the trust. Fourth, where 
the trust agreement expressly grants the management rights to the 
beneficial owner, that grant is sufficient to constitute the arrangement 
required under this section.
    (2) Required activities. The same participation standards apply 
under section 2032A where property is owned by a qualified closely held 
business as where the property is directly owned. In the case of a 
corporation, a partnership, or a trust where the participating decedent 
and/or family members are employees and thereby not subject to self-
employment income taxes, they are to be viewed as if they were self-
employed, and their activities must be activities that would subject 
them to self-employment income taxes were they so. Where property is 
owned by a corporation, a partnership or a trust, participation in the 
management and operation of the real property itself as a component of 
the closely held business is the determinative factor. Nominally holding 
positions as a corporate officer or director and receiving a salary 
therefrom or merely being listed as a partner and sharing in profits and 
losses will not alone support a finding of material participation. This 
is so even though, as partners, the participants pay self-employment 
income taxes on their distributive shares of partnership earnings under 
Sec. 1.1402(a)-2. Further, it is especially true for corporate 
directors in states where the board of directors need not be an actively 
functioning entity or need only act informally. Corporate offices held 
by an owner are, however, factors to be considered with all other 
relevant facts in judging the degree of participation. When real 
property is directly owned and is leased to a corporation or partnership 
in which the decedent owns an interest which qualified as an interest in 
a trade or business within the meaning of section 6166(b)(1), the 
presence of material participation is determined by looking at the 
activities of the participant with regard to the property in whatever 
capacity rendered. During any periods when qualified real property is 
held by an estate, material participation is to be determined in the 
same manner as if the property were owned by a trust.
    (g) Examples. The rules for determining material participation may 
be illustrated by the following examples. Additional illustrations may 
be found in examples (1) through (6) in Sec. 1.1402(a)-4.

    Example (1). A, the decedent, actively operated his 100-acre farm on 
a full-time basis for 20 years. He then leased it to B for the 10 years 
immediately preceding his death. By the terms of the lease, A was to 
consult with B on where crops were to be planted, to supervise marketing 
of the crop, and to share equally with B in expenses and earnings. A was 
present on the farm each spring for consultation; however, once planting 
was completed, he left for his retirement cottage where he remained 
until late summer, at which time he returned to the farm to supervise 
the marketing operation. A at all times maintained the farm home in 
which he had lived for the time he had owned the farm and lived there 
when at the farm. In light of his activities, assumption of risks, and 
valuable knowledge of proper techniques for the particular land gained 
over 20 years of full-time farming on the land involved, A is deemed to 
have materially participated in the farming business.
    Example (2). D is the 70-year old widow of farmer C. She lives on a 
farm for which special valuation has been elected and has lived there 
for 20 years. D leases the land to E under an arrangement calling for 
her participation in the operation of the farm. D annually raises a 
vegetable garden, chickens, and hogs. She also inspects the tobacco 
fields (which produce approximately 50 percent of farm income) weekly 
and informs E if she finds any work that needs to be done. D and E share 
expenses and income equally. Other decisions such as what fields to 
plant and when to plant and harvest crops are left to E, but D does 
occasionally make suggestions. During the harvest season, D prepares and 
serves meals for all temporary farm help. D is deemed to participate 
materially in the farm operations based on her farm residence and her 
involvement with the main money crop.

[[Page 315]]

    Example (3). Assume that D in example (2) moved to a nursing home 1 
year after her husband's death. E completely operated the farm for her 
for 6 years following her move. If E is not a member of D's family, 
material participation ceases when D moves; however, if E is a member of 
D's family, E's material participation will prevent disqualification 
even if D owns the property. Further, upon D's death, the section 2032A 
valuation could be elected for her estate if E were a member of her 
family and the other requirements of section 203A were satisfied.
    Example (4). F, a qualified heir, owned a specially valued farm. He 
contracted with G to manage the farm for him as F, a lawyer, lived and 
worked 15 miles away in a nearby town. F supplied all machinery and 
equipment and assumed financial responsiblity for the expenses of the 
farm operation. The contract specified that G was to submit a crop plan 
and a list of expenses and earnings for F's approval. It also called for 
F to inspect the farm regularly and to approve all expenditures over 
$100. In practice, F visited the farm weekly during the growing season 
to inspect and discuss operations. He actively participated in making 
important management decisions such as what fields to plant or pasture 
and how to utilize the subsidy program. F is deemed to have materially 
participated in the farm operation as his personal involvement amounted 
to more than managing an investment. Had F not regularly inspected the 
farm and participated in management decisions, however, he would not be 
considered to be materially participating. This would be true even 
though F did assume financial responsibility for the operation and did 
review annual crop plans.
    Example (5). Decedent I owned 90 percent of all outstanding stock of 
X Corporation, a qualified closely-held business which owns real 
property to be specially valued. I held no formal position in the 
corporation and there was no arrangement for him to participate in daily 
business operations. I regularly spent several hours each day at the 
corporate offices and made decisions on many routine matters. I is not 
deemed to have materially participated in the X Corporation despite his 
activity because there was no arrangement requiring him to act in the 
manner in which he did.
    Example (6). Decedent J was a senior partner in the law firm of X, 
Y, and Z, which is a qualified closely held business owning the building 
in which its offices are located. J ceased to practice law actively 5 
years before his death in 1977; however, he remained a full partner and 
annually received a share of firm profits. J is not deemed to have 
materially participated under section 2032A even though he still may 
have reported his distributive share of partnership income for self-
employment income tax purposes if the payments were not made pursuant to 
any retirement agreement. This is so because J does not meet the 
requirement of actual personal material participation.
    Example (7). K, the decedent, owned a tree farm. He contracted with 
L, a professional forester, to manage the property for him as K, a 
doctor, lived and worked in a town 50 miles away. The activities of L 
are not considered in determining whether K materially participated in 
the tree farm operation. During the 5 years preceding K's death, there 
was no need for frequent inspections of the property or consultation 
concerning it, inasmuch as most of the land had been reforested and the 
trees were in the beginning stages of their growing cycle. However, once 
every year, L submitted for K's approval a proposed plan for the 
management of the property over the next year. K actively participated 
in making important management decisions, such as where and whether a 
pre-commercial thinning should be conducted, whether the timber was 
adequately protected from fire and disease, whether fire lines needed to 
be plowed around the new trees, and whether boundary lines were properly 
maintained around the property. K inspected the property at least twice 
every year and assumed financial responsibility for the expenses of the 
tree farm. K also reported his income from the tree farm as earned 
income for purposes of the tax on self-employment income. Over a period 
of several years, K had harvested and marketed timber from certain 
tracts of the tree farm and had supervised replanting of the areas where 
trees were removed. K's history of harvesting, marketing, and replanting 
of trees showed him to be in the business of tree farming rather than 
merely passively investing in timber land. If the history of K's tree 
farm did not show such an active business operation, however, the tree 
farm would not qualify for special use valuation. In light of all these 
facts, K is deemed to have materially participated in the farm as his 
personal involvement amounted to more than managing an investment.
    Example (8). Decedent M died on January 1, 1978, owning a farm for 
which special use valuation under section 2032A has been elected. M 
owned the farm real property for 15 years before his death. During the 4 
years preceding M's death (January 1, 1974 through December 31, 1977), 
the farm was rented to N, a non-family member, and neither M nor any 
member of his family materially participated in the farming operation. 
From January 1, 1970, until December 31, 1973, both M and his daughter, 
O, materially participated in the farming operation. The material 
participation requirement of section 2032A(b)(1)(C)(ii) is not satisfied 
because material participation did not occur for periods

[[Page 316]]

aggregating at least 5 different years of the 8 years preceding M's 
death.

[T.D. 7710, 45 FR 50739, July 31, 1980, as amended by T.D. 7786, 46 FR 
43037, Aug. 26, 1981]



Sec. 20.2032A-4  Method of valuing farm real property.

    (a) In general. Unless the executor of the decedent's estate elects 
otherwise under section 2032A(e)(7)(B)(ii) or fails to document 
comparable rented farm property meeting the requirements of this 
section, the value of the property which is used for farming purposes 
and which is subject to an election under section 2032A is determined 
by--
    (1) Subtracting the average annual state and local real estate taxes 
on actual tracts of comparable real property in the same locality from 
the average annual gross cash rental for that same comparable property, 
and
    (2) Dividing the result so obtained by the average annual effective 
interest rate charged on new Federal land bank loans.

The computation of each average annual amount is to be based on the 5 
most recent calendar years ending before the date of the decedent's 
death.
    (b) Gross cash rental--(1) Generally. Gross cash rental is the total 
amount of cash received for the use of actual tracts of comparable farm 
real property in the same locality as the property being specially 
valued during the period of one calendar year. This amount is not 
diminished by the amount of any expenses or liabilities associated with 
the farm operation or the lease. See, paragraph (d) of this section for 
a definition of comparable property and rules for property on which 
buildings or other improvements are located and farms including multiple 
property types. Only rentals from tracts of comparable farm property 
which are rented solely for an amount of cash which is not contingent 
upon production are acceptable for use in valuing real property under 
section 2032A (e) (7). The rentals considered must result from an arm's-
length transaction as defined in this section. Additionally, rentals 
received under leases which provide for payment solely in cash are not 
acceptable as accurate measures of cash rental value if involvement by 
the lessor (or a member of the lessor's family who is other than a 
lessee) in the management or operation of the farm to an extent which 
amounts to material participation under the rules of section 2032A is 
contemplated or actually occurs. In general, therefore, rentals for any 
property which qualifies for special use valuation cannot be used to 
compute gross cash rentals under this section because the total amount 
received by the lessor does not reflect the true cash rental value of 
the real property.
    (2) Special rules--(i) Documentation required of executor. The 
executor must identify to the Internal Revenue Service actual comparable 
property for all specially valued property and cash rentals from that 
property if the decedent's real property is valued under section 
2032A(e)(7). If the executor does not identify such property and cash 
rentals, all specially valued real property must be valued under the 
rules of section 2032A(e)(8) if special use valuation has been elected. 
See, however, Sec. 20.2032A-8(d) for a special rule for estates 
electing section 2032A treatment on or before August 30, 1980.
    (ii) Arm's-length transaction required. Only those cash rentals 
which result from a lease entered into in an arm's-length transaction 
are acceptable under section 2032A(e)(7). For these purposes, lands 
leased from the Federal government, or any state or local government, 
which are leased for less than the amount that would be demanded by a 
private individual leasing for profit are not leased in an arm's-length 
transaction. Additionally, leases between family members (as defined in 
section 2032A(e)(2)) which do not provide a return on the property 
commensurate with that received under leases between unrelated parties 
in the locality are not acceptable under this section.
    (iii) In-kind rents, statements of appraised rental value, and area 
averages. Rents which are paid wholly or partly in kind (e.g., crop 
shares) may not be used to determine the value of real property under 
section 2032A(e)(7). Likewise, appraisals or other statements regarding 
rental value as well as area-wide averages of rentals (i.e., those 
compiled by the United States Department of Agriculture) may not be

[[Page 317]]

used under section 2032A(e)(7) because they are not true measures of the 
actual cash rental value of comparable property in the same locality as 
the specially valued property.
    (iv) Period for which comparable real property must have been rented 
solely for cash. Comparable real property rented solely for cash must be 
identified for each of the five calendar years preceding the year of the 
decedent's death if section 2032A(e)(7) is used to value the decedent's 
real property. Rentals from the same tract of comparable property need 
not be used for each of these 5 years, however, provided an actual tract 
of property meeting the requirements of this section is identified for 
each year.
    (v) Leases under which rental of personal property is included. No 
adjustment to the rents actually received by the lessor is made for the 
use of any farm equipment or other personal property the use of which is 
included under a lease for comparable real property unless the lease 
specifies the amount of the total rental attributable to the personal 
property and that amount is reasonable under the circumstances.
    (c) State and local real estate taxes. For purposes of the farm 
valuation formula under section 2032A(e)(7) state and local taxes are 
taxes which are assessed by a state or local government and which are 
allowable deductions under section 164. However, only those taxes on the 
comparable real property from which cash rentals are determined may be 
used in the formula valuation.
    (d) Comparable real property defined. Comparable real property must 
be situated in the same locality as the specially valued property. This 
requirement is not to be viewed in terms of mileage or political 
divisions alone, but rather is to be judged according to generally 
accepted real property valuation rules. The determination of properties 
which are comparable is a factual one and must be based on numerous 
factors, no one of which is determinative. It will, therefore, 
frequently be necessary to value farm property in segments where there 
are different uses or land characteristics included in the specially 
valued farm. For example, if section 2032A(e)(7) is used, rented 
property on which comparable buildings or improvements are located must 
be identified for specially valued property on which buildings or other 
real property improvements are located. In cases involving multiple 
areas or land characteristics, actual comparable property for each 
segment must be used, and the rentals and taxes from all such properties 
combined (using generally accepted real property valuation rules) for 
use in the valuation formula given in this section. However, any premium 
or discount resulting from the presence of multiple uses or other 
characteristics in one farm is also to be reflected. All factors 
generally considered in real estate valuation are to be considered in 
determining comparability under section 2032A. While not intended as an 
exclusive list, the following factors are among those to be considered 
in determining comparability--
    (1) Similarity of soil as determined by any objective means, 
including an official soil survey reflected in a soil productivity 
index;
    (2) Whether the crops grown are such as would deplete the soil in a 
similar manner;
    (3) The types of soil conservation techniques that have been 
practiced on the two properties;
    (4) Whether the two properties are subject to flooding;
    (5) The slope of the land;
    (6) In the case of livestock operations, the carrying capacity of 
the land;
    (7) Where the land is timbered, whether the timber is comparable to 
that on the subject property;
    (8) Whether the property as a whole is unified or whether it is 
segmented, and where segmented, the availability of the means necessary 
for movement among the different segments;
    (9) The number, types, and conditions of all buildings and other 
fixed improvements located on the properties and their location as it 
affects efficient management and use of property and value per se; and
    (10) Availability of, and type of, transportation facilities in 
terms of costs and of proximity of the properties to local markets.
    (e) Effective interest rate defined--(1) Generally. The annual 
effective interest

[[Page 318]]

rate on new Federal land bank loans is the average billing rate charged 
on new agricultural loans to farmers and ranchers in the farm credit 
district in which the real property to be valued under section 2032A is 
located, adjusted as provided in paragraph (e)(2) of this section. This 
rate is to be a single rate for each district covering the period of one 
calendar year and is to be computed to the nearest one-hundredth of one 
percent. In the event that the district billing rates of interest on 
such new agricultural loans change during a year, the rate for that year 
is to be weighted to reflect the portion of the year during which each 
such rate was charged. If a district's billing rate on such new 
agricultural loans varies according to the amount of the loan, the rate 
applicable to a loan in an amount resulting from dividing the total 
dollar amount of such loans closed during the year by the total number 
of the loans closed is to be used under section 2032A. Applicable rates 
may be obtained from the district director of internal revenue.
    (2) Adjustment to billing rate of interest. The billing rate of 
interest determined under this paragraph is to be adjusted to reflect 
the increased cost of borrowing resulting from the required purchase of 
land bank association stock. For section 2032A purposes, the rate of 
required stock investment is the average of the percentages of the face 
amount of new agricultural loans to farmers and ranchers required to be 
invested in such stock by the applicable district bank during the year. 
If this percentage changes during a year, the average is to be adjusted 
to reflect the period when each percentage requirement was effective. 
The percentage is viewed as a reduction in the loan proceeds actually 
received from the amount upon which interest is charged.
    (3) Example. The determination of the effective interest rate for 
any year may be illustrated as follows:

    Example. District X of the Federal land bank system charged an 8 
percent billed interest rate on new agricultural loans for 8 months of 
the year, 1976, and an 8.75 percent rate for 4 months of the year. The 
average billing rate was, therefore, 8.25 percent [(1.08 x 8/12) + 
(1.0875 x 4/12)=1.0825]. The district required stock equal to 5 percent 
of the face amount of the loan to be purchased as a precondition to 
receiving a loan. Thus, the borrower only received 95 percent of the 
funds upon which he paid interest. The applicable annual interest rate 
for 1976 of 8.68 percent is computed as follows:

8.25 percent x 1.00 (total loan amount)=8.25 percent (billed interest 
          rate) divided by 0.95 (percent of loan proceeds received by 
          borrower) = 8.68 percent (effective interest rate for 1976).

[T.D. 7710, 45 FR 50742, July 31, 1980]



Sec. 20.2032A-8  Election and agreement to have certain property valued
under section 2032A for estate tax purposes.

    (a) Election of special use valuation--(1) In general. An election 
under section 2032A is made as prescribed in paragraph (a)(3) of this 
section and on Form 706, United States Estate Tax Return. Once made, 
this election is irrevocable; however, see paragraph (d) of this section 
for a special rule for estates for which elections are made on or before 
August 30, 1980. Under section 2032A(a)(2), special use valuation may 
not reduce the value of the decedent's estate by more than $500,000. 
This election is available only if, at the time of death, the decedent 
was a citizen or resident of the United States.
    (2) Elections to specially value less than all qualified real 
property included in an estate. An election under section 2032A need not 
include all real property included in an estate which is eligible for 
special use valuation, but sufficient property to satisfy the threshold 
requirements of section 2032A(b)(1)(B) must be specially valued under 
the election. If joint or undivided interests (e.g. interests as joint 
tenants or tenants in common) in the same property are received from a 
decedent by qualified heirs, an election with respect to one heir's 
joint or undivided interest need not include any other heir's interest 
in the same property if the electing heir's interest plus other property 
to be specially valued satisfy the requirements of section 
2032A(b)(1)(B). If successive interests (e.g. life estates and remainder 
interests) are created by a decedent in otherwise qualified property, an 
election under section 2032A is available only with respect to that 
property (or portion thereof) in which qualified heirs of the decedent 
receive all of the successive interests, and such

[[Page 319]]

an election must include the interests of all of those heirs. For 
example, if a surviving spouse receives a life estate in otherwise 
qualified property and the spouse's brother receives a remainder 
interest in fee, no part of the property may be valued pursuant to an 
election under section 2032A. Where successive interests in specially 
valued property are created, remainder interests are treated as being 
received by qualified heirs only if such remainder interests are not 
contingent upon surviving a nonfamily member or are not subject to 
divestment in favor of a nonfamily member.
    (3) Time and manner of making election. An election under this 
section is made by attaching to a timely filed estate tax return the 
agreement described in paragraph (c)(1) of this section and a notice of 
election which contains the following information:
    (i) The decedent's name and taxpayer identification number as they 
appear on the estate tax return;
    (ii) The relevant qualified use;
    (iii) The items of real property shown on the estate tax return to 
be specially valued pursuant to the election (identified by schedule and 
item number);
    (iv) The fair market value of the real property to be specially 
valued under section 2032A and its value based on its qualified use 
(both values determined without regard to the adjustments provided by 
section 2032A(b)(3)(B));
    (v) The adjusted value (as defined in section 2032A(b)(3)(B)) of all 
real property which is used in a qualified use and which passes from the 
decedent to a qualified heir and the adjusted value of all real property 
to be specially valued;
    (vi) The items of personal property shown on the estate tax return 
that pass from the decedent to a qualified heir and are used in a 
qualified use under section 2032A (identified by schedule and item 
number) and the total value of such personal property adjusted as 
provided under section 2032A(b)(3)(B);
    (vii) The adjusted value of the gross estate, as defined in section 
2032A(b)(3)(A);
    (viii) The method used in determining the special value based on 
use;
    (ix) Copies of written appraisals of the fair market value of the 
real property;
    (x) A statement that the decedent and/or a member of his or her 
family has owned all specially valued real property for at least 5 years 
of the 8 years immediately preceding the date of the decedent's death;
    (xi) Any periods during the 8-year period preceding the date of the 
decedent's death during which the decedent or a member of his or her 
family did not own the property, use it in a qualified use, or 
materially participate in the operation of the farm or other business 
within the meaning of section 2032A(e)(6);
    (xii) The name, address, taxpayer identification number, and 
relationship to the decedent of each person taking an interest in each 
item of specially valued property, and the value of the property 
interests passing to each such person based on both fair market value 
and qualified use;
    (xiii) Affidavits describing the activities constituting material 
participation and the identity of the material participant or 
participants; and
    (xiv) A legal description of the specially valued property.

If neither an election nor a protective election is timely made, special 
use valuation is not available to the estate. See sections 2032A(d)(1), 
6075(a), and 6081(a).
    (b) Protective election. A protective election may be made to 
specially value qualified real property. The availability of special use 
valuation pursuant to this election is contingent upon values as finally 
determined (or agreed to following examination of a return) meeting the 
requirements of section 2032A. A protective election does not, however, 
extend the time for payment of any amount of tax. Rules for such 
extensions are contained in sections 6161, 6163, 6166, and 6166A. The 
protective election is to be made by a notice of election filed with a 
timely estate tax return stating that a protective election under 
section 2032A is being made pending final determination of values. This 
notice is to include the following information:

[[Page 320]]

    (1) The decedent's name and taxpayer identification number as they 
appear on the estate tax return;
    (2) The relevant qualified use; and
    (3) The items of real and personal property shown on the estate tax 
return which are used in a qualified use, and which pass to qualified 
heirs (identified by schedule and item number).

If it is found that the estate qualifies for special use valuation based 
upon values as finally determined (or agreed to following examination of 
a return), an additional notice of election must be filed within 60 days 
after the date of such determination. This notice must set forth the 
information required under paragraph (a)(3) of this section and is to be 
attached, together with the agreement described in paragraph (c)(1) of 
this section, to an amended estate tax return. The new return is to be 
filed with the Internal Revenue Service office where the original return 
was filed.
    (c) Agreement to special valuation by persons with an interest in 
property--(1) In general. The agreement required under section 2032A 
(a)(1)(B) and (d)(2) must be executed by all parties who have any 
interest in the property being valued based on its qualified use as of 
the date of the decedent's death. In the case of a qualified heir, the 
agreement must express consent to personal liability under section 
2032A(c) in the event of certain early dispositions of the property or 
early cessation of the qualified use. See section 2032A(c)(6). In the 
case of parties (other than qualified heirs) with interests in the 
property, the agreement must express consent to collection of any 
additional estate tax imposed under section 2032A(c) from the qualified 
property. The agreement is to be in a form that is binding on all 
parties having an interest in the property. It must designate an agent 
with satisfactory evidence of authority to act for the parties to the 
agreement in all dealings with the Internal Revenue Service on matters 
arising under section 2032A and must indicate the address of that agent.
    (2) Persons having an interest in designated property. An interest 
in property is an interest which, as of the date of the decedent's 
death, can be asserted under applicable local law so as to affect the 
disposition of the specially valued property by the estate. Any person 
in being at the death of the decedent who has any such interest in the 
property, whether present or future, or vested or contingent, must enter 
into the agreement. Included among such persons are owners of remainder 
and executory interests, the holders of general or special powers of 
appointment, beneficiaries of a gift over in default of exercise of any 
such power, co-tenants, joint tenants and holders of other undivided 
interests when the decedent held only a joint or undivided interest in 
the property or when only an undivided interest is specially valued, and 
trustees of trusts holding any interest in the property. An heir who has 
the power under local law to caveat (challenge) a will and thereby 
affect disposition of the property is not, however, considered to be a 
person with an interest in property under section 2032A solely by reason 
of that right. Likewise, creditors of an estate are not such persons 
solely by reason of their status as creditors.
    (3) Consent on behalf of interested party. If any person required to 
enter into the agreement provided for by paragraph (c)(1) either desires 
that an agent act for him or her or cannot legally bind himself or 
herself due to infancy or other incompetency, or to death before the 
election under section 2032A is timely exercised, a representative 
authorized under local law to bind such person in an agreement of this 
nature is permitted to sign the agreement on his or her behalf.
    (4) Duties of agent designated in agreement. The Internal Revenue 
Service will contact the agent designated in the agreement under 
paragraph (c)(1) on all matters relating to continued qualification 
under section 2032A of the specially valued real property and on all 
matters relating to the special lien arising under section 6324B. It is 
the duty of the agent as attorney-in-fact for the parties with interests 
in the specially valued property to furnish the Service with any 
requested information and to notify the Service of any disposition or 
cessation of qualified use of any part of the property.
    (d) Special rule for estates for which elections under section 2032A 
are made on

[[Page 321]]

or before August 30, 1980. An election to specially value real property 
under section 2032A that is made on or before August 30, 1980, may be 
revoked. To revoke an election, the executor must file a notice of 
revocation with the Internal Revenue Service office where the original 
estate tax return was filed on or before January 31, 1981 (or if 
earlier, the date on which the period of limitation for assessment 
expires). This notice of revocation must contain the decedent's name, 
date of death, and taxpayer identification number, and is to be 
accompanied by remittance of any additional amount of estate tax and 
interest determined to be due as a result of valuation of the qualified 
property based upon its fair market value. Elections that are made on or 
before August 30, 1980, that do not comply with this section as proposed 
on July 13, 1978 (43 FR 30070), and amended on December 21, 1978 (43 FR 
59517), must be conformed to this final regulation by means of an 
amended return before the original estate tax return can be finally 
accepted by the Internal Revenue Service.

[T.D. 7710, 45 FR 50743, July 31, 1980, as amended by T.D. 7786, 46 FR 
43037, Aug. 26, 1981]



Sec. 20.2033-1  Property in which the decedent had an interest.

    (a) In general. The gross estate of a decedent who was a citizen or 
resident of the United States at the time of his death includes under 
section 2033 the value of all property, whether real or personal, 
tangible or intangible, and wherever situated, beneficially owned by the 
decedent at the time of his death. (For certain exceptions in the case 
of real property situated outside the United States, see paragraphs (a) 
and (c) of Sec. 20.2031-1.) Real property is included whether it came 
into the possession and control of the executor or administrator or 
passed directly to heirs or devisees. Various statutory provisions which 
exempt bonds, notes, bills, and certificates of indebtedness of the 
Federal Government or its agencies and the interest thereon from 
taxation are generally not applicable to the estate tax, since such tax 
is an excise tax on the transfer of property at death and is not a tax 
on the property transferred.
    (b) Miscellaneous examples. A cemetery lot owned by the decedent is 
part of his gross estate, but its value is limited to the salable value 
of that part of the lot which is not designed for the interment of the 
decedent and the members of his family. Property subject to homestead or 
other exemptions under local law is included in the gross estate. Notes 
or other claims held by the decedent are likewise included even though 
they are cancelled by the decedent's will. Interest and rents accrued at 
the date of the decedent's death constitute a part of the gross estate. 
Similarly, dividends which are payable to the decedent or his estate by 
reason of the fact that on or before the date of the decedent's death he 
was a stockholder of record (but which have not been collected at death) 
constitute a part of the gross estate.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6684, 28 FR 
11409, Oct. 24, 1963]



Sec. 20.2034-1  Dower or curtesy interests.

    A decedent's gross estate includes under section 2034 any interest 
in property of the decedent's surviving spouse existing at the time of 
the decedent's death as dower or curtesy, or any interest created by 
statute in lieu thereof (although such other interest may differ in 
character from dower or curtesy). Thus, the full value of property is 
included in the decedent's gross estate, without deduction of such an 
interest of the surviving husband or wife, and without regard to when 
the right to such an interest arose.



Sec. 20.2036-1  Transfers with retained life estate.

    (a) In general. A decedent's gross estate includes under section 
2036 the value of any interest in property transferred by the decedent 
after March 3, 1931, whether in trust or otherwise, except to the extent 
that the transfer was for an adequate and full consideration in money or 
money's worth (see Sec. 20.2043-1), if the decedent retained or 
reserved--
    (1) For his life;
    (2) For any period not ascertainable without reference to his death 
(if the

[[Page 322]]

transfer was made after June 6, 1932); or
    (3) For any period which does not in fact end before his death:
    (i) The use, possession, right to income, or other enjoyment of the 
transferred property.
    (ii) The right, either alone or in conjunction with any other person 
or persons, to designate the person or persons who shall possess or 
enjoy the transferred property or its income (except that, if the 
transfer was made before June 7, 1932, the right to designate must be 
retained by or reserved to the decedent alone).
    (b) Meaning of terms. (1) A reservation by the decedent ``for any 
period not ascertainable without reference to his death'' may be 
illustrated by the following examples:
    (i) A decedent reserved the right to receive the income from 
transferred property in quarterly payments, with the proviso that no 
part of the income between the last quarterly payment and the date of 
the decedent's death was to be received by the decedent or his estate; 
and
    (ii) A decedent reserved the right to receive the income, annuity, 
or other payment from transferred property after the death of another 
person who was in fact enjoying the income, annuity, or other payment at 
the time of the decedent's death. In such a case, the amount to be 
included in the decedent's gross estate under this section does not 
include the value of the outstanding interest of the other person as 
determined in paragraphs (c)(1)(i) and (c)(2)(ii) of this section. See 
also, paragraphs (c)(1)(ii) Example 1 and (c)(2)(iv) Example 8 of this 
section. If the other person predeceased the decedent, the reservation 
by the decedent may be considered to be either for life, or for a period 
that does not in fact end before death.
    (2) The ``use, possession, right to the income, or other enjoyment 
of the transferred property'' is considered as having been retained by 
or reserved to the decedent to the extent that the use, possession, 
right to the income, or other enjoyment is to be applied toward the 
discharge of a legal obligation of the decedent, or otherwise for his 
pecuniary benefit. The term ``legal obligation'' includes a legal 
obligation to support a dependent during the decedent's lifetime.
    (3) The phrase ``right * * * to designate the person or persons who 
shall possess or enjoy the transferred property or the income 
therefrom'' includes a reserved power to designate the person or persons 
to receive the income from the transferred property, or to possess or 
enjoy nonincome-producing property, during the decedent's life or during 
any other period described in paragraph (a) of this section. With 
respect to such a power, it is immaterial (i) whether the power was 
exercisable alone or only in conjunction with another person or persons, 
whether or not having an adverse interest; (ii) in what capacity the 
power was exercisable by the decedent or by another person or persons in 
conjunction with the decedent; and (iii) whether the exercise of the 
power was subject to a contingency beyond the decedent's control which 
did not occur before his death (e.g., the death of another person during 
the decedent's lifetime). The phrase, however, does not include a power 
over the transferred property itself which does not affect the enjoyment 
of the income received or earned during the decedent's life. (See, 
however, section 2038 for the inclusion of property in the gross estate 
on account of such a power.) Nor does the phrase apply to a power held 
solely by a person other than the decedent. But, for example, if the 
decedent reserved the unrestricted power to remove or discharge a 
trustee at any time and appoint himself as trustee, the decedent is 
considered as having the powers of the trustee.
    (c) Retained or reserved interest--(1) Amount included in gross 
estate--(i) In general. If the decedent retained or reserved an interest 
or right with respect to all of the property transferred by him, the 
amount to be included in his gross estate under section 2036 is the 
value of the entire property, less only the value of any outstanding 
income interest which is not subject to the decedent's interest or right 
and which is actually being enjoyed by another person at the time of the 
decedent's death. If the decedent retained or reserved an interest or 
right with respect to a part only of the property transferred by

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him, the amount to be included in his gross estate under section 2036 is 
only a corresponding proportion of the amount described in the preceding 
sentence. An interest or right is treated as having been retained or 
reserved if at the time of the transfer there was an understanding, 
express, or implied, that the interest or right would later be 
conferred. If this section applies to an interest retained by the 
decedent in a trust or otherwise and the terms of the trust or other 
governing instrument provide that, after the decedent's death, payments 
the decedent was receiving during life are to continue to be made to the 
decedent's estate for a specified period (as opposed to payments that 
were payable to the decedent prior to the decedent's death but were not 
actually paid until after the decedent's death), such payments that 
become payable after the decedent's death are not includible in the 
decedent's gross estate under section 2033 because they are properly 
reflected in the value of the trust corpus included under this section. 
Payments that become payable to the decedent prior to the decedent's 
date of death, but are not paid until after the decedent's date of 
death, are includible in the decedent's gross estate under section 2033.
    (ii) Examples. The application of paragraph (c)(1)(i) of this 
section is illustrated in the following examples:

    Example 1. Decedent (D) creates an irrevocable inter vivos trust. 
The terms of the trust provide that all of the trust income is to be 
paid to D and D's child, C, in equal shares during their joint lives 
and, on the death of the first to die of D and C, all of the trust 
income is to be paid to the survivor. On the death of the survivor of D 
and C, the remainder is to be paid to another individual, F. 
Subsequently, D dies survived by C. Fifty percent of the value of the 
trust corpus is includible in D's gross estate under section 2036(a)(1) 
because, under the terms of the trust, D retained the right to receive 
one-half of the trust income for D's life. In addition, the excess (if 
any) of the value of the remaining 50 percent of the trust corpus, over 
the present value of C's outstanding life estate in that 50 percent of 
trust corpus, also is includible in D's gross estate under section 
2036(a)(1), because D retained the right to receive all of the trust 
income for such time as D survived C. If C had predeceased D, then 100 
percent of the trust corpus would have been includible in D's gross 
estate.
    Example 2. D transferred D's personal residence to D's child (C), 
but retained the right to use the residence for a term of years. D dies 
during the term. At D's death, the fair market value of the personal 
residence is includible in D's gross estate under section 2036(a)(1) 
because D retained the right to use the residence for a period that did 
not in fact end before D's death.

    (2) Retained annuity, unitrust, and other income interests in 
trusts--(i) In general. This paragraph (c)(2) applies to a grantor's 
retained use of an asset held in trust or a retained annuity, unitrust, 
or other interest in any trust (other than a trust constituting an 
employee benefit) including without limitation the following 
(collectively referred to in this paragraph (c)(2) as ``trusts''): 
Certain charitable remainder trusts (collectively CRTs) such as a 
charitable remainder annuity trust (CRAT) within the meaning of section 
664(d)(1), a charitable remainder unitrust (CRUT) within the meaning of 
section 664(d)(2) or (d)(3), and any charitable remainder trust that 
does not qualify under section 664(d), whether because the CRT was 
created prior to 1969, there was a defect in the drafting of the CRT, 
there was no intention to qualify the CRT for the charitable deduction, 
or otherwise; other trusts established by a grantor (collectively GRTs) 
such as a grantor retained annuity trust (GRAT) paying out a qualified 
annuity interest within the meaning of Sec. 25.2702-3(b) of this 
chapter, a grantor retained unitrust (GRUT) paying out a qualified 
unitrust interest within the meaning of Sec. 25.2702-3(c) of this 
chapter; and various other forms of grantor retained income trusts 
(GRITs) whether or not the grantor's retained interest is a qualified 
interest as defined in section 2702(b), including without limitation a 
qualified personal residence trust (QPRT) within the meaning of Sec. 
25.2702-5(c) of this chapter and a personal residence trust (PRT) within 
the meaning of Sec. 25.2702-5(b) of this chapter. If a decedent 
transferred property into such a trust and retained or reserved the 
right to use such property, or the right to an annuity, unitrust, or 
other interest in such trust with respect to the property decedent so 
transferred for decedent's life, any period not ascertainable without 
reference to the decedent's death, or for a period that

[[Page 324]]

does not in fact end before the decedent's death, then the decedent's 
right to use the property or the retained annuity, unitrust, or other 
interest (whether payable from income and/or principal) constitutes the 
retention of the possession or enjoyment of, or the right to the income 
from, the property for purposes of section 2036. The portion of the 
trust's corpus includible in the decedent's gross estate for Federal 
estate tax purposes is that portion of the trust corpus necessary to 
provide the decedent's retained use or retained annuity, unitrust, or 
other payment (without reducing or invading principal). In the case of a 
retained annuity or unitrust, the portion of the trust's corpus 
includible in the decedent's gross estate is that portion of the trust 
corpus necessary to generate sufficient income to satisfy the retained 
annuity or unitrust (without reducing or invading principal), using the 
interest rates provided in section 7520 and the adjustment factors 
prescribed in Sec. 20.2031-7 (or Sec. 20.2031-7A), if applicable. The 
computation is illustrated in paragraph (c)(2)(iv), Examples 1, 2, and 3 
of this section. The portion of the trust's corpus includible in the 
decedent's gross estate under section 2036, however, shall not exceed 
the fair market value of the trust's corpus at the decedent's date of 
death.
    (ii) Decedent's retained annuity following a current annuity 
interest of another person. If the decedent retained the right to 
receive an annuity or other payment (rather than income) after the death 
of the current recipient of that interest, then the amount includible in 
the decedent's gross estate under this section is the amount of trust 
corpus required to produce sufficient income to satisfy the entire 
annuity or other payment the decedent would have been entitled to 
receive if the decedent had survived the current recipient (thus, also 
including the portion of that entire amount payable to the decedent 
before the current recipient's death), reduced by the present value of 
the current recipient's interest. However, the amount includible shall 
not be less than the amount of corpus required to produce sufficient 
income to satisfy the annuity or other payment the decedent was 
entitled, at the time of the decedent's death, to receive for each year. 
In addition, in no event shall the amount includible exceed the value of 
the trust corpus on the date of death. Finally, in calculating the 
present value of the current recipient's interest, the exhaustion of 
trust corpus test described in Sec. 20.7520-3(b)(2) (exhaustion test) 
is not to be applied, even in cases where Sec. 20.7520-3(b)(2) would 
otherwise require it to be applied. The following steps implement this 
computation.
    (A) Step 1: Determine the fair market value of the trust corpus on 
the decedent's date of death.
    (B) Step 2: Determine, in accordance with paragraph (c)(2)(i) of 
this section, the amount of corpus required to generate sufficient 
income to pay the annuity, unitrust, or other payment (determined on the 
date of the decedent's death) payable to the decedent for the trust year 
in which the decedent's death occurred.
    (C) Step 3: Determine, in accordance with paragraph (c)(2)(i) of 
this section, the amount of corpus required to generate sufficient 
income to pay the annuity, unitrust, or other payment that the decedent 
would have been entitled to receive for each trust year if the decedent 
had survived the current recipient.
    (D) Step 4: Determine the present value of the current recipient's 
annuity, unitrust, or other payment (without applying the exhaustion 
test).
    (E) Step 5: Reduce the amount determined in Step 3 by the amount 
determined in Step 4, but not to below the amount determined in Step 2.
    (F) Step 6: The amount includible in the decedent's gross estate 
under this section is the lesser of the amounts determined in Step 5 and 
Step 1.
    (iii) Graduated retained interests--(A) In general. For purposes of 
this section, a graduated retained interest is the grantor's reservation 
of a right to receive an annuity, unitrust, or other payment as 
described in paragraph (c)(2)(i) of this section, payable at least 
annually, that increases (but does not decrease) over a period of time, 
not more often than annually.
    (B) Other definitions--(1) Base amount. The base amount is the 
amount of corpus required to generate the annuity,

[[Page 325]]

unitrust, or other payment payable for the trust year in which the 
decedent's death occurs. See paragraph (c)(2)(i) of this section for the 
calculation of the base amount.
    (2) Periodic addition. The periodic addition in a graduated retained 
interest for each year after the year in which decedent's death occurs 
is the amount (if any) by which the annuity, unitrust, or other payment 
that would have been payable for that year if the decedent had survived 
exceeds the total amount of payments that would have been payable for 
the year immediately preceding that year. For example, assume the trust 
instrument provides that the grantor is to receive an annual annuity 
payable to the grantor or the grantor's estate for a 5-year term. The 
initial annual payment is $100,000, and each succeeding annual payment 
is to be 120 percent of the amount payable for the preceding year. 
Assuming the grantor dies in the second year of the trust (whether 
before or after the due date of the second annual payment), the periodic 
additions for years 3, 4, and 5 of the trust are as follows:

------------------------------------------------------------------------
                                          (1)      (2) Prior     (1-2)
                                        Annual       year      Periodic
                                        payment     payment    addition
------------------------------------------------------------------------
Year 3..............................     144,000     120,000      24,000
Year 4..............................     172,800     144,000      28,800
Year 5..............................     207,360     172,800      34,560
------------------------------------------------------------------------

    (3) Corpus amount. For each trust year in which a periodic addition 
occurs (increase year), the corpus amount is the amount of trust corpus 
which, starting from the decedent's date of death, is necessary to 
generate an amount of income sufficient to pay the periodic addition, 
beginning in the increase year and continuing in perpetuity, without 
reducing or invading principal. For each year with a periodic addition, 
the corpus amount required as of the decedent's date of death is the 
product of two factors: The first is the result of dividing the periodic 
addition (adjusted for payments made more frequently than annually, if 
applicable, and for payments due at the beginning, rather than the end, 
of a payment period (see Table K or J of Sec. 20.2031-7(d)(6)) by the 
section 7520 rate (periodic addition/rate)); and the second is 1 divided 
by the sum of 1 and the section 7520 rate raised to the T power (1/(1 + 
rate)[supcaret]T). The second factor applies a present value discount to 
reflect the period beginning with the date of death and ending on the 
last day of the trust year immediately before the year for which the 
periodic addition is first payable.
    (i) The corpus amount is determined as follows:
    [GRAPHIC] [TIFF OMITTED] TR08NO11.026
    
    (ii) The adjustment factor, if applicable, is the factor for 
payments made more frequently than annually and for payments due at the 
beginning, rather than the end, of a calendar period (see Table K or J 
of Sec. 20.2031-7(d)(6)). T equals the time period in years from the 
decedent's date of death through the last day of the trust year 
immediately before the year for which the periodic addition is first 
payable.
    (C) Amount includible. The amount includible in the gross estate in 
the case of a graduated retained interest is the sum of the base amount 
and the corpus amount for each year for which a periodic addition is 
first payable. The sum of these amounts represents the amount of trust 
principal that would be necessary to generate the annual payments that 
would have been paid to the decedent if the decedent had survived and 
had continued to receive the graduated retained interest. The amount of 
trust corpus includible in a decedent's gross estate under this section, 
however, shall not exceed the fair market value of the trust corpus on 
the decedent's date of death. The provisions of this section also apply 
to graduated retained interests in transferred property not held in 
trust.
    (iv) Examples. The application of paragraphs (c)(2)(i), (c)(2)(ii), 
and (c)(2)(iii) of this section is illustrated in the following 
examples:


[[Page 326]]


    Example 1. (i) Decedent (D) transferred $100,000 to an inter vivos 
trust that qualifies as a CRAT under section 664(d)(1). The trust 
agreement provides for an annuity of $7,500 to be paid each year to D 
for D's life, then to D's child (C) for C's life, with the remainder to 
be distributed upon the survivor's death to N, a charitable organization 
described in sections 170(c), 2055(a), and 2522(a). The annuity is 
payable to D or C, as the case may be, annually on each December 31st. D 
dies in September 2006, survived by C who was then age 40. On D's death, 
the value of the trust assets was $300,000 and the section 7520 interest 
rate was 6 percent. D's executor does not elect to use the alternate 
valuation date.
    (ii) The amount of corpus with respect to which D retained the right 
to the income, and thus the amount includible in D's gross estate under 
section 2036, is that amount of corpus necessary to yield the annual 
annuity payment to D (without reducing or invading principal). In this 
case, the formula for determining the amount of corpus necessary to 
yield the annual annuity payment to D is: annual annuity / section 7520 
interest rate = amount includible under section 2036. The amount of 
corpus necessary to yield the annual annuity is $7,500 / .06 = $125,000. 
Therefore, $125,000 is includible in D's gross estate under section 
2036(a)(1). (The result would be the same if D had retained an interest 
in the CRAT for a term of years and had died during the term. The result 
also would be the same if D had irrevocably relinquished D's annuity 
interest less than 3 years prior to D's death because of the application 
of section 2035.) If, instead, the trust agreement had provided that D 
could revoke C's annuity interest or change the identity of the 
charitable remainderman, see section 2038 with regard to the portion of 
the trust to be included in the gross estate on account of such a 
retained power to revoke. Under the facts presented, section 2039 does 
not apply to include any amount in D's gross estate by reason of this 
retained annuity. See Sec. 20.2039-1(e).
    Example 2. (i) D transferred $100,000 to a GRAT in which D's annuity 
is a qualified interest described in section 2702(b). The trust 
agreement provides for an annuity of $12,000 per year to be paid to D 
for a term of ten years or until D's earlier death. The annuity amount 
is payable in twelve equal installments at the end of each month. At the 
expiration of the term of years or on D's earlier death, the remainder 
is to be distributed to D's child (C). D dies prior to the expiration of 
the ten-year term. On the date of D's death, the value of the trust 
assets is $300,000 and the section 7520 interest rate is 6 percent. D's 
executor does not elect to use the alternate valuation date.
    (ii) The amount of corpus with respect to which D retained the right 
to the income, and thus the amount includible in D's gross estate under 
section 2036, is that amount of corpus necessary to yield the annual 
annuity payment to D (without reducing or invading principal). In this 
case, the formula for determining the amount of corpus necessary to 
yield the annual annuity payment to D is: annual annuity (adjusted for 
monthly payments) / section 7520 interest rate = amount includible under 
section 2036. The Table K adjustment factor for monthly annuity payments 
in this case is 1.0272. Thus, the amount of corpus necessary to yield 
the annual annuity is ($12,000 x 1.0272) / .06 = $205,440. Therefore, 
$205,440 is includible in D's gross estate under section 2036(a)(1). If, 
instead, the trust agreement had provided that the annuity was to be 
paid to D during D's life and to D's estate for the balance of the 10-
year term if D died during that term, then the portion of trust corpus 
includible in D's gross estate would still be as calculated in this 
paragraph. It is not material whether payments are made to D's estate 
after D's death. Under the facts presented, section 2039 does not apply 
to include any amount in D's gross estate by reason of this retained 
annuity. See Sec. 20.2039-1(e).
    Example 3. (i) In 2000, D created a CRUT within the meaning of 
section 664(d)(2). The trust instrument directs the trustee to hold, 
invest, and reinvest the corpus of the trust and to pay to D for D's 
life, and then to D's child (C) for C's life, in equal quarterly 
installments payable at the end of each calendar quarter, an amount 
equal to 6 percent of the fair market value of the trust as valued on 
December 15 of the prior taxable year of the trust. At the termination 
of the trust, the then-remaining corpus, together with any and all 
accrued income, is to be distributed to N, a charitable organization 
described in sections 170(c), 2055(a), and 2522(a). D dies in 2006, 
survived by C, who was then age 55. The value of the trust assets on D's 
death was $300,000. D's executor does not elect to use the alternate 
valuation date and, as a result, D's executor does not choose to use the 
section 7520 interest rate for either of the two months prior to D's 
death.
    (ii) The amount of the corpus with respect to which D retained the 
right to the income, and thus the amount includible in D's gross estate 
under section 2036(a)(1), is that amount of corpus necessary to yield 
the unitrust payments. In this case, such amount of corpus is determined 
by dividing the trust's equivalent income interest rate by the section 
7520 rate (which was 6 percent at the time of D's death). The equivalent 
income interest rate is determined by dividing the trust's adjusted 
payout rate by the excess of 1 over the adjusted payout rate. Based on 
Sec. 1.664-4(e)(3) of this chapter, the appropriate adjusted payout 
rate for the trust at D's death is 5.786 percent (6 percent x .964365). 
Thus, the equivalent income interest rate is 6.141 percent (5.786 
percent / (1--

[[Page 327]]

5.786 percent)). The ratio of the equivalent interest rate to the 
assumed interest rate under section 7520 is 102.35 percent (6.141 
percent / 6 percent). Because this exceeds 100 percent, D's retained 
payout interest exceeds a full income interest in the trust, and D 
effectively retained the income from all the assets transferred to the 
trust. Accordingly, because D retained for life an interest at least 
equal to the right to all income from all the property transferred by D 
to the CRUT, the entire value of the corpus of the CRUT is includible in 
D's gross estate under section 2036(a)(1). (The result would be the same 
if D had retained, instead, an interest in the CRUT for a term of years 
and had died during the term.) Under the facts presented, section 2039 
does not apply to include any amount in D's gross estate by reason of 
D's retained unitrust interest. See Sec. 20.2039-1(e).
    (iii) If, instead, D had retained the right to a unitrust amount 
having an adjusted payout for which the corresponding equivalent 
interest rate would have been less than the 6 percent assumed interest 
rate of section 7520, then a correspondingly reduced proportion of the 
trust corpus would be includible in D's gross estate under section 
2036(a)(1). Alternatively, if the interest retained by D was instead 
only one-half of the 6 percent unitrust interest, then the amount 
included in D's estate would be the amount needed to produce a 3 percent 
unitrust interest. All of the results in this Example 3 would be the 
same if the trust had been a GRUT instead of a CRUT.
    Example 4. During life, D established a 15-year GRIT for the benefit 
of individuals who are not members of D's family within the meaning of 
section 2704(c)(2). D retained the right to receive all of the net 
income from the GRIT, payable annually, during the GRIT's term. D dies 
during the GRIT's term. D's executor does not elect to use the alternate 
valuation date. In this case, the GRIT's corpus is includible in D's 
gross estate under section 2036(a)(1) because D retained the right to 
receive all of the income from the GRIT for a period that did not in 
fact end before D's death. If, instead, D had retained the right to 
receive 60 percent of the GRIT's net income, then 60 percent of the 
GRIT's corpus would have been includible in D's gross estate under 
section 2036. Under the facts presented, section 2039 does not apply to 
include any amount in D's gross estate by reason of D's retained 
interest. See Sec. 20.2039-1(e).
    Example 5. In 2003, D transferred $10X to a pooled income fund that 
conforms to Rev. Proc. 88-53, 1988-2 CB 712 (1988) in exchange for 1 
unit in the fund. D is to receive all of the income from that 1 unit 
during D's life. Upon D's death, D's child (C), is to receive D's income 
interest for C's life. In 2008, D dies. D's executor does not elect to 
use the alternate valuation date. In this case, the fair market value of 
D's 1 unit in the pooled income fund is includible in D's gross estate 
under section 2036(a)(1) because D retained the right to receive all of 
the income from that unit for a period that did not in fact end before 
D's death. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
    Example 6. D transferred D's personal residence to a trust that met 
the requirements of a qualified personal residence trust (QPRT) as set 
forth in Sec. 25.2702-5(c) of this chapter. Pursuant to the terms of 
the QPRT, D retained the right to use the residence for 10 years or 
until D's prior death. D dies before the end of the term. D's executor 
does not elect to use the alternate valuation date. In this case, the 
fair market value of the QPRT's assets on the date of D's death are 
includible in D's gross estate under section 2036(a)(1) because D 
retained the right to use the residence for a period that did not in 
fact end before D's death.
    Example 7. (i) On November 1, year N, D transfers assets valued at 
$2,000,000 to a GRAT. Under the terms of the GRAT, the trustee is to pay 
to D an annuity for a 5-year term that is a qualified interest described 
in section 2702(b). The annuity amount is to be paid annually at the end 
of each trust year, on October 31st. The first annual payment is to be 
$100,000. Each succeeding payment is to be 120 percent of the amount 
paid in the preceding year. Income not distributed in any year is to be 
added to principal. If D dies during the 5-year term, the payments are 
to be made to D's estate for the balance of the GRAT term. At the end of 
the 5-year term, the trust is to terminate and the corpus is to be 
distributed to C, D's child. D dies on January 31st of the third year of 
the GRAT term. On the date of D's death, the value of the trust corpus 
is $3,200,000, the section 7520 interest rate is 6.8 percent, and the 
adjustment factor from Table K of Sec. 20.2031-7 is 1.0000. D's 
executor does not elect to value the gross estate as of the alternate 
valuation date pursuant to section 2032.
    (ii) The amount includible in D's gross estate under section 
2036(a)(1) as described in paragraph (c)(2)(iii)(C) of this section is 
determined and illustrated as follows:

[[Page 328]]

[GRAPHIC] [TIFF OMITTED] TR08NO11.027

    (iii) Specifically:
    (A) Column A. First, determine the year of the trust term during 
which the decedent's death occurs, and the number of subsequent years 
remaining in the trust term for which the decedent retained or reserved 
an interest. In this example, D dies during year 3, with two additional 
years remaining in the term.
    (B) Column B. Under the formula specified in the trust, the annuity 
payment to be made on October 31st of the 3rd year of the trust term is 
$144,000. Using that same formula, determine the annuity amounts for 
years 4 and 5.
    (C) Column C. Determine the periodic addition for year 4 and year 5 
by subtracting the annuity amount for the preceding year from the 
annuity amount for that year; the periodic addition for that year is the 
amount of the increase in the annuity amount for that year.
    (D) Columns D through G for year 3. For the year of the decedent's 
death (year 3), determine the principal required to produce the annuity 
amount (Column D) by multiplying the annuity amount (Column B) by the 
adjustment factor (in this case 1.0000) and by dividing the product by 
the applicable interest rate under section 7520. Because this is the 
year of decedent's death and reflects the annuity amount payable to the 
decedent in that year, there is no deferral, so this is also the Base 
Amount (the amount of corpus required to produce the annuity for year 3) 
(Column G).
    (E) Columns D through G for years 4 and 5. For each succeeding year 
of the trust term during which the periodic addition will not be payable 
until a year subsequent to the year of the decedent's death, determine 
the principal required to produce the periodic addition payable for that 
year (Column D) by multiplying the periodic addition (Column C) by the 
adjustment factor and by dividing the product by the applicable interest 
rate under section 7520. Compute the factors to reflect the length of 
the deferral period (Column E) and the present value (Column F) as 
described in paragraph (c)(2)(iii)(B)(3) of this section. Multiply the 
amount of corpus in Column D by the factors in Columns E and F to 
determine the Corpus Amount for that year (Column G).
    (F) Column G total. The sum of the amounts in Column G represents 
the total amount includable in the gross estate (but not in excess of 
the fair market value of the trust on the decedent's date of death).
    (iv) An illustration of the amount of trust corpus (as of the 
decedent's death) necessary to produce the scheduled payments is as 
follows:
[GRAPHIC] [TIFF OMITTED] TR08NO11.028


[[Page 329]]


    (v) A total corpus amount (as defined in paragraph (c)(2)(iii)(B)(3) 
of this section) of $2,973,866 constitutes the principal required as of 
decedent's date of death to produce (without reducing or invading 
principal) the annual payments that D would have received if D had 
survived and had continued to receive the retained annuity. Therefore, 
$2,973,866 of the trust corpus is includible in D's gross estate under 
section 2036(a)(1). The remaining $226,134 of the trust corpus is not 
includible in D's gross estate under section 2036(a)(1). The result 
would be the same if D's retained annuity instead had been payable to D 
for a term of 5 years, or until D's prior death, at which time the GRAT 
would have terminated and the trust corpus would have become payable to 
another.
    (vi) If, instead, D's annuity was to have been paid on a monthly or 
quarterly basis, then the periodic addition would have to be adjusted as 
provided in paragraph (c)(2)(iii)(B)(3) of this section. Specifically, 
in Column D of the Table for years 4 and 5 in this example, the amount 
of the principal required would be computed by multiplying the periodic 
addition by the appropriate factor from Table K or J of Sec. 20.2031-
7(d)(6) before dividing as indicated and computing the amounts in 
Columns E through G. In addition, Column D in year 3 also would have to 
be so adjusted. Under the facts presented, section 2039 does not apply 
to include any amount in D's gross estate by reason of this retained 
interest. See Sec. 20.2039-1(e).
    Example 8. (i) D creates an irrevocable inter vivos trust. The terms 
of the trust provide that an annuity of $10,000 per year is to be paid 
to D and C, D's child, in equal shares during their joint lives. On the 
death of the first to die of D and C, the entire $10,000 annuity is to 
be paid to the survivor for life. On the death of the survivor of D and 
C, the remainder is to be paid to another individual, F. Subsequently, D 
dies survived by C. On D's date of death, the fair market value of the 
trust is $120,000 and the section 7520 rate is 7 percent. At the date of 
D's death, the amount of trust corpus needed to produce D's annuity 
interest ($5,000 per year) is $71,429 ($5,000/0.07). In addition, assume 
the present value of C's right to receive $5,000 annually for the 
remainder of C's life is $40,000. The portion of the trust corpus 
includible in D's gross estate under section 2036(a)(1) is $102,857, 
determined as follows:

(ii) Step 1: Fair market value of corpus..............          $120,000
(iii) Step 2: Corpus required to produce D's date of              71,429
 death annuity ($5,000/0.07)..........................
(iv) Step 3: Corpus required to produce D's annuity if           142,857
 D had survived C ($10,000/0.07)......................
(v) Step 4: Present value of C's interest.............            40,000
(vi) Step 5: The amount determined in Step 3, reduced            102,857
 by the amount determined in Step 4, but not to below
 the amount determined in Step 2 ($142,857--$40,000,
 but not less than $71,429)...........................
(vii) Step 6: The lesser of the amounts determined in            102,857
 Steps 5 and 1 ($102,857 or $120,000).................
 

    (3) Effective/applicability dates. Paragraphs (a) and (c)(1)(i) of 
this section are applicable to the estates of decedents dying after 
August 16, 1954. Paragraphs (c)(1)(ii) and (c)(2) of this section apply 
to the estates of decedents dying on or after July 14, 2008. All but the 
last two sentences at the end of paragraph (c)(1)(i) of this section are 
applicable to the estates of decedents dying after August 16, 1954. The 
first, second, and sixth sentences in paragraph (c)(2)(i) of this 
section and all but the introductory text, Example 7, and Example 8 of 
paragraph (c)(2)(iv) of this section are applicable to the estates of 
decedent's dying on or after July 14, 2008. Paragraph (b)(1)(ii) of this 
section, the last two sentences at the end of paragraph (c)(1)(i) of 
this section, Example 1 of paragraph (c)(1)(ii) of this section, the 
third, fourth, and fifth sentences in paragraph (c)(2)(i) of this 
section; paragraph (c)(2)(ii) of this section; paragraph (c)(2)(iii) of 
this section; and the introductory text, Example 7, and Example 8 of 
paragraph (c)(2)(iv) of this section are applicable to the estates of 
decedents dying on or after November 8, 2011.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6501, 25 FR 
10869, Nov. 16, 1960; T.D. 9414, 73 FR 40177, July 14, 2008; 73 FR 
44648, July 31, 2008; T.D. 9555, 76 FR 69128, Nov. 8, 2011]



Sec. 20.2037-1  Transfers taking effect at death.

    (a) In general. A decedent's gross estate includes under section 
2037 the

[[Page 330]]

value of any interest in property transferred by the decedent after 
September 7, 1916, whether in trust or otherwise, except to the extent 
that the transfer was for an adequate and full consideration in money or 
money's worth (see Sec. 20.2043-1), if--
    (1) Possession or enjoyment of the property could, through ownership 
of the interest, have been obtained only by surviving the decedent,
    (2) The decedent had retained a possibility (referred to in this 
section as a ``reversionary interest'') that the property, other than 
the income alone, would return to the decedent or his estate or would be 
subject to a power of disposition by him, and
    (3) The value of the reversionary interest immediately before the 
decedent's death exceeded 5 percent of the value of the entire property.

However, if the transfer was made before October 8, 1949, section 2037 
is applicable only if the reversionary interest arose by the express 
terms of the instrument of transfer and not by operation of law (see 
paragraph (f) of this section). See also paragraph (g) of this section 
with respect to transfers made between November 11, 1935, and January 
29, 1940. The provisions of section 2037 do not apply to transfers made 
before September 8, 1916.
    (b) Condition of survivorship. As indicated in paragraph (a) of this 
section, the value of an interest in transferred property is not 
included in a decedent's gross estate under section 2037 unless 
possession or enjoyment of the property could, through ownership of such 
interest, have been obtained only by surviving the decedent. Thus, 
property is not included in the decedent's gross estate if, immediately 
before the decedent's death, possession or enjoyment of the property 
could have been obtained by any beneficiary either by surviving the 
decedent or through the occurrence of some other event such as the 
expiration of a term of years. However, if a consideration of the terms 
and circumstances of the transfer as a whole indicates that the ``other 
event'' is unreal and if the death of the decedent does, in fact, occur 
before the ``other event'', the beneficiary will be considered able to 
possess or enjoy the property only by surviving the decedent. 
Notwithstanding the foregoing, an interest in transferred property is 
not includible in a decedent's gross estate under section 2037 if 
possession or enjoyment of the property could have been obtained by any 
beneficiary during the decedent's life through the exercise of a general 
power of appointment (as defined in section 2041) which in fact was 
exercisable immediately before the decedent's death. See examples (5) 
and (6) in paragraph (e) of this section.
    (c) Retention of reversionary interest. (1) As indicated in 
paragraph (a) of this section, the value of an interest in transferred 
property is not included in a decedent's gross estate under section 2037 
unless the decedent had retained a reversionary interest in the 
property, and the value of the reversionary interest immediately before 
the death of the decedent exceeded 5 percent of the value of the 
property.
    (2) For purposes of section 2037, the term ``reversionary interest'' 
includes a possibility that property transferred by the decedent may 
return to him or his estate and a possibility that property transferred 
by the decedent may become subject to a power of disposition by him. The 
term is not used in a technical sense, but has reference to any reserved 
right under which the transferred property shall or may be returned to 
the grantor. Thus, it encompasses an interest arising either by the 
express terms of the instrument of transfer or by operation of law. 
(See, however, paragraph (f) of this section with respect to transfers 
made before October 8, 1949.) The term ``reversionary interest'' does 
not include rights to income only, such as the right to receive the 
income from a trust after the death of another person. (However, see 
section 2036 for the inclusion of property in the gross estate on 
account of such rights.) Nor does the term ``reversionary interest'' 
include the possibility that the decedent during his lifetime might have 
received back an interest in transferred property by inheritance through 
the estate of another person. Similarly, a statutory right of a spouse 
to receive a portion of whatever estate a decedent may leave at the time 
of his death is not a ``reversionary interest''.

[[Page 331]]

    (3) For purposes of this section, the value of the decedent's 
reversionary interest is computed as of the moment immediately before 
his death, without regard to whether or not the executor elects the 
alternate valuation method under section 2032 and without regard to the 
fact of the decedent's death. The value is ascertained in accordance 
with recognized valuation principles for determining the value for 
estate tax purposes of future or conditional interests in property. (See 
Sec. Sec. 20.2031-1, 20.2031-7, and 20.2031-9). For example, if the 
decedent's reversionary interest was subject to an outstanding life 
estate in his wife, his interest is valued according to the actuarial 
rules set forth in Sec. 20.2031-7. On the other hand, if the decedent's 
reversionary interest was contingent on the death of his wife without 
issue surviving and if it cannot be shown that his wife is incapable of 
having issue (so that his interest is not subject to valuation according 
to the actuarial rules in Sec. 20.2031-7), his interest is valued 
according to the general rules set forth in Sec. 20.2031-1. A 
possibility that the decedent may be able to dispose of property under 
certain conditions is considered to have the same value as a right of 
the decedent to the return of the property under those same conditions.
    (4) In order to determine whether or not the decedent retained a 
reversionary interest in transferred property of a value in excess of 5 
percent, the value of the reversionary interest is compared with the 
value of the transferred property, including interests therein which are 
not dependent upon survivorship of the decedent. For example, assume 
that the decedent, A, transferred property in trust with the income 
payable to B for life and with the remainder payable to C if A 
predeceases B, but with the property to revert to A if B predeceases A. 
Assume further that A does, in fact, predecease B. The value of A's 
reversionary interest immediately before his death is compared with the 
value of the trust corpus, without deduction of the value of B's 
outstanding life estate. If, in the above example, A had retained a 
reversionary interest in one-half only of the trust corpus, the value of 
his reversionary interest would be compared with the value of one-half 
of the trust corpus, again without deduction of any part of the value of 
B's outstanding life estate.
    (d) Transfers partly taking effect at death. If separate interests 
in property are transferred to one or more beneficiaries, paragraphs (a) 
to (c) of this section are to be separately applied with respect to each 
interest. For example, assume that the decedent transferred an interest 
in Blackacre to A which could be possessed or enjoyed only by surviving 
the decedent, and that the decedent transferred an interest in Blackacre 
to B which could be possessed or enjoyed only on the occurrence of some 
event unrelated to the decedent's death. Assume further that the 
decedent retained a reversionary interest in Blackacre of a value in 
excess of 5 percent. Only the value of the interest transferred to A is 
includible in the decedent's gross estate. Similar results would obtain 
if possession or enjoyment of the entire property could have been 
obtained only by surviving the decedent, but the decedent had retained a 
reversionary interest in a part only of such property.
    (e) Examples. The provisions of paragraphs (a) to (d) of this 
section may be further illustrated by the following examples. It is 
assumed that the transfers were made on or after October 8, 1949; for 
the significance of this date, see paragraphs (f) and (g) of this 
section:

    Example (1). The decedent transferred property in trust with the 
income payable to his wife for life and, at her death, remainder to the 
decedent's then surviving children, or if none, to the decedent or his 
estate. Since each beneficiary can possess or enjoy the property without 
surviving the decedent, no part of the property is includible in the 
decedent's gross estate under section 2037, regardless of the value of 
the decedent's reversionary interest. (However, see section 2033 for 
inclusion of the value of the reversionary interest in the decedent's 
gross estate.)
    Example (2). The decedent transferred property in trust with the 
income to be accumulated for the decedent's life, and at his death, 
principal and accumulated income to be paid to the decedent's then 
surviving issue, or, if none, to A or A's estate. Since the decedent 
retained no reversionary interest in the property, no part of the 
property is includible in the decedent's gross estate, even

[[Page 332]]

though possession or enjoyment of the property could be obtained by the 
issue only by surviving the decedent.
    Example (3). The decedent transferred property in trust with the 
income payable to his wife for life and with the remainder payable to 
the decedent or, if he is not living at his wife's death, to his 
daughter or her estate. The daughter cannot obtain possession or 
enjoyment of the property without surviving the decedent. Therefore, if 
the decedent's reversionary interest immediately before his death 
exceeded 5 percent of the value of the property, the value of the 
property, less the value of the wife's outstanding life estate, is 
includible in the decedent's gross estate.
    Example (4). The decedent transferred property in trust with the 
income payable to his wife for life and with the remainder payable to 
his son or, if the son is not living at the wife's death, to the 
decedent or, if the decedent is not then living, to X or X's estate. 
Assume that the decedent was survived by his wife, his son, and X. Only 
X cannot obtain possession or enjoyment of the property without 
surviving the decedent. Therefore, if the decedent's reversionary 
interest immediately before his death exceeded 5 percent of the value of 
the property, the value of X's remainder interest (with reference to the 
time immediately after the decedent's death) is includible in the 
decedent's gross estate.
    Example (5). The decedent transferred property in trust with the 
income to be accumulated for a period of 20 years or until the 
decedent's prior death, at which time the principal and accumulated 
income was to be paid to the decedent's son if then surviving. Assume 
that the decedent does, in fact, die before the expiration of the 20-
year period. If, at the time of the transfer, the decedent was 30 years 
of age, in good health, etc., the son will be considered able to possess 
or enjoy the property without surviving the decedent. If, on the other 
hand, the decedent was 70 years of age at the time of the transfer, the 
son will not be considered able to possess or enjoy the property without 
surviving the decedent. In this latter case, if the value of the 
decedent's reversionary interest (arising by operation of law) 
immediately before his death exceeded 5 percent of the value of the 
property, the value of the property is includible in the decedent's 
gross estate.
    Example (6). The decedent transferred property in trust with the 
income to be accumulated for his life and, at his death, the principal 
and accumulated income to be paid to the decedent's then surviving 
children. The decedent's wife was given the unrestricted power to alter, 
amend, or revoke the trust. Assume that the wife survived the decedent 
but did not, in fact, exercise her power during the decedent's lifetime. 
Since possession or enjoyment of the property could have been obtained 
by the wife during the decedent's lifetime under the exercise of a 
general power of appointment, which was, in fact, exercisable 
immediately before the decedent's death, no part of the property is 
includible in the decedent's gross estate.

    (f) Transfers made before October 8, 1949. (1) Notwithstanding any 
provisions to the contrary contained in paragraphs (a) to (e) of this 
section, the value of an interest in property transferred by a decedent 
before October 8, 1949, is included in his gross estate under section 
2037 only if the decedent's reversionary interest arose by the express 
terms of the instrument and not by operation of law. For example, assume 
that the decedent, on January 1, 1947, transferred property in trust 
with the income payable to his wife for the decedent's life, and, at his 
death, remainder to his then surviving descendants. Since no provision 
was made for the contingency that no descendants of the decedent might 
survive him, a reversion to the decedent's estate existed by operation 
of law. The descendants cannot obtain possession or enjoyment of the 
property without surviving the decedent. However, since the decedent's 
reversionary interest arose by operation of law, no part of the property 
is includible in the decedent's gross estate under section 2037. If, in 
the above example, the transfer had been made on or after October 8, 
1949, and if the decedent's reversionary interest immediately before his 
death exceeded 5 percent of the value of the property, the value of the 
property would be includible in the decedent's gross estate.
    (2) The decedent's reversionary interest will be considered to have 
arisen by the express terms of the instrument of transfer and not by 
operation of law if the instrument contains an express disposition which 
affirmatively creates the reversionary interest, even though the terms 
of the disposition do not refer to the decedent or his estate, as such. 
For example, where the disposition is, in its terms, to the next of kin 
of the decedent and such a disposition, under applicable local law, 
constitute a reversionary interest in the decedent's estate, the 
decedent's reversionary interest will be considered to have arisen by 
the express terms of the instrument of transfer and not by operation of 
law.

[[Page 333]]

    (g) Transfers made after November 11, 1935, and before January 29, 
1940. The provisions of paragraphs (a) to (f) of this section are fully 
applicable to transfers made after November 11, 1935 (the date on which 
the Supreme Court decided Helvering v. St. Louis Union Trust Co. (296 
U.S. 39) and Becker v. St. Louis Union Trust Co. (296 U.S. 48)), and 
before January 29, 1940 (the date on which the Supreme Court decided 
Helvering v. Hallock and companion cases (309 U.S. 106)), except that 
the value of an interest in property transferred between these dates is 
not included in a decedent's gross estate under section 2037 if--
    (1) The Commissioner, whose determination shall be final, determines 
that the transfer is classifiable with the transfers involved in the St. 
Louis Union Trust Co. cases, rather than with the transfer involved in 
the case of Klein v. United States (283 U.S. 231), previously decided by 
the Supreme Court, and
    (2) The transfer shall have been finally treated for all gift tax 
purposes, both as to the calendar year of the transfer and as to 
subsequent calendar years, as a gift in an amount measured by the value 
of the property undiminished by reason of a provision in the instrument 
of transfer by which the property, in whole or in part, is to revert to 
the decedent should he survive the donee or another person, or the 
reversion is conditioned upon some other contingency terminable by the 
decedent's death.



Sec. 20.2038-1  Revocable transfers.

    (a) In general. A decedent's gross estate includes under section 
2038 the value of any interest in property transferred by the decedent, 
whether in trust or otherwise, if the enjoyment of the interest was 
subject at the date of the decedent's death to any change through the 
exercise of a power by the decedent to alter, amend, revoke, or 
terminate, or if the decedent relinquished such a power in contemplation 
of death. However, section 2038 does not apply--
    (1) To the extent that the transfer was for an adequate and full 
consideration in money or money's worth (see Sec. 20.2043-1);
    (2) If the decedent's power could be exercised only with the consent 
of all parties having an interest (vested or contingent) in the 
transferred property, and if the power adds nothing to the rights of the 
parties under local law; or
    (3) To a power held solely by a person other than the decedent. But, 
for example, if the decedent had the unrestricted power to remove or 
discharge a trustee at any time and appoint himself trustee, the 
decedent is considered as having the powers of the trustee. However, 
this result would not follow if he only had the power to appoint himself 
trustee under limited conditions which did not exist at the time of his 
death. (See last two sentences of paragraph (b) of this section.)

Except as provided in this paragraph, it is immaterial in what capacity 
the power was exercisable by the decedent or by another person or 
persons in conjunction with the decedent; whether the power was 
exercisable alone or only in conjunction with another person or persons, 
whether or not having an adverse interest (unless the transfer was made 
before June 2, 1924; see paragraph (d) of this section); and at what 
time or from what source the decedent acquired his power (unless the 
transfer was made before June 23, 1936; see paragraph (c) of this 
section). Section 2038 is applicable to any power affecting the time or 
manner of enjoyment of property or its income, even though the identity 
of the beneficiary is not affected. For example, section 2038 is 
applicable to a power reserved by the grantor of a trust to accumulate 
income or distribute it to A, and to distribute corpus to A, even though 
the remainder is vested in A or his estate, and no other person has any 
beneficial interest in the trust. However, only the value of an interest 
in property subject to a power to which section 2038 applies is included 
in the decedent's gross estate under section 2038.
    (b) Date of existence of power. A power to alter, amend, revoke, or 
terminate will be considered to have existed at the date of the 
decedent's death even though the exercise of the power was subject to a 
precedent giving of notice or even though the alteration, amendment, 
revocation, or termination

[[Page 334]]

would have taken effect only on the expiration of a stated period after 
the exercise of the power, whether or not on or before the date of the 
decedent's death notice had been given or the power had been exercised. 
In determining the value of the gross estate in such cases, the full 
value of the property transferred subject to the power is discounted for 
the period required to elapse between the date of the decedent's death 
and the date upon which the alteration, amendment, revocation, or 
termination could take effect. In this connection, see especially Sec. 
20.2031-7. However, section 2038 is not applicable to a power the 
exercise of which was subject to a contingency beyond the decedent's 
control which did not occur before his death (e.g., the death of another 
person during the decedent's life). See, however, section 2036(a)(2) for 
the inclusion of property in the decedent's gross estate on account of 
such a power.
    (c) Transfers made before June 23, 1936. Notwithstanding anything to 
the contrary in paragraphs (a) and (b) of this section, the value of an 
interest in property transferred by a decedent before June 23, 1936, is 
not included in his gross estate under section 2038 unless the power to 
alter, amend, revoke, or terminate was reserved at the time of the 
transfer. For purposes of this paragraph, the phrase ``reserved at the 
time of the transfer'' has reference to a power (arising either by the 
express terms of the instrument of transfer or by operation of law) to 
which the transfer was subject when made and which continued to the date 
of the decedent's death (see paragraph (b) of this section) to be 
exercisable by the decedent alone or by the decedent in conjunction with 
any other person or persons. The phrase also has reference to any 
understanding, express or implied, had in connection with the making of 
the transfer that the power would later be created or conferred.
    (d) Transfers made before June 2, 1924. Notwithstanding anything to 
the contrary in paragraphs (a) to (c) of this section, if an interest in 
property was transferred by a decedent before the enactment of the 
Revenue Act of 1924. (June 2, 1924, 4:01 p.m., eastern standard time), 
and if a power reserved by the decedent to alter, amend, revoke, or 
terminate was exercisable by the decedent only in conjunction with a 
person having a substantial adverse interest in the transferred 
property, or in conjunction with several persons some or all of whom 
held such an adverse interest, there is included in the decedent's gross 
estate only the value of any interest or interests held by a person or 
persons not required to joint in the exercise of the power plus the 
value of any insubstantial adverse interest or interests of a person or 
persons required to join in the exercise of the power.
    (e) Powers relinquished in contemplation of death--(1) In general. 
If a power to alter, amend, revoke, or terminate would have resulted in 
the inclusion of an interest in property in a decedent's gross estate 
under section 2038 if it had been held until the decedent's death, the 
relinquishment of the power in contemplation of the decedent's death 
within 3 years before his death results in the inclusion of the same 
interest in property in the decedent's gross estate, except to the 
extent that the power was relinquished for an adequate and full 
consideration in money or money's worth (see Sec. 20.2043-1). For the 
meaning of the phrase ``in contemplation of death'', see paragraph (c) 
of Sec. 20.2035-1.
    (2) Transfers before June 23, 1936. In the case of a transfer made 
before June 23, 1936, section 2038 applies only to a relinquishment made 
by the decedent. However, in the case of a transfer made after June 22, 
1936, section 2038 also applies to a relinquishment made by a person or 
persons holding the power in conjunction with the decedent, if the 
relinquishment was made in contemplation of the decedent's death and had 
the effect of extinguishing the power.
    (f) Effect of disability to relinquish power in certain cases. 
Notwithstanding anything to the contrary in paragraphs (a) through (e) 
of this section the provisions of this section do not apply to a 
transfer if--
    (1) The relinquishment on or after January 1, 1940, and on or before 
December 31, 1947, of the power would, by reason of section 1000(e), of 
the Internal Revenue Code of 1939, be deemed

[[Page 335]]

not a transfer of property for the purpose of the gift tax under chapter 
4 of the Internal Revenue Code of 1939, and
    (2) The decedent was, for a continuous period beginning on or before 
September 30, 1947, and ending with his death, after August 16, 1954, 
under a mental disability to relinquish a power.

For the purpose of the foregoing provision, the term ``mental 
disability'' means mental incompetence, in fact, to release the power 
whether or not there was an adjudication of incompetence. Such provision 
shall apply even though a guardian could have released the power for the 
decedent. No interest shall be allowed or paid on any overpayment 
allowable under section 2038(c) with respect to amounts paid before 
August 7, 1959.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6600, 27 FR 
4985, May 29, 1962]



Sec. 20.2039-1  Annuities.

    (a) In general. A decedent's gross estate includes under section 
2039(a) and (b) the value of an annuity or other payment receivable by 
any beneficiary by reason of surviving the decedent under certain 
agreements or plans to the extent that the value of the annuity or other 
payment is attributable to contributions made by the decedent or his 
employer. Sections 2039(a) and (b), however, have no application to an 
amount which constitutes the proceeds of insurance under a policy on the 
decedent's life. Paragraph (b) of this section describes the agreements 
or plans to which section 2039(a) and (b) applies; paragraph (c) of this 
section provides rules for determining the amount includible in the 
decedent's gross estate; paragraph (d) of this section distinguishes 
proceeds of life insurance; and paragraph (e) of this section 
distinguishes annuity, unitrust, and other interests retained by a 
decedent in certain trusts.

The fact that an annuity or other payment is not includible in a 
decedent's gross estate under section 2039(a) and (b) does not mean that 
it is not includible under some other section of part III of subchapter 
A of chapter 11. However, see section 2039(c) and (d) and Sec. 20.2039-
2 for rules relating to the exclusion from a decedent's gross estate of 
annuities and other payments under certain ``qualified plans.'' Further, 
the fact that an annuity or other payment may be includible under 
section 2039(a) will not preclude the application of another section of 
chapter 11 with regard to that interest. For annuity interests in trust, 
see paragraph (e)(1) of this section.
    (b) Agreements or plans to which section 2039 (a) and (b) applies. 
(1) Section 2039 (a) and (b) applies to the value of an annuity or other 
payment receivable by any beneficiary under any form of contract or 
agreement entered into after March 3, 1931, under which--
    (i) An annuity or other payment was payable to the decedent, either 
alone or in conjunction with another person or persons, for his life or 
for any period not ascertainable without reference to his death or for 
any period which does not in fact end before his death, or
    (ii) The decedent possessed, for his life or for any period not 
ascertainable without reference to his death or for any period which 
does not in fact end before his death, the right to receive such an 
annuity or other payment, either alone or in conjunction with another 
person or persons.

The term ``annuity or other payment'' as used with respect to both the 
decedent and the beneficiary has reference to one or more payments 
extending over any period of time. The payments may be equal or unequal, 
conditional or uncondititional, periodic or sporadic. The term 
``contract or agreement'' includes any arrangement, understanding or 
plan, or any combination of arrangements, understandings or plans 
arising by reason of the decedent's employment. An annuity or other 
payment ``was payable'' to the decedent if, at the time of his death, 
the decedent was in fact receiving an annuity or other payment, whether 
or not he had an enforceable right to have payments continued. The 
decedent ``possessed the right to receive'' an annuity or other payment 
if, immediately before his death, the decedent had an enforceable right 
to receive payments at some time in the future, whether or not, at the 
time of his death, he had a present right to receive payments. In

[[Page 336]]

connection with the preceding sentence, the decedent will be regarded as 
having had ``an enforceable right to receive payments at some time in 
the future'' so long as he had complied with his obligations under the 
contract or agreement up to the time of his death. For the meaning of 
the phrase ``for his life or for any period not ascertainable without 
reference to his death or for any period which does not in fact end 
before his death'', see section 2036 and Sec. 20.2036-1.
    (2) The application of this paragraph is illustrated and more fully 
explained in the following examples. In each example: (i) It is assumed 
that all transactions occurred after March 3, 1931, and (ii) the amount 
stated to be includible in the decedent's gross estate is determined in 
accordance with the provisions of paragraph (c) of this section.

    Example (1). The decedent purchased an annuity contract under the 
terms of which the issuing company agreed to pay an annuity to the 
decedent for his life and, upon his death, to pay a specified lump sum 
to his designated beneficiary. The decedent was drawing his annuity at 
the time of his death. The amount of the lump sum payment to the 
beneficiary is includible in the decedent's gross estate under section 
2039 (a) and (b).
    Example (2). Pursuant to a retirement plan, the employer made 
contributions to a fund which was to provide the employee, upon his 
retirement at age 60, with an annuity for life, and which was to provide 
the employee's wife, upon his death after retirement, with a similar 
annuity for life. The benefits under the plan were completely 
forfeitable during the employee's life, but upon his death after 
retirement, the benefits to the wife were forfeitable only upon her 
remarriage. The employee had no right to originally designate or to ever 
change the employer's designation of the surviving beneficiary. The 
retirement plan at no time met the requirements of section 401(a) 
(relating to qualified plans). Assume that the employee died at age 61 
after the employer started payment of his annuity as described above. 
The value of the wife's annuity is includible in the decedent's gross 
estate under section 2039 (a) and (b). Includibility in this case is 
based on the fact that the annuity to the decedent ``was payable'' at 
the time of his death. The fact that the decedent's annuity was 
forfeitable is of no consequence since, at the time of his death, he was 
in fact receiving payments under the plan. Nor is it important that the 
decedent had no right to choose the surviving beneficiary. The element 
of forfeitability in the wife's annuity may be taken into account only 
with respect to the valuation of the annuity in the decedent's gross 
estate.
    Example (3). Pursuant to a retirement plan, the employer made 
contributions to a fund which was to provide the employee, upon his 
retirement at age 60, with an annuity of $100 per month for life, and 
which was to provide his designated beneficiary, upon the employee's 
death after retirement, with a similar annuity for life. The plan also 
provided that (a) upon the employee's separation from service before 
retirement, he would have a nonforfeitable right to receive a reduced 
annuity starting at age 60, and (b) upon the employee's death before 
retirement, a lump sum payment representing the amount of the employer's 
contributions credited to the employee's account would be paid to the 
designated beneficiary. The plan at no time met the requirements of 
section 401(a) (relating to qualified plans). Assume that the employee 
died at age 49 and that the designated beneficiary was paid the 
specified lump sum payment. Such amount is includible in the decedent's 
gross estate under section 2039 (a) and (b). Since immediately before 
his death, the employee had an enforceable right to receive an annuity 
commencing at age 60, he is considered to have ``possessed the right to 
receive'' an annuity as that term is used in section 2039 (a). If, in 
this example, the employee would not be entitled to any benefits in the 
event of his separation from service before retirement for any reason 
other than death, the result would be the same so long as the decedent 
had complied with his obligations under the contract up to the time of 
his death. In such case, he is considered to have had, immediately 
before his death, an enforceable right to receive an annuity commencing 
at age 60.
    Example (4). Pursuant to a retirement plan, the employee made 
contributions to a fund which was to provide the employee, upon his 
retirement at age 60, with an annuity for life, and which was to provide 
his designated beneficiary, upon the employee's death after retirement, 
with a similar annuity for life. The plan provided, however, that no 
benefits were payable in the event of the employee's death before 
retirement. The retirement plan at no time met the requirements of 
section 401(a) (relating to qualified plans). Assume that the employee 
died at age 59 but that the employer nevertheless started payment of an 
annuity in a slightly reduced amount to the designated beneficiary. The 
value of the annuity is not includible in the decedent's gross estate 
under section 2039 (a) and (b). Since the employee died before reaching 
the retirement age, the employer was under no obligation to pay the 
annuity to the employee's designated beneficiary. Therefore, the annuity 
was not paid under a ``contract or agreement'' as that term is used in 
section 2039 (a). If, however, it can be

[[Page 337]]

established that the employer has consistently paid an annuity under 
such circumstances, the annuity will be considered as having been paid 
under a ``contract or agreement''.
    Example (5). The employer made contributions to a retirement fund 
which were credited to the employee's individual account. Under the 
plan, the employee was to receive one-half the amount credited to his 
account upon his retirement at age 60, and his designated beneficiary 
was to receive the other one-half upon the employee's death after 
retirement. If the employee should die before reaching the retirement 
age, the entire amount credited to his account at such time was to be 
paid to the designated beneficiary. The retirement plan at no time met 
the requirements of section 401(a) (relating to qualified plans). Assume 
that the employee received one-half the amount credited to his account 
upon reaching the retirement age and that he died shortly thereafter. 
Since the employee received all that he was entitled to receive under 
the plan before his death, no amount was payable to him for his life or 
for any period not ascertainable without reference to his death, or for 
any period which did not in fact end before his death. Thus, the amount 
of the payment to the designated beneficiary is not includible in the 
decedent's gross estate under section 2039 (a) and (b). If, in this 
example, the employee died before reaching the retirement age, the 
amount of the payment to the designated beneficiary would be includible 
in the decedent's gross estate under section 2039 (a) and (b). In this 
latter case, the decedent possessed the right to receive lump sum 
payment for a period which did not in fact end before his death.
    Example (6). The employer made contributions to two different funds 
set up under two different plans. One plan was to provide the employee 
upon his retirement at age 60, with an annuity for life, and the other 
plan was to provide the employee's designated beneficiary, upon the 
employee's death, with a similar annuity for life. Each plan was 
established at a different time and each plan was administered 
separately in every respect. Neither plan at any time met the 
requirements of section 401(a) (relating to qualified plans). The value 
of the designated beneficiary's annuity is includible in the employee's 
gross estate. All rights and benefits accruing to an employee and to 
others by reason of the employment (except rights and benefits accruing 
under certain plans meeting the requirements of section 401(a) (see 
Sec. 20.2039-2)) are considered together in determining whether or not 
section 2039 (a) and (b) applies. The scope of section 2039 (a) and (b) 
cannot be limited by indirection.

    (c) Amount includible in the gross estate. The amount to be included 
in a decedent's gross estate under section 2039 (a) and (b) is an amount 
which bears the same ratio to the value at the decedent's death of the 
annuity or other payment receivable by the beneficiary as the 
contribution made by the decedent, or made by his employer (or former 
employer) for any reason connected with his employment, to the cost of 
the contract or agreement bears to its total cost. In applying this 
ratio, the value at the decedent's death of the annuity or other payment 
is determined in accordance with the rules set forth in Sec. Sec. 
20.2031-1, 20.2031-7, 20.2031-8, and 20.2031-9. The application of this 
paragraph may be illustrated by the following examples:

    Example (1). On January 1, 1945, the decedent and his wife each 
contributed $15,000 to the purchase price of an annuity contract under 
the terms of which the issuing company agreed to pay an annuity to the 
decedent and his wife for their joint lives and to continue the annuity 
to the survivor for his life. Assume that the value of the survivor's 
annuity at the decedent's death (computed under Sec. 20.2031-8) is 
$20,000. Since the decedent contributed one-half of the cost of the 
contract, the amount to be included in his gross estate under section 
2039 (a) and (b) is $10,000.
    Example (2). Under the terms of an employment contract entered into 
on January 1, 1945, the employer and the employee made contributions to 
a fund which was to provide the employee, upon his retirement at age 60, 
with an annuity for life, and which was to provide his designated 
beneficiary, upon the employee's death after retirement, with a similar 
annuity for life. The retirement fund at no time formed part of a plan 
meeting the requirements of section 401(a) (relating to qualified 
plans). Assume that the employer and the employee each contributed 
$5,000 to the retirement fund. Assume further, that the employee died 
after retirement at which time the value of the survivor's annuity was 
$8,000. Since the employer's contributions were made by reason of the 
decedent's employment, the amount to be included in his gross estate 
under section 2039 (a) and (b) is the entire $8,000. If, in the above 
example, only the employer made contributions to the fund, the amount to 
be included in the gross estate would still be $8,000.

    (d) Insurance under policies on the life of the decedent. If an 
annuity or other payment receivable by a beneficiary under a contract or 
agreement is in substance the proceeds of insurance

[[Page 338]]

under a policy on the life of the decedent, section 2039 (a) and (b) 
does not apply. For the extent to which such an annuity or other payment 
is includable in a decedent's gross estate, see section 2042 and Sec. 
20.2042-1. A combination annuity contract and life insurance policy on 
the decedent's life (e.g., a ``retirement income'' policy with death 
benefits) which matured during the decedent's lifetime so that there was 
no longer an insurance element under the contract at the time of the 
decedent's death is subject to the provisions of section 2039 (a) and 
(b). On the other hand, the treatment of a combination annuity contract 
and life insurance policy on the decedent's life which did not mature 
during the decedent's lifetime depends upon the nature of the contract 
at the time of the decedent's death. The nature of the contract is 
generally determined by the relation of the reserve value of the policy 
to the value of the death benefit at the time of the decedent's death. 
If the decedent dies before the reserve value equals the death benefit, 
there is still an insurance element under the contract. The contract is 
therefore considered, for estate tax purposes, to be an insurance policy 
subject to the provisions of section 2042. However, if the decedent dies 
after the reserve value equals the death benefit, there is no longer an 
insurance element under the contract. The contract is therefore 
considered to be a contract for an annuity or other payment subject to 
the provisions of section 2039 (a) and (b) or some other section of Part 
III of Subchapter A of Chapter 11. Notwithstanding the relation of the 
reserve value to the value of the death benefit, a contract under which 
the death benefit could never exceed the total premiums paid, plus 
interest, contains no insurance element.

    Example. Pursuant to a retirement plan established January 1, 1945, 
the employer purchased a contract from an insurance company which was to 
provide the employee, upon his retirement at age 65, with an annuity of 
$100 per month for life, and which was to provide his designated 
beneficiary, upon the employee's death after retirement, with a similar 
annuity for life. The contract further provided that if the employee 
should die before reaching the retirement age, a lump sum payment of 
$20,000 would be paid to his designated beneficiary in lieu of the 
annuity described above. The plan at no time met the requirements of 
section 401(a) (relating to qualified plans). Assume that the reserve 
value of the contract at the retirement age would be $20,000. If the 
employee died after reaching the retirement age, the death benefit to 
the designated beneficiary would constitute an annuity, the value of 
which would be includable in the employee's gross estate under section 
2039 (a) and (b). If, on the other hand, the employee died before 
reaching his retirement age, the death benefit to the designated 
beneficiary would constitute insurance under a policy on the life of the 
decedent since the reserve value would be less than the death benefit. 
Accordingly, its includability would depend upon section 2042 and Sec. 
20.2042-1.
    (e) No application to certain trusts. Section 2039 shall not be 
applied to include in a decedent's gross estate all or any portion of a 
trust (other than a trust constituting an employee benefit, but 
including those described in the following sentence) if the decedent 
retained a right to use property of the trust or retained an annuity, 
unitrust, or other interest in the trust, in either case as described in 
section 2036. Such trusts include without limitation the following 
(collectively referred to in this paragraph (e) as ``trusts''): Certain 
charitable remainder trusts (collectively CRTs) such as a charitable 
remainder annuity trust (CRAT) within the meaning of section 664(d)(1), 
a charitable remainder unitrust (CRUT) within the meaning of section 
664(d)(2) or (d)(3), and any other charitable remainder trust that does 
not qualify under section 664(d), whether because the CRT was created 
prior to 1969, there was a defect in the drafting of the CRT, there was 
no intention to qualify the CRT for the charitable deduction, or 
otherwise; other trusts established by a grantor (collectively GRTs) 
such as a grantor retained annuity trust (GRAT) paying out a qualified 
annuity interest within the meaning of Sec. 25.2702-3(b) of this 
chapter, a grantor retained unitrust (GRUT) paying out a qualified 
unitrust interest within the meaning of Sec. 25.2702-3(c) of this 
chapter; and various forms of grantor retained income trusts (GRITs) 
whether or not the grantor's retained interest is a qualified interest 
as defined in section 2702(b), including without limitation a qualified 
personal residence trust (QPRT) within the meaning of Sec. 25.2702-

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5(c) of this chapter and a personal residence trust (PRT) within the 
meaning of Sec. 25.2702-5(b) of this chapter. For purposes of 
determining the extent to which a retained interest causes all or a 
portion of a trust to be included in a decedent's gross estate, see 
Sec. 20.2036-1(c)(1), (2), and (3).
    (f) Effective/applicability dates. The first, second, and fourth 
sentences in paragraph (a) of this section are applicable to the estates 
of decedents dying after August 16, 1954. The fifth sentence of 
paragraph (a) of this section is applicable to the estates of decedents 
dying on or after October 27, 1972, and to the estates of decedents for 
which the period for filing a claim for credit or refund of an estate 
tax overpayment ends on or after October 27, 1972. The third, sixth, and 
seventh sentences of paragraph (a) of this section and all of paragraph 
(e) of this section are applicable to the estates of decedents dying on 
or after July 14, 2008.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7416, 41 FR 14514, Apr. 6, 1976; T.D. 9414, 73 FR 40178, 
July 14, 2008]



Sec. 20.2039-1T  Limitations and repeal of estate tax exclusion for 
qualified plans and individual retirement plans (IRAs) (temporary).

    Q-1: Are there any exceptions to the general effective dates of the 
$100,000 limitation and the repeal of the estate tax exclusion for the 
value of interests under qualified plans and IRAs described in section 
2039 (c) and (e)?
    A-1: (a) Yes. Section 245 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (TEFRA) limited the estate tax exclusion to 
$100,000 for estates of decedents dying after December 31, 1982. Section 
525 of the Tax Reform Act of 1984 (TRA of 1984) repealed the exclusion 
for estates of decedents dying after December 31, 1984.
    (b) Section 525(b)(3) of the TRA of 1984 amended section 245 of 
TEFRA to provide that the $100,000 limitation on the exclusion for the 
value of a decedent's interest in a plan or IRA will not apply to the 
estate of any decedent dying after December 31, 1982, to the extent that 
the decedent-participant was in pay status on December 31, 1982, with 
respect to such interest and irrevocably elected the form of benefit 
payable under the plan or IRA (including the form of any survivor 
benefits) with respect to such interest before January 1, 1983.
    (c) Similarly, the TRA of 1984 provides that the repeal of the 
estate tax exclusion for the value of a decedent's interest in a plan or 
IRA will not apply to the estate of a decedent dying after December 31, 
1984, to the extent that the decedent-participant was in pay status on 
December 31, 1984, with respect to such interest and irrevocably elected 
the form of benefit payable under the plan or IRA (including the form of 
any survivor benefits) with respect to such interest before July 18, 
1984.
    Q-2: What is the meaning of ``in pay status'' on the applicable 
date?
    A-2: A participant was in pay status on the applicable date with 
respect to a portion of his or her interest in a plan or IRA if such 
portion is to be paid in a benefit form that has been elected on or 
before such date and the participant has received, on or before such 
date, at least one payment under such benefit form.
    Q-3: What is required for an election of the form of benefit payable 
under the plan to have been irrevocable as of any applicable date?
    A-3: As of any applicable date, an election of the form of benefit 
payable under a plan is irrevocable if, as of such date, it was a 
written irrevocable election that, with respect to all payments to be 
received after such date, specified the form of distribution (e.g., lump 
sum, level dollar annuity, formula annuity) and the period over which 
the distribution would be made (e.g., single life, joint and survivor, 
term certain). An election is not irrevocable as of any applicable date 
if, on or after such date, the form or period of the distribution could 
be determined or altered by any person or persons. An election does not 
fail to be irrevocable as of an applicable date merely because the 
beneficiaries were not designated as of such date or could be changed 
after such date. If any interest in any IRA may not, by law or contract, 
be subject to an irrevocable election described in this section, any 
election of the form of benefit payable under the

[[Page 340]]

IRA does not satisfy the requirement that an irrevocable election have 
been made.

[T.D. 8073, 51 FR 4335, Feb. 4, 1986]



Sec. 20.2039-2  Annuities under ``qualified plans'' and section 403(b) 
annuity contracts.

    (a) Section 2039(c) exclusion. In general, in the case of a decedent 
dying after December 31, 1953, the value of an annuity or other payment 
receivable under a plan or annuity contract described in paragraph (b) 
of this section is excluded from the decedent's gross estate to the 
extent provided in paragraph (c) of this section. In the case of a plan 
described in paragraph (b) (1) or (2) of this section (a ``qualified 
plan''), the exclusion is subject to the limitation described in Sec. 
20.2039-3 (relating to lump sum distributions paid with respect to a 
decedent dying after December 31, 1976, and before January 1, 1979) or 
Sec. 20.2039-4 (relating to lump sum distributions paid with respect to 
a decedent dying after December 31, 1978).
    (b) Plans and annuity contracts to which section 2039(c) applies. 
Section 2039(c) excludes from a decedent's gross estate, to the extent 
provided in paragraph (c) of this section, the value of an annuity or 
other payment receivable by any beneficiary (except the value of an 
annuity or other payment receivable by or for the benefit of the 
decedent's estate) under--
    (1) An employees' trust (or under a contract purchased by an 
employees' trust) forming part of a pension, stock bonus, or profit-
sharing plan which, at the time of the decedent's separation from 
employment (whether by death or otherwise), or at the time of the 
earlier termination of the plan, met the requirements of section 401(a);
    (2) A retirement annuity contract purchased by an employer (and not 
by an employees' trust) pursuant to a plan which, at the time of 
decedent's separation from employment (by death or otherwise), or at the 
time of the earlier termination of the plan, was a plan described in 
section 403(a);
    (3) In the case of a decedent dying after December 31, 1957, a 
retirement annuity contract purchased for an employee by an employer 
which, for its taxable year in which the purchase occurred, is an 
organization referred to in section 170(b)(1)(A) (ii) or (iv) or which 
is a religious organization (other than a trust) and is exempt from tax 
under section 501(a);
    (4) In the case of a decedent dying after December 31, 1965, an 
annuity under Chapter 73 of title 10 of the United States Code (10 
U.S.C. 1431, et seq.); or
    (5) In the case of a decedent dying after December 31, 1962, a bond 
purchase plan described in section 405.


For the meaning of the term ``annuity or other payment'', see paragraph 
(b) of Sec. 20.2039-1. For the meaning of the phrase ``receivable by or 
for the benefit of the decedent's estate'', see paragraph (b) of Sec. 
20.2042-1. The application of this paragraph may be illustrated by the 
following examples in each of which it is assumed that the amount stated 
to be excludable from the decedent's gross estate is determined in 
accordance with paragraph (c) of this section:

    Example (1). Pursuant to a pension plan, the employer made 
contributions to a trust which was to provide the employee, upon his 
retirement at age 60, with an annuity for life, and which was to provide 
his wife, upon the employee's death after retirement, with a similar 
annuity for life. At the time of the employee's retirement, the pension 
trust formed part of a plan meeting the requirements of section 401(a). 
Assume that the employee died at age 61 after the trustee started 
payment of his annuity as described above. Since the wife's annuity was 
receivable under a qualified pension plan, no part of the value of such 
annuity is includable in the decedent's gross estate by reason of the 
provisions of section 2039(c). If, in this example, the employer 
provided other benefits under nonqualified plans, the result would be 
the same since the exclusion under section 2039(c) is confined to the 
benefits provided for under the qualified plan.
    Example (2). Pursuant to a profit-sharing plan, the employer made 
contributions to a trust which were allocated to the employee's 
individual account. Under the plan, the employee would, upon retirement 
at age 60, receive a distribution of the entire amount credited to the 
account. If the employee should die before reaching retirement age, the 
amount credited to the account would be distributed to the employee's 
designated beneficiary. Assume that the employee died before reaching 
the retirement age and that at such time the plan met the requirements 
of section 401(a). Since the payment to the

[[Page 341]]

designated beneficiary is receivable under a qualified profit-sharing 
plan, the provisions of section 2039(c) apply. However, if the payment 
is a lump sum distribution to which Sec. 20.2039-3 or Sec. 20.2039-4 
applies, the payment is excludable from the decedent's gross estate only 
as provided in such section.
    Example (3). Pursuant to a pension plan, the employer made 
contributions to a trust which were used by the trustee to purchase a 
contract from an insurance company for the benefit of an employee. The 
contract was to provide the employee, upon retirement at age 65, with an 
annuity of $100 per month for life, and was to provide the employee's 
designated beneficiary upon the employee's death after retirement, with 
a similar annuity for life. The contract further provided that if the 
employee should die before reaching retirement age, a lump sum payment 
equal to the greater of (a) $10,000 or (b) the reserve value of the 
policy would be paid to the designated beneficiary in lieu of the 
annuity. Assume that the employee died before reaching the retirement 
age and that at such time the plan met the requirements of section 
401(a). Since the payment to the designated beneficiary is receivable 
under a qualified pension plan, the provisions of section 2039(c) apply. 
However, if the payment is a lump sum distribution to which Sec. 
20.2039-3 or Sec. 20.2039-4 applies, the payment is excludable from the 
decedent's gross estate only as provided in such section. It should be 
noted that for purposes of the exclusion under section 2039(c) it is 
immaterial whether or not the payment constitutes the proceeds of life 
insurance under the principles set forth in Sec. 20.2039-1(d).
    Example (4). Pursuant to a profit-sharing plan, the employer made 
contributions to a trust which were allocated to the employee's 
individual account. Under the plan, the employee would, upon his 
retirement at age 60, be given the option to have the amount credited to 
his account (a) paid to him in a lump sum, (b) used to purchase a joint 
and survivor annuity for him and his designated beneficiary, or (c) left 
with the trustee under an arrangement whereby interest would be paid to 
him for his lifetime with the principal to be paid, at his death, to his 
designated beneficiary. The plan further provided that if the third 
method of settlement were selected, the employee would retain the right 
to have the principal paid to himself in a lump sum up to the time of 
his death. At the time of the employee's retirement, the profit-sharing 
plan met the requirements of section 401(a). Assume that the employee, 
upon reaching his retirement age, elected to have the amount credited to 
his account left with the trustee under the interest arrangement. 
Assume, further, that the employee did not exercise his right to have 
such amount paid to him before his death. Under such circumstances, the 
employee is considered as having constructively received the amount 
credited to his account upon his retirement. Thus, such amount is not 
considered as receivable by the designated beneficiary under the profit-
sharing plan and the exclusion of section 2039(c) is not applicable.
    Example (5). An employer purchased a retirement annuity contract for 
an employee which was to provide the employee, upon his retirement at 
age 60, with an annuity for life and which was to provide his wife, upon 
the employee's death after retirement, with a similar annuity for life. 
The employer, for its taxable year in which the annuity contract was 
purchased, was an organization referred to in section 170(b)(1)(ii), and 
was exempt from tax under section 501(a). The entire amount of the 
purchase price of the annuity contract was excluded from the employee's 
gross income under section 403(b). No part of the value of the survivor 
annuity payable after the employee's death is includible in the 
decedent's gross estate by reason of the provisions of section 2039(c).

    (c) Amounts excludable from the gross estate. (1) The amount to be 
excluded from a decedent's gross estate under section 2039(c) is an 
amount which bears the same ratio to the value at the decedent's death 
of an annuity or other payment receivable by the beneficiary as the 
employer's contribution (or a contribution made on the employer's 
behalf) on the employee's account to the plan or towards the purchase of 
the annuity contract bears to the total contributions on the employee's 
account to the plan or towards the purchase of the annuity contract. In 
applying this ratio--
    (i) Payments or contributions made by or on behalf of the employer 
towards the purchase of an annuity contract described in paragraph 
(b)(3) of this section are considered to include only such payments or 
contributions as are, or were, excludable from the employee's gross 
income under section 403(b).
    (ii) In the case of a decedent dying before January 1, 1977, 
payments or contributions made under a plan described in paragraph (b) 
(1), (2) or (5) of this section on behalf of the decedent for a period 
for which the decedent was self-employed, within the meaning of section 
401(c)(1), with respect to the plan are considered payments or 
contributions made by the decedent and not by the employer.

[[Page 342]]

    (iii) In the case of a decedent dying after December 31, 1976, 
however, payments or contributions made under a plan described in 
paragraph (b) (1), (2) or (5) of this section on behalf of the decedent 
for a period for which the decedent was self-employed, within the 
meaning of section 401(c)(1), with respect to the plan are considered 
payments or contributions made by the employer to the extent the 
payments or contributions are, or were, deductible under section 404 or 
405(c). Contributions or payments attributable to that period which are 
not, or were not, so deductible are considered made by the decedent.
    (iv) In the case of a plan described in paragraph (b) (1) or (2) of 
this section, a rollover contribution described in section 402(a)(5), 
403(a)(4), 409(d)(3)(A)(ii) or 409(b)(3)(C) is considered an amount 
contributed by the employer.
    (v) In the case of an annuity contract described in paragraph (b)(3) 
of this section, a rollover contribution described in section 403(b)(8) 
is considered an amount contributed by the employer.
    (vi) In the case of a plan described in paragraph (b) (1), (2) or 
(5) of this section, an amount includable in the gross income of an 
employee under section 1379(b) (relating to shareholder-employee 
beneficiaries under certain qualified plans) is considered an amount 
paid or contributed by the decedent.
    (vii) Amounts payable under paragraph (b)(4) of this section are 
attributable to payments or contributions made by the decedent only to 
the extent of amounts deposited by the decedent pursuant to section 1438 
or 1452(d) of title 10 of the United States Code.
    (viii) The value at the decedent's death of the annuity or other 
payment is determined under the rules of Sec. Sec. 20.2031-1 and 
20.2031-7 or, for certain prior periods, Sec. 20.2031-7A.
    (2) In certain cases, the employer's contribution (or a contribution 
made on his behalf) to a plan on the employee's account and thus the 
total contributions to the plan on the employee's account cannot be 
readily ascertained. In order to apply the ratio stated in subparagraph 
(1) of this paragraph in such a case, the method outlined in the 
following two sentences must be used unless a more precise method is 
presented. In such a case, the total contributions to the plan on the 
employee's account is the value of any annuity or other payment payable 
to the decedent and his survivor computed as of the time the decedent's 
rights first mature (or as of the time the survivor's rights first 
mature if the decedent's rights never mature) and computed in accordance 
with the rules set forth in Sec. Sec. 20.2031-1, 20.2031-7, 20.2031-8, 
and 20.2031-9. By subtracting from such value the amount of the 
employee's contribution to the plan, the amount of the employer's 
contribution to the plan on the employee's account may be obtained. The 
application of this paragraph may be illustrated by the following 
example.

    Example. Pursuant to a pension plan, the employer and the employee 
contributed to a trust which was to provide the employee, upon his 
retirement at age 60, with an annuity for life, and which was to provide 
his wife, upon the employee's death after retirement, with a similar 
annuity for life. At the time of the employee's retirement, the pension 
trust formed part of a plan meeting the requirements of section 401(a). 
Assume the following: (i) That the employer's contributions to the fund 
were not credited to the accounts of individual employees; (ii) that the 
value of the employee's annuity and his wife's annuity, computed as of 
the time of the decedent's retirement, was $40,000; (iii) that the 
employee contributed $10,000 to the plan; and (iv) that the value at the 
decedent's death of the wife's annuity was $16,000. On the basis of 
these facts, the total contributions to the fund on the employee's 
account are presumed to be $40,000 and the employer's contribution to 
the plan on the employee's account is presumed to be $30,000 ($40,000 
less $10,000). Since the wife's annuity was receivable under a qualified 
pension plan, that part of the value of such annuity which is 
attributable to the employer's contributions ($30,000/$40,000x$16,000), 
or $12,000 is excludable from the decedent's gross estate by reason of 
the provisions of section 2039(c). Compare this result with the results 
reached in the examples set forth in paragraph (b) of this section in 
which all contributions to the plans were made by the employer.

    (d) Exclusion of certain annuity interests created by community 
property laws. (1) In the case of an employee on whose behalf 
contributions or payments were

[[Page 343]]

made by his employer or former employer under an employees' trust 
forming part of a pension, stock bonus, or profit-sharing plan described 
in section 2039(c)(1), under an employee's retirement annuity contract 
described in section 2039(c)(2), or toward the purchase of an employee's 
retirement annuity contract described in section 2039(c)(3), which under 
section 2039(c) are not considered as contributed by the employee, if 
the spouse of such employee predeceases him, then, notwithstanding the 
provisions of section 2039 or of any other provision of law, there shall 
be excluded from the gross estate of such spouse the value of any 
interest of such spouse in such plan or trust or such contract, to the 
extent such interest--
    (i) Is attributable to such contributions or payments, and
    (ii) Arises solely by reason of such spouse's interest in community 
income under the community property laws of a State.
    (2) Section 2039(d) and this paragraph do not provide any exclusion 
for such spouse's property interest in the plan, trust or contract to 
the extent it is attributable to the contributions of the employee 
spouse. Thus, the decedent's community property interest in the plan, 
trust, or contract which is attributable to contributions made by the 
employee spouse are includible in the decendent's gross estate. See 
paragraph (c) of this section.
    (3) Section 2039(d) and this paragraph apply to the estate of a 
decedent who dies on or after October 27, 1972, and to the estate of a 
decedent who died before October 27, 1972, if the period for filing a 
claim for credit or refund of an overpayment of the estate tax ends on 
or after October 27, 1972. Interest will not be allowed or paid on any 
overpayment of tax resulting from the application of section 2039(d) and 
this paragraph for any period prior to April 26, 1973.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6526, 26 FR 
416, Jan. 19, 1961; T.D. 7043, 35 FR 8480, June 2, 1970; T.D. 7416, 41 
FR 14514, Apr. 6, 1976; T.D. 7428, 41 FR 34628, Aug. 16, 1976; T.D. 
7562, 43 FR 38820, Aug. 31, 1978; T.D. 7761, 46 FR 7303, Jan. 23, 1981; 
T.D. 8540, 59 FR 30103, June 10, 1994]



Sec. 20.2039-3  Lump sum distributions under ``qualified plans;'' 
decedents dying after December 31, 1976, and before January 1, 1979.

    (a) Limitation of section 2039(c) exclusion. This section applies in 
the case of a decedent dying after December 31, 1976, and before January 
1, 1979. If a lump sum distribution is paid with respect to the decedent 
under a plan described in Sec. 20.2039-2(b) (1) or (2) (a ``qualified 
plan''), no amount payable with respect to the decedent under the plan 
is excludable from the decedent's gross estate under Sec. 20.2039-2.
    (b) ``Lump sum distribution'' defined. For purposes of this section 
the term ``lump sum distribution'' means a lump sum distribution defined 
in section 402(e)(4)(A) that satisfies the requirements of section 
402(e)(4)(C), relating to the aggregation of certain trusts and plans. 
The distribution of an annuity contract is not a lump sum distribution 
for purposes of this section, and Sec. 20.2039-2 will apply with 
respect to the distribution of an annuity contract without regard to 
whether the contract is included in a distribution that is otherwise a 
lump sum distribution under this paragraph (b). A distribution is a lump 
sum distribution for purposes of this section without regard to the 
election described in section 402(e)(4)(B).
    (c) Amounts payable as a lump sum distribution. If on the date the 
estate tax return is filed, an amount under a qualified plan is payable 
with respect to the decedent as a lump sum distribution (whether at the 
election of a beneficiary or otherwise), for purposes of this section 
the amount is deemed paid as a lump sum distribution no later than on 
such date. Accordingly, no portion of the amount payable under the plan 
is excludable from the value of the decedent's gross estate under Sec. 
20.2039-2. If, however, the amount payable as a lump sum distribution is 
not, in fact, thereafter paid as a lump sum distribution, there shall be 
allowed a credit or refund of any tax paid which is attributable to 
treating such amount as a lump sum distribution under this paragraph. 
Any claim for credit or refund filed under this paragraph must be filed 
within the time prescribed by section

[[Page 344]]

6511, and must provide satisfactory evidence that the amount originally 
payable as a lump sum distribution is no longer payable in such form.
    (d) Filing date. For purposes of paragraph (c) of this section, 
``the date the estate tax return is filed'' means the earlier of--
    (1) The date the estate tax return is actually filed, or
    (2) The date nine months after the decedent's death, plus any 
extension of time for filing the estate tax return granted under section 
6081.

[T.D. 7761, 46 FR 7304, Jan. 23, 1981]



Sec. 20.2039-4  Lump sum distributions from ``qualified plans;'' 
decedents dying after December 31, 1978.

    (a) Limitation on section 2039(c) exclusion. This section applies in 
the case of a decedent dying after December 31, 1978. If a lump sum 
distribution is paid or payable with respect to a decedent under a plan 
described in Sec. 20.2039-2(b) (1) or (2) (a ``qualified plan''), no 
amount paid or payable with respect to the decedent under the plan is 
excludable from the decedent's gross estate under Sec. 20.2039-2, 
unless the recipient of the distribution makes the section 402(a)/403(a) 
taxation election described in paragraph (c) of this section. For 
purposes of this section, an amount is payable as a lump sum 
distribution under a plan if, as of the date the estate tax return is 
filed (as determined under Sec. 20.2039-3(d)), it is payable as a lump 
sum distribution at the election of the recipient or otherwise.
    (b) ``Lump sum distribution'' defined; treatment of annuity 
contracts. For purposes of this section the term ``lump sum 
distribution'' means a lump sum distribution defined in section 
402(e)(4)(A) that satisfies the requirements of section 402(e)(4)(C), 
relating to the aggregation of certain trusts and plans. A distribution 
is a lump sum distribution for purposes of this section without regard 
to the election described in section 402(e)(4)(B). The distribution of 
an annuity contract is not a lump sum distribution for purposes of this 
section, and the limitation described in this section does not apply to 
an annuity contract distributed under a plan. Accordingly, if the amount 
payable with respect to a decedent under a plan is paid to a recipient 
partly by the distribution of an annuity contract, and partly by the 
distribution of an amount that is a lump sum distribution within the 
meaning of this paragraph (b), Sec. 20.2039-2 shall apply with respect 
to the annuity contract without regard to whether the recipient makes 
the section 402(a)/403(a) taxation election with respect to the 
remainder of the distribution.
    (c) Recipient's section 402(a)/403(a) taxation election. The section 
402(a)/403(a) taxation election is the election by the recipient of a 
lump sum distribution to treat the distribution as--
    (1) Taxable under section 402(a), without regard to section 
402(a)(2), to the extent includable in gross income (in the case of a 
distribution under a qualified plan described in Sec. 20.2039-2(b)(1)),
    (2) Taxable under section 403(a), without regard to section 
403(a)(2), to the extent includable in gross income (in the case of a 
distribution under a qualified annuity contract described in Sec. 
20.2039-2(b)(2)), or
    (3) A rollover contribution, in whole or in part, under section 
402(a)(7) (relating to rollovers by a decedent's surviving spouse).

Accordingly, if a recipient makes the election, no portion of the 
distribution is taxable to the recipient under the 10-year averaging 
provisions of section 402(e) or as long-term capital gain under section 
402(a)(2). However, a recipient's election under this paragraph (c) does 
not preclude the application of section 402(e)(4)(J) to any securities 
of the employer corporation included in the distribution.
    (d) Method of election--(1) General rule. The recipient of a lump 
sum distribution shall make the section 402(a)/403(a) taxation election 
by:
    (i) Determining the income tax liability on the income tax return 
(or amended return) for the taxable year of the distribution in a manner 
consistent with paragraph (c) (1) or (2) of this section,
    (ii) Rolling over all or any part of the distribution under section 
402(a)(7), or
    (iii) Filing a section 2039(f)(2) election statement described in 
paragraph (d)(2) of this section.

[[Page 345]]

    (2) Election statement. A recipient may file a section 2039(f)(2) 
election statement indicating that the recipient elects to treat a lump 
sum distribution in the manner described in paragraph (c) of this 
section. The statement must be filed where the recipient would file the 
income tax return for the taxable year of the distribution. The 
statement must be signed by the recipient and include the individual's 
name, address, social security number, the name of the decedent, and a 
statement indicating the election is being made. A section 2039(f)(2) 
election statement may be filed at any time prior to making the election 
under paragraph (d)(1) (i) or (ii) of this section.
    (3) Effect on estate tax return. If the date the estate tax return 
is filed precedes the date on which the recipient makes the section 
402(a)/403(a) taxation election with respect to a lump sum distribution, 
the estate tax return may not reflect the election. However, if after 
the estate tax return is filed, the recipient makes the section 402(a)/
403(a) taxation election, the executor of the estate may file a claim 
for refund or credit of an overpayment of the Federal estate tax within 
the time prescribed in section 6511. See also, Sec. 20.6081-1 for rules 
relating to obtaining an extension of time for filing the estate tax 
return.
    (e) Election irrevocable. If a recipient of a lump sum distribution 
files a section 2039(f)(2) election statement, an income tax return (or 
amended return) or makes a rollover contribution that constitutes the 
section 402(a)/403(a) taxation election described in paragraphs (c) and 
(d), the election may not be revoked. Accordingly, a subsequent and 
amended income tax return filed by the recipient that is inconsistent 
with the prior election will not be given effect for purposes of section 
2039 and section 402 or 403.
    (f) Lump sum distribution to multiple recipients. In the case of a 
lump sum distribution paid or payable under a qualified plan with 
respect to the decedent to more than one recipient, the exclusion under 
Sec. 20.2039-2 applies to so much of the distribution as is paid or 
payable to a recipient who makes the section 402(a)/403(a) taxation 
election.
    (g) Distributions of annuity contracts included in multiple 
distributions. Notwithstanding that a recipient makes the section 
402(a)/403(a) taxation election with respect to a lump sum distribution 
that includes the distribution of an annuity contract, the distribution 
of the annuity contract is to be taken into account by the recipient for 
purposes of the multiple distribution rules under section 402(e).

[T.D. 7761, 46 FR 7304, Jan. 23, 1981, as amended by T.D. 7956, 49 FR 
20284, May 14, 1984]



Sec. 20.2039-5  Annuities under individual retirement plans.

    (a) Section 2039(e) exclusion--(1) In general. In the case of a 
decedent dying after December 31, 1976, section 2039 (e) excludes from 
the decedent's gross estate, to the extent provided in paragraph (c) of 
this section, the value of a ``qualifying annuity'' receivable by a 
beneficiary under an individual retirement plan. The term ``individual 
retirement plan'' means--
    (i) An individual retirement account described in section 408(a).
    (ii) An individual retirement annuity described in section 408(b), 
or
    (iii) A retirement bond described in section 409(a).
    (2) Limitations. (i) Section 2039(e) applies only with respect to 
the gross estate of a decedent on whose behalf the individual retirement 
plan was established. Accordingly, section 2039(e) does not apply with 
respect to the estate of a decedent who was only a beneficiary under the 
plan.
    (ii) Section 2039(e) does not apply to an annuity receivable by or 
for the benefit of the decedent's estate. For the meaning of the term 
``receivable by or for the benefit of the decedent's estate,'' see Sec. 
20.2042-1(b).
    (b) Qualifying annuity. For purposes of this section, the term 
``qualifying annuity'' means an annuity contract or other arrangement 
providing for a series of substantially equal periodic payments to be 
made to a beneficiary for the beneficiary's life or over a period ending 
at least 36 months after the decedent's death. The term ``annuity 
contract'' includes an annuity purchased for a beneficiary and 
distributed to the beneficiary, if under section 408 the contract is not 
included in the

[[Page 346]]

gross income of the beneficiary upon distribution. The term ``other 
arrangement'' includes any arrangement arising by reason of the 
decedent's participation in the program providing the individual 
retirement plan. Payments shall be considered ``periodic'' if under the 
arrangement or contract (including a distributed contract) payments are 
to be made to the beneficiary at regular intervals. If the contract or 
arrangement provides optional payment provisions, not all of which 
provide for periodic payments, payments shall be considered periodic 
only if an option providing periodic payments is elected not later than 
the date the estate tax return is filed (as determined under Sec. 
20.2039-3(d)). For this purpose, the right to surrender a contract 
(including a distributed contract) for a cash surrender value will not 
be considered an optional payment provision. Payments shall be 
considered ``substantially equal'' even though the amounts receivable by 
the beneficiary may vary. Payments shall not be considered substantially 
equal, however, if more than 40% of the total amount payable to the 
beneficiary under the individual retirement plan, determined as of the 
date of the decedent's death and excluding any postmortem increase, is 
payable to the beneficary in any 12-month period.
    (c) Amount excludible from gross estate--(1) In general. Except as 
otherwise described in this paragraph (c), the amount excluded from the 
decedent's gross estate under section 2039 (e) is the entire value of 
the qualifying annuity (as determined under Sec. Sec. 20.2031-1 and 
20.2031-7 or, for certain prior periods, Sec. 20.2031-7A) payable under 
the individual retirement plan.
    (2) Excess contribution. In any case in which there exists, on the 
date of the decedent's death, an excess contribution (as defined in 
section 4973(b)) with respect to the individual retirement plan, the 
amount excluded from the value of the decedent's gross estate is 
determined under the following formula:

E=A-A(X/C-R)

    Where:

E=The amount excluded from the decedent's gross estate under section 
          2039(e),
A=The value of the qualifying annuity at the decedent's death (as 
          determined under Sec. Sec. 20.2031-1 and 20.2031-7 or, for 
          certain prior periods, Sec. 20.2031-7A),
X=The amount which is an excess contribution at the decedent's death (as 
          determined under section 4973(b)),
C=The total amount contributed by or on behalf of the decedent to the 
          individual retirement plan, and
R=The total of amounts paid or distributed from the individual 
          retirement plan before the death of the decedent which were 
          either includable in the gross income of the recipient under 
          section 408(d)(1) and represented the payment or distribution 
          of an excess contribution, or were payments or distributions 
          described in section 408(d)(4) or (5) (relating to returned 
          excess contributions).

    (3) Certain section 403(b)(8) rollover contributions. This 
subparagraph (3) applies if the decedent made a rollover contribution to 
the individual retirement plan under section 403(b)(8), and the 
contribution was attributable to a distribution under an annuity 
contract other than an annuity contract described in Sec. 20.2039-
2(b)(3). If such a rollover contribution was the only contribution made 
to the plan, no part of the value of the qualifying annuity payable 
under the plan is excluded from the decedent's gross estate under 
section 2039(e). If a contribution other than such a rollover 
contribution was made to the plan, the amount excluded from the 
decedent's gross estate is determined under the formula described in 
subparagraph (2) of this paragraph, except that for purposes of that 
formula, X includes the amount that was a rollover contribution under 
section 403(b)(8) attributable to a distribution under an annuity 
contract not described in Sec. 20.2039-2(b)(3).
    (4) Surviving spouse's rollover contribution. This subparagraph (4) 
applies if the decedent made a rollover contribution to the individual 
retirement plan under section 402(a)(7), relating to rollovers by a 
surviving spouse. If the rollover contribution under section 402(a)(7) 
was the only contribution made by the decedent to the plan, no part of 
the value of the qualifying annuity payable under the plan is excluded 
from the decedent's gross estate under section 2039(e). If a 
contribution other than a rollover contribution under section 402(a)(7) 
was made by the

[[Page 347]]

decedent to the plan, the amount excluded from the decedent's gross 
estate is determined under the formula described in subparagraph (2) of 
this paragraph, except that for purposes of that formula, X includes the 
amount that was a rollover contribution under section 402(a)(7).
    (5) Election under Sec. 1.408-2(b)(7)(ii). This subparagraph (5) 
applies if the decedent at any time made the election described in Sec. 
1.408-2(b)(7)(ii) with respect to an amount in the individual retirement 
plan. If this subparagraph (5) applies, the amount excluded from the 
decedent's gross estate is determined under the formula described in 
subparagraph (2), except that for purposes of that formula, X and C 
include the amount with respect to which the election was made.
    (6) Plan-to-plan rollovers. (i) This subparagraph (6) applies if the 
individual retirement plan is a transferee plan. A ``transferee plan'' 
is a plan that was the recipient of a contribution described in section 
408(d)(3)(A)(i) or 409(b)(3)(C) (relating to rollovers from one 
individual retirement plan to another) made by the decedent. The amount 
of the contribution described in section 408(d)(3)(A)(i) or 409(b)(3)(C) 
is the ``rollover amount.'' The plan from which the rollover amount was 
paid or distributed to the decedent is the ``transferor plan.''
    (ii) If the decedent made a contribution described in subparagraph 
(3) or (4) to the transferor plan, the amount excluded from the 
decedent's gross estate with respect to the transferee plan is 
determined under the formula described in subparagraph (2), except that 
for purposes of that formula, X includes so much of the rollover amount 
as was attributable to the contribution to the transferor plan that was 
described in subparagraph (3) or (4). The extent to which a rollover 
amount is attributable to a contribution described in subparagraph (3) 
or (4) that was made to the transferor plan is determined by multiplying 
the rollover amount by a fraction, the numerator of which is the amount 
of such contribution, and the denominator of which is the sum of all 
amounts contributed by the decedent to the transferor plan (if not 
returned as described under R in subparagraph (2)), and any amount in 
the transferor plan to which the election described in subparagraph (5) 
applied.
    (iii) If the decedent made the election described in subparagraph 
(5) with respect to an amount in the transferor plan, the amount 
excluded from the decedent's gross estate with respect to the transferee 
plan is determined under the formula described in subparagraph (2), 
except that for purposes of that formula, X includes so much of the 
rollover amount as was attributable to the amount in the transferor plan 
to which the election applied. The extent to which a rollover amount is 
attributable to an amount in the transferor plan to which the election 
applied is determined by multiplying the rollover amount by a fraction, 
the numerator of which is the amount to which the election applied, and 
the denominator of which is the sum of all amounts contributed by the 
decedent to the transferor plan (if not returned as described under R in 
subparagraph (2)), and the amount in the transferor plan to which the 
election applied.
    (iv) If a transferor plan described in this subparagraph (6) was 
also a transferee plan, then the rules described in this subparagraph 
(6) are to be applied with respect to both the rollover amount paid to 
the plan and the rollover amount thereafter paid from the plan.
    (d) Examples. The provisions of this section are illustrated by the 
following examples:

    Example (1). (1) A establishes an individual retirement account 
described in section 408 (a) on January 1, 1976, when A is age 65. A's 
only contribution to the account is a rollover contribution described in 
section 402(a)(5). The trust agreement provides that A may at any time 
elect to have the balance in the account distributed in one of the 
following methods:
    (i) A single sum payment of the account,
    (ii) Equal or substantially equal semiannual payments over a period 
equal to A's life expectancy, or
    (iii) Equal or substantially equal semiannual payments over a period 
equal to the life expectancy of A and A's spouse.
    (2) The trust agreement further provides that although semiannual 
payments have commenced under option (ii) or (iii), A (or A's surviving 
spouse) may, by written notice to the trustee, receive all or a part of 
the

[[Page 348]]

balance remaining in the account. In addition, under option (ii), any 
balance remaining in the account at A's death is payable in a single sum 
to A's designated beneficiary. Under option (iii), any balance remaining 
in the account at the death of the survivor of A or A's spouse is 
payable in a single sum to a beneficiary designated by A or A's 
surviving spouse.
    (3) A elects option (iii), and the first semiannual payment is made 
to A on July 1, 1976. On that date, A's life expectancy is 15 years, and 
that of A's spouse is 22 years. Under option (iii), the semiannual 
payments to A or A's surviving spouse will continue until July 1, 1998.
    (4) A dies on November 20, 1978. On December 15, 1978, the trust 
agreement is modified so that A's surviving spouse no longer may elect 
to receive all or part of the balance remaining in the account. The 
value of the semiannual payments payable to A's spouse is excluded from 
A's gross estate under section 2039(e).
    (5) A's spouse dies July 12, 1981, and the single sum payment 
payable on account of the death of A's spouse is paid to the designated 
beneficiary on August 1, 1981. Notwithstanding that the balance in the 
account was paid to the designated beneficiary within 36 months after 
A's death, the value of the semiannual payments payable to A's spouse 
are excluded from A's gross estate, since at A's death those semiannual 
payments were to be paid over a period extending beyond 36 months. 
Section 2039(e) does not apply to exclude any amount from the estate of 
A's spouse, because A's spouse was only a beneficiary and not the 
individual on whose behalf the account was established.
    Example (2). Assume the same facts as in example (1), except that 
the trust agreement is not modified so that A's surviving spouse no 
longer may elect to receive all or part of the balance remaining in the 
account (see (2) and (4) in example (1)). Instead, the balance of the 
account is applied toward the purchase of a contract providing an 
immediate annuity, the contract is distributed to A's surviving spouse 
on December 15, 1978, and under section 408 the contract is not included 
in the gross income of the spouse upon its distribution. The value of 
the annuity contract is excluded from A's gross estate, if the contract 
provides for a series of substantially equal periodic payments (within 
the meaning of paragraph (b) of this section) to be made over the life 
of A's surviving spouse or over a period not ending before the date 36 
months after A's death.
    Example (3). (1) B establishes an individual retirement plan 
described in section 408(a) (``IRA B'') on February 6, 1981, in order to 
receive a $220,000 rollover contribution from a qualified plan, as 
described in section 402(a)(5). B dies August 14, 1981. C, an 
individual, is the sole beneficiary under IRA B. The amount in IRA B 
($238,000) is payable to C in whole or part as C may elect. Because the 
amount in IRA B is payable to C as other than a qualifying annuity, 
within the meaning of paragraph (b) of this section, no amount is 
excluded from B's gross estate under section 2039(e).
    (2) On October 17, 1981, C contributes $1,500 on C's own behalf to 
IRA B. Under Sec. 1.408-2(b)(7)(ii), C's contribution will cause IRA B 
to be treated as being maintained by and on behalf of C (``IRA C'') and 
C's making the contribution constitutes an election to which paragraph 
(c)(5) of this section applies. The balance in IRA C immediately before 
C's contribution is $240,000. Accordingly, the amount with respect to 
which C made the election is $240,000.
    (3) C dies January 19, 1982. E, an individual, is the sole 
beneficiary under the plan, and the amounts payable to E ($242,000) are 
payable as a qualifying annuity, within the meaning of paragraph (b) of 
this section.
    (4) The rules described in section 2039(e) and this section are 
applied with respect to the gross estate of C without regard to whether 
amounts now payable under IRA C were or were not excluded from B's gross 
estate. Under paragraph (c) of this section, the amount not excluded 
from C's gross estate is the value of the qualifying annuity payable to 
E ($242,000), multiplied by the fraction $240,000/($240,000+$1,500). 
Thus, the amount not excluded from C's gross estate is $240,497. 
[($242,000) ($240,000 ($240,000+$1,500))=$240,497.] The amount excluded 
is therefore $1,503 ($242,000-$240,497).
    Example (4). (1) F, an individual, establishes an individual 
retirement plan (``IRA F1'') in 1977 and makes $1,250 annual 
contributions for 1977, 1978, 1979 and 1980 (4x$1,250=$5,000), each of 
which is deducted by F under section 219. In February 1980, F receives 
an $85,000 distribution on account of the death of G, F's spouse, from 
the qualified plan of G's former employer, and rolls it over into IRA 
F1, under section 402(a)(7). Because IRA F1 includes a rollover 
contribution under section 402(a)(7), paragraph (c)(4) of this section 
applies. In 1981, F's entire interest in IRA F1, $100,000, is paid to F 
and contributed to another individual retirement plan (``IRA F2'') under 
section 408(d)(3)(A)(i). IRA F2 is a transferee plan to which paragraph 
(c)(6) of this section applies because of the rollover. F makes a $1,500 
deductible contribution to IRA F2 for 1981.
    (2) F dies in 1984. The balance in IRA F2 ($146,000) is payable to 
G, an individual, as a qualifying annuity, within the meaning of 
paragraph (b) of this section.
    (3) Under paragraph (c) of this section, the amount not excluded 
from F's gross estate is the value of the qualifying annuity payable 
under IRA F2 multiplied by the fraction $96,700/$101,500. Accordingly, 
the amount not excluded is $139,096. [($146,000) ($96,700/

[[Page 349]]

$101,500)=$139,096.] The amount excluded is $6,904 ($146,000-$139,096).
    (4) The numerator of the fraction ($96,700) is determined by 
multiplying the amount rolled over from IRA F1 to IRA F2 ($100,000) by a 
fraction, the numerator of which is the amount of the rollover 
contribution to IRA F1 ($85,000), and the denominator of which is the 
total contributions to IRA F1 ($85,000+$5,000=$90,000). [($100,000) 
($85,000/$90,000)=$96,700.]
    (5) The denominator of the fraction ($101,500) is the sum of the 
contributions to IRA F2 (the $100,000 rollover contribution from IRA F1, 
and the $1,500 annual contribution to IRA F2).

[T.D. 7761, 46 FR 7305, Jan. 23, 1981; 46 FR 17191, Mar. 18, 1981, as 
amended by T.D. 8540, 59 FR 30103, June 10, 1994]



Sec. 20.2040-1  Joint interests.

    (a) In general. A decedent's gross estate includes under section 
2040 the value of property held jointly at the time of the decedent's 
death by the decedent and another person or persons with right of 
survivorship, as follows:
    (1) To the extent that the property was acquired by the decedent and 
the other joint owner or owners by gift, devise, bequest, or 
inheritance, the decedent's fractional share of the property is 
included.
    (2) In all other cases, the entire value of the property is included 
except such part of the entire value as is attributable to the amount of 
the consideration in money or money's worth furnished by the other joint 
owner or owners. See Sec. 20.2043-1 with respect to adequacy of 
consideration. Such part of the entire value is that portion of the 
entire value of the property at the decedent's death (or at the 
alternate valuation date described in section 2032 which the 
consideration in money or money's worth furnished by the other joint 
owner or owners bears to the total cost of acquisition and capital 
additions. In determining the consideration furnished by the other joint 
owner or owners, there is taken into account only that portion of such 
consideration which is shown not to be attributable to money or other 
property acquired by the other joint owner or owners from the decedent 
for less than a full and adequate consideration in money or money's 
worth.

The entire value of jointly held property is included in a decedent's 
gross estate unless the executor submits facts sufficient to show that 
property was not acquired entirely with consideration furnished by the 
decedent, or was acquired by the decedent and the other joint owner or 
owners by gift, bequest, devise, or inheritance.
    (b) Meaning of ``property held jointly''. Section 2040 specifically 
covers property held jointly by the decedent and any other person (or 
persons), property held by the decedent and spouse as tenants by the 
entirety, and a deposit of money, or a bond or other instrument, in the 
name of the decedent and any other person and payable to either or the 
survivor. The section applies to all classes of property, whether real 
or personal, and regardless of when the joint interests were created. 
Furthermore, it makes no difference that the survivor takes the entire 
interest in the property by right of survivorship and that no interest 
therein forms a part of the decedent's estate for purposes of 
administration. The section has no application to property held by the 
decedent and any other person (or persons) as tenants in common.
    (c) Examples. The application of this section may be explained in 
the following examples in each of which it is assumed that the other 
joint owner or owners survived the decedent:
    (1) If the decedent furnished the entire purchase price of the 
jointly held property, the value of the entire property is included in 
his gross estate;
    (2) If the decedent furnished a part only of the purchase price, 
only a corresponding portion of the value of the property is so 
included;
    (3) If the decedent furnished no part of the purchase price, no part 
of the value of the property is so included;
    (4) If the decedent, before the acquisition of the property by 
himself and the other joint owner, gave the latter a sum of money or 
other property which thereafter became the other joint owner's entire 
contribution to the purchase price, then the value of the entire 
property is so included, notwithstanding the fact that the other 
property may have appreciated in value due to market conditions between 
the time of the gift and the time of the acquisition of the jointly held 
property;

[[Page 350]]

    (5) If the decedent, before the acquisition of the property by 
himself and the other joint owner, transferred to the latter for less 
than an adequate and full consideration in money or money's worth other 
income-producing property, the income from which belonged to and became 
the other joint owner's entire contribution to the purchase price, then 
the value of the jointly held property less that portion attributable to 
the income which the other joint owner did furnish is included in the 
decedent's gross estate;
    (6) If the property originally belonged to the other joint owner and 
the decedent purchased his interest from the other joint owner, only 
that portion of the value of the property attributable to the 
consideration paid by the decedent is included;
    (7) If the decedent and his spouse acquired the property by will or 
gift as tenants by the entirety, one-half of the value of the property 
is included in the decedent's gross estate; and
    (8) If the decedent and his two brothers acquired the property by 
will or gift as joint tenants, one-third of the value of the property is 
so included.



Sec. 20.2041-1  Powers of appointment; in general.

    (a) Introduction. A decedent's gross estate includes under section 
2041 the value of property in respect of which the decedent possessed, 
exercised, or released certain powers of appointment. This section 
contains rules of general application; Sec. 20.2041-2 contains rules 
specifically applicable to general powers of appointment created on or 
before October 21, 1942; and Sec. 20.2041-3 sets forth specific rules 
applicable to powers of appointment created after October 21, 1942.
    (b) Definition of ``power of appointment''--(1) In general. The term 
``power of appointment'' includes all powers which are in substance and 
effect powers of appointment regardless of the nomenclature used in 
creating the power and regardless of local property law connotations. 
For example, if a trust instrument provides that the beneficiary may 
appropriate or consume the principal of the trust, the power to consume 
or appropriate is a power of appointment. Similarly, a power given to a 
decedent to affect the beneficial enjoyment of trust property or its 
income by altering, amending, or revoking the trust instrument or 
terminating the trust is a power of appointment. If the community 
property laws of a State confer upon the wife a power of testamentary 
disposition over property in which she does not have a vested interest 
she is considered as having a power of appointment. A power in a donee 
to remove or discharge a trustee and appoint himself may be a power of 
appointment. For example, if under the terms of a trust instrument, the 
trustee or his successor has the power to appoint the principal of the 
trust for the benefit of individuals including himself, and the decedent 
has the unrestricted power to remove or discharge the trustee at any 
time and appoint any other person including himself, the decedent is 
considered as having a power of appointment. However, the decedent is 
not considered to have a power of appointment if he only had the power 
to appoint a successor, including himself, under limited conditions 
which did not exist at the time of his death, without an accompanying 
unrestricted power of removal. Similarly, a power to amend only the 
administrative provisions of a trust instrument, which cannot 
substantially affect the beneficial enjoyment of the trust property or 
income, is not a power of appointment. The mere power of management, 
investment, custody of assets, or the power to allocate receipts and 
disbursements as between income and principal, exercisable in a 
fiduciary capacity, whereby the holder has no power to enlarge or shift 
any of the beneficial interests therein except as an incidental 
consequence of the discharge of such fiduciary duties is not a power of 
appointment. Further, the right in a beneficiary of a trust to assent to 
a periodic accounting, thereby relieving the trustee from further 
accountability, is not a power of appointment if the right of assent 
does not consist of any power or right to enlarge or shift the 
beneficial interest of any beneficiary therein.
    (2) Relation to other sections. For purposes of Sec. Sec. 20.2041-1 
to 20.2041-3, the term ``power of appointment'' does not

[[Page 351]]

include powers reserved by the decedent to himself within the concept of 
sections 2036 through 2038. (See Sec. Sec. 20.2036-1 to 20.2038-1.) No 
provision of section 2041 or of Sec. Sec. 20.2041-1 to 20.2041-3 is to 
be construed as in any way limiting the application of any other section 
of the Internal Revenue Code or of these regulations. The power of the 
owner of a property interest already possessed by him to dispose of his 
interest, and nothing more, is not a power of appointment, and the 
interest is includable in his gross estate to the extent it would be 
includable under section 2033 or some other provision of Part III of 
Subchapter A of Chapter 11. For example, if a trust created by S 
provides for payment of the income to A for life with power in A to 
appoint the remainder by will and, in default of such appointment for 
payment of the income to A's widow, W, for her life and for payment of 
the remainder to A's estate, the value of A's interest in the remainder 
is includable in his gross estate under section 2033 regardless of its 
includability under section 2041.
    (3) Powers over a portion of property. If a power of appointment 
exists as to part of an entire group of assets or only over a limited 
interest in property, section 2041 applies only to such part or 
interest. For example, if a trust created by S provides for the payment 
of income to A for life, then to W for life, with power in A to appoint 
the remainder by will and in default of appointment for payment of the 
remainder to B or his estate, and if A dies before W, section 2041 
applies only to the value of the remainder interest excluding W's life 
estate. If A dies after W, section 2041 would apply to the value of the 
entire property. If the power were only over one-half the remainder 
interest, section 2041 would apply only to one-half the value of the 
amounts described above.
    (c) Definition of ``general power of appointment''--(1) In general. 
The term ``general power of appointment'' as defined in section 
2041(b)(1) means any power of appointment exercisable in favor of the 
decedent, his estate, his creditors, or the creditors of his estate, 
except (i) joint powers, to the extent provided in Sec. Sec. 20.2041-2 
and 20.2041-3, and (ii) certain powers limited by an ascertainable 
standard, to the extent provided in subparagraph (2) of this paragraph. 
A power of appointment exercisable to meet the estate tax, or any other 
taxes, debts, or charges which are enforceable against the estate, is 
included within the meaning of a power of appointment exercisable in 
favor of the decedent's estate, his creditors, or the creditors of his 
estate. A power of appointment exercisable for the purpose of 
discharging a legal obligation of the decedent or for his pecuniary 
benefit is considered a power of appointment exercisable in favor of the 
decedent or his creditors. However, for purposes of Sec. Sec. 20.2041-1 
to 20.2041-3, a power of appointment not otherwise considered to be a 
general power of appointment is not treated as a general power of 
appointment merely by reason of the fact that an appointee may, in fact, 
be a creditor of the decedent or his estate. A power of appointment is 
not a general power if by its terms it is either--
    (a) Exercisable only in favor of one or more designated persons or 
classes other than the decedent or his creditors, or the decedent's 
estate or the creditors of his estate, or
    (b) Expressly not exercisable in favor of the decedent or his 
creditors, or the decedent's estate or the creditors of his estate.

A decedent may have two powers under the same instrument, one of which 
is a general power of appointment and the other of which is not. For 
example, a beneficiary may have a power to withdraw trust corpus during 
his life, and a testamentary power to appoint the corpus among his 
descendants. The testamentary power is not a general power of 
appointment.
    (2) Powers limited by an ascertainable standard. A power to consume, 
invade, or appropriate income or corpus, or both, for the benefit of the 
decedent which is limited by an ascertainable standard relating to the 
health, education, support, or maintenance of the decedent is, by reason 
of section 2041(b)(1)(A), not a general power of appointment. A power is 
limited by such a standard if the extent of the holder's duty to 
exercise and not to exercise the power is reasonably measurable in

[[Page 352]]

terms of his needs for health, education, or support (or any combination 
of them). As used in this subparagraph, the words ``support'' and 
``maintenance'' are synonymous and their meaning is not limited to the 
bare necessities of life. A power to use property for the comfort, 
welfare, or happiness of the holder of the power is not limited by the 
requisite standard. Examples of powers which are limited by the 
requisite standard are powers exercisable for the holder's ``support,'' 
``support in reasonable comfort,'' ``maintenance in health and 
reasonable comfort,'' ``support in his accustomed manner of living,'' 
``education, including college and professional education,'' ``health,'' 
and ``medical, dental, hospital and nursing expenses and expenses of 
invalidism.'' In determining whether a power is limited by an 
ascertainable standard, it is immaterial whether the beneficiary is 
required to exhaust his other income before the power can be exercised.
    (3) Certain powers under wills of decedents dying between January 1 
and April 2, 1948. Section 210 of the Technical Changes Act of 1953 
provides that if a decedent died after December 31, 1947, but before 
April 3, 1948, certain property interests described therein may, if the 
decedent's surviving spouse so elects, be accorded special treatment in 
the determination of the marital deduction to be allowed the decedent's 
estate under the provisions of section 812(e) of the Internal Revenue 
Code of 1939. See Sec. 81.47a (h) of Regulations 105 (26 CFR (1939) 
81.47a(h)). The section further provides that property affected by the 
election shall, for the purpose of inclusion in the surviving spouse's 
gross estate, be considered property with respect to which she has a 
general power of appointment. Therefore, notwithstanding any other 
provision of law or of Sec. Sec. 20.2041-1 to 20.2041-3, if the present 
decedent (in her capacity as surviving spouse of a prior decedent) has 
made an election under section 210 of the Technical Changes Act of 1953, 
the property which was the subject of the election shall be considered 
as property with respect to which the present decedent has a general 
power of appointment created after October 21, 1942, exercisable by deed 
or will, to the extent it was treated as an interest passing to the 
surviving spouse and not passing to any other person for the purpose of 
the marital deduction in the prior decedent's estate.
    (d) Definition of ``exercise''. Whether a power of appointment is in 
fact exercised may depend upon local law. For example, the residuary 
clause of a will may be considered under local law as an exercise of a 
testamentary power of appointment in the absence of evidence of a 
contrary intention drawn from the whole of the testator's will. However, 
regardless of local law, a power of appointment is considered as 
exercised for purposes of section 2041 even though the exercise is in 
favor of the taker in default of appointment, and irrespective of 
whether the appointed interest and the interest in default of 
appointment are identical or whether the appointee renounces any right 
to take under the appointment. A power of appointment is also considered 
as exercised even though the disposition cannot take effect until the 
occurrence of an event after the exercise takes place, if the exercise 
is irrevocable and, as of the time of the exercise, the condition was 
not impossible of occurrence. For example, if property is left in trust 
to A for life, with a power in B to appoint the remainder by will, and B 
dies before A, exercising his power by appointing the remainder to C if 
C survives A, B is considered to have exercised his power if C is living 
at B's death. On the other hand, a testamentary power of appointment is 
not considered as exercised if it is exercised subject to the occurrence 
during the decedent's life of an express or implied condition which did 
not in fact occur. Thus, if in the preceding example, C dies before B, 
B's power of appointment would not be considered to have been exercised. 
Similarly, if a trust provides for income to A for life, remainder as A 
appoints by will, and A appoints a life estate in the property to B and 
does not otherwise exercise his power, but B dies before A, A's power is 
not considered to have been exercised.
    (e) Time of creation of power. A power of appointment created by 
will is, in general, considered as created on the date of the testator's 
death. However, section 2041(b)(3) provides that a power

[[Page 353]]

of appointment created by a will executed on or before October 21, 1942, 
is considered a power created on or before that date if the testator 
dies before July 1, 1949, without having republished the will, by 
codicil or otherwise, after October 21, 1942. A power of appointment 
created by an inter vivos instrument is considered as created on the 
date the instrument takes effect. Such a power is not considered as 
created at some future date merely because it is not exercisable on the 
date the instrument takes effect, or because it is revocable, or because 
the identity of its holders is not ascertainable until after the date 
the instrument takes effect. However, if the holder of a power exercises 
it by creating a second power, the second power is considered as created 
at the time of the exercise of the first. The application of this 
paragraph may be illustrated by the following examples:

    Example (1). A created a revocable trust before October 22, 1942, 
providing for payment of income to B for life with remainder as B shall 
appoint by will. Even though A dies after October 21, 1942, without 
having exercised his power of revocation, B's power of appointment is 
considered a power created before October 22, 1942.
    Example (2). C created an irrevocable inter vivos trust before 
October 22, 1942, naming T as trustee and providing for payment of 
income to D for life with remainder to E. T was given the power to pay 
corpus to D and the power to appoint a successor trustee. If T resigns 
after October 21, 1942, and appoints D as successor trustee, D is 
considered to have a power of appointment created before October 22, 
1942.
    Example (3). F created an irrevocable inter vivos trust before 
October 22, 1942, providing for payment of income to G for life with 
remainder as G shall appoint by will, but in default of appointment 
income to H for life with remainder as H shall appoint by will. If G 
died after October 21, 1942, without having exercised his power of 
appointment, H's power of appointment is considered a power created 
before October 22, 1942, even though it was only a contingent interest 
until G's death.
    Example (4). If in example (3) above G had exercised his power of 
appointment by creating a similar power in J, J's power of appointment 
would be considered a power created after October 21, 1942.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6582, 26 FR 
11861, Dec. 12, 1961]



Sec. 20.2041-2  Powers of appointment created on or before 
October 21, 1942.

    (a) In general. Property subject to a general power of appointment 
created on or before October 21, 1942, is includable in the gross estate 
of the holder of the power under section 2041 only if he exercised the 
power under specified circumstances. Section 2041(a)(1) requires that 
there be included in the gross estate of a decedent the value of 
property subject to such a power only if the power is exercised by the 
decedent either (1) by will, or (2) by a disposition which is of such 
nature that if it were a transfer of property owned by the decedent, the 
property would be includable in the decedent's gross estate under 
section 2035 (relating to transfers in contemplation of death), 2036 
(relating to transfers with retained life estate), 2037 (relating to 
transfers taking effect at death), or 2038 (relating to revocable 
transfers). See paragraphs (b), (c), and (d) of Sec. 20.2041-1 for the 
definition of various terms used in this section.
    (b) Joint powers created on or before October 21, 1942. Section 
2041(b)(1)(B) provides that a power created on or before October 21, 
1942, which at the time of the exercise is not exercisable by the 
decedent except in conjunction with another person, is not deemed a 
general power of appointment.
    (c) Exercise during life. The circumstances under which section 2041 
applies to the exercise other than by will of a general power of 
appointment created on or before October 21, 1942, are set forth in 
paragraph (a) of this section. In this connection, the rules of sections 
2035 through 2038 which are to be applied are those in effect on the 
date of the decedent's death which are applicable to transfers made on 
the date when the exercised of the power occurred. Those rules are to be 
applied in determining the extent to which and the conditions under 
which a disposition is considered a transfer of property. The 
application of this paragraph may be illustrated by the following 
examples:

    Example (1). A decedent in 1951 exercised a general power of 
appointment created in 1940, reserving no interest in or power over the 
property subject to the general power. The decedent died in 1956. Since 
the exercise

[[Page 354]]

was not made within three years before the decedent's death, no part of 
the property is includable in his gross estate. See section 2035(b), 
relating to transfers in contemplation of death.
    Example (2). S created a trust in 1930 to pay the income to A for 
life, remainder as B appoints by an instrument filed with the trustee 
during B's lifetime, and in default of appointment remainder to C. B 
exercised the power in 1955 by directing that after A's death the income 
be paid to himself for life with remainder to C. If B dies after A, the 
entire value of the trust property would be included in B's gross 
estate, since such a disposition if it were a transfer of property owned 
by B would cause the property to be included in his gross estate under 
section 2036(a)(1). If B dies before A, the value of the trust property 
less the value of A's life estate would be included in B's gross estate 
for the same reason.
    Example (3). S created a trust in 1940 to pay the income to A for 
life, remainder as A appoints by an instrument filed with the trustee 
during A's lifetime. A exercised the trustee during A's lifetime. A 
exercised the power in 1955, five years before his death, reserving the 
right of revocation. The exercise, if not revoked before death, will 
cause the property subject to the power to be included in A's gross 
estate under section 2041(a)(1), since such a disposition if it were a 
transfer of property owned by A would cause the property to be included 
in his gross estate under section 2038. However, if the exercise were 
completely revoked, so that A died still possessed of the power, the 
property would not be included in A's gross estate for the reason that 
the power will not be treated as having been exercised.
    Example (4). A decedent exercised a general power of appointment 
created in 1940 by making a disposition in trust under which possession 
or enjoyment of the property subject to the exercise could be obtained 
only by surviving the decedent and under which the decedent retained a 
reversionary interest in the property of a value of more than five 
percent. The exercise will cause the property subject to the power to be 
included in the decedent's gross estate, since such a disposition if it 
were a transfer of property owned by the decedent would cause the 
property to be included in his gross estate under section 2037.

    (d) Release or lapse. A failure to exercise a general power of 
appointment created on or before October 21, 1942, or a complete release 
of such a power is not considered to be an exercise of a general power 
of appointment. The phrase ``a complete release'' means a release of all 
powers over all or a portion of the property subject to a power of 
appointment, as distinguished from the reduction of a power of 
appointment to a lesser power. Thus, if the decedent completely 
relinquished all powers over one-half of the property subject to a power 
of appointment, the power is completely released as to that one-half. If 
at or before the time a power of appointment is relinquished, the holder 
of the power exercises the power in such a manner or to such an extent 
that the relinquishment results in the reduction, enlargement, or shift 
in a beneficial interest in property, the relinquishment will be 
considered to be an exercise and not a release of the power. For 
example, assume that A created a trust in 1940 providing for payment on 
the income to B for life and, upon B's death, remainder to C. Assume 
further that B was given the unlimited power to amend the trust 
instrument during his lifetime. If B amended the trust in 1948 by 
providing that upon his death the remainder was to be paid to D, and if 
he further amended the trust in 1950 by deleting his power to amend the 
trust, such relinquishment will be considered an exercise and not a 
release of a general power of appointment. On the other hand, if the 
1948 amendment became ineffective before or at the time of the 1950 
amendment, or if B in 1948 merely amended the trust by changing the 
purely ministerial powers of the trustee, his relinquishment of the 
power in 1950 will be considered as a release of a power of appointment.
    (e) Partial release. If a general power of appointment created on or 
before October 21, 1942, is partially released so that it is not 
thereafter a general power of appointment, a subsequent exercise of the 
partially released power is not an exercise of a general power of 
appointment if the partial release occurs before whichever is the later 
of the following dates:
    (1) November 1, 1951, or
    (2) If the decedent was under a legal disability to release the 
power on October 21, 1942, the day after the expiration of 6 months 
following the termination of such legal disability.

However, if a general power created on or before October 21, 1942, is 
partially released on or after the later of these dates, a subsequent 
exercise of the

[[Page 355]]

power will cause the property subject to the power to be included in the 
holder's gross estate, if the exercise is such that if it were a 
disposition of property owned by the decedent it would cause the 
property to be included in his gross estate. The legal disability 
referred to in this paragraph is determined under local law and may 
include the disability of an insane person, a minor, or an unborn child. 
The fact that the type of general power of appointment possessed by the 
decedent actually was not generally releasable under the local law does 
not place the decedent under a legal disability within the meaning of 
this paragraph. In general, however, it is assumed that all general 
powers of appointment are releasable, unless the local law on the 
subject is to the contrary, and it is presumed that the method employed 
to release the power is effective, unless it is not in accordance with 
the local law relating specifically to releases or, in the absence of 
such local law, is not in accordance with the local law relating to 
similar transactions.
    (f) Partial exercise. If a general power of appointment created on 
or before October 21, 1942, is exercised only as to a portion of the 
property subject to the power, section 2041 is applicable only to the 
value of that portion. For example, if a decedent had a general power of 
appointment exercisable by will created on or before October 21, 1942, 
over a trust fund valued at $200,000 at the date of his death, and if 
the decedent exercised his power either to the extent of directing the 
distribution of one-half of the trust property to B or of directing the 
payment of $100,000 to B, the trust property would be includable in the 
decedent's gross estate only to the extent of $100,000.



Sec. 20.2041-3  Powers of appointment created after October 21, 1942.

    (a) In general. (1) Property subject to a power of appointment 
created after October 21, 1942, is includable in the gross estate of the 
holder of the power under varying conditions depending on whether the 
power is (i) general in nature, (ii) possessed at death, or (iii) 
exercised or released. See paragraphs (b), (c), and (d) of Sec. 
20.2041-1 for the definition of various terms used in this section. See 
paragraph (c) of this section for the rules applicable to determine the 
extent to which joint powers created after October 21, 1942, are to be 
treated as general powers of appointment.
    (2) If the power is a general power of appointment, the value of an 
interest in property subject to such a power is includable in a 
decedent's gross estate under section 2041(a)(2) if either--
    (i) The decedent has the power at the time of his death (and the 
interest exists at the time of his death), or
    (ii) The decedent exercised or released the power, or the power 
lapsed, under the circumstances and to the extent described in paragraph 
(d) of this section.
    (3) If the power is not a general power of appointment, the value of 
property subject to the power is includable in the holder's gross estate 
under section 2041(a)(3) only if it is exercised to create a further 
power under certain circumstances (see paragraph (e) of this section).
    (b) Existence of power at death. For purposes of section 2041(a)(2), 
a power of appointment is considered to exist on the date of a 
decedent's death even though the exercise of the power is subject to the 
precedent giving of notice, or even though the exercise of the power 
takes effect only on the expiration of a stated period after its 
exercise, whether or not on or before the decedent's death notice has 
been given or the power has been exercised. However, a power which by 
its terms is exercisable only upon the occurrence during the decedent's 
lifetime of an event or a contingency which did not in fact take place 
or occur during such time is not a power in existence on the date of the 
decedent's death. For example, if a decedent was given a general power 
of appointment exercisable only after he reached a certain age, only if 
he survived another person, or only if he died without descendants, the 
power would not be in existence on the date of the decedent's death if 
the condition precedent to its exercise had not occurred.
    (c) Joint powers created after October 21, 1942. The treatment of a 
power of appointment created after October 21,

[[Page 356]]

1942, which is exercisable only in conjunction with another person is 
governed by section 2041(b)(1)(C), which provides as follows:
    (1) Such a power is not considered a general power of appointment if 
it is not exercisable by the decedent except with the consent or joinder 
of the creator of the power.
    (2) Such power is not considered a general power of appointment if 
it is not exercisable by the decedent except with the consent or joinder 
of a person having a substantial interest in the property subject to the 
power which is adverse to the exercise of the power in favor of the 
decedent, his estate, his creditors, or the creditors of his estate. An 
interest adverse to the exercise of a power is considered as substantial 
if its value in relation to the total value of the property subject to 
the power is not insignificant. For this purpose, the interest is to be 
valued in accordance with the actuarial principles set forth in Sec. 
20.2031-7 or, if it is not susceptible to valuation under those 
provisions, in accordance with the general principles set forth in Sec. 
20.2031-1. A taker in default of appointment under a power has an 
interest which is adverse to an exercise of the power. A coholder of the 
power has no adverse interest merely because of his joint possession of 
the power nor merely because he is a permissible appointee under a 
power. However, a coholder of a power is considered as having an adverse 
interest where he may possess the power after the decedent's death and 
may exercise it at that time in favor of himself, his estate, his 
creditors, or the creditors of his estate. Thus, for example, if X, Y, 
and Z held a power jointly to appoint among a group of persons which 
includes themselves and if on the death of X the power will pass to Y 
and Z jointly, then Y and Z are considered to have interests adverse to 
the exercise of the power in favor of X. Similarly, if on Y's death the 
power will pass to Z, Z is considered to have an interest adverse to the 
exercise of the power in favor of Y. The application of this 
subparagraph may be further illustrated by the following additional 
examples in each of which it is assumed that the value of the interest 
in question is substantial:

    Example (1). The decedent and R were trustees of a trust under the 
terms of which the income was to be paid to the decedent for life and 
then to M for life, and the remainder was to be paid to R. The trustees 
had power to distribute corpus to the decedent. Since R's interest was 
substantially adverse to an exercise of the power in favor of the 
decedent the latter did not have a general power of appointment. If M 
and the decedent were the trustees, M's interest would likewise have 
been adverse.
    Example (2). The decedent and L were trustees of a trust under the 
terms of which the income was to be paid to L for life and then to M for 
life, and the remainder was to be paid to the decedent. The trustees had 
power to distribute corpus to the decedent during L's life. Since L's 
interest was adverse to an exercise of the power in favor of the 
decedent, the decedent did not have a general power of appointment. If 
the decedent and M were the trustees, M's interest would likewise have 
been adverse.
    Example (3). The decedent and L were trustees of a trust under the 
terms of which the income was to be paid to L for life. The trustees 
could designate whether corpus was to be distributed to the decedent or 
to A after L's death. L's interest was not adverse to an exercise of the 
power in favor of the decedent, and the decedent therefore had a general 
power of appointment.

    (3) A power which is exercisable only in conjunction with another 
person, and which after application of the rules set forth in 
subparagraphs (1) and (2) of this paragraph constitutes a general power 
of appointment, will be treated as though the holders of the power who 
are permissible appointees of the property were joint owners of property 
subject to the power. The decedent, under this rule, will be treated as 
possessed of a general power of appointment over an aliquot share of the 
property to be determined with reference to the number of joint holders, 
including the decedent, who (or whose estates or creditors) are 
permissible appointees. Thus, for example, if X, Y, and Z hold an 
unlimited power jointly to appoint among a group of persons, including 
themselves, but on the death of X the power does not pass to Y and Z 
jointly, then Y and Z are not considered to have interests adverse to 
the exercise of the power in favor of X. In this case X is considered to 
possess a general power of appointment as to one-third of the property 
subject to the power.

[[Page 357]]

    (d) Releases, lapses, and disclaimers of general powers of 
appointment. (1) Property subject to a general power of appointment 
created after October 21, 1942, is includable in the gross estate of a 
decedent under section 2041(a)(2) even though he does not have the power 
at the date of his death, if during his life he exercised or released 
the power under circumstances such that, if the property subject to the 
power had been owned and transferred by the decedent, the property would 
be includable in the decedent's gross estate under section 2035, 2036, 
2037, or 2038. Further, section 2041(b)(2) provides that the lapse of a 
power of appointment is considered to be a release of the power to the 
extent set forth in subparagraph (3) of this paragraph. A release of a 
power of appointment need not be formal or express in character. The 
principles set forth in Sec. 20.2041-2 for determining the application 
of the pertinent provisions of sections 2035 through 2038 to a 
particular exercise of a power of appointment are applicable for 
purposes of determining whether or not an exercise or release of a power 
of appointment created after October 21, 1942, causes the property to be 
included in a decedent's gross estate under section 2041(a)(2). If a 
general power of appointment created after October 21, 1942, is 
partially released, a subsequent exercise or release of the power under 
circumstances described in the first sentence of this subparagraph, or 
its possession at death will nevertheless cause the property subject to 
the power to be included in the gross estate of the holder of the power.
    (2) Section 2041(a)(2) is not applicable to the complete release of 
a general power of appointment created after October 21, 1942, whether 
exercisable during life or by will, if the release was not made in 
contemplation of death within the meaning of section 2035, and if after 
the release the holder of the power retained no interest in or control 
over the property subject to the power which would cause the property to 
be included in his gross estate under sections 2036 through 2038 if the 
property had been transferred by the holder.
    (3) The failure to exercise a power of appointment created after 
October 21, 1942, within a specified time, so that the power lapses, 
constitutes a release of the power. However, section 2041(b)(2) provides 
that such a lapse of a power of appointment during any calendar year 
during the decedent's life is treated as a release for purposes of 
inclusion of property in the gross estate under section 2041(a)(2) only 
to the extent that the property which could have been appointed by 
exercise of the lapsed power exceeds the greater of (i) $5,000 or (ii) 5 
percent of the aggregate value, at the time of the lapse, of the assets 
out of which, or the proceeds of which, the exercise of the lapsed power 
could have been satisfied. For example, assume that A transferred 
$200,000 worth of securities in trust providing for payment of income to 
B for life with remainder to B's issue. Assume further that B was given 
a noncumulative right to withdraw $10,000 a year from the principal of 
the trust fund (which neither increased nor decreased in value prior to 
B's death). In such case, the failure of B to exercise his right of 
withdrawal will not result in estate tax with respect to the power to 
withdraw $10,000 which lapses each year before the year of B's death. At 
B's death there will be included in his gross estate the $10,000 which 
he was entitled to withdraw for the year in which his death occurs less 
any amount which he may have taken during that year. However, if in the 
above example B had possessed the right to withdraw $15,000 of the 
principal annually, the failure to exercise such power in any year will 
be considered a release of the power to the extent of the excess of the 
amount subject to withdrawal over 5 percent of the trust fund (in this 
example, $5,000, assuming that the trust fund is worth $200,000 at the 
time of the lapse). Since each lapse is treated as though B had 
exercised dominion over the trust property by making a transfer of 
principal reserving the income therefrom for his life, the value of the 
trust property (but only to the extent of the excess of the amount 
subject to withdrawal over 5 percent of the trust fund) is includable in 
B's gross estate (unless before B's death he has disposed of his right 
to the income under circumstances to which sections 2035 through 2038 
would not be applicable).

[[Page 358]]

The extent to which the value of the trust property is included in the 
decedent's gross estate is determined as provided in subparagraph (4) of 
this paragraph.
    (4) The purpose of section 2041(b)(2) is to provide a determination, 
as of the date of the lapse of the power, of the proportion of the 
property over which the power lapsed which is an exempt disposition for 
estate tax purposes and the proportion which, if the other requirements 
of sections 2035 through 2038 are satisfied, will be considered as a 
taxable disposition. Once the taxable proportion of any disposition at 
the date of lapse has been determined, the valuation of that proportion 
as of the date of the decedent's death (or, if the executor has elected 
the alternate valuation method under section 2032, the value as of the 
date therein provided), is to be ascertained in accordance with the 
principles which are applicable to the valuation of transfers of 
property by the decedent under the corresponding provisions of sections 
2035 through 2038. For example, if the life beneficiary of a trust had a 
right exercisable only during one calendar year to draw down $50,000 
from the corpus of a trust, which he did not exercise, and if at the end 
of the year the corpus was worth $800,000, the taxable portion over 
which the power lapsed is $10,000 (the excess of $50,000 over 5 percent 
of the corpus), or \1/80\ of the total value. On the decedent's death, 
if the total value of the corpus of the trust (excluding income 
accumulated after the lapse of the power) on the applicable valuation 
date was $1,200,000, $15,000 (\1/80\ of $1,200,000) would be includable 
in the decedent's gross estate. However, if the total value was then 
$600,000, only $7,500 (\1/80\ of $600,000) would be includable.
    (5) If the failure to exercise a power, such as a right of 
withdrawal, occurs in more than a single year, the proportion of the 
property over which the power lapsed which is treated as a taxable 
disposition will be determined separately for each such year. The 
aggregate of the taxable proportions for all such years, valued in 
accordance with the above principles, will be includable in the gross 
estate by reason of the lapse. The includable amount, however, shall not 
exceed the aggregate value of the assets out of which, or the proceeds 
of which, the exercise of the power could have been satisfied, valued as 
of the date of the decedent's death (or, if the executor has elected the 
alternate valuation method under section 2032, the value as of the date 
therein provided).
    (6)(i) A disclaimer or renunciation of a general power of 
appointment created in a transfer made after December 31, 1976, is not 
considered to be the release of the power if the disclaimer or 
renunciation is a qualified disclaimer as described in section 2518 and 
the corresponding regulations. For rules relating to when the transfer 
creating the power occurs, see Sec. 25.2518-2(c)(3) of this chapter. If 
the disclaimer or renunciation is not a qualified disclaimer, it is 
considered a release of the power by the disclaimant.
    (ii) The disclaimer or renunication of a general power of 
appointment created in a taxable transfer before January 1, 1977, in the 
person disclaiming is not considered to be a release of the power. The 
disclaimer or renunciation must be unequivocal and effective under local 
law. A disclaimer is a complete and unqualified refusal to accept the 
rights to which one is entitled. There can be no disclaimer or 
renunciation of a power after its acceptance. In the absence of facts to 
the contrary, the failure to renounce or disclaim within a reasonable 
time after learning of its existence will be presumed to constitute an 
acceptance of the power. In any case where a power is purported to be 
disclaimed or renounced as to only a portion of the property subject to 
the power, the determination as to whether or not there has been a 
complete and unqualified refusal to accept the rights to which one is 
entitled will depend on all the facts and circumstances of the 
particular case, taking into account the recognition and effectiveness 
of such a disclaimer under local law. Such rights refer to the incidents 
of the power and not to other interests of the decedent in the property. 
If effective under local law, the power may be disclaimed or renounced 
without disclaiming or renouncing such other interests.
    (iii) The first and second sentences of paragraph (d)(6)(i) of this 
section are

[[Page 359]]

applicable for transfers creating the power to be disclaimed made on or 
after December 31, 1997.
    (e) Successive powers. (1) Property subject to a power of 
appointment created after October 21, 1942, which is not a general 
power, is includable in the gross estate of the holder of the power 
under section 2041(a)(3) if the power is exercised, and if both of the 
following conditions are met:
    (i) If the exercise is (a) by will, or (b) by a disposition which is 
of such nature that if it were a transfer of property owned by the 
decedent, the property would be includable in the decedent's gross 
estate under sections 2035 through 2037; and
    (ii) If the power is exercised by creating another power of 
appointment which, under the terms of the instruments creating and 
exercising the first power and under applicable local law, can be 
validly exercised so as to (a) postpone the vesting of any estate or 
interest in the property for a period ascertainable without regard to 
the date of the creation of the first power, or (b) (if the applicable 
rule against perpetuities is stated in terms of suspension of ownership 
or of the power of alienation, rather than of vesting) suspend the 
absolute ownership or the power of alienation of the property for a 
period ascertainable without regard to the date of the creation of the 
first power.
    (2) For purposes of the application of section 2041(a)(3), the value 
of the property subject to the second power of appointment is considered 
to be its value unreduced by any precedent or subsequent interest which 
is not subject to the second power. Thus, if a decedent has a power to 
appoint by will $100,000 to a group of persons consisting of his 
children and grandchildren and exercises the power by making an outright 
appointment of $75,000 and by giving one appointee a power to appoint 
$25,000, no more than $25,000 will be includable in the decedent's gross 
estate under section 2041(a)(3). If, however, the decedent appoints the 
income from the entire fund to a beneficiary for life with power in the 
beneficiary to appoint the remainder by will, the entire $100,000 will 
be includable in the decedent's gross estate under section 2041(a)(3) if 
the exercise of the second power can validly postpone the vesting of any 
estate or interest in the property or can suspend the absolute ownership 
or power of alienation of the property for a period ascertainable 
without regard to the date of the creation of the first power.
    (f) Examples. The application of this section may be further 
illustrated by the following examples, in each of which it is assumed, 
unless otherwise stated, that S has transferred property in trust after 
October 21, 1942, with the remainder payable to R at L's death, and that 
neither L nor R has any interest in or power over the enjoyment of the 
trust property except as is indicated separately in each example:

    Example (1). Income is directed to be paid to L during his lifetime 
at the end of each year, if living. L has an unrestricted power during 
his lifetime to cause the income to be distributed to any other person, 
but no power to cause it to be accumulated. At L's death, no part of the 
trust property is includable in L's gross estate since L had a power to 
dispose of only his income interest, a right otherwise possessed by him.
    Example (2). Income is directed to be accumulated during L's life 
but L has a noncumulative power to distribute $10,000 of each year's 
income to himself. Unless L's power is limited to himself. Unless L's 
power is limited by an ascertainable standard (relating to his health, 
etc.), as defined in paragraph (c)(2) of Sec. 20.2041-1, he has a 
general power of appointment over $10,000 of each year's income, the 
lapse of which may cause a portion of any income not distriibuted to be 
included in his gross estate under section 2041. See subparagraphs (3), 
(4), and (5) of paragraph (d) of this section. Thus, if the trust income 
during the year amounts to $20,000, L's failure to distribute any of the 
income to himself constitutes a lapse as to $5,000 (i.e., the amount by 
which $10,000 exceeds $5,000). If L's power were cumulative (i.e., if 
the power did not lapse at the end of each year but lapsed only by 
reason of L's death), the total accumulations which L chose not to 
distribute to himself immediately before his death would be includable 
in his gross estate under section 2041.
    Example (3). L is entitled to all the income during his lifetime and 
has an unrestricted power to cause corpus to be distributed to himself. 
L had a general power of appointment over the corpus of the trust, and 
the entire corpus as of the time of his death is includable in his gross 
estate under section 2041.
    Example (4). Income was payable to L during his lifetime. R has an 
unrestricted power to cause corpus to be distributed to L. R dies

[[Page 360]]

before L. In such case, R has only a power to dispose of his remainder 
interest, the value of which is includable in his gross estate under 
section 2033, and nothing in addition would be includable under section 
2041. If in this example R's remainder were contingent on his surviving 
L, nothing would be includable in his gross estate under either section 
2033 or 2041. While R would have a power of appointment, it would not be 
a general power.
    Example (5). Income was payable to L during his lifetime. R has an 
unrestricted power to cause corpus to be distributed to himself. R dies 
before L. While the value of R's remainder interest is includable in his 
gross estate under section 2033, R also has a general power of 
appointment over the entire trust corpus. Under such circumstances, the 
entire value of the trust corpus is includable in R's gross estate under 
section 2041.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8095, 51 FR 28367, Aug. 7, 1986; T.D. 8744, 62 FR 68184, 
Dec. 31, 1997]



Sec. 20.2042-1  Proceeds of life insurance.

    (a) In general. (1) Section 2042 provides for the inclusion in a 
decedent's gross estate of the proceeds of insurance on the decedent's 
life (i) receivable by or for the benefit of the estate (see paragraph 
(b) of this section) and (ii) receivable by other beneficiaries (see 
paragraph (c) of this section). The term ``insurance'' refers to life 
insurance of every description, including death benefits paid by 
fraternal beneficial societies operating under the lodge system.
    (2) Proceeds of life insurance which are not includable in the gross 
estate under section 2042 may, depending upon the facts of the 
particular case, be includable under some other section of Part III of 
Subchapter A of Chapter 11. For example, if the decedent possessed 
incidents of ownership in an insurance policy on his life but 
gratuitously transferred all rights in the policy in contemplation of 
death, the proceeds would be includable under section 2035. Section 2042 
has no application to the inclusion in the gross estate of the value of 
rights in an insurance policy on the life of a person other than the 
decedent, or the value of rights in a combination annuity contract and 
life insurance policy on the decedent's life (i.e., a ``retirement 
income'' policy with death benefit or an ``endowment'' policy) under 
which there was no insurance element at the time of the decedent's death 
(see paragraph (d) of Sec. 20.2039-1).
    (3) Except as provided in paragraph (c)(6), the amount to be 
included in the gross estate under section 2042 is the full amount 
receivable under the policy. If the proceeds of the policy are made 
payable to a beneficiary in the form of an annuity for life or for a 
term of years, the amount to be included in the gross estate is the one 
sum payable at death under an option which could have been exercised 
either by the insured or by the beneficiary, or if no option was 
granted, the sum used by the insurance company in determining the amount 
of the annuity.
    (b) Receivable by or for the benefit of the estate. (1) Section 2042 
requires the inclusion in the gross estate of the proceeds of insurance 
on the decedent's life receivable by the executor or administrator, or 
payable to the decedent's estate. It makes no difference whether or not 
the estate is specifically named as the beneficiary under the terms of 
the policy. Thus, if under the terms of an insurance policy the proceeds 
are receivable by another beneficiary but are subject to an obligation, 
legally binding upon the other beneficiary, to pay taxes, debts, or 
other charges enforceable against the estate, then the amount of such 
proceeds required for the payment in full (to the extent of the 
beneficiary's obligation) of such taxes, debts, or other charges is 
includable in the gross estate. Similarly, if the decedent purchased an 
insurance policy in favor of another person or a corporation as 
collateral security for a loan or other accommodation, its proceeds are 
considered to be receivable for the benefit of the estate. The amount of 
the loan outstanding at the date of the decedent's death, with interest 
accrued to that date, will be deductible in determining the taxable 
estate. See Sec. 20.2053-4.
    (2) If the proceeds of an insurance policy made payable to the 
decedent's estate are community assets under the local community 
property law and, as a result, one-half of the proceeds belongs to the 
decedent's spouse, then

[[Page 361]]

only one-half of the proceeds is considered to be receivable by or for 
the benefit of the decedent's estate.
    (c) Receivable by other beneficiaries. (1) Section 2042 requires the 
inclusion in the gross estate of the proceeds of insurance on the 
decedent's life not receivable by or for the benefit of the estate if 
the decedent possessed at the date of his death any of the incidents of 
ownership in the policy, exercisable either alone or in conjunction with 
any other person. However, if the decedent did not possess any of such 
incidents of ownership at the time of his death nor transfer them in 
contemplation of death, no part of the proceeds would be includible in 
his gross estate under section 2042. Thus, if the decedent owned a 
policy of insurance on his life and, 4 years before his death, 
irrevocably assigned his entire interest in the policy to his wife 
retaining no reversionary interest therein (see subparagraph (3) of this 
paragraph), the proceeds of the policy would not be includible in his 
gross estate under section 2042.
    (2) For purposes of this paragraph, the term ``incidents of 
ownership'' is not limited in its meaning to ownership of the policy in 
the technical legal sense. Generally speaking, the term has reference to 
the right of the insured or his estate to the economic benefits of the 
policy. Thus, it includes the power to change the beneficiary, to 
surrender or cancel the policy, to assign the policy, to revoke an 
assignment, to pledge the policy for a loan, or to obtain from the 
insurer a loan against the surrender value of the policy, etc. See 
subparagraph (6) of this paragraph for rules relating to the 
circumstances under which incidents of ownership held by a corporation 
are attributable to a decedent through his stock ownership.
    (3) The term ``incidents of ownership'' also includes a reversionary 
interest in the policy or its proceeds, whether arising by the express 
terms of the policy or other instrument or by operation of law, but only 
if the value of the reversionary interest immediately before the death 
of the decedent exceeded 5 percent of the value of the policy.

As used in this subparagraph, the term ``reversionary interest'' 
includes a possibility that the policy or its proceeds may return to the 
decedent or his estate and a possibility that the policy or its proceeds 
may become subject to a power of disposition by him. In order to 
determine whether or not the value of a reversionary interest 
immediately before the death of the decedent exceeded 5 percent of the 
value of the policy, the principles contained in paragraph (c) (3) and 
(4) of Sec. 20.2037-1, insofar as applicable, shall be followed under 
this subparagraph. In that connection, there must be specifically taken 
into consideration any incidents of ownership-held by others immediately 
before the decedent's death which would affect the value of the 
reversionary interest. For example, the decedent would not be considered 
to have a reversionary interest in the policy of a value in excess of 5 
percent if the power to obtain the cash surrender value existed in some 
other person immediately before the decedent's death and was exercisable 
by such other person alone and in all events. The terms ``reversionary 
interest'' and ``incidents of ownership'' do not include the possibility 
that the decedent might receive a policy or its proceeds by inheritance 
through the estate of another person, or as a surviving spouse under a 
statutory right of election or a similar right.
    (4) A decedent is considered to have an ``incident of ownership'' in 
an insurance policy on his life held in trust if, under the terms of the 
policy, the decedent (either alone or in conjunction with another person 
or persons) has the power (as trustee or otherwise) to change the 
beneficial ownership in the policy or its proceeds, or the time or 
manner of enjoyment thereof, even though the decedent has no beneficial 
interest in the trust. Moreover, assuming the decedent created the 
trust, such a power may result in the inclusion in the decedent's gross 
estate under section 2036 or 2038 of other property transferred by the 
decedent to the trust if, for example, the decedent has the power to 
surrender the insurance policy and if the income otherwise used to pay 
premiums on the policy would become currently payable to a beneficiary 
of the trust in the event that the policy were surrendered.

[[Page 362]]

    (5) As an additional step in determining whether or not a decedent 
possessed any incidents of ownership in a policy or any part of a 
policy, regard must be given to the effect of the State or other 
applicable law upon the terms of the policy. For example, assume that 
the decedent purchased a policy of insurance on his life with funds held 
by him and his surviving wife as community property, designating their 
son as beneficiary but retaining the right to surrender the policy. 
Under the local law, the proceeds upon surrender would have inured to 
the marital community. Assuming that the policy is not surrendered and 
that the son receives the proceeds on the decedent's death, the wife's 
transfer of her one-half interest in the policy was not considered 
absolute before the decedent's death. Upon the wife's prior death, one-
half of the value of the policy would have been included in her gross 
estate. Under these circumstances, the power of surrender possessed by 
the decedent as agent for his wife with respect to one-half of the 
policy is not, for purposes of this section, an ``incident of 
ownership'', and the decedent is, therefore, deemed to possess an 
incident of ownership in only one-half of the policy.
    (6) In the case of economic benefits of a life insurance policy on 
the decedent's life that are reserved to a corporation of which the 
decedent is the sole or controlling stockholders, the corporations' 
incidents of ownership will not be attributed to the decedent through 
his stock ownership to the extent the proceeds of the policy are payable 
to the corporation. Any proceeds payable to a third party for a valid 
business purpose, such as in satisfaction of a business debt of the 
corporation, so that the net worth of the corporation is increased by 
the amount of such proceeds, shall be deemed to be payable to the 
corporation for purposes of the preceding sentence. See Sec. 20.2031-
2(f) for a rule providing that the proceeds of certain life insurance 
policies shall be considered in determining the value of the decedent's 
stock. Except as hereinafter provided with respect to a group-term life 
insurance policy, if any part of the proceeds of the policy are not 
payable to or for the benefit of the corporation, and thus are not taken 
into account in valuing the decedent's stock holdings in the corporation 
for purposes of section 2031, any incidents of ownership held by the 
corporation as to that part of the proceeds will be attributed to the 
decedent through his stock ownership where the decedent is the sole or 
controlling stockholder. Thus, for example, if the decedent is the 
controlling stockholder in a corporation, and the corporation owns a 
life insurance policy on his life, the proceeds of which are payable to 
the decedent's spouse, the incidents of ownership held by the 
corporation will be attributed to the decedent through his stock 
ownership and the proceeds will be included in his gross estate under 
section 2042. If in this example the policy proceeds had been payable 40 
percent to decedent's spouse and 60 percent to the corporation, only 40 
percent of the proceeds would be included in decedent's gross estate 
under section 2042. For purposes of this subparagraph, the decedent will 
not be deemed to be the controlling stockholder of a corporation unless, 
at the time of his death, he owned stock possessing more than 50 percent 
of the total combined voting power of the corporation. Solely for 
purposes of the preceding sentence, a decedent shall be considered to be 
the owner of only the stock with respect to which legal title was held, 
at the time of his death, by (i) the decedent (or his agent or nominee); 
(ii) the decedent and another person jointly (but only the proportionate 
number of shares which corresponds to the portion of the total 
consideration which is considered to be furnished by the decedent for 
purposes of section 2040 and the regulations thereunder); and (iii) by a 
trustee of a voting trust (to the extent of the decedent's beneficial 
interest therein) or any other trust with respect to which the decedent 
was treated as an owner under Subpart E, Part I, Subchapter J, Chapter I 
of the Code immediately prior to his death. In the case of group-term 
life insurance, as defined in the regulations under section 79, the 
power to surrender or cancel a policy

[[Page 363]]

held by a corporation shall not be attributed to any decedent through 
his stock ownership.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960 as 
amended by T.D. 7312, 39 FR 14949, Apr. 29, 1974; T.D. 7623, 44 FR 
28800, May 17, 1979]



Sec. 20.2043-1  Transfers for insufficient consideration.

    (a) In general. The transfers, trusts, interests, rights or powers 
enumerated and described in sections 2035 through 2038 and section 2041 
are not subject to the Federal estate tax if made, created, exercised, 
or relinquished in a transaction which constituted a bona fide sale for 
an adequate and full consideration in money or money's worth. To 
constitute a bona fide sale for an adequate and full consideration in 
money or money's worth, the transfer must have been made in good faith, 
and the price must have been an adequate and full equivalent reducible 
to a money value. If the price was less than such a consideration, only 
the excess of the fair market value of the property (as of the 
applicable valuation date) over the price received by the decedent is 
included in ascertaining the value of his gross estate.
    (b) Marital rights and support obligations. For purposes of chapter 
11, a relinquishment or promised relinquishment or dower, curtesy, or of 
a statutory estate created in lieu of dower or curtesy, or of other 
marital rights in the decedent's property or estate, is not to any 
extent a consideration in ``money or money's worth.''



Sec. 20.2044-1  Certain property for which marital deduction was 
previously allowed.

    (a) In general. Section 2044 generally provides for the inclusion in 
the gross estate of property in which the decedent had a qualifying 
income interest for life and for which a deduction was allowed under 
section 2056(b)(7) or 2523(f). The value of the property included in the 
gross estate under section 2044 is not reduced by the amount of any 
section 2503(b) exclusion that applied to the transfer creating the 
interest. See section 2207A, regarding the right of recovery against the 
persons receiving the property that is applicable in certain cases.
    (b) Passed from. For purposes of section 1014 and chapters 11 and 13 
of subtitle B of the Internal Revenue Code, property included in a 
decedent's gross estate under section 2044 is considered to have been 
acquired from or to have passed from the decedent to the person 
receiving the property upon the decedent's death. Thus, for example, the 
property is treated as passing from the decedent for purposes of 
determining the availability of the charitable deduction under section 
2055, the marital deduction under section 2056, and special use 
valuation under section 2032A. In addition, the tax imposed on property 
includible under section 2044 is eligible for the installment payment of 
estate tax under section 6166.
    (c) Presumption. Unless established to the contrary, section 2044 
applies to the entire value of the trust at the surviving spouse's 
death. If a marital deduction is taken on either the estate or gift tax 
return with respect to the transfer which created the qualifying income 
interest, it is presumed that the deduction was allowed for purposes of 
section 2044. To avoid the inclusion of property in the decedent-
spouse's gross estate under this section, the executor of the spouse's 
estate must establish that a deduction was not taken for the transfer 
which created the qualifying income interest. For example, to establish 
that a deduction was not taken, the executor may produce a copy of the 
estate or gift tax return filed with respect to the transfer by the 
first spouse or the first spouse's estate establishing that no deduction 
was taken under section 2523(f) or section 2056(b)(7). In addition, the 
executor may establish that no return was filed on the original transfer 
by the decedent because the value of the first spouse's gross estate was 
below the threshold requirement for filing under section 6018. 
Similarly, the executor could establish that the transfer creating the 
decedent's qualifying income interest for life was made before the 
effective date of section 2056(b)(7) or section 2523(f).
    (d) Amount included--(1) In general. The amount included under this 
section is the value of the entire interest

[[Page 364]]

in which the decedent had a qualifying income interest for life, 
determined as of the date of the decedent's death (or the alternate 
valuation date, if applicable). If, in connection with the transfer of 
property that created the decedent's qualifying income interest for 
life, a deduction was allowed under section 2056(b)(7) or section 
2523(f) for less than the entire interest in the property (i.e., for a 
fractional or percentage share of the entire interest in the transferred 
property), the amount includible in the decedent's gross estate under 
this section is equal to the fair market value of the entire interest in 
the property on the date of the decedent's death (or the alternate 
valuation date, if applicable) multiplied by the fractional or 
percentage share of the interest for which the deduction was taken.
    (2) Inclusion of income. If any income from the property for the 
period between the date of the transfer creating the decedent-spouse's 
interest and the date of the decedent-spouse's death has not been 
distributed before the decedent-spouse's death, the undistributed income 
is included in the decedent-spouse's gross estate under this section to 
the extent that the income is not so included under any other section of 
the Internal Revenue Code.
    (3) Reduction of includible share in certain cases. If only a 
fractional or percentage share is includible under this section, the 
includible share is appropriately reduced if--
    (i) The decedent-spouse's interest was in a trust and distributions 
of principal were made to the spouse during the spouse's lifetime;
    (ii) The trust provides that the distributions are to be made from 
the qualified terminable interest share of the trust; and
    (iii) The executor of the decedent-spouse's estate can establish the 
reduction in that share based on the fair market value of the trust 
assets at the time of each distribution.
    (4) Interest in previously severed trust. If the decedent-spouse's 
interest was in a trust consisting of only qualified terminable interest 
property and the trust was severed (in compliance with Sec. 20.2056(b)-
7(b) or Sec. 25.2523(f)-1(b) of this chapter) from a trust that, after 
the severance, held only property that was not qualified terminable 
interest property, only the value of the property in the severed portion 
of the trust is includible in the decedent-spouse's gross estate.
    (e) Examples. The following examples illustrate the principles in 
paragraphs (a) through (d) of this section, where the decedent, D, was 
survived by spouse, S.

    Example 1. Inclusion of trust subject to election. Under D's will, 
assets valued at $800,000 in D's gross estate (net of debts, expenses 
and other charges, including death taxes, payable from the property) 
passed in trust with income payable to S for life. Upon S's death, the 
trust principal is to be distributed to D's children. D's executor 
elected under section 2056(b)(7) to treat the entire trust property as 
qualified terminable interest property and claimed a marital deduction 
of $800,000. S made no disposition of the income interest during S's 
lifetime under section 2519. On the date of S's death, the fair market 
value of the trust property was $740,000. S's executor did not elect the 
alternate valuation date. The amount included in S's gross estate 
pursuant to section 2044 is $740,000.
    Example 2. Inclusion of trust subject to partial election. The facts 
are the same as in Example 1, except that D's executor elected under 
section 2056(b)(7) with respect to only 50 percent of the value of the 
trust ($400,000). Consequently, only the equivalent portion of the trust 
is included in S's gross estate; i.e., $370,000 (50 percent of 
$740,000).
    Example 3. Spouse receives qualifying income interest in a fraction 
of trust income. Under D's will, assets valued at $800,000 in D's gross 
estate (net of debts, expenses and other charges, including death taxes, 
payable from the property) passed in trust with 20 percent of the trust 
income payable to S for S's life. The will provides that the trust 
principal is to be distributed to D's children upon S's death. D's 
executor elected to deduct, pursuant to section 2056(b)(7), 50 percent 
of the amount for which the election could be made; i.e., $80,000 (50 
percent of 20 percent of $800,000). Consequently, on the death of S, 
only the equivalent portion of the trust is included in S's gross 
estate; i.e., $74,000 (50 percent of 20 percent of $740,000).
    Example 4. Distribution of corpus during spouse's lifetime. The 
facts are the same as in Example 3, except that S was entitled to 
receive all the trust income but the executor of D's estate elected 
under section 2056(b)(7) with respect to only 50 percent of the value of 
the trust ($400,000). Pursuant to authority in the will, the trustee 
made a discretionary distribution of $100,000 of principal to S in 1995 
and charged the entire distribution to

[[Page 365]]

the qualified terminable interest share. Immediately prior to the 
distribution, the fair market value of the trust property was $1,100,000 
and the qualified terminable interest portion of the trust was 50 
percent. Immediately after the distribution, the qualified terminable 
interest portion of the trust was 45 percent ($450,000 divided by 
$1,000,000). Provided S's executor can establish the relevant facts, the 
amount included in S's gross estate is $333,000 (45 percent of 
$740,000).
    Example 5. Spouse assigns a portion of income interest during life. 
Under D's will, assets valued at $800,000 in D's gross estate (net of 
debts, expenses and other charges, including death taxes, payable from 
the property) passed in trust with all the income payable to S, for S's 
life. The will provides that the trust principal is to be distributed to 
D's children upon S's death. D's executor elected under section 
2056(b)(7) to treat the entire trust property as qualified terminable 
interest property and claimed a marital deduction of $800,000. During 
the term of the trust, S transfers to C the right to 40 percent of the 
income from the trust for S's life. Because S is treated as transferring 
the entire remainder interest in the trust corpus under section 2519 (as 
well as 40 percent of the income interest under section 2511), no part 
of the trust is includible in S's gross estate under section 2044. 
However, if S retains until death an income interest in 60 percent of 
the trust corpus (which corpus is treated pursuant to section 2519 as 
having been transferred by S for both gift and estate tax purposes), 60 
percent of the property will be includible in S's gross estate under 
section 2036(a) and a corresponding adjustment is made in S's adjusted 
taxable gifts.
    Example 6. Inter vivos trust subject to election under section 
2523(f). D transferred $800,000 to a trust providing that trust income 
is to be paid annually to S, for S's life. The trust provides that upon 
S's death, $100,000 of principal is to be paid to X charity and the 
remaining principal distributed to D's children. D elected to treat all 
of the property transferred to the trust as qualified terminable 
interest property under section 2523(f). At the time of S's death, the 
fair market value of the trust is $1,000,000. S's executor does not 
elect the alternate valuation date. The amount included in S's gross 
estate is $1,000,000; i.e., the fair market value at S's death of the 
entire trust property. The $100,000 that passes to X charity on S's 
death is treated as a transfer by S to X charity for purposes of section 
2055. Therefore, S's estate is allowed a charitable deduction for the 
$100,000 transferred from the trust to the charity to the same extent 
that a deduction would be allowed by section 2055 for a bequest by S to 
X charity.
    Example 7. Spousal interest in the form of an annuity. D died prior 
to October 24, 1992, the effective date of the Energy Policy Act of 1992 
(Pub. L. 102-486). See Sec. 20.2056(b)-7(e). Under D's will, assets 
valued at $500,000 in D's gross estate (net of debts, expenses and other 
charges, including death taxes, payable from the property) passed in 
trust pursuant to which an annuity of $20,000 a year was payable to S 
for S's life. Trust income not paid to S as an annuity is to be 
accumulated in the trust and may not be distributed during S's lifetime. 
D's estate deducted $200,000 under section 2056(b)(7) and Sec. 
20.2056(b)-7(e)(2). S did not assign any portion of S's interest during 
S's life. At the time of S's death, the value of the trust property is 
$800,000. S's executor does not elect the alternate valuation date. The 
amount included in S's gross estate pursuant to section 2044 is $320,000 
([$200,000/$500,000]x$800,000).
    Example 8. Inclusion of trust property when surviving spouse dies 
before first decedent's estate tax return is filed. D dies on July 1, 
1997. Under the terms of D's will, a trust is established for the 
benefit of D's spouse, S. The will provides that S is entitled to 
receive the income from that portion of the trust that the executor 
elects to treat as qualified terminable interest property. The remaining 
portion of the trust passes as of D's date of death to a trust for the 
benefit of C, D's child. The trust terms otherwise provide S with a 
qualifying income interest for life under section 2056(b)(7)(B)(ii). S 
dies on February 10, 1998. On April 1, 1998, D's executor files D's 
estate tax return on which an election is made to treat a portion of the 
trust as qualified terminable interest property under section 
2056(b)(7). S's estate tax return is filed on November 10, 1998. The 
value on the date of S's death of the portion of the trust for which D's 
executor made a QTIP election is includible in S's gross estate under 
section 2044.

[T.D. 8522, 59 FR 9646, Mar. 1, 1994, as amended by T.D. 8779, 63 FR 
44393, Aug. 19, 1998]



Sec. 20.2044-2  Effective dates.

    Except as specifically provided in Example 7 of Sec. 20.2044-1(e), 
the provisions of Sec. 20.2044-1 are effective with respect to estates 
of a decedent-spouse dying after March 1, 1994. With respect to estates 
of decedent-spouses dying on or before such date, taxpayers may rely on 
any reasonable interpretation of the statutory provisions. For these 
purposes, the provisions of Sec. 20.2044-1 (as well as project LR-211-
76, 1984-1 C.B., page 598, see Sec. 601.601(d)(2)(ii)(b) of this 
chapter), are considered a reasonable interpretation of the statutory 
provisions.

[T.D. 8522, 59 FR 9647, Mar. 1, 1994]

[[Page 366]]



Sec. 20.2045-1  Applicability to pre-existing transfers or interests.

    Sections 2034 through 2042 are applicable regardless of when the 
interests and events referred to in those sections were created or took 
place, except as otherwise provided in those sections and the 
regulations thereunder.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960. 
Redesignated by T.D. 8522, 59 FR 9646, Mar. 1, 1994]



Sec. 20.2046-1  Disclaimed property.

    (a) This section shall apply to the disclaimer or renunciation of an 
interest in the person disclaiming by a transfer made after December 31, 
1976. For rules relating to when the transfer creating the interest 
occurs, see Sec. 25.2518-2(c)(3) and (c)(4) of this chapter. If a 
qualified disclaimer is made with respect to such a transfer, the 
Federal estate tax provisions are to apply with respect to the property 
interest disclaimed as if the interest had never been transferred to the 
person making the disclaimer. See section 2518 and the corresponding 
regulations for rules relating to a qualified disclaimer.
    (b) The first and second sentences of this section are applicable 
for transfers creating the interest to be disclaimed made on or after 
December 31, 1997.

[T.D. 8744, 62 FR 68184, Dec. 31, 1997]

              Actuarial Tables Applicable Before May 1, 2009



Sec. 20.2031-7A  Valuation of annuities, interests for life or term of
years, and remainder or reversionary interests for estates of decedents

for which the valuation date of the gross estate is before May 1, 2009.

    (a) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests for estates of decedents for which 
the valuation date of the gross estate is before January 1, 1952. Except 
as otherwise provided in Sec. 20.2031-7(b), if the valuation date of 
the decedent's gross estate is before January 1, 1952, the present value 
of annuities, life estates, terms for years, remainders, and reversions 
is their present value determined under this section. If the valuation 
of the interest involved is dependent upon the continuation or 
termination of one or more lives or upon a term certain concurrent with 
one or more lives, the factor for the present value is computed on the 
basis of interest at the rate of 4 percent a year, compounded annually, 
and life contingencies as to each life involved from values that are 
based on the Actuaries' or Combined Experience Table of Mortality, as 
extended. This table and related factors are described in former Sec. 
81.10 (as contained in the 26 CFR part 81 edition revised as of April 1, 
1958). The present value of an interest measured by a term of years is 
computed on the basis of interest at the rate of 4 percent a year.
    (b) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests for estates of decedents for which 
the valuation date of the gross estate is after December 31, 1951, and 
before January 1, 1971. Except as otherwise provided in Sec. 20.2031-
7(b), if the valuation date for the decedent's gross estate is after 
December 31, 1951, and before January 1, 1971, the present value of 
annuities, life estates, terms of years, remainders, and reversions is 
their present value determined under this section. If the valuation of 
the interest involved is dependent upon the continuation or termination 
of one or more lives, or upon a term certain concurrent with one or more 
lives, the factor for the present value is computed on the basis of 
interest at the rate of 3\1/2\ percent a year, compounded annually, and 
life contingencies as to each life involved are taken from U.S. Life 
Table 38. This table and related factors are set forth in former Sec. 
20.2031-7 (as contained in the 26 CFR part 20 edition revised as of 
April 1, 1984). Special factors involving one and two lives may be found 
in or computed with the use of tables contained in the publication 
entitled ``Actuarial Values for Estate and Gift Tax,'' Internal Revenue 
Service Publication Number 11 (Rev. 5-59). This publication is no longer 
available for purchase from the Superintendent of Documents. However, it 
may be obtained by requesting a copy from: CC:DOM:CORP:T:R (IRS 
Publication 11), room 5228, Internal Revenue Service, POB 7604, Ben 
Franklin Station, Washington, DC 20044. The present value of an interest 
measured by a term of years is computed on the basis

[[Page 367]]

of interest at the rate of 3\1/2\ percent a year.
    (c) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests for estates of decedents for which 
the valuation date of the gross estate is after December 31, 1970, and 
before December 1, 1983. Except as otherwise provided in Sec. 20.2031-
7(b), if the valuation date of the decedent's gross estate is after 
December 31, 1970, and before December 1, 1983, the present value of 
annuities, life estates, terms of years, remainders, and reversions is 
their present value determined under this section. If the valuation of 
the interest involved is dependent upon the continuation of or 
termination of one or more lives or upon a term certain concurrent with 
one or more lives, the factor for the present value is computed on the 
basis of interest at the rate of 6 percent a year, compounded annually, 
and life contingencies are determined as to each male and female life 
involved, from values that are set forth in Table LN. Table LN contains 
values that are taken from the life table for total males and the life 
table for total females appearing as Tables 2 and 3, respectively, in 
United States Life Tables: 1959- 1960, published by the Department of 
Health and Human Services, Public Health Service. Table LN and related 
factors are set forth in former Sec. 20.2031-10 (as contained in the 26 
CFR part 20 edition revised as of April 1, 1994). Special factors 
involving one and two lives may be found in or computed with the use of 
tables contained in Internal Revenue Service Publication 723, 
``Actuarial Values I: Valuation of Last Survivor Charitable 
Remainders,'' (12-70), and Internal Revenue Service Publication 723A, 
``Actuarial Values II: Factors at 6 Percent Involving One and Two 
Lives,'' (12-70). These publications are no longer available for 
purchase from the Superintendent of Documents. However, a copy of each 
may be obtained from: CC:DOM:CORP:T:R (IRS Publication 723/723A), room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044.
    (d) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests for estates of decedents for which 
the valuation date of the gross estate is after November 30, 1983, and 
before May 1, 1989--(1) In general. (i) Except as otherwise provided in 
Sec. 20.2031-7(b), if the decedent died after November 30, 1983, and 
the valuation date for the gross estate is before May 1, 1989, the fair 
market value of annuities, life estates, terms of years, remainders, and 
reversions is their present value determined under this section. If the 
decedent died after November 30, 1983, and before August 9, 1984, or, in 
cases where the valuation date of the decedent's gross estate is before 
May 1, 1989, if, on December 1, 1983, the decedent was mentally 
incompetent so that the disposition of the decedent's property could not 
be changed, and the decedent died on or after December 1, 1983, without 
having regained competency to dispose of the decedent's property, or if 
the decedent died within 90 days of the date on which the decedent first 
regained competency, the fair market value of annuities, life estates, 
terms for years, remainders, and reversions included in the gross estate 
of such decedent is their present value determined under either this 
section or Sec. 20.2031-7A(c), at the option of the taxpayer. The value 
of annuities issued by companies regularly engaged in their sale, and of 
insurance policies on the lives of persons other than the decedent, is 
determined under Sec. 20.2031-8. The fair market value of a remainder 
interest in a charitable remainder unitrust, as defined in Sec. 1.664-3 
of this chapter, is its present value determined under Sec. 1.664-4 of 
this chapter. The fair market value of a life interest or term for years 
in a charitable remainder unitrust is the fair market value of the 
property as of the date of valuation less the fair market value of the 
remainder interest on such date determined under Sec. 1.664-4 of this 
chapter. The fair market value of the interests in a pooled income fund, 
as defined in Sec. 1.642(c)-5 of this chapter, is their value 
determined under Sec. 1.642(c)-6 of this chapter.
    (ii) The present value of an annuity, life estate, remainder, or 
reversion determined under this section which is dependent on the 
continuation or termination of the life of one person is computed by the 
use of Table A in paragraph (d)(6) of this section. The

[[Page 368]]

present value of an annuity, term for years, remainder, or reversion 
dependent on a term certain is computed by the use of Table B in 
paragraph (d)(6) of this section. If the interest to be valued is 
dependent upon more than one life or there is a term certain concurrent 
with one or more lives, see paragraph (d)(5) of this section. For 
purposes of the computations described in this section, the age of a 
person is to be taken as the age of that person at his or her nearest 
birthday.
    (iii) In all examples set forth in this section, the decedent is 
assumed to have died on or after August 9, 1984, with the valuation date 
of the decedent's gross estate before May 1, 1989, and to have been 
competent to change the disposition of the property on December 1, 1983.
    (2) Annuities. (i) If an annuity is payable annually at the end of 
each year during the life of an individual (as for example if the first 
payment is due one year after the decedent's death), the amount payable 
annually is multiplied by the figure in column 2 of Table A opposite the 
number of years in coumn 1 nearest the age of the individual whose life 
measures the duration of the annuity. If the annuity is payable annually 
at the end of each of year for a definite number of years, the amount 
payable annually is multiplied by the figure in column 2 of Table B 
opposite the number of years in column 1 representing the duration of 
the annuity. The application of this paragraph (d)(2)(i) may be 
illustrated by the following examples:

    Example (1). The decedent received, under the terms of the 
decedent's father's will an annuity of $10,000 a year payable annually 
for the life of the decedent's elder brother. At the time the decedent 
died, an annual payment had just been made. The brother at the 
decedent's death was 40 years eight months old. By reference to Table A, 
the figure in column 2 opposite 41 years, the number nearest to the 
brother's actual age, is found to be 9.1030. The present value of the 
annuity at the date of the decedent's death is, therefore, $91,030 
($10,000x9.1030).
    Example (2). The decedent was entitled to receive an annuity of 
$10,000 a year payable annually throughout a term certain. At the time 
the decedent died, the annual payment had just been made and five more 
annual payments were still to be made. By reference to Table B, it is 
found that the figure in column 2 opposite five years is 3.7908. The 
present value of the annuity is, therefore, $37,908 ($10,000x3.7808).

    (ii) If an annuity is payable at the end of semiannual, quarterly, 
monthly, or weekly periods during the life of an individual (as for 
example if the first payment is due one month after the decedent's 
death), the aggregate amount to be paid within a year is first 
multiplied by the figure in column 2 of Table A opposite the number of 
years in column 1 nearest the age of the individual whose life measures 
the duration of the annuity. The product so obtained is then multiplied 
by whichever of the following factors is appropriate:

1.0244 for semiannual payments,
1.0368 for quarterly payments,
1.0450 for monthly payments,
1.0482 for weekly payments.


If the annuity is payable at the end of semiannual, quarterly, monthly, 
or weekly periods for a definite number of years, the aggregate amount 
to be paid within a year is first multiplied by the figure in column 2 
of Table B opposite the number of years in column 1 representing the 
duration of the annuity. The product so obtained is then multiplied by 
whichever of the above factors is appropriate. The application of this 
paragraph (d)(2)(ii) may be illustrated by the following example:

    Example. The facts are the same as those contained in example (1) 
set forth in paragraph (d)(2)(i) of this section, except that the 
annuity is payable semiannually. The aggregate annual amount, $10,000, 
is multiplied by the factor 9.1030 and the product multiplied by 1.0244. 
The present value of the annuity at the date of the decedent's death is, 
therefore, $93,251.13 ($10,000x9.1030x1.0244).

    (iii)(A) If the first payment of an annuity for the life of an 
individual is due at the beginning of the annual or other payment period 
rather than at the end (as for example if the first payment is to be 
made immediately after the decedent's death), the value of the annuity 
is the sum of (A) the first payment plus (B) the present value of a 
similar annuity, the first payment of which is not to be made until the 
end of the payment period, determined as provided in paragraphs 
(d)(2)(i) or (ii) of this section. the application of this paragraph

[[Page 369]]

(d)(2)(iii)(A) may be illustrated by the following example:

    Example. The decedent was entitled to receive an annuity of $50 a 
month during the life of another person. The decedent died on the date 
the payment was due. At the date of the decedent's death, the person 
whose life measures the duration of the annuity was 50 years of age. The 
value of the annuity at the date of the decedent's death is $50 plus the 
product of $50x12x8.4743 (see Table A)x1.0450 (See paragraph (d)(2)(ii) 
of this section). That is $50 plus $5,313.39, or $5,363.39.

    (B) If the first payment of an annuity for a definite number of 
years is due at the beginning of the annual or other payment period, the 
applicable factor is the product of the factor shown in Table B 
multiplied by whichever of the following factors is appropriate:

1.1000 for annual payments,
1.0744 for semiannual payments,
1.0618 for quarterly payments,
1.0534 for monthly payments,
1.0502 for weekly payments.


The application of this paragraph (d)(2)(iii)(B) may be illustrated by 
the following example:

    Example. The decedent was the beneficiary of an annuity of $50 a 
month. On the day a payment was due, the decedent died. There were 300 
payments to be made, including the payment due. The value of the annuity 
as of the date of decedent's death is the product of $50x12x9.0770 (see 
Table B)x1.0534, or $5,737.03.

    (3) Life estates and terms for years. If the interest to be valued 
is the right of a person for his or her life, or for the life of another 
person, to receive the income of certain property or to use nonincome-
producing property, the value of the interest is the value of the 
property multiplied by the figure in column 3 of Table A opposite the 
number of years nearest to the actual age of the measuring life. If the 
interest to be valued is the right to receive income of property or to 
use nonincome-producing property for a term of years, column 3 of Table 
B is used. The application of this paragraph (d)(3) may be illustrated 
by the following example:

    Example. The decedent or the decedent's estate was entitled to 
receive the income from a fund of $50,000 during the life of the 
decedent's elder brother. Upon the brother's death, the remainder is to 
go to B. The brother was 31 years, five months old at the time of 
decedent's death. By reference to Table A the figure in column 3 
opposite 31 years is found to be 0.95254. The present value of the 
decedent's interest is, therefore, $47,627 ($50,000x0.95254).

    (4) Remainders or reversionary interests. If a decedent had, at the 
time of the decedent's death, a remainder or a reversionary interest in 
property to take effect after an estate for the life of another, the 
present value of the decedent's interest is obtained by multiplying the 
value of the property by the figure in column 4 of Table A opposite the 
number of years nearest to the actual age of the person whose life 
measures the preceding estate. If the remainder or reversion is to take 
effect at the end of the term for years, column 4 of Table B is used. 
The application of this paragraph (d)(4) may be illustrated by the 
following example:

    Example. The decedent was entitled to receive certain property worth 
$50,000 upon the death of the decedent's elder sister, to whom the 
income was bequeathed for life. At the time of the decedent's death, the 
elder sister was 31 years five months old. By reference to Table A the 
figure in column 4 opposite 31 years is found to be .04746. The present 
value of the remainder interest at the date of the decedent's death is, 
therefore, $2,373 ($50,000x.04746).

    (5) Actuarial computations by the Internal Revenue Service. If the 
valuation of the interest involved is dependent upon the continuation or 
the termination of more than one life or upon a term certain concurrent 
with one or more lives a special factor must be used. The factor is to 
be computed on the basis of interest at the rate of 10 percent a year, 
compounded annually, and life contingencies determined, as to each 
person involved, from the values of lx that are set forth in column 2 of 
Table LN of paragraph (d)(6). Table LN contains values of lx taken from 
the life table for the total population appearing as Table 1 of United 
States Life Tables: 1969-71, published by the Department of Health and 
Human Services, Public Health Service. Many special factors involving 
one and two lives may be found in or computed with the use of the tables 
contained in Internal Revenue Service Publication 723E, ``Actuarial 
Values II: Factors at 10 Percent Involving One and Two Lives,'' (12-83). 
This publication is no longer

[[Page 370]]

available for purchase from the Superintendent of Documents. However, it 
may be obtained by requesting a copy from: CC:DOM:CORP:T:R (IRS 
Publication 723E), room 5228, Internal Revenue Service, POB 7604, Ben 
Franklin Station, Washington, DC 20044. However, if a special factor is 
required in the case of an actual decedent, the Commissioner will 
furnish the factor to the executor upon request. The request must be 
accompanied by a statement of the date of birth of each person, the 
duration of whose life may affect the value of the interest, and by 
copies of the relevant instruments. Special factors are not furnished 
for prospective transfers.
    (6) Tables. The following tables shall be used in the application of 
the provisions of this section:

   Table A--Single Life, Unisex, 10 Percent--Table Showing the Present
    Worth of an Annuity, of a Life Estate, and a Remainder Interest--
Applicable for Transfers After November 30, 1983, and Before May 1, 1989
------------------------------------------------------------------------
                                              (2)    (3) Life     (4)
                 (1) Age                    Annuity   estate   Remainder
------------------------------------------------------------------------
0........................................    9.7188    .97188     .02812
1........................................    9.8988    .98988     .01012
2........................................    9.9017    .99017     .00983
3........................................    9.9008    .99008     .00992
4........................................    9.8981    .98981     .01019
5........................................    9.8938    .98938     .01062
6........................................    9.8884    .98884     .01116
7........................................    9.8822    .98822     .01178
8........................................    9.8748    .98748     .01252
9........................................    9.8663    .98663     .01337
10.......................................    9.8565    .98565     .01435
11.......................................    9.8453    .98453     .01547
12.......................................    9.8329    .98329     .01671
13.......................................    9.8198    .98198     .01802
14.......................................    9.8066    .98066     .01934
15.......................................    9.7937    .97937     .02063
16.......................................    9.7815    .97815     .02185
17.......................................    9.7700    .97700     .02300
18.......................................    9.7590    .97590     .02410
19.......................................    9.7480    .97480     .02520
20.......................................    9.7365    .97365     .02635
21.......................................    9.7245    .97245     .02755
22.......................................    9.7120    .97120     .02880
23.......................................    9.6986    .96986     .03014
24.......................................    9.6841    .96841     .03159
25.......................................    9.6678    .96678     .03322
26.......................................    9.6495    .96495     .03505
27.......................................    9.6290    .96290     .03710
28.......................................    9.6062    .96062     .03938
29.......................................    9.5813    .95813     .04187
30.......................................    9.5543    .95543     .04457
31.......................................    9.5254    .95254     .04746
32.......................................    9.4942    .94942     .05058
33.......................................    9.4608    .94608     .05392
34.......................................    9.4250    .94250     .05750
35.......................................    9.3868    .93868     .06132
36.......................................    9.3460    .93460     .06540
37.......................................    9.3026    .93026     .06974
38.......................................    9.2567    .92567     .07433
39.......................................    9.2083    .92083     .07917
40.......................................    9.1571    .91571     .08429
41.......................................    9.1030    .91030     .08970
42.......................................    9.0457    .90457     .09543
43.......................................    8.9855    .89855     .10145
44.......................................    8.9221    .89221     .10779
45.......................................    8.8558    .88558     .11442
46.......................................    8.7863    .87863     .12137
47.......................................    8.7137    .87137     .12863
48.......................................    8.6374    .86374     .13626
49.......................................    8.5578    .85578     .14422
50.......................................    8.4743    .84743     .15257
51.......................................    8.3874    .83874     .16126
52.......................................    8.2969    .82969     .17031
53.......................................    8.2028    .82028     .17972
54.......................................    8.1054    .81054     .18946
55.......................................    8.0046    .80046     .19954
56.......................................    7.9006    .79006     .20994
57.......................................    7.7931    .77931     .22069
58.......................................    7.6822    .76822     .23178
59.......................................    7.5675    .75675     .24325
60.......................................    7.4491    .74491     .25509
61.......................................    7.3267    .73267     .26733
62.......................................    7.2002    .72002     .27998
63.......................................    7.0696    .70696     .29304
64.......................................    6.9352    .69352     .30648
65.......................................    6.7970    .67970     .32030
66.......................................    6.6551    .66551     .33449
67.......................................    6.5098    .65098     .34902
68.......................................    6.3610    .63610     .36390
69.......................................    6.2086    .62086     .37914
70.......................................    6.0522    .60522     .39478
71.......................................    5.8914    .58914     .41086
72.......................................    5.7261    .57261     .42739
73.......................................    5.5571    .55571     .44429
74.......................................    5.3862    .53862     .46138
75.......................................    5.2149    .52149     .47851
76.......................................    5.0441    .50441     .49559
77.......................................    4.8742    .48742     .51258
78.......................................    4.7049    .47049     .52951
79.......................................    4.5357    .45357     .54643
80.......................................    4.3659    .43659     .56341
81.......................................    4.1967    .41967     .58033
82.......................................    4.0295    .40295     .59705
83.......................................    3.8642    .38642     .61358
84.......................................    3.6998    .36998     .63002
85.......................................    3.5359    .35359     .64641
86.......................................    3.3764    .33764     .66236
87.......................................    3.2262    .32262     .67738
88.......................................    3.0859    .30859     .69141
89.......................................    2.9526    .29526     .70474
90.......................................    2.8221    .28221     .71779
91.......................................    2.6955    .26955     .73045
92.......................................    2.5771    .25771     .74229
93.......................................    2.4692    .24692     .75308
94.......................................    2.3728    .23728     .76272
95.......................................    2.2887    .22887     .77113
96.......................................    2.2181    .22181     .77819
97.......................................    2.1550    .21550     .78450
98.......................................    2.1000    .21000     .79000
99.......................................    2.0486    .20486     .79514
100......................................    1.9975    .19975     .80025
101......................................    1.9532    .19532     .80468
102......................................    1.9054    .19054     .80946

[[Page 371]]

 
103......................................    1.8437    .18437     .81563
104......................................    1.7856    .17856     .82144
105......................................    1.6962    .16962     .83038
106......................................    1.5488    .15488     .84512
107......................................    1.3409    .13409     .86591
108......................................    1.0068    .10068     .89932
109......................................     .4545    .04545     .95455
------------------------------------------------------------------------


  Table B--Term Certain, Unisex, 10 Percent--Table Showing the Present
Worth of an Annuity for a Term Certain, of an Income Interest for a Term
   Certain, and of a Remainder Interest Postponed for a Term Certain--
Applicable for Transfers After November 30, 1983, and before May 1, 1989
------------------------------------------------------------------------
                                              (2)    (3) Term     (4)
           (1) Number of years              Annuity   certain  Remainder
------------------------------------------------------------------------
1........................................     .9091   .090909    .909091
2........................................    1.7355   .173554    .826446
3........................................    2.4869   .248685    .751315
4........................................    3.1699   .316987    .683013
5........................................    3.7908   .379079    .620921
6........................................    4.3553   .435526    .564474
7........................................    4.8684   .486842    .513158
8........................................    5.3349   .533493    .466507
9........................................    5.7590   .575902    .424098
10.......................................    6.1446   .614457    .385543
11.......................................    6.4951   .649506    .350494
12.......................................    6.8137   .681369    .318631
13.......................................    7.1034   .710336    .289664
14.......................................    7.3667   .736669    .263331
15.......................................    7.6061   .760608    .239392
16.......................................    7.8237   .782371    .217629
17.......................................    8.0216   .802155    .197845
18.......................................    8.2014   .820141    .179859
19.......................................    8.3649   .836492    .163508
20.......................................    8.5136   .851356    .148644
21.......................................    8.6487   .864869    .135131
22.......................................    8.7715   .877154    .122846
23.......................................    8.8832   .888322    .111678
24.......................................    8.9847   .898474    .101526
25.......................................    9.0770   .907704    .092296
26.......................................    9.1609   .916095    .083905
27.......................................    9.2372   .923722    .076278
28.......................................    9.3066   .930657    .069343
29.......................................    9.3696   .936961    .063039
30.......................................    9.4269   .942691    .057309
31.......................................    9.4790   .947901    .052099
32.......................................    9.5264   .952638    .047362
33.......................................    9.5694   .956943    .043057
34.......................................    9.6086   .960857    .039143
35.......................................    9.6442   .964416    .035584
36.......................................    9.6765   .967651    .032349
37.......................................    9.7059   .970592    .029408
38.......................................    9.7327   .973265    .026735
39.......................................    9.7570   .975696    .024304
40.......................................    9.7791   .977905    .022095
41.......................................    9.7991   .979914    .020086
42.......................................    9.8174   .981740    .018260
43.......................................    9.8340   .983400    .016600
44.......................................    9.8491   .984909    .015091
45.......................................    9.8628   .986281    .013719
46.......................................    9.8753   .987528    .012472
47.......................................    9.8866   .988662    .011338
48.......................................    9.8969   .989693    .010307
49.......................................    9.9063   .990630    .009370
50.......................................    9.9140   .991481    .008519
51.......................................    9.9226   .992256    .007744
52.......................................    9.9296   .992960    .007040
53.......................................    9.9360   .993600    .006400
54.......................................    9.9418   .994182    .005818
55.......................................    9.9471   .994711    .005289
56.......................................    9.9519   .995191    .004809
57.......................................    9.9563   .995629    .004371
58.......................................    9.9603   .996026    .003974
59.......................................    9.9639   .996387    .003613
60.......................................    9.9672   .996716    .003284
------------------------------------------------------------------------


 Table LN--Applicable for Transfers After November 30, 1983, and Before
                               May 1, 1989
------------------------------------------------------------------------
                           (1) Age X                             (2) lx
------------------------------------------------------------------------
0.............................................................   100,000
1.............................................................    97,998
2.............................................................    97,876
3.............................................................    97,792
4.............................................................    97,724
5.............................................................    97,668
6.............................................................    97,619
7.............................................................    97,573
8.............................................................    97,531
9.............................................................    97,494
10............................................................    97,460
11............................................................    97,430
12............................................................    97,401
13............................................................    97,367
14............................................................    97,322
15............................................................    97,261
16............................................................    97,181
17............................................................    97,083
18............................................................    96,970
19............................................................    96,846
20............................................................    96,716
21............................................................    96,580
22............................................................    96,438
23............................................................    96,292
24............................................................    96,145
25............................................................    96,000
26............................................................    95,859
27............................................................    95,721
28............................................................    95,586
29............................................................    95,448
30............................................................    95,307
31............................................................    95,158
32............................................................    95,003
33............................................................    94,840
34............................................................    94,666
35............................................................    94,482

[[Page 372]]

 
36............................................................    94,285
37............................................................    94,073
38............................................................    93,843
39............................................................    93,593
40............................................................    93,322
41............................................................    93,028
42............................................................    92,712
43............................................................    92,368
44............................................................    91,995
45............................................................    91,587
46............................................................    91,144
47............................................................    90,662
48............................................................    90,142
49............................................................    89,579
50............................................................    88,972
51............................................................    88,315
52............................................................    87,605
53............................................................    86,838
54............................................................    86,007
55............................................................    85,110
56............................................................    84,142
57............................................................    83,103
58............................................................    81,988
59............................................................    80,798
60............................................................    79,529
61............................................................    78,181
62............................................................    76,751
63............................................................    75,236
64............................................................    73,631
65............................................................    71,933
66............................................................    70,139
67............................................................    68,246
68............................................................    66,254
69............................................................    64,166
70............................................................    61,984
71............................................................    59,715
72............................................................    57,360
73............................................................    54,913
74............................................................    52,363
75............................................................    49,705
76............................................................    46,946
77............................................................    44,101
78............................................................    41,192
79............................................................    38,245
80............................................................    35,285
81............................................................    32,323
82............................................................    29,375
83............................................................    26,469
84............................................................    23,638
85............................................................    20,908
86............................................................    18,282
87............................................................    15,769
88............................................................    13,407
89............................................................    11,240
90............................................................     9,297
91............................................................     7,577
92............................................................     6,070
93............................................................     4,773
94............................................................     3,682
95............................................................     2,786
96............................................................     2,068
97............................................................     1,511
98............................................................     1,087
99............................................................       772
100...........................................................       542
101...........................................................       375
102...........................................................       257
103...........................................................       175
104...........................................................       117
105...........................................................        78
106...........................................................        52
107...........................................................        34
108...........................................................        22
109...........................................................        14
110...........................................................         0
------------------------------------------------------------------------

    (e) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests for estates of decedents for which 
the valuation date of the gross estate is after April 30, 1989, and 
before May 1, 1999--(1) In general. Except as otherwise provided in 
Sec. 20.2031-7(b) and Sec. 20.7520-3(b) (pertaining to certain 
limitations on the use of prescribed tables), if the valuation date for 
the gross estate of the decedent is after April 30, 1989, and before May 
1, 1999, the fair market value of annuities, life estates, terms of 
years, remainders, and reversionary interests is the present value of 
the interests determined by use of standard or special section 7520 
actuarial factors and the valuation methodology described in Sec. 
20.2031-7(d). These factors are derived by using the appropriate section 
7520 interest rate and, if applicable, the mortality component for the 
valuation date of the interest that is being valued. See Sec. Sec. 
20.7520-1 through 20.7520-4. See paragraph (e)(4) of this section for 
determination of the appropriate table for use in valuing these 
interests.
    (2) Transitional rule. (i) If the valuation date is after April 30, 
1989, and before June 10, 1994, a taxpayer can rely on Notice 89-24 
(1989-1 C.B. 660), or Notice 89-60 (1989-1 C.B. 700). See Sec. 
601.601(d)(2)(ii)(b) of this chapter.
    (ii) If a decedent dies after April 30, 1989, and if on May 1, 1989, 
the decedent was mentally incompetent so that the disposition of the 
decedent's property could not be changed, and the decedent dies without 
having regained competency to dispose of the decedent's property or dies 
within 90 days of the date on which the decedent first regains 
competency, the fair market value of annuities, life estates, terms for 
years, remainders, and reversions included in the gross estate of the 
decedent is their present value determined either under this section or 
under the

[[Page 373]]

corresponding section applicable at the time the decedent became 
mentally incompetent, at the option of the decedent's executor. For 
example, see paragraph (d) of this section.
    (3) Publications and actuarial computations by the Internal Revenue 
Service. Many standard actuarial factors not included in paragraph 
(e)(4) of this section or in Sec. 20.2031-7(d)(6) are included in 
Internal Revenue Service Publication 1457, ``Actuarial Values, Alpha 
Volume,'' (8-89). Publication 1457 also includes examples that 
illustrate how to compute many special factors for more unusual 
situations. Publication 1457 is no longer available for purchase from 
the Superintendent of Documents, United States Government Printing 
Office, Washington, DC 20402. However, pertinent factors in this 
publication may be obtained from: CC:DOM:CORP:R (IRS Publication 1457), 
room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. If a special factor is required in the case of an 
actual decedent, the Internal Revenue Service may furnish the factor to 
the executor upon a request for a ruling. The request for a ruling must 
be accompanied by a recitation of the facts including a statement of the 
date of birth for each measuring life, the date of the decedent's death, 
any other applicable dates, and a copy of the will, trust, or other 
relevant documents. A request for a ruling must comply with the 
instructions for requesting a ruling published periodically in the 
Internal Revenue Bulletin (see Sec. Sec. 601.201 and 
601.601(d)(2)(ii)(b) of this chapter) and include payment of the 
required user fee.
    (4) Actuarial tables. Except as provided in Sec. 20.7520-3(b) 
(pertaining to certain limitations on the use of prescribed tables), 
Life Table 80CNSMT and Table S (Single life remainder factors applicable 
where the valuation date is after April 30, 1989, and before May 1, 
1999), contained in this paragraph (e)(4), and Table B, Table J, and 
Table K set forth in Sec. 20.2031-7(d)(6) must be used in the 
application of the provisions of this section when the section 7520 
interest rate component is between 4.2 and 14 percent. Table S and Table 
80CNSMT are as follows:

                                           Table S--Based on Life Table 80CNSMT Single Life Remainder Factors
                                                [Applicable After April 30, 1989, and Before May 1, 1999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                         Age                         ---------------------------------------------------------------------------------------------------
                                                        4.2%      4.4%      4.6%      4.8%      5.0%      5.2%      5.4%      5.6%      5.8%      6.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0...................................................    .07389    .06749    .06188    .05695    .05261    .04879    .04541    .04243    .03978    .03744
1...................................................    .06494    .05832    .05250    .04738    .04287    .03889    .03537    .03226    .02950    .02705
2...................................................    .06678    .05999    .05401    .04874    .04410    .03999    .03636    .03314    .03028    .02773
3...................................................    .06897    .06200    .05587    .05045    .04567    .04143    .03768    .03435    .03139    .02875
4...................................................    .07139    .06425    .05796    .05239    .04746    .04310    .03922    .03578    .03271    .02998
5...................................................    .07401    .06669    .06023    .05451    .04944    .04494    .04094    .03738    .03421    .03137
6...................................................    .07677    .06928    .06265    .05677    .05156    .04692    .04279    .03911    .03583    .03289
7...................................................    .07968    .07201    .06521    .05918    .05381    .04903    .04477    .04097    .03757    .03453
8...................................................    .08274    .07489    .06792    .06172    .05621    .05129    .04689    .04297    .03945    .03630
9...................................................    .08597    .07794    .07079    .06443    .05876    .05370    .04917    .04511    .04148    .03821
10..................................................    .08936    .08115    .07383    .06730    .06147    .05626    .05159    .04741    .04365    .04027
11..................................................    .09293    .08453    .07704    .07035    .06436    .05900    .05419    .04988    .04599    .04250
12..................................................    .09666    .08807    .08040    .07354    .06739    .06188    .05693    .05248    .04847    .04486
13..................................................    .10049    .09172    .08387    .07684    .07053    .06487    .05977    .05518    .05104    .04731
14..................................................    .10437    .09541    .08738    .08017    .07370    .06788    .06263    .05791    .05364    .04978
15..................................................    .10827    .09912    .09090    .08352    .07688    .07090    .06551    .06064    .05623    .05225
16..................................................    .11220    .10285    .09445    .08689    .08008    .07394    .06839    .06337    .05883    .05472
17..................................................    .11615    .10661    .09802    .09028    .08330    .07699    .07129    .06612    .06144    .05719
18..................................................    .12017    .11043    .10165    .09373    .08656    .08009    .07422    .06890    .06408    .05969
19..................................................    .12428    .11434    .10537    .09726    .08992    .08327    .07724    .07177    .06679    .06226
20..................................................    .12850    .11836    .10919    .10089    .09337    .08654    .08035    .07471    .06959    .06492
21..................................................    .13282    .12248    .11311    .10462    .09692    .08991    .08355    .07775    .07247    .06765
22..................................................    .13728    .12673    .11717    .10848    .10059    .09341    .08686    .08090    .07546    .07049
23..................................................    .14188    .13113    .12136    .11248    .10440    .09703    .09032    .08418    .07858    .07345
24..................................................    .14667    .13572    .12575    .11667    .10839    .10084    .09395    .08764    .08187    .07659
25..................................................    .15167    .14051    .13034    .12106    .11259    .10486    .09778    .09130    .08536    .07991
26..................................................    .15690    .14554    .13517    .12569    .11703    .10910    .10184    .09518    .08907    .08346
27..................................................    .16237    .15081    .14024    .13056    .12171    .11359    .10614    .09930    .09302    .08724
28..................................................    .16808    .15632    .14555    .13567    .12662    .11831    .11068    .10366    .09720    .09125
29..................................................    .17404    .16208    .15110    .14104    .13179    .12329    .11547    .10827    .10163    .09551

[[Page 374]]

 
30..................................................    .18025    .16808    .15692    .14665    .13721    .12852    .12051    .11313    .10631    .10002
31..................................................    .18672    .17436    .16300    .15255    .14291    .13403    .12584    .11827    .11127    .10480
32..................................................    .19344    .18090    .16935    .15870    .14888    .13980    .13142    .12367    .11650    .10985
33..................................................    .20044    .18772    .17598    .16514    .15513    .14587    .13730    .12936    .12201    .11519
34..................................................    .20770    .19480    .18287    .17185    .16165    .15221    .14345    .13533    .12780    .12080
35..................................................    .21522    .20215    .19005    .17884    .16846    .15883    .14989    .14159    .13388    .12670
36..................................................    .22299    .20974    .19747    .18609    .17552    .16571    .15660    .14812    .14022    .13287
37..................................................    .23101    .21760    .20516    .19360    .18286    .17288    .16358    .15492    .14685    .13933
38..................................................    .23928    .22572    .21311    .20139    .19048    .18032    .17085    .16201    .15377    .14607
39..................................................    .24780    .23409    .22133    .20945    .19837    .18804    .17840    .16939    .16097    .15310
40..................................................    .25658    .24273    .22982    .21778    .20654    .19605    .18624    .17706    .16847    .16043
41..................................................    .26560    .25163    .23858    .22639    .21499    .20434    .19436    .18502    .17627    .16806
42..................................................    .27486    .26076    .24758    .23525    .22370    .21289    .20276    .19326    .18434    .17597
43..................................................    .28435    .27013    .25683    .24436    .23268    .22172    .21143    .20177    .19270    .18416
44..................................................    .29407    .27975    .26633    .25373    .24191    .23081    .22038    .21057    .20134    .19265
45..................................................    .30402    .28961    .27608    .26337    .25142    .24019    .22962    .21966    .21028    .20144
46..................................................    .31420    .29970    .28608    .27326    .26120    .24983    .23913    .22904    .21951    .21053
47..................................................    .32460    .31004    .29632    .28341    .27123    .25975    .24892    .23870    .22904    .21991
48..................................................    .33521    .32058    .30679    .29379    .28151    .26992    .25897    .24862    .23883    .22957
49..................................................    .34599    .33132    .31746    .30438    .29201    .28032    .26926    .25879    .24888    .23949
50..................................................    .35695    .34224    .32833    .31518    .30273    .29094    .27978    .26921    .25918    .24966
51..................................................    .36809    .35335    .33940    .32619    .31367    .30180    .29055    .27987    .26973    .26010
52..................................................    .37944    .36468    .35070    .33744    .32486    .31292    .30158    .29081    .28057    .27083
53..................................................    .39098    .37622    .36222    .34892    .33629    .32429    .31288    .30203    .29170    .28186
54..................................................    .40269    .38794    .37393    .36062    .34795    .33590    .32442    .31349    .30308    .29316
55..................................................    .41457    .39985    .38585    .37252    .35983    .34774    .33621    .32522    .31474    .30473
56..................................................    .42662    .41194    .39796    .38464    .37193    .35981    .34824    .33720    .32666    .31658
57..................................................    .43884    .42422    .41028    .39697    .38426    .37213    .36053    .34945    .33885    .32872
58..................................................    .45123    .43668    .42279    .40951    .39682    .38468    .37307    .36196    .35132    .34114
59..................................................    .46377    .44931    .43547    .42224    .40958    .39745    .38584    .37471    .36405    .35383
60..................................................    .47643    .46206    .44830    .43513    .42250    .41040    .39880    .38767    .37699    .36674
61..................................................    .48916    .47491    .46124    .44814    .43556    .42350    .41192    .40080    .39012    .37985
62..................................................    .50196    .48783    .47427    .46124    .44874    .43672    .42518    .41408    .40340    .39314
63..................................................    .51480    .50081    .48736    .47444    .46201    .45006    .43856    .42749    .41684    .40658
64..................................................    .52770    .51386    .50054    .48773    .47540    .46352    .45208    .44105    .43043    .42019
65..................................................    .54069    .52701    .51384    .50115    .48892    .47713    .46577    .45480    .44422    .43401
66..................................................    .55378    .54029    .52727    .51472    .50262    .49093    .47965    .46876    .45824    .44808
67..................................................    .56697    .55368    .54084    .52845    .51648    .50491    .49373    .48293    .47248    .46238
68..................................................    .58026    .56717    .55453    .54231    .53049    .51905    .50800    .49729    .48694    .47691
69..................................................    .59358    .58072    .56828    .55624    .54459    .53330    .52238    .51179    .50154    .49160
70..................................................    .60689    .59427    .58205    .57021    .55874    .54762    .53683    .52638    .51624    .50641
71..................................................    .62014    .60778    .59578    .58415    .57287    .56193    .55131    .54100    .53099    .52126
72..................................................    .63334    .62123    .60948    .59808    .58700    .57624    .56579    .55563    .54577    .53617
73..................................................    .64648    .63465    .62315    .61198    .60112    .59056    .58029    .57030    .56059    .55113
74..................................................    .65961    .64806    .63682    .62590    .61527    .60492    .59485    .58504    .57550    .56620
75..................................................    .67274    .66149    .65054    .63987    .62948    .61936    .60950    .59990    .59053    .58140
76..................................................    .68589    .67495    .66429    .65390    .64377    .63390    .62427    .61487    .60570    .59676
77..................................................    .69903    .68841    .67806    .66796    .65811    .64849    .63910    .62993    .62097    .61223
78..................................................    .71209    .70182    .69179    .68199    .67242    .66307    .65393    .64501    .63628    .62775
79..................................................    .72500    .71507    .70537    .69588    .68660    .67754    .66867    .65999    .65151    .64321
80..................................................    .73768    .72809    .71872    .70955    .70058    .69180    .68320    .67479    .66655    .65849
81..................................................    .75001    .74077    .73173    .72288    .71422    .70573    .69741    .68926    .68128    .67345
82..................................................    .76195    .75306    .74435    .73582    .72746    .71926    .71123    .70335    .69562    .68804
83..................................................    .77346    .76491    .75654    .74832    .74026    .73236    .72460    .71699    .70952    .70219
84..................................................    .78456    .77636    .76831    .76041    .75265    .74503    .73756    .73021    .72300    .71592
85..................................................    .79530    .78743    .77971    .77212    .76466    .75733    .75014    .74306    .73611    .72928
86..................................................    .80560    .79806    .79065    .78337    .77621    .76917    .76225    .75544    .74875    .74216
87..................................................    .81535    .80813    .80103    .79404    .78717    .78041    .77375    .76720    .76076    .75442
88..................................................    .82462    .81771    .81090    .80420    .79760    .79111    .78472    .77842    .77223    .76612
89..................................................    .83356    .82694    .82043    .81401    .80769    .80147    .79533    .78929    .78334    .77747
90..................................................    .84225    .83593    .82971    .82357    .81753    .81157    .80570    .79991    .79420    .78857
91..................................................    .85058    .84455    .83861    .83276    .82698    .82129    .81567    .81013    .80466    .79927
92..................................................    .85838    .85263    .84696    .84137    .83585    .83040    .82503    .81973    .81449    .80933
93..................................................    .86557    .86009    .85467    .84932    .84405    .83884    .83370    .82862    .82360    .81865
94..................................................    .87212    .86687    .86169    .85657    .85152    .84653    .84160    .83673    .83192    .82717
95..................................................    .87801    .87298    .86801    .86310    .85825    .85345    .84872    .84404    .83941    .83484
96..................................................    .88322    .87838    .87360    .86888    .86420    .85959    .85502    .85051    .84605    .84165
97..................................................    .88795    .88328    .87867    .87411    .86961    .86515    .86074    .85639    .85208    .84782
98..................................................    .89220    .88769    .88323    .87883    .87447    .87016    .86589    .86167    .85750    .85337

[[Page 375]]

 
99..................................................    .89612    .89176    .88745    .88318    .87895    .87478    .87064    .86656    .86251    .85850
100.................................................    .89977    .89555    .89136    .88722    .88313    .87908    .87506    .87109    .86716    .86327
101.................................................    .90326    .89917    .89511    .89110    .88712    .88318    .87929    .87543    .87161    .86783
102.................................................    .90690    .90294    .89901    .89513    .89128    .88746    .88369    .87995    .87624    .87257
103.................................................    .91076    .90694    .90315    .89940    .89569    .89200    .88835    .88474    .88116    .87760
104.................................................    .91504    .91138    .90775    .90415    .90058    .89704    .89354    .89006    .88661    .88319
105.................................................    .92027    .91681    .91337    .90996    .90658    .90322    .89989    .89659    .89331    .89006
106.................................................    .92763    .92445    .92130    .91816    .91506    .91197    .90890    .90586    .90284    .89983
107.................................................    .93799    .93523    .93249    .92977    .92707    .92438    .92170    .91905    .91641    .91378
108.................................................    .95429    .95223    .95018    .94814    .94611    .94409    .94208    .94008    .93809    .93611
109.................................................    .97985    .97893    .97801    .97710    .97619    .97529    .97438    .97348    .97259    .97170
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                           Table S--Based on Life Table 80CNSMT Single Life Remainder Factors
                                                [Applicable After April 30, 1989, and Before May 1, 1999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                         Age                         ---------------------------------------------------------------------------------------------------
                                                        6.2%      6.4%      6.6%      6.8%      7.0%      7.2%      7.4%      7.6%      7.8%      8.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0...................................................    .03535    .03349    .03183    .03035    .02902    .02783    .02676    .02579    .02492    .02413
1...................................................    .02486    .02292    .02119    .01963    .01824    .01699    .01587    .01486    .01395    .01312
2...................................................    .02547    .02345    .02164    .02002    .01857    .01727    .01609    .01504    .01408    .01321
3...................................................    .02640    .02429    .02241    .02073    .01921    .01785    .01662    .01552    .01451    .01361
4...................................................    .02753    .02535    .02339    .02163    .02005    .01863    .01735    .01619    .01514    .01418
5...................................................    .02883    .02656    .02453    .02269    .02105    .01956    .01822    .01700    .01590    .01490
6...................................................    .03026    .02790    .02578    .02387    .02215    .02060    .01919    .01792    .01677    .01572
7...................................................    .03180    .02935    .02714    .02515    .02336    .02174    .02027    .01894    .01773    .01664
8...................................................    .03347    .03092    .02863    .02656    .02469    .02300    .02146    .02007    .01881    .01766
9...................................................    .03528    .03263    .03025    .02810    .02615    .02438    .02278    .02133    .02000    .01880
10..................................................    .03723    .03449    .03201    .02977    .02774    .02590    .02423    .02271    .02133    .02006
11..................................................    .03935    .03650    .03393    .03160    .02949    .02757    .02583    .02424    .02279    .02147
12..................................................    .04160    .03865    .03598    .03356    .03136    .02936    .02755    .02589    .02438    .02299
13..................................................    .04394    .04088    .03811    .03560    .03331    .03123    .02934    .02761    .02603    .02458
14..................................................    .04629    .04312    .04025    .03764    .03527    .03311    .03113    .02933    .02768    .02617
15..................................................    .04864    .04536    .04238    .03968    .03721    .03496    .03290    .03103    .02930    .02773
16..................................................    .05099    .04759    .04451    .04170    .03913    .03679    .03466    .03270    .03090    .02926
17..................................................    .05333    .04982    .04662    .04370    .04104    .03861    .03638    .03434    .03247    .03075
18..................................................    .05570    .05207    .04875    .04573    .04296    .04044    .03812    .03599    .03404    .03225
19..................................................    .05814    .05438    .05095    .04781    .04494    .04231    .03990    .03769    .03565    .03378
20..................................................    .06065    .05677    .05321    .04996    .04698    .04424    .04173    .03943    .03731    .03535
21..................................................    .06325    .05922    .05554    .05217    .04907    .04623    .04362    .04122    .03901    .03697
22..................................................    .06594    .06178    .05797    .05447    .05126    .04831    .04559    .04309    .04078    .03865
23..................................................    .06876    .06446    .06051    .05688    .05355    .05048    .04766    .04505    .04265    .04042
24..................................................    .07174    .06729    .06321    .05945    .05599    .05281    .04987    .04715    .04465    .04233
25..................................................    .07491    .07031    .06609    .06219    .05861    .05530    .05224    .04941    .04680    .04438
26..................................................    .07830    .07355    .06918    .06515    .06142    .05799    .05481    .05187    .04915    .04662
27..................................................    .08192    .07702    .07250    .06832    .06446    .06090    .05759    .05454    .05170    .04906
28..................................................    .08577    .08071    .07603    .07171    .06772    .06402    .06059    .05740    .05445    .05170
29..................................................    .08986    .08464    .07981    .07534    .07120    .06736    .06380    .06049    .05742    .05456
30..................................................    .09420    .08882    .08383    .07921    .07492    .07095    .06725    .06381    .06061    .05763
31..................................................    .09881    .09327    .08812    .08335    .07891    .07479    .07095    .06738    .06405    .06095
32..................................................    .10369    .09797    .09267    .08774    .08315    .07888    .07491    .07120    .06774    .06451
33..................................................    .10885    .10297    .09750    .09241    .08767    .08325    .07913    .07529    .07170    .06834
34..................................................    .11430    .10824    .10261    .09736    .09246    .08790    .08363    .07964    .07592    .07243
35..................................................    .12002    .11380    .10800    .10259    .09754    .09282    .08841    .08428    .08041    .07679
36..................................................    .12602    .11963    .11366    .10809    .10288    .09800    .09344    .08917    .08516    .08140
37..................................................    .13230    .12574    .11961    .11387    .10850    .10347    .09876    .09433    .09018    .08628
38..................................................    .13887    .13214    .12584    .11994    .11441    .10922    .10436    .09978    .09549    .09145
39..................................................    .14573    .13883    .13237    .12630    .12061    .11527    .11025    .10553    .10109    .09690
40..................................................    .15290    .14583    .13920    .13297    .12712    .12162    .11644    .11157    .10698    .10266
41..................................................    .16036    .15312    .14633    .13994    .13393    .12827    .12294    .11792    .11318    .10871
42..................................................    .16810    .16071    .15375    .14720    .14103    .13522    .12973    .12456    .11967    .11505
43..................................................    .17614    .16858    .16146    .15475    .14842    .14245    .13682    .13149    .12645    .12169
44..................................................    .18447    .17675    .16948    .16261    .15613    .15000    .14421    .13873    .13355    .12864
45..................................................    .19310    .18524    .17780    .17078    .16414    .15787    .15192    .14630    .14096    .13591
46..................................................    .20204    .19402    .18644    .17926    .17247    .16604    .15995    .15418    .14870    .14350
47..................................................    .21128    .20311    .19538    .18806    .18112    .17454    .16830    .16238    .15676    .15141
48..................................................    .22080    .21249    .20462    .19716    .19007    .18335    .17696    .17090    .16513    .15964

[[Page 376]]

 
49..................................................    .23059    .22214    .21413    .20653    .19930    .19244    .18591    .17970    .17379    .16816
50..................................................    .24063    .23206    .22391    .21617    .20881    .20180    .19514    .18879    .18274    .17697
51..................................................    .25095    .24225    .23398    .22610    .21861    .21147    .20466    .19818    .19199    .18609
52..................................................    .26157    .25275    .24436    .23636    .22874    .22147    .21453    .20791    .20159    .19556
53..................................................    .27249    .26357    .25505    .24694    .23919    .23180    .22474    .21799    .21154    .20537
54..................................................    .28369    .27466    .26604    .25782    .24995    .24244    .23526    .22839    .22181    .21552
55..................................................    .29518    .28605    .27734    .26900    .26103    .25341    .24611    .23912    .23243    .22601
56..................................................    .30695    .29774    .28893    .28050    .27242    .26469    .25728    .25019    .24338    .23685
57..................................................    .31902    .30973    .30084    .29232    .28415    .27632    .26881    .26161    .25469    .24805
58..................................................    .33138    .32203    .31306    .30446    .29621    .28829    .28069    .27339    .26637    .25962
59..................................................    .34402    .33461    .32558    .31691    .30859    .30059    .29290    .28550    .27839    .27155
60..................................................    .35690    .34745    .33836    .32963    .32124    .31317    .30540    .29792    .29073    .28379
61..................................................    .36999    .36050    .35137    .34259    .33414    .32601    .31817    .31062    .30334    .29633
62..................................................    .38325    .37374    .36458    .35576    .34726    .33907    .33117    .32356    .31621    .30912
63..................................................    .39669    .38717    .37799    .36913    .36060    .35236    .34441    .33674    .32933    .32217
64..................................................    .41031    .40078    .39159    .38272    .37415    .36588    .35789    .35016    .34270    .33548
65..................................................    .42416    .41464    .40545    .39656    .38798    .37968    .37166    .36390    .35639    .34912
66..................................................    .43825    .42876    .41958    .41070    .40211    .39380    .38576    .37797    .37043    .36312
67..................................................    .45260    .44315    .43399    .42513    .41655    .40824    .40019    .39238    .38482    .37749
68..................................................    .46720    .45779    .44868    .43985    .43129    .42299    .41494    .40713    .39956    .39221
69..................................................    .48197    .47263    .46357    .45478    .44625    .43798    .42995    .42215    .41458    .40722
70..................................................    .49686    .48760    .47861    .46988    .46140    .45316    .44516    .43738    .42983    .42248
71..................................................    .51182    .50265    .49374    .48508    .47666    .46847    .46051    .45276    .44523    .43790
72..................................................    .52685    .51778    .50896    .50038    .49203    .48390    .47599    .46829    .46079    .45349
73..................................................    .54194    .53298    .52426    .51578    .50751    .49946    .49161    .48397    .47652    .46926
74..................................................    .55714    .54832    .53972    .53134    .52317    .51520    .50744    .49986    .49247    .48527
75..................................................    .57250    .56382    .55536    .54710    .53904    .53118    .52351    .51601    .50870    .50156
76..................................................    .58803    .57951    .57120    .56308    .55515    .54740    .53984    .53245    .52522    .51817
77..................................................    .60369    .59535    .58720    .57923    .57144    .56383    .55639    .54912    .54200    .53504
78..................................................    .61942    .61126    .60329    .59549    .58787    .58040    .57310    .56596    .55896    .55212
79..................................................    .63508    .62713    .61935    .61174    .60428    .59698    .58983    .58283    .57597    .56925
80..................................................    .65059    .64285    .63527    .62785    .62058    .61345    .60646    .59961    .59290    .58632
81..................................................    .66579    .65827    .65090    .64368    .63659    .62965    .62283    .61615    .60959    .60316
82..................................................    .68061    .67332    .66616    .65914    .65226    .64550    .63886    .63235    .62595    .61968
83..................................................    .69499    .68793    .68099    .67418    .66749    .66092    .65447    .64813    .64191    .63579
84..................................................    .70896    .70213    .69541    .68881    .68233    .67595    .66969    .66353    .65748    .65153
85..................................................    .72256    .71596    .70947    .70308    .69681    .69063    .68456    .67859    .67271    .66693
86..................................................    .73569    .72931    .72305    .71688    .71081    .70484    .69896    .69318    .68748    .68188
87..................................................    .74818    .74204    .73599    .73003    .72417    .71839    .71271    .70711    .70159    .69616
88..................................................    .76011    .75419    .74836    .74261    .73695    .73137    .72588    .72046    .71512    .70986
89..................................................    .77169    .76599    .76037    .75484    .74938    .74400    .73870    .73347    .72831    .72323
90..................................................    .78302    .77755    .77215    .76683    .76158    .75640    .75129    .74625    .74128    .73638
91..................................................    .79395    .78870    .78352    .77842    .77337    .76840    .76349    .75864    .75385    .74913
92..................................................    .80423    .79920    .79423    .78933    .78449    .77971    .77499    .77033    .76572    .76118
93..................................................    .81377    .80894    .80417    .79946    .79481    .79022    .78568    .78120    .77677    .77239
94..................................................    .82247    .81784    .81325    .80873    .80425    .79983    .79547    .79115    .78688    .78266
95..................................................    .83033    .82586    .82145    .81709    .81278    .80852    .80431    .80014    .79602    .79195
96..................................................    .83729    .83298    .82872    .82451    .82034    .81622    .81215    .80812    .80414    .80019
97..................................................    .84361    .83944    .83532    .83124    .82721    .82322    .81927    .81537    .81151    .80769
98..................................................    .84929    .84525    .84126    .83730    .83339    .82952    .82569    .82190    .81815    .81443
99..................................................    .85454    .85062    .84674    .84290    .83910    .83534    .83161    .82792    .82427    .82066
100.................................................    .85942    .85561    .85184    .84810    .84440    .84074    .83711    .83352    .82997    .82644
101.................................................    .86408    .86037    .85670    .85306    .84946    .84589    .84236    .83886    .83539    .83196
102.................................................    .86894    .86534    .86177    .85823    .85473    .85126    .84782    .84442    .84104    .83770
103.................................................    .87408    .87060    .86714    .86371    .86032    .85695    .85362    .85031    .84703    .84378
104.................................................    .87980    .87644    .87311    .86980    .86653    .86328    .86005    .85686    .85369    .85054
105.................................................    .88684    .88363    .88046    .87731    .87418    .87108    .86800    .86494    .86191    .85890
106.................................................    .89685    .89389    .89095    .88804    .88514    .88226    .87940    .87656    .87374    .87094
107.................................................    .91117    .90858    .90600    .90344    .90089    .89836    .89584    .89334    .89085    .88838
108.................................................    .93414    .93217    .93022    .92828    .92634    .92442    .92250    .92060    .91870    .91681
109.................................................    .97081    .96992    .96904    .96816    .96729    .96642    .96555    .96468    .96382    .96296
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 377]]


                                           Table S--Based on Life Table 80CNSMT Single Life Remainder Factors
                                                [Applicable After April 30, 1989, and Before May 1, 1999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                         Age                         ---------------------------------------------------------------------------------------------------
                                                        8.2%      8.4%      8.6%      8.8%      9.0%      9.2%      9.4%      9.6%      9.8%      10.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0...................................................    .02341    .02276    .02217    .02163    .02114    .02069    .02027    .01989    .01954    .01922
1...................................................    .01237    .01170    .01108    .01052    .01000    .00953    .00910    .00871    .00834    .00801
2...................................................    .01243    .01172    .01107    .01048    .00994    .00944    .00899    .00857    .00819    .00784
3...................................................    .01278    .01203    .01135    .01073    .01016    .00964    .00916    .00872    .00832    .00795
4...................................................    .01332    .01253    .01182    .01116    .01056    .01001    .00951    .00904    .00862    .00822
5...................................................    .01400    .01317    .01241    .01172    .01109    .01051    .00998    .00949    .00904    .00862
6...................................................    .01477    .01390    .01310    .01238    .01171    .01110    .01054    .01002    .00954    .00910
7...................................................    .01563    .01472    .01389    .01312    .01242    .01178    .01118    .01064    .01013    .00966
8...................................................    .01660    .01564    .01477    .01396    .01322    .01254    .01192    .01134    .01081    .01031
9...................................................    .01770    .01669    .01577    .01492    .01414    .01342    .01276    .01216    .01159    .01107
10..................................................    .01891    .01785    .01688    .01599    .01517    .01442    .01372    .01308    .01249    .01194
11..................................................    .02026    .01915    .01814    .01720    .01634    .01555    .01481    .01414    .01351    .01293
12..................................................    .02173    .02056    .01950    .01852    .01761    .01678    .01601    .01529    .01463    .01402
13..................................................    .02326    .02204    .02092    .01989    .01895    .01807    .01726    .01651    .01582    .01517
14..................................................    .02478    .02351    .02234    .02126    .02027    .01935    .01850    .01771    .01698    .01630
15..................................................    .02628    .02495    .02372    .02259    .02155    .02058    .01969    .01886    .01810    .01738
16..................................................    .02774    .02635    .02507    .02388    .02279    .02178    .02084    .01997    .01917    .01842
17..................................................    .02917    .02772    .02637    .02513    .02399    .02293    .02194    .02103    .02018    .01940
18..................................................    .03059    .02907    .02767    .02637    .02517    .02406    .02302    .02207    .02118    .02035
19..................................................    .03205    .03046    .02899    .02763    .02637    .02521    .02412    .02312    .02218    .02131
20..................................................    .03355    .03188    .03035    .02892    .02760    .02638    .02524    .02419    .02320    .02229
21..................................................    .03509    .03334    .03173    .03024    .02886    .02758    .02638    .02527    .02424    .02328
22..................................................    .03669    .03487    .03318    .03162    .03017    .02882    .02757    .02640    .02532    .02430
23..................................................    .03837    .03646    .03470    .03306    .03154    .03013    .02881    .02759    .02644    .02538
24..................................................    .04018    .03819    .03634    .03463    .03303    .03155    .03016    .02888    .02767    .02655
25..................................................    .04214    .04006    .03812    .03633    .03465    .03309    .03164    .03029    .02902    .02784
26..................................................    .04428    .04210    .04008    .03820    .03644    .03481    .03328    .03186    .03052    .02928
27..................................................    .04662    .04434    .04223    .04025    .03841    .03670    .03509    .03360    .03219    .03088
28..................................................    .04915    .04677    .04456    .04249    .04056    .03876    .03708    .03550    .03403    .03264
29..................................................    .05189    .04941    .04709    .04493    .04291    .04102    .03925    .03760    .03604    .03458
30..................................................    .05485    .05226    .04984    .04757    .04546    .04348    .04162    .03988    .03825    .03671
31..................................................    .05805    .05535    .05282    .05045    .04824    .04616    .04421    .04238    .04067    .03905
32..................................................    .06149    .05867    .05603    .05356    .05124    .04906    .04702    .04510    .04329    .04160
33..................................................    .06520    .06226    .05950    .05692    .05449    .05221    .05007    .04806    .04616    .04438
34..................................................    .06916    .06609    .06322    .06052    .05799    .05560    .05336    .05125    .04926    .04738
35..................................................    .07339    .07020    .06720    .06439    .06174    .05925    .05690    .05469    .05260    .05063
36..................................................    .07787    .07455    .07143    .06850    .06573    .06313    .06068    .05836    .05617    .05411
37..................................................    .08262    .07917    .07593    .07287    .06999    .06727    .06470    .06228    .05999    .05783
38..................................................    .08765    .08407    .08069    .07751    .07451    .07167    .06899    .06646    .06407    .06180
39..................................................    .09296    .08925    .08574    .08243    .07931    .07635    .07356    .07092    .06841    .06604
40..................................................    .09858    .09472    .09109    .08765    .08440    .08132    .07841    .07565    .07303    .07055
41..................................................    .10449    .10050    .09673    .09316    .08978    .08658    .08355    .08067    .07794    .07535
42..................................................    .11069    .10656    .10265    .09895    .09544    .09212    .08896    .08596    .08312    .08041
43..................................................    .11718    .11291    .10887    .10503    .10140    .09794    .09466    .09154    .08858    .08576
44..................................................    .12399    .11958    .11540    .11143    .10766    .10407    .10067    .09743    .09434    .09141
45..................................................    .13111    .12656    .12224    .11814    .11423    .11052    .10699    .10362    .10042    .09736
46..................................................    .13856    .13387    .12941    .12516    .12113    .11728    .11362    .11013    .10680    .10363
47..................................................    .14633    .14150    .13690    .13252    .12835    .12438    .12059    .11697    .11352    .11022
48..................................................    .15442    .14945    .14471    .14020    .13589    .13179    .12787    .12412    .12055    .11713
49..................................................    .16280    .15769    .15281    .14816    .14373    .13949    .13544    .13157    .12787    .12433
50..................................................    .17147    .16622    .16121    .15643    .15186    .14749    .14331    .13931    .13548    .13182
51..................................................    .18045    .17507    .16993    .16501    .16030    .15580    .15150    .14737    .14342    .13963
52..................................................    .18979    .18427    .17899    .17394    .16911    .16448    .16004    .15579    .15172    .14780
53..................................................    .19947    .19383    .18842    .18324    .17828    .17352    .16896    .16458    .16038    .15635
54..................................................    .20950    .20372    .19819    .19288    .18779    .18291    .17822    .17372    .16940    .16524
55..................................................    .21986    .21397    .20831    .20288    .19767    .19266    .18785    .18322    .17878    .17450
56..................................................    .23058    .22457    .21879    .21324    .20791    .20278    .19785    .19310    .18854    .18414
57..................................................    .24167    .23554    .22965    .22399    .21854    .21329    .20824    .20338    .19870    .19419
58..................................................    .25314    .24690    .24090    .23512    .22956    .22420    .21904    .21407    .20927    .20464
59..................................................    .26497    .25863    .25252    .24664    .24097    .23550    .23023    .22515    .22024    .21551
60..................................................    .27712    .27068    .26448    .25849    .25272    .24716    .24178    .23659    .23158    .22674
61..................................................    .28956    .28304    .27674    .27067    .26480    .25913    .25366    .24837    .24325    .23831
62..................................................    .30228    .29567    .28929    .28312    .27717    .27141    .26584    .26045    .25524    .25020
63..................................................    .31525    .30857    .30211    .29586    .28982    .28397    .27832    .27284    .26754    .26240
64..................................................    .32851    .32176    .31522    .30890    .30278    .29685    .29111    .28555    .28016    .27493
65..................................................    .34209    .33528    .32868    .32229    .31610    .31010    .30429    .29865    .29317    .28787
66..................................................    .35604    .34918    .34253    .33609    .32983    .32377    .31788    .31217    .30663    .30124
67..................................................    .37037    .36347    .35678    .35028    .34398    .33786    .33191    .32614    .32053    .31508
68..................................................    .38508    .37815    .37142    .36489    .35854    .35237    .34638    .34055    .33488    .32937

[[Page 378]]

 
69..................................................    .40008    .39313    .38638    .37982    .37344    .36724    .36120    .35533    .34961    .34405
70..................................................    .41533    .40838    .40162    .39504    .38864    .38241    .37634    .37043    .36468    .35907
71..................................................    .43076    .42382    .41705    .41047    .40405    .39780    .39171    .38578    .38000    .37436
72..................................................    .44638    .43945    .43269    .42611    .41969    .41344    .40733    .40138    .39558    .38991
73..................................................    .46218    .45527    .44854    .44197    .43556    .42931    .42321    .41725    .41143    .40575
74..................................................    .47823    .47137    .46466    .45812    .45173    .44549    .43940    .43345    .42763    .42195
75..................................................    .49459    .48777    .48112    .47462    .46826    .46205    .45598    .45004    .44424    .43856
76..................................................    .51127    .50452    .49793    .49148    .48517    .47900    .47297    .46706    .46129    .45563
77..................................................    .52823    .52157    .51505    .50867    .50243    .49632    .49033    .48447    .47873    .47311
78..................................................    .54541    .53885    .53242    .52613    .51996    .51392    .50800    .50220    .49652    .49094
79..................................................    .56267    .55621    .54989    .54369    .53762    .53166    .52582    .52009    .51448    .50897
80..................................................    .57987    .57354    .56733    .56125    .55527    .54941    .54366    .53802    .53248    .52705
81..................................................    .59685    .59065    .58457    .57860    .57274    .56699    .56134    .55579    .55035    .54499
82..................................................    .61351    .60746    .60151    .59567    .58993    .58429    .57875    .57331    .56796    .56270
83..................................................    .62978    .62387    .61806    .61236    .60675    .60123    .59581    .59047    .58523    .58007
84..................................................    .64567    .63992    .63426    .62869    .62321    .61783    .61253    .60731    .60218    .59713
85..................................................    .66125    .65565    .65014    .64472    .63938    .63413    .62896    .62387    .61886    .61392
86..................................................    .67636    .67092    .66557    .66030    .65511    .65000    .64496    .64000    .63511    .63030
87..................................................    .69081    .68554    .68034    .67522    .67018    .66520    .66031    .65548    .65071    .64602
88..................................................    .70468    .69957    .69453    .68956    .68466    .67983    .67507    .67037    .66574    .66117
89..................................................    .71821    .71326    .70838    .70357    .69882    .69414    .68952    .68495    .68045    .67601
90..................................................    .73153    .72676    .72204    .71739    .71280    .70827    .70379    .69938    .69502    .69071
91..................................................    .74447    .73986    .73532    .73083    .72640    .72202    .71770    .71343    .70921    .70504
92..................................................    .75669    .75225    .74787    .74354    .73927    .73504    .73087    .72674    .72267    .71864
93..................................................    .76807    .76379    .75957    .75540    .75127    .74719    .74317    .73918    .73524    .73135
94..................................................    .77849    .77437    .77030    .76627    .76229    .75835    .75446    .75061    .74680    .74303
95..................................................    .78792    .78394    .78001    .77611    .77226    .76845    .76468    .76096    .75727    .75362
96..................................................    .79630    .79244    .78863    .78485    .78112    .77742    .77377    .77015    .76657    .76303
97..................................................    .80391    .80016    .79646    .79280    .78917    .78559    .78203    .77852    .77504    .77160
98..................................................    .81076    .80712    .80352    .79996    .79643    .79294    .78948    .78606    .78267    .77931
99..................................................    .81709    .81354    .81004    .80657    .80313    .79972    .79635    .79302    .78971    .78644
100.................................................    .82296    .81950    .81609    .81270    .80934    .80602    .80273    .79947    .79624    .79304
101.................................................    .82855    .82518    .82185    .81854    .81526    .81201    .80880    .80561    .80245    .79932
102.................................................    .83438    .83110    .82785    .82462    .82142    .81826    .81512    .81200    .80892    .80586
103.................................................    .84056    .83737    .83420    .83106    .82795    .82487    .82181    .81878    .81577    .81279
104.................................................    .84743    .84433    .84127    .83822    .83521    .83221    .82924    .82630    .82338    .82048
105.................................................    .85591    .85295    .85001    .84709    .84419    .84132    .83846    .83563    .83282    .83003
106.................................................    .86816    .86540    .86266    .85993    .85723    .85454    .85187    .84922    .84659    .84397
107.................................................    .88592    .88348    .88105    .87863    .87623    .87384    .87147    .86911    .86676    .86443
108.................................................    .91493    .91306    .91119    .90934    .90749    .90566    .90383    .90201    .90020    .89840
109.................................................    .96211    .96125    .96041    .95956    .95872    .95788    .95704    .95620    .95537    .95455
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                           Table S--Based on Life Table 80CNSMT Single Life Remainder Factors
                                                [Applicable After April 30, 1989, and Before May 1, 1999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                         Age                         ---------------------------------------------------------------------------------------------------
                                                        10.2%     10.4%     10.6%     10.8%     11.0%     11.2%     11.4%     11.6%     11.8%     12.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0...................................................    .01891    .01864    .01838    .01814    .01791    .01770    .01750    .01732    .01715    .01698
1...................................................    .00770    .00741    .00715    .00690    .00667    .00646    .00626    .00608    .00590    .00574
2...................................................    .00751    .00721    .00693    .00667    .00643    .00620    .00600    .00580    .00562    .00544
3...................................................    .00760    .00728    .00699    .00671    .00646    .00622    .00600    .00579    .00560    .00541
4...................................................    .00786    .00752    .00721    .00692    .00665    .00639    .00616    .00594    .00573    .00554
5...................................................    .00824    .00788    .00755    .00724    .00695    .00668    .00643    .00620    .00598    .00578
6...................................................    .00869    .00832    .00796    .00764    .00733    .00705    .00678    .00654    .00630    .00608
7...................................................    .00923    .00883    .00846    .00811    .00779    .00749    .00720    .00694    .00669    .00646
8...................................................    .00986    .00943    .00904    .00867    .00833    .00801    .00771    .00743    .00716    .00692
9...................................................    .01059    .01014    .00972    .00933    .00897    .00863    .00831    .00801    .00773    .00747
10..................................................    .01142    .01095    .01051    .01009    .00971    .00935    .00901    .00869    .00840    .00812
11..................................................    .01239    .01189    .01142    .01098    .01057    .01019    .00983    .00950    .00918    .00889
12..................................................    .01345    .01292    .01243    .01197    .01154    .01113    .01075    .01040    .01007    .00975
13..................................................    .01457    .01401    .01349    .01300    .01255    .01212    .01172    .01135    .01100    .01067
14..................................................    .01567    .01508    .01453    .01402    .01354    .01309    .01267    .01227    .01190    .01155
15..................................................    .01672    .01610    .01552    .01498    .01448    .01400    .01356    .01314    .01275    .01238
16..................................................    .01772    .01707    .01646    .01589    .01536    .01486    .01439    .01396    .01354    .01315
17..................................................    .01866    .01798    .01734    .01674    .01618    .01566    .01516    .01470    .01427    .01386
18..................................................    .01958    .01886    .01818    .01755    .01697    .01641    .01590    .01541    .01495    .01452

[[Page 379]]

 
19..................................................    .02050    .01974    .01903    .01837    .01775    .01717    .01662    .01611    .01563    .01517
20..................................................    .02143    .02064    .01989    .01919    .01854    .01793    .01735    .01681    .01630    .01582
21..................................................    .02238    .02154    .02075    .02002    .01933    .01868    .01807    .01750    .01696    .01646
22..................................................    .02336    .02247    .02164    .02087    .02014    .01946    .01882    .01821    .01764    .01711
23..................................................    .02438    .02345    .02257    .02176    .02099    .02027    .01959    .01895    .01835    .01778
24..................................................    .02550    .02451    .02359    .02273    .02192    .02115    .02044    .01976    .01913    .01853
25..................................................    .02673    .02569    .02472    .02381    .02295    .02214    .02138    .02067    .01999    .01936
26..................................................    .02811    .02701    .02598    .02502    .02411    .02326    .02246    .02170    .02098    .02031
27..................................................    .02965    .02849    .02741    .02639    .02543    .02452    .02367    .02287    .02211    .02140
28..................................................    .03134    .03013    .02898    .02790    .02689    .02593    .02503    .02418    .02338    .02262
29..................................................    .03322    .03193    .03072    .02958    .02851    .02750    .02654    .02564    .02479    .02398
30..................................................    .03527    .03391    .03264    .03143    .03030    .02923    .02821    .02726    .02635    .02550
31..................................................    .03753    .03610    .03475    .03348    .03228    .03115    .03008    .02907    .02811    .02720
32..................................................    .04000    .03849    .03707    .03573    .03446    .03326    .03213    .03105    .03004    .02907
33..................................................    .04269    .04111    .03961    .03819    .03685    .03558    .03438    .03325    .03217    .03115
34..................................................    .04561    .04394    .04236    .04087    .03946    .03812    .03685    .03565    .03451    .03342
35..................................................    .04877    .04702    .04535    .04378    .04229    .04087    .03953    .03826    .03706    .03591
36..................................................    .05215    .05031    .04856    .04690    .04533    .04384    .04242    .04108    .03980    .03859
37..................................................    .05578    .05384    .05200    .05025    .04860    .04703    .04553    .04411    .04276    .04148
38..................................................    .05965    .05761    .05568    .05385    .05211    .05045    .04888    .04738    .04595    .04460
39..................................................    .06379    .06165    .05962    .05770    .05587    .05412    .05247    .05089    .04939    .04795
40..................................................    .06820    .06596    .06383    .06181    .05989    .05806    .05631    .05465    .05307    .05155
41..................................................    .07288    .07054    .06832    .06620    .06418    .06226    .06042    .05868    .05701    .05541
42..................................................    .07784    .07539    .07306    .07085    .06873    .06671    .06479    .06295    .06119    .05952
43..................................................    .08308    .08052    .07808    .07576    .07355    .07143    .06941    .06748    .06564    .06387
44..................................................    .08861    .08594    .08340    .08097    .07865    .07644    .07432    .07230    .07036    .06851
45..................................................    .09445    .09167    .08901    .08648    .08406    .08174    .07953    .07741    .07538    .07343
46..................................................    .10060    .09770    .09494    .09230    .08977    .08735    .08503    .08281    .08068    .07865
47..................................................    .10707    .10406    .10119    .09843    .09579    .09327    .09085    .08853    .08630    .08417
48..................................................    .11386    .11073    .10774    .10487    .10213    .09949    .09697    .09455    .09222    .08999
49..................................................    .12094    .11769    .11458    .11160    .10874    .10600    .10337    .10084    .09842    .09609
50..................................................    .12831    .12494    .12172    .11862    .11565    .11280    .11006    .10743    .10490    .10247
51..................................................    .13600    .13251    .12917    .12596    .12288    .11991    .11706    .11432    .11169    .10915
52..................................................    .14405    .14044    .13698    .13366    .13046    .12738    .12442    .12157    .11883    .11619
53..................................................    .15247    .14875    .14517    .14172    .13841    .13522    .13215    .12919    .12635    .12360
54..................................................    .16124    .15740    .15370    .15014    .14671    .14341    .14023    .13717    .13421    .13136
55..................................................    .17039    .16642    .16261    .15893    .15539    .15198    .14868    .14551    .14244    .13948
56..................................................    .17991    .17583    .17190    .16811    .16445    .16092    .15752    .15423    .15106    .14799
57..................................................    .18984    .18564    .18160    .17769    .17392    .17029    .16677    .16338    .16010    .15692
58..................................................    .20018    .19587    .19172    .18770    .18382    .18007    .17645    .17295    .16956    .16628
59..................................................    .21093    .20652    .20225    .19812    .19414    .19028    .18655    .18294    .17945    .17606
60..................................................    .22206    .21753    .21316    .20893    .20483    .20087    .19703    .19332    .18972    .18624
61..................................................    .23353    .22890    .22442    .22009    .21589    .21182    .20788    .20407    .20037    .19678
62..................................................    .24532    .24059    .23601    .23158    .22728    .22311    .21907    .21515    .21135    .20767
63..................................................    .25742    .25260    .24793    .24339    .23900    .23473    .23060    .22658    .22268    .21890
64..................................................    .26987    .26495    .26019    .25556    .25107    .24671    .24248    .23837    .23438    .23050
65..................................................    .28271    .27771    .27286    .26815    .26357    .25912    .25480    .25059    .24651    .24254
66..................................................    .29601    .29093    .28600    .28120    .27654    .27200    .26760    .26331    .25913    .25507
67..................................................    .30978    .30462    .29961    .29474    .29000    .28539    .28090    .27653    .27227    .26813
68..................................................    .32401    .31879    .31371    .30877    .30396    .29927    .29471    .29027    .28593    .28171
69..................................................    .33863    .33336    .32822    .32322    .31835    .31359    .30896    .30445    .30005    .29576
70..................................................    .35361    .34829    .34310    .33804    .33311    .32830    .32361    .31903    .31457    .31021
71..................................................    .36886    .36349    .35826    .35316    .34818    .34332    .33858    .33394    .32942    .32500
72..................................................    .38439    .37899    .37373    .36858    .36356    .35866    .35387    .34919    .34461    .34015
73..................................................    .40021    .39479    .38950    .38432    .37927    .37433    .36950    .36478    .36016    .35565
74..................................................    .41639    .41096    .40565    .40046    .39538    .39042    .38556    .38081    .37616    .37161
75..................................................    .43301    .42758    .42226    .41706    .41198    .40699    .40212    .39734    .39267    .38809
76..................................................    .45009    .44467    .43937    .43417    .42908    .42410    .41921    .41443    .40974    .40514
77..................................................    .46761    .46221    .45693    .45175    .44667    .44170    .43682    .43203    .42734    .42274
78..................................................    .48548    .48013    .47488    .46973    .46468    .45972    .45486    .45009    .44541    .44082
79..................................................    .50356    .49826    .49306    .48795    .48294    .47802    .47319    .46845    .46379    .45922
80..................................................    .52171    .51647    .51133    .50628    .50132    .49644    .49166    .48695    .48233    .47779
81..................................................    .53974    .53457    .52950    .52451    .51961    .51479    .51006    .50541    .50083    .49633
82..................................................    .55753    .55245    .54745    .54254    .53771    .53296    .52828    .52369    .51917    .51472
83..................................................    .57500    .57001    .56510    .56026    .55551    .55083    .54623    .54170    .53724    .53285
84..................................................    .59216    .58726    .58245    .57770    .57304    .56844    .56391    .55945    .55506    .55074
85..................................................    .60906    .60428    .59956    .59492    .59034    .58583    .58139    .57702    .57270    .56845
86..................................................    .62555    .62088    .61627    .61173    .60725    .60284    .59849    .59420    .58997    .58580
87..................................................    .64139    .63683    .63233    .62790    .62352    .61921    .61495    .61076    .60661    .60253

[[Page 380]]

 
88..................................................    .65666    .65221    .64783    .64350    .63923    .63502    .63086    .62675    .62270    .61871
89..................................................    .67163    .66730    .66304    .65882    .65466    .65055    .64650    .64249    .63854    .63463
90..................................................    .68646    .68226    .67812    .67402    .66998    .66599    .66204    .65814    .65430    .65049
91..................................................    .70093    .69686    .69285    .68888    .68496    .68108    .67725    .67347    .66973    .66604
92..................................................    .71466    .71073    .70684    .70300    .69920    .69545    .69173    .68806    .68444    .68085
93..................................................    .72750    .72370    .71994    .71622    .71254    .70890    .70530    .70174    .69822    .69474
94..................................................    .73931    .73562    .73198    .72838    .72481    .72129    .71780    .71434    .71093    .70755
95..................................................    .75001    .74644    .74291    .73941    .73595    .73253    .72914    .72579    .72247    .71919
96..................................................    .75953    .75606    .75262    .74923    .74586    .74253    .73924    .73598    .73275    .72955
97..................................................    .76819    .76481    .76147    .75816    .75489    .75165    .74844    .74526    .74211    .73899
98..................................................    .77599    .77270    .76944    .76621    .76302    .75986    .75672    .75362    .75054    .74750
99..................................................    .78319    .77998    .77680    .77365    .77053    .76744    .76437    .76134    .75833    .75535
100.................................................    .78987    .78673    .78362    .78054    .77748    .77446    .77146    .76849    .76555    .76263
101.................................................    .79622    .79315    .79010    .78708    .78409    .78113    .77819    .77528    .77239    .76953
102.................................................    .80283    .79983    .79685    .79390    .79097    .78807    .78519    .78234    .77951    .77671
103.................................................    .80983    .80690    .80399    .80111    .79825    .79541    .79260    .78981    .78705    .78430
104.................................................    .81760    .81475    .81192    .80912    .80633    .80357    .80083    .79810    .79541    .79273
105.................................................    .82726    .82451    .82178    .81907    .81638    .81371    .81106    .80843    .80582    .80322
106.................................................    .84137    .83879    .83623    .83368    .83115    .82863    .82614    .82366    .82119    .81874
107.................................................    .86211    .85981    .85751    .85523    .85297    .85071    .84847    .84624    .84403    .84182
108.................................................    .89660    .89481    .89304    .89127    .88950    .88775    .88601    .88427    .88254    .88081
109.................................................    .95372    .95290    .95208    .95126    .95045    .94964    .94883    .94803    .94723    .94643
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                           Table S--Based on Life Table 80CNSMT Single Life Remainder Factors
                                                [Applicable After April 30, 1989, and Before May 1, 1999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Interest rate
                         Age                         ---------------------------------------------------------------------------------------------------
                                                        12.2%     12.4%     12.6%     12.8%     13.0%     13.2%     13.4%     13.6%     13.8%     14.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0...................................................    .01683    .01669    .01655    .01642    .01630    .01618    .01607    .01596    .01586    .01576
1...................................................    .00559    .00544    .00531    .00518    .00506    .00494    .00484    .00473    .00464    .00454
2...................................................    .00528    .00513    .00499    .00485    .00473    .00461    .00449    .00439    .00428    .00419
3...................................................    .00524    .00508    .00493    .00479    .00465    .00453    .00441    .00429    .00419    .00408
4...................................................    .00536    .00519    .00503    .00488    .00473    .00460    .00447    .00435    .00423    .00412
5...................................................    .00558    .00540    .00523    .00507    .00492    .00477    .00464    .00451    .00439    .00427
6...................................................    .00588    .00569    .00550    .00533    .00517    .00502    .00487    .00473    .00460    .00448
7...................................................    .00624    .00604    .00584    .00566    .00549    .00532    .00517    .00502    .00488    .00475
8...................................................    .00668    .00646    .00626    .00606    .00588    .00570    .00554    .00538    .00523    .00509
9...................................................    .00722    .00699    .00677    .00656    .00636    .00617    .00600    .00583    .00567    .00552
10..................................................    .00785    .00761    .00737    .00715    .00694    .00674    .00655    .00637    .00620    .00604
11..................................................    .00861    .00835    .00810    .00786    .00764    .00743    .00723    .00704    .00686    .00668
12..................................................    .00946    .00918    .00891    .00866    .00843    .00820    .00799    .00779    .00760    .00741
13..................................................    .01035    .01006    .00978    .00951    .00927    .00903    .00880    .00859    .00839    .00819
14..................................................    .01122    .01091    .01061    .01034    .01007    .00982    .00958    .00936    .00914    .00894
15..................................................    .01203    .01171    .01140    .01110    .01082    .01056    .01031    .01007    .00985    .00963
16..................................................    .01279    .01244    .01211    .01181    .01151    .01123    .01097    .01072    .01048    .01025
17..................................................    .01347    .01311    .01276    .01244    .01213    .01184    .01156    .01130    .01104    .01081
18..................................................    .01411    .01373    .01336    .01302    .01270    .01239    .01210    .01182    .01155    .01130
19..................................................    .01474    .01434    .01396    .01359    .01325    .01293    .01262    .01233    .01205    .01178
20..................................................    .01537    .01494    .01454    .01415    .01379    .01345    .01313    .01282    .01252    .01224
21..................................................    .01598    .01553    .01510    .01470    .01432    .01396    .01361    .01329    .01298    .01268
22..................................................    .01660    .01613    .01568    .01525    .01485    .01446    .01410    .01375    .01343    .01312
23..................................................    .01725    .01674    .01627    .01581    .01539    .01498    .01460    .01423    .01388    .01355
24..................................................    .01796    .01742    .01692    .01644    .01599    .01556    .01515    .01476    .01439    .01404
25..................................................    .01876    .01819    .01765    .01714    .01666    .01621    .01577    .01536    .01497    .01460
26..................................................    .01967    .01907    .01850    .01796    .01745    .01696    .01650    .01606    .01565    .01525
27..................................................    .02072    .02008    .01948    .01890    .01836    .01784    .01735    .01688    .01644    .01601
28..................................................    .02190    .02122    .02057    .01996    .01938    .01883    .01831    .01781    .01734    .01689
29..................................................    .02322    .02249    .02181    .02116    .02054    .01996    .01940    .01887    .01836    .01788
30..................................................    .02469    .02392    .02319    .02250    .02184    .02122    .02062    .02006    .01952    .01900
31..................................................    .02634    .02552    .02475    .02401    .02331    .02264    .02201    .02140    .02083    .02028
32..................................................    .02816    .02729    .02647    .02568    .02494    .02423    .02355    .02291    .02229    .02170
33..................................................    .03018    .02926    .02838    .02755    .02675    .02600    .02528    .02459    .02393    .02331
34..................................................    .03239    .03142    .03048    .02960    .02875    .02795    .02718    .02645    .02575    .02508
35..................................................    .03482    .03378    .03279    .03185    .03095    .03009    .02928    .02850    .02775    .02704
36..................................................    .03743    .03633    .03528    .03428    .03333    .03242    .03155    .03072    .02992    .02916
37..................................................    .04026    .03909    .03798    .03692    .03591    .03494    .03401    .03313    .03228    .03147

[[Page 381]]

 
38..................................................    .04330    .04207    .04089    .03977    .03869    .03767    .03668    .03574    .03484    .03398
39..................................................    .04658    .04528    .04403    .04284    .04170    .04061    .03957    .03857    .03762    .03670
40..................................................    .05011    .04873    .04741    .04615    .04495    .04379    .04269    .04163    .04061    .03964
41..................................................    .05389    .05244    .05104    .04971    .04844    .04721    .04604    .04492    .04384    .04281
42..................................................    .05791    .05638    .05491    .05350    .05216    .05086    .04962    .04844    .04729    .04620
43..................................................    .06219    .06057    .05902    .05754    .05612    .05475    .05344    .05218    .05098    .04981
44..................................................    .06673    .06503    .06340    .06184    .06034    .05890    .05752    .05619    .05491    .05368
45..................................................    .07157    .06978    .06806    .06642    .06484    .06332    .06186    .06046    .05911    .05781
46..................................................    .07669    .07481    .07301    .07128    .06962    .06802    .06649    .06501    .06358    .06221
47..................................................    .08212    .08015    .07826    .07645    .07470    .07302    .07140    .06984    .06834    .06690
48..................................................    .08784    .08578    .08380    .08190    .08006    .07830    .07660    .07496    .07338    .07186
49..................................................    .09384    .09169    .08961    .08762    .08570    .08384    .08206    .08034    .07868    .07708
50..................................................    .10013    .09787    .09570    .09361    .09160    .08966    .08779    .08598    .08424    .08256
51..................................................    .10671    .10436    .10209    .09991    .09780    .09577    .09381    .09192    .09009    .08832
52..................................................    .11365    .11120    .10883    .10655    .10435    .10222    .10017    .09819    .09628    .09442
53..................................................    .12095    .11840    .11593    .11355    .11126    .10904    .10689    .10482    .10282    .10088
54..................................................    .12860    .12595    .12338    .12090    .11851    .11619    .11396    .11179    .10970    .10767
55..................................................    .13663    .13386    .13120    .12862    .12613    .12372    .12138    .11912    .11694    .11482
56..................................................    .14503    .14217    .13940    .13672    .13413    .13162    .12919    .12683    .12456    .12235
57..................................................    .15385    .15089    .14801    .14523    .14254    .13994    .13741    .13496    .13259    .13029
58..................................................    .16311    .16004    .15706    .15418    .15139    .14868    .14606    .14352    .14105    .13866
59..................................................    .17279    .16961    .16654    .16355    .16066    .15786    .15514    .15250    .14994    .14745
60..................................................    .18286    .17958    .17640    .17332    .17033    .16743    .16462    .16188    .15922    .15664
61..................................................    .19330    .18992    .18665    .18347    .18038    .17738    .17447    .17164    .16889    .16622
62..................................................    .20409    .20061    .19724    .19396    .19078    .18768    .18467    .18175    .17891    .17614
63..................................................    .21522    .21165    .20818    .20480    .20152    .19833    .19523    .19221    .18928    .18642
64..................................................    .22672    .22306    .21949    .21602    .21265    .20937    .20617    .20306    .20003    .19708
65..................................................    .23867    .23491    .23125    .22769    .22423    .22085    .21757    .21437    .21125    .20821
66..................................................    .25112    .24727    .24353    .23988    .23632    .23286    .22948    .22619    .22299    .21986
67..................................................    .26409    .26016    .25633    .25260    .24896    .24541    .24195    .23857    .23528    .23206
68..................................................    .27760    .27359    .26968    .26586    .26214    .25851    .25497    .25151    .24814    .24484
69..................................................    .29157    .28748    .28350    .27961    .27581    .27211    .26849    .26495    .26150    .25812
70..................................................    .30596    .30181    .29775    .29379    .28992    .28614    .28245    .27884    .27532    .27187
71..................................................    .32069    .31648    .31236    .30833    .30440    .30055    .29679    .29312    .28952    .28600
72..................................................    .33578    .33151    .32733    .32325    .31925    .31535    .31152    .30778    .30412    .30054
73..................................................    .35123    .34691    .34269    .33855    .33450    .33054    .32666    .32286    .31914    .31550
74..................................................    .36715    .36279    .35852    .35434    .35024    .34623    .34230    .33845    .33468    .33098
75..................................................    .38360    .37921    .37491    .37069    .36656    .36250    .35853    .35464    .35082    .34708
76..................................................    .40064    .39623    .39190    .38765    .38349    .37941    .37540    .37148    .36762    .36384
77..................................................    .41823    .41381    .40947    .40521    .40103    .39692    .39290    .38895    .38507    .38126
78..................................................    .43632    .43189    .42755    .42329    .41910    .41499    .41095    .40698    .40309    .39926
79..................................................    .45473    .45032    .44599    .44173    .43755    .43344    .42940    .42543    .42153    .41770
80..................................................    .47333    .46894    .46463    .46040    .45623    .45213    .44811    .44414    .44025    .43642
81..................................................    .49191    .48755    .48328    .47907    .47493    .47085    .46684    .46290    .45902    .45520
82..................................................    .51034    .50603    .50179    .49762    .49351    .48947    .48549    .48157    .47772    .47392
83..................................................    .52852    .52427    .52008    .51595    .51189    .50788    .50394    .50006    .49623    .49246
84..................................................    .54648    .54228    .53815    .53407    .53006    .52610    .52221    .51836    .51458    .51084
85..................................................    .56426    .56013    .55606    .55205    .54810    .54420    .54035    .53656    .53282    .52913
86..................................................    .58169    .57764    .57364    .56970    .56581    .56197    .55818    .55445    .55076    .54713
87..................................................    .59850    .59452    .59060    .58673    .58291    .57913    .57541    .57174    .56811    .56453
88..................................................    .61476    .61086    .60702    .60322    .59947    .59577    .59212    .58851    .58494    .58142
89..................................................    .63078    .62697    .62321    .61950    .61583    .61220    .60862    .60508    .60159    .59813
90..................................................    .64674    .64302    .63935    .63573    .63215    .62861    .62511    .62165    .61823    .61485
91..................................................    .66238    .65877    .65520    .65167    .64819    .64474    .64133    .63795    .63462    .63132
92..................................................    .67730    .67379    .67032    .66689    .66350    .66014    .65682    .65354    .65029    .64708
93..................................................    .69130    .68789    .68452    .68119    .67789    .67463    .67140    .66820    .66504    .66191
94..................................................    .70421    .70090    .69762    .69438    .69118    .68800    .68486    .68175    .67867    .67563
95..................................................    .71594    .71272    .70954    .70639    .70326    .70017    .69712    .69409    .69109    .68812
96..................................................    .72638    .72325    .72014    .71707    .71403    .71101    .70803    .70507    .70215    .69925
97..................................................    .73590    .73285    .72982    .72682    .72385    .72090    .71799    .71510    .71224    .70941
98..................................................    .74448    .74149    .73853    .73560    .73269    .72981    .72696    .72414    .72134    .71856
99..................................................    .75240    .74948    .74658    .74371    .74086    .73805    .73525    .73248    .72974    .72702
100.................................................    .75974    .75687    .75403    .75121    .74842    .74566    .74292    .74020    .73751    .73484
101.................................................    .76669    .76388    .76109    .75833    .75559    .75287    .75018    .74751    .74486    .74223
102.................................................    .77393    .77117    .76844    .76573    .76304    .76037    .75773    .75511    .75251    .74993
103.................................................    .78158    .77888    .77620    .77355    .77091    .76830    .76571    .76313    .76058    .75805
104.................................................    .79007    .78743    .78482    .78222    .77964    .77709    .77455    .77203    .76953    .76705
105.................................................    .80065    .79809    .79556    .79304    .79054    .78805    .78559    .78314    .78071    .77829
106.................................................    .81631    .81389    .81149    .80911    .80674    .80438    .80204    .79972    .79741    .79511

[[Page 382]]

 
107.................................................    .83963    .83745    .83529    .83313    .83099    .82886    .82674    .82463    .82254    .82045
108.................................................    .87910    .87739    .87569    .87400    .87232    .87064    .86897    .86731    .86566    .86401
109.................................................    .94563    .94484    .94405    .94326    .94248    .94170    .94092    .94014    .93937    .93860
--------------------------------------------------------------------------------------------------------------------------------------------------------


                     Table 80CNSMT--Applicable After April 30, 1989, and Before May 1, 1999
----------------------------------------------------------------------------------------------------------------
               Age x                   1(x)            Age x             1(x)            Age x            1(x)
----------------------------------------------------------------------------------------------------------------
(1)                                      (2)   (1)..................       (2)   (1).................       (2)
----------------------------------------------------------------------------------------------------------------
0.................................    100000   37...................     95492    74.................     59279
1.................................     98740   38...................     95317    75.................     56799
2.................................     98648   39...................     95129    76.................     54239
3.................................     98584   40...................     94926    77.................     51599
4.................................     98535   41...................     94706    78.................     48878
5.................................     98495   42...................     94465    79.................     46071
6.................................     98459   43...................     94201    80.................     43180
7.................................     98426   44...................     93913    81.................     40208
8.................................     98396   45...................     93599    82.................     37172
9.................................     98370   46...................     93256    83.................     34095
10................................     98347   47...................     92882    84.................     31012
11................................     98328   48...................     92472    85.................     27960
12................................     98309   49...................     92021    86.................     24961
13................................     98285   50...................     91526    87.................     22038
14................................     98248   51...................     90986    88.................     19235
15................................     98196   52...................     90402    89.................     16598
16................................     98129   53...................     89771    90.................     14154
17................................     98047   54...................     89087    91.................     11908
18................................     97953   55...................     88348    92.................      9863
19................................     97851   56...................     87551    93.................      8032
20................................     97741   57...................     86695    94.................      6424
21................................     97623   58...................     85776    95.................      5043
22................................     97499   59...................     84789    96.................      3884
23................................     97370   60...................     83726    97.................      2939
24................................     97240   61...................     82581    98.................      2185
25................................     97110   62...................     81348    99.................      1598
26................................     96982   63...................     80024   100.................      1150
27................................     96856   64...................     78609   101.................       815
28................................     96730   65...................     77107   102.................       570
29................................     96604   66...................     75520   103.................       393
30................................     96477   67...................     73846   104.................       267
31................................     96350   68...................     72082   105.................       179
32................................     96220   69...................     70218   106.................       119
33................................     96088   70...................     68248   107.................        78
34................................     95951   71...................     66165   108.................        51
35................................     95808   72...................     63972   109.................        33
36................................     95655   73...................     61673   110.................         0

    (f) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests for estates of decedents for which 
the valuation date of the gross estate is after April 30,1999, and 
before May 1, 2009--(1) In general. Except as otherwise provided in 
Sec. 20.2031-7(b) and Sec. 20.7520-3(b) (pertaining to certain 
limitations on the use of prescribed tables), if the valuation date for 
the gross estate of the decedent is after April 30, 1999, and before May 
1, 2009, the fair market value of annuities, life estates, terms of 
years, remainders, and reversionary interests is the present value of 
the interests determined by use of standard or special section 7520 
actuarial factors and the valuation methodology described in Sec. 
20.2031-7(d). These factors are derived by using the appropriate section 
7520 interest rate and, if applicable, the mortality component for the 
valuation date of the interest that is being valued. See Sec. Sec. 
20.7520-1 through 20.7520-4. See paragraph (f)(4) of this section for 
determination of the appropriate table for use in valuing these 
interests.

[[Page 383]]

    (2) Transitional rule. (i) If a decedent dies after April 30, 1999, 
and if on May 1, 1999, the decedent was mentally incompetent so that the 
disposition of the decedent's property could not be changed, and the 
decedent dies without having regained competency to dispose of the 
decedent's property or dies within 90 days of the date on which the 
decedent first regains competency, the fair market value of annuities, 
life estates, terms for years, remainders, and reversions included in 
the gross estate of the decedent is their present value determined 
either under this section or under the corresponding section applicable 
at the time the decedent became mentally incompetent, at the option of 
the decedent's executor. For example, see paragraph (d) of this section.
    (ii) If a decedent dies after April 30, 1999, and before July 1, 
1999, the fair market value of annuities, life estates, remainders, and 
reversions based on one or more measuring lives included in the gross 
estate of the decedent is their present value determined under this 
section by use of the section 7520 interest rate for the month in which 
the valuation date occurs (see Sec. Sec. 20.7520-1(b) and 20.7520-
2(a)(2)) and the appropriate actuarial tables under either paragraph 
(e)(4) or paragraph (f)(4) of this section, at the option of the 
decedent's executor.
    (iii) For purposes of paragraphs (f)(2)(i) and (f)(2)(ii) of this 
section, where the decedent's executor is given the option to use the 
appropriate actuarial tables under either paragraph (e)(4) or paragraph 
(f)(4) of this section, the decedent's executor must use the same 
actuarial table with respect to each individual transaction and with 
respect to all transfers occurring on the valuation date (for example, 
gift and income tax charitable deductions with respect to the same 
transfer must be determined based on the same tables, and all assets 
includible in the gross estate and/or estate tax deductions claimed must 
be valued based on the same tables).
    (3) Publications and actuarial computations by the Internal Revenue 
Service. Many standard actuarial factors not included in paragraph 
(f)(4) of this section or in Sec. 20.2031-7(d)(6) are included in 
Internal Revenue Service Publication 1457, ``Actuarial Values, Book 
Aleph,'' (7-99). Publication 1457 also includes examples that illustrate 
how to compute many special factors for more unusual situations. 
Publication 1457 is no longer available for purchase from the 
Superintendent of Documents, United States Government Printing Office. 
However, pertinent factors in this publication may be obtained from: 
CC:PA:LPD:PR (IRS Publication 1457), Room 5205, Internal Revenue 
Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. If a 
special factor is required in the case of an actual decedent, the 
Internal Revenue Service may furnish the factor to the executor upon a 
request for a ruling. The request for a ruling must be accompanied by a 
recitation of the facts including a statement of the date of birth for 
each measuring life, the date of the decedent's death, any other 
applicable dates, and a copy of the will, trust, or other relevant 
documents. A request for a ruling must comply with the instructions for 
requesting a ruling published periodically in the Internal Revenue 
Bulletin (see Sec. Sec. 601.201 and 601.601(d)(2)(ii)(b)) and include 
payment of the required user fee.
    (4) Actuarial tables. Except as provided in Sec. 20.7520-3(b) 
(pertaining to certain limitations on the use of prescribed tables), 
Life Table 90CM and Table S (Single life remainder factors applicable 
where the valuation date is after April 30, 1999, and before May 1, 
2009), contained in this paragraph (f)(4), and Table B, Table J, and 
Table K set forth in Sec. 20.2031-7(d)(6) must be used in the 
application of the provisions of this section when the section 7520 
interest rate component is between 4.2 and 14 percent. Table S and Table 
90CM are as follows:
    (4) Actuarial Table S and Table 90CM where the valuation date is 
after April 30, 1999. Except as provided in Sec. 20.7520-2(b) 
(pertaining to certain limitations on the use of prescribed tables), for 
determination of the present value of an interest that is dependent on 
the termination of a life interest, Table 90CM and Table S, single life 
remainder factors applicable where the valuation date is after April 30, 
1999, contained in this paragraph (d)(7) (or Table S and Table 80CNSMT 
contained in Sec. 20.2031-

[[Page 384]]

7A(e)(4) for valuation dates after April 30, 1989, and before May 1, 
1999) and Table J and Table K contained in paragraph (d)(6) of this 
section, must be used in the application of the provisions of this 
section when the section 7520 interest rate component is between 4.2 and 
14 percent.

            Table S--Based on Life on Life Table 90CM Single Life Remainder Factors, Applicable After April 30, 1999, and Before May 1, 2009
                                                                     [Interest rate]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Age                                 4.2%     4.4%     4.6%     4.8%     5.0%     5.2%     5.4%     5.6%     5.8%     6.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.............................................................   .06752   .06130   .05586   .05109   .04691   .04322   .03998   .03711   .03458   .03233
1.............................................................   .06137   .05495   .04932   .04438   .04003   .03620   .03283   .02985   .02721   .02487
2.............................................................   .06325   .05667   .05088   .04580   .04132   .03737   .03388   .03079   .02806   .02563
3.............................................................   .06545   .05869   .05275   .04752   .04291   .03883   .03523   .03203   .02920   .02668
4.............................................................   .06784   .06092   .05482   .04944   .04469   .04048   .03676   .03346   .03052   .02791
5.............................................................   .07040   .06331   .05705   .05152   .04662   .04229   .03845   .03503   .03199   .02928
6.............................................................   .07310   .06583   .05941   .05372   .04869   .04422   .04025   .03672   .03357   .03076
7.............................................................   .07594   .06849   .06191   .05607   .05089   .04628   .04219   .03854   .03528   .03236
8.............................................................   .07891   .07129   .06453   .05853   .05321   .04846   .04424   .04046   .03709   .03407
9.............................................................   .08203   .07423   .06731   .06115   .05567   .05079   .04643   .04253   .03904   .03592
10............................................................   .08532   .07734   .07024   .06392   .05829   .05326   .04877   .04474   .04114   .03790
11............................................................   .08875   .08059   .07331   .06683   .06104   .05587   .05124   .04709   .04336   .04002
12............................................................   .09233   .08398   .07653   .06989   .06394   .05862   .05385   .04957   .04572   .04226
13............................................................   .09601   .08748   .07985   .07304   .06693   .06146   .05655   .05214   .04816   .04458
14............................................................   .09974   .09102   .08322   .07624   .06997   .06435   .05929   .05474   .05064   .04694
15............................................................   .10350   .09460   .08661   .07946   .07303   .06725   .06204   .05735   .05312   .04930
16............................................................   .10728   .09818   .09001   .08268   .07608   .07014   .06479   .05996   .05559   .05164
17............................................................   .11108   .10179   .09344   .08592   .07916   .07306   .06755   .06257   .05807   .05399
18............................................................   .11494   .10545   .09691   .08921   .08227   .07601   .07034   .06521   .06057   .05636
19............................................................   .11889   .10921   .10047   .09259   .08548   .07904   .07322   .06794   .06315   .05880
20............................................................   .12298   .11310   .10417   .09610   .08881   .08220   .07622   .07078   .06584   .06135
21............................................................   .12722   .11713   .10801   .09976   .09228   .08550   .07935   .07375   .06866   .06403
22............................................................   .13159   .12130   .11199   .10354   .09588   .08893   .08260   .07685   .07160   .06682
23............................................................   .13613   .12563   .11612   .10748   .09964   .09250   .08601   .08009   .07468   .06975
24............................................................   .14084   .13014   .12043   .11160   .10357   .09625   .08958   .08349   .07793   .07284
25............................................................   .14574   .13484   .12493   .11591   .10768   .10018   .09334   .08708   .08135   .07611
26............................................................   .15084   .13974   .12963   .12041   .11199   .10431   .09728   .09085   .08496   .07956
27............................................................   .15615   .14485   .13454   .12513   .11652   .10865   .10144   .09484   .08878   .08322
28............................................................   .16166   .15016   .13965   .13004   .12124   .11319   .10580   .09901   .09279   .08706
29............................................................   .16737   .15567   .14497   .13516   .12617   .11792   .11035   .10339   .09699   .09109
30............................................................   .17328   .16138   .15048   .14047   .13129   .12286   .11510   .10796   .10138   .09532
31............................................................   .17938   .16728   .15618   .14599   .13661   .12799   .12004   .11272   .10597   .09974
32............................................................   .18568   .17339   .16210   .15171   .14214   .13333   .12520   .11769   .11076   .10435
33............................................................   .19220   .17972   .16824   .15766   .14790   .13889   .13058   .12289   .11578   .10920
34............................................................   .19894   .18627   .17460   .16383   .15388   .14468   .13618   .12831   .12102   .11426
35............................................................   .20592   .19307   .18121   .17025   .16011   .15073   .14204   .13399   .12652   .11958
36............................................................   .21312   .20010   .18805   .17691   .16658   .15701   .14814   .13990   .13225   .12514
37............................................................   .22057   .20737   .19514   .18382   .17331   .16356   .15450   .14608   .13825   .13096
38............................................................   .22827   .21490   .20251   .19100   .18031   .17038   .16113   .15253   .14452   .13705
39............................................................   .23623   .22270   .21013   .19845   .18759   .17747   .16805   .15927   .15108   .14344
40............................................................   .24446   .23078   .21805   .20620   .19516   .18487   .17527   .16631   .15795   .15013
41............................................................   .25298   .23915   .22626   .21425   .20305   .19259   .18282   .17368   .16514   .15715
42............................................................   .26178   .24782   .23478   .22262   .21125   .20062   .19069   .18138   .17267   .16450
43............................................................   .27087   .25678   .24360   .23129   .21977   .20898   .19888   .18941   .18053   .17220
44............................................................   .28025   .26603   .25273   .24027   .22860   .21766   .20740   .19777   .18873   .18023
45............................................................   .28987   .27555   .26212   .24953   .23772   .22664   .21622   .20644   .19724   .18858
46............................................................   .29976   .28533   .27179   .25908   .24714   .23591   .22536   .21542   .20606   .19725
47............................................................   .30987   .29535   .28171   .26889   .25682   .24546   .23476   .22468   .21518   .20621
48............................................................   .32023   .30563   .29190   .27897   .26678   .25530   .24447   .23425   .22460   .21549
49............................................................   .33082   .31615   .30234   .28931   .27702   .26543   .25447   .24412   .23434   .22509
50............................................................   .34166   .32694   .31306   .29995   .28756   .27586   .26479   .25432   .24441   .23502
51............................................................   .35274   .33798   .32404   .31085   .29838   .28658   .27541   .26482   .25479   .24528
52............................................................   .36402   .34924   .33525   .32200   .30946   .29757   .28630   .27561   .26547   .25584
53............................................................   .37550   .36070   .34668   .33339   .32078   .30882   .29746   .28667   .27643   .26669
54............................................................   .38717   .37237   .35833   .34500   .33234   .32031   .30888   .29801   .28766   .27782
55............................................................   .39903   .38424   .37019   .35683   .34413   .33205   .32056   .30961   .29918   .28925
56............................................................   .41108   .39631   .38227   .36890   .35617   .34405   .33250   .32149   .31099   .30097
57............................................................   .42330   .40857   .39455   .38118   .36844   .35629   .34469   .33363   .32306   .31297
58............................................................   .43566   .42098   .40699   .39364   .38089   .36873   .35710   .34600   .33538   .32522
59............................................................   .44811   .43351   .41956   .40623   .39350   .38133   .36968   .35855   .34789   .33768
60............................................................   .46066   .44613   .43224   .41896   .40624   .39408   .38243   .37127   .36058   .35033
61............................................................   .47330   .45887   .44505   .43182   .41914   .40699   .39535   .38418   .37347   .36318
62............................................................   .48608   .47175   .45802   .44485   .43223   .42011   .40848   .39732   .38660   .37629
63............................................................   .49898   .48478   .47115   .45807   .44550   .43343   .42184   .41069   .39997   .38966

[[Page 385]]

 
64............................................................   .51200   .49793   .48442   .47143   .45895   .44694   .43539   .42427   .41357   .40326
65............................................................   .52512   .51121   .49782   .48495   .47255   .46062   .44912   .43805   .42738   .41709
66............................................................   .53835   .52461   .51137   .49862   .48634   .47449   .46307   .45206   .44143   .43118
67............................................................   .55174   .53818   .52511   .51250   .50034   .48860   .47727   .46633   .45576   .44556
68............................................................   .56524   .55188   .53899   .52654   .51452   .50291   .49168   .48083   .47034   .46020
69............................................................   .57882   .56568   .55299   .54071   .52885   .51737   .50627   .49552   .48513   .47506
70............................................................   .59242   .57951   .56703   .55495   .54325   .53193   .52096   .51034   .50004   .49007
71............................................................   .60598   .59332   .58106   .56918   .55767   .54651   .53569   .52520   .51503   .50516
72............................................................   .61948   .60707   .59504   .58338   .57206   .56108   .55043   .54009   .53004   .52029
73............................................................   .63287   .62073   .60895   .59751   .58640   .57561   .56513   .55495   .54505   .53543
74............................................................   .64621   .63435   .62282   .61162   .60073   .59015   .57985   .56984   .56009   .55061
75............................................................   .65953   .64796   .63671   .62575   .61510   .60473   .59463   .58480   .57523   .56591
76............................................................   .67287   .66160   .65063   .63995   .62954   .61940   .60952   .59989   .59050   .58135
77............................................................   .68622   .67526   .66459   .65419   .64404   .63415   .62450   .61509   .60590   .59694
78............................................................   .69954   .68892   .67856   .66845   .65858   .64895   .63955   .63036   .62140   .61264
79............................................................   .71278   .70250   .69246   .68265   .67308   .66372   .65457   .64563   .63690   .62836
80............................................................   .72581   .71588   .70618   .69668   .68740   .67833   .66945   .66077   .65227   .64396
81............................................................   .73857   .72899   .71962   .71045   .70147   .69268   .68408   .67566   .66741   .65933
82............................................................   .75101   .74178   .73274   .72389   .71522   .70672   .69840   .69024   .68225   .67441
83............................................................   .76311   .75423   .74553   .73700   .72864   .72044   .71240   .70451   .69678   .68919
84............................................................   .77497   .76645   .75809   .74988   .74183   .73393   .72618   .71857   .71110   .70377
85............................................................   .78665   .77848   .77047   .76260   .75487   .74728   .73982   .73250   .72530   .71823
86............................................................   .79805   .79025   .78258   .77504   .76764   .76036   .75320   .74617   .73925   .73245
87............................................................   .80904   .80159   .79427   .78706   .77998   .77301   .76615   .75940   .75277   .74624
88............................................................   .81962   .81251   .80552   .79865   .79188   .78521   .77865   .77220   .76584   .75958
89............................................................   .82978   .82302   .81636   .80980   .80335   .79699   .79072   .78455   .77847   .77248
90............................................................   .83952   .83309   .82676   .82052   .81437   .80831   .80234   .79645   .79064   .78492
91............................................................   .84870   .84260   .83658   .83064   .82479   .81902   .81332   .80771   .80217   .79671
92............................................................   .85716   .85136   .84563   .83998   .83441   .82891   .82348   .81812   .81283   .80761
93............................................................   .86494   .85942   .85396   .84858   .84326   .83801   .83283   .82771   .82266   .81767
94............................................................   .87216   .86690   .86170   .85657   .85149   .84648   .84153   .83664   .83181   .82704
95............................................................   .87898   .87397   .86902   .86412   .85928   .85450   .84977   .84510   .84049   .83592
96............................................................   .88537   .88060   .87587   .87121   .86659   .86203   .85751   .85305   .84864   .84427
97............................................................   .89127   .88672   .88221   .87775   .87335   .86898   .86467   .86040   .85618   .85200
98............................................................   .89680   .89245   .88815   .88389   .87968   .87551   .87138   .86730   .86326   .85926
99............................................................   .90217   .89803   .89393   .88987   .88585   .88187   .87793   .87402   .87016   .86633
100...........................................................   .90738   .90344   .89953   .89567   .89183   .88804   .88428   .88056   .87687   .87322
101...........................................................   .91250   .90876   .90504   .90137   .89772   .89412   .89054   .88699   .88348   .88000
102...........................................................   .91751   .91396   .91045   .90696   .90350   .90007   .89668   .89331   .88997   .88666
103...........................................................   .92247   .91912   .91579   .91249   .90922   .90598   .90276   .89957   .89640   .89326
104...........................................................   .92775   .92460   .92148   .91839   .91532   .91227   .90924   .90624   .90326   .90031
105...........................................................   .93290   .92996   .92704   .92415   .92127   .91841   .91558   .91276   .90997   .90719
106...........................................................   .93948   .93680   .93415   .93151   .92889   .92628   .92370   .92113   .91857   .91604
107...........................................................   .94739   .94504   .94271   .94039   .93808   .93579   .93351   .93124   .92899   .92675
108...........................................................   .95950   .95767   .95585   .95404   .95224   .95045   .94867   .94689   .94512   .94336
109...........................................................   .97985   .97893   .97801   .97710   .97619   .97529   .97438   .97348   .97259   .97170


--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Age                                 6.2%     6.4%     6.6%     6.8%     7.0%     7.2%     7.4%     7.6%     7.8%     8.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.............................................................   .03034   .02857   .02700   .02559   .02433   .02321   .02220   .02129   .02047   .01973
1.............................................................   .02279   .02094   .01929   .01782   .01650   .01533   .01427   .01331   .01246   .01168
2.............................................................   .02347   .02155   .01983   .01829   .01692   .01569   .01458   .01358   .01268   .01187
3.............................................................   .02444   .02243   .02065   .01905   .01761   .01632   .01516   .01412   .01317   .01232
4.............................................................   .02558   .02349   .02163   .01996   .01846   .01712   .01590   .01481   .01382   .01292
5.............................................................   .02686   .02469   .02275   .02101   .01945   .01804   .01677   .01562   .01458   .01364
6.............................................................   .02825   .02600   .02398   .02217   .02053   .01906   .01773   .01653   .01544   .01445
7.............................................................   .02976   .02742   .02532   .02343   .02172   .02019   .01880   .01754   .01640   .01536
8.............................................................   .03137   .02894   .02675   .02479   .02301   .02140   .01995   .01864   .01744   .01635
9.............................................................   .03311   .03059   .02832   .02627   .02442   .02274   .02122   .01985   .01859   .01745
10............................................................   .03499   .03237   .03001   .02788   .02595   .02420   .02262   .02118   .01987   .01867
11............................................................   .03700   .03428   .03183   .02961   .02760   .02578   .02413   .02262   .02125   .02000
12............................................................   .03913   .03632   .03377   .03146   .02937   .02748   .02575   .02418   .02275   .02144
13............................................................   .04135   .03843   .03579   .03339   .03122   .02924   .02744   .02580   .02431   .02294
14............................................................   .04359   .04057   .03783   .03534   .03308   .03102   .02915   .02744   .02587   .02444
15............................................................   .04584   .04270   .03986   .03728   .03493   .03279   .03083   .02905   .02742   .02593
16............................................................   .04806   .04482   .04187   .03919   .03674   .03452   .03248   .03063   .02892   .02736
17............................................................   .05029   .04692   .04387   .04108   .03855   .03623   .03411   .03218   .03040   .02877
18............................................................   .05253   .04905   .04588   .04299   .04036   .03795   .03574   .03373   .03187   .03017
19............................................................   .05484   .05124   .04796   .04496   .04222   .03972   .03742   .03532   .03339   .03161
20............................................................   .05726   .05354   .05013   .04702   .04418   .04158   .03919   .03700   .03498   .03313

[[Page 386]]

 
21............................................................   .05980   .05595   .05242   .04920   .04625   .04354   .04105   .03877   .03667   .03473
22............................................................   .06246   .05847   .05482   .05147   .04841   .04559   .04301   .04063   .03844   .03642
23............................................................   .06524   .06112   .05734   .05387   .05069   .04777   .04508   .04260   .04032   .03821
24............................................................   .06819   .06392   .06001   .05642   .05312   .05008   .04728   .04470   .04232   .04012
25............................................................   .07131   .06690   .06285   .05913   .05570   .05255   .04964   .04695   .04447   .04218
26............................................................   .07460   .07005   .06586   .06200   .05845   .05518   .05215   .04936   .04677   .04438
27............................................................   .07810   .07340   .06907   .06508   .06140   .05800   .05485   .05195   .04925   .04676
28............................................................   .08179   .07693   .07246   .06833   .06451   .06098   .05772   .05469   .05189   .04929
29............................................................   .08566   .08065   .07603   .07176   .06780   .06414   .06075   .05761   .05469   .05198
30............................................................   .08973   .08456   .07978   .07536   .07127   .06748   .06396   .06069   .05766   .05483
31............................................................   .09398   .08865   .08372   .07915   .07491   .07098   .06733   .06394   .06078   .05785
32............................................................   .09843   .09294   .08785   .08313   .07875   .07468   .07089   .06737   .06409   .06103
33............................................................   .10310   .09745   .09220   .08732   .08279   .07858   .07466   .07100   .06759   .06441
34............................................................   .10799   .10217   .09676   .09173   .08705   .08269   .07862   .07483   .07129   .06798
35............................................................   .11314   .10715   .10157   .09638   .09155   .08704   .08283   .07890   .07522   .07179
36............................................................   .11852   .11236   .10662   .10127   .09628   .09162   .08726   .08319   .07938   .07581
37............................................................   .12416   .11783   .11193   .10641   .10126   .09645   .09194   .08772   .08377   .08006
38............................................................   .13009   .12359   .11751   .11183   .10652   .10155   .09689   .09253   .08843   .08459
39............................................................   .13629   .12962   .12338   .11753   .11206   .10693   .10212   .09761   .09337   .08938
40............................................................   .14281   .13597   .12955   .12355   .11791   .11262   .10766   .10299   .09860   .09447
41............................................................   .14966   .14264   .13606   .12989   .12409   .11864   .11352   .10870   .10417   .09989
42............................................................   .15685   .14966   .14291   .13657   .13061   .12500   .11972   .11475   .11006   .10564
43............................................................   .16437   .15702   .15010   .14360   .13747   .13171   .12627   .12115   .11631   .11174
44............................................................   .17224   .16472   .15764   .15098   .14469   .13876   .13317   .12789   .12290   .11819
45............................................................   .18042   .17274   .16550   .15867   .15223   .14615   .14040   .13496   .12982   .12496
46............................................................   .18893   .18110   .17370   .16671   .16011   .15387   .14796   .14238   .13708   .13207
47............................................................   .19775   .18975   .18220   .17505   .16830   .16190   .15584   .15010   .14466   .13950
48............................................................   .20688   .19873   .19102   .18373   .17682   .17027   .16406   .15817   .15258   .14727
49............................................................   .21633   .20804   .20018   .19274   .18568   .17898   .17262   .16658   .16084   .15539
50............................................................   .22612   .21769   .20969   .20210   .19490   .18805   .18155   .17536   .16948   .16388
51............................................................   .23625   .22769   .21955   .21182   .20448   .19749   .19084   .18452   .17849   .17275
52............................................................   .24669   .23799   .22973   .22186   .21438   .20726   .20047   .19400   .18784   .18196
53............................................................   .25742   .24861   .24022   .23222   .22461   .21735   .21043   .20383   .19753   .19151
54............................................................   .26845   .25952   .25101   .24290   .23516   .22777   .22072   .21399   .20756   .20140
55............................................................   .27978   .27074   .26212   .25389   .24604   .23853   .23136   .22450   .21793   .21166
56............................................................   .29140   .28227   .27355   .26522   .25725   .24963   .24233   .23535   .22867   .22227
57............................................................   .30333   .29411   .28529   .27686   .26879   .26106   .25365   .24656   .23976   .23324
58............................................................   .31551   .30621   .29731   .28878   .28061   .27278   .26528   .25807   .25116   .24453
59............................................................   .32790   .31854   .30956   .30095   .29269   .28477   .27716   .26986   .26284   .25610
60............................................................   .34050   .33107   .32202   .31334   .30500   .29699   .28929   .28190   .27478   .26794
61............................................................   .35331   .34384   .33473   .32598   .31757   .30948   .30170   .29422   .28701   .28007
62............................................................   .36639   .35688   .34772   .33892   .33044   .32229   .31443   .30687   .29958   .29255
63............................................................   .37974   .37020   .36101   .35216   .34363   .33542   .32750   .31986   .31250   .30539
64............................................................   .39334   .38378   .37456   .36568   .35711   .34884   .34087   .33317   .32574   .31857
65............................................................   .40718   .39761   .38838   .37947   .37087   .36257   .35455   .34681   .33932   .33208
66............................................................   .42128   .41172   .40249   .39357   .38496   .37663   .36858   .36079   .35326   .34597
67............................................................   .43569   .42616   .41694   .40803   .39941   .39107   .38299   .37518   .36761   .36028
68............................................................   .45038   .44089   .43170   .42281   .41419   .40585   .39777   .38994   .38235   .37499
69............................................................   .46531   .45587   .44672   .43786   .42927   .42094   .41286   .40503   .39743   .39006
70............................................................   .48040   .47103   .46194   .45312   .44456   .43626   .42820   .42038   .41278   .40540
71............................................................   .49558   .48629   .47727   .46851   .46000   .45174   .44371   .43591   .42832   .42095
72............................................................   .51082   .50162   .49268   .48399   .47554   .46733   .45934   .45157   .44401   .43666
73............................................................   .52607   .51697   .50813   .49952   .49114   .48299   .47506   .46733   .45981   .45249
74............................................................   .54139   .53241   .52367   .51515   .50686   .49879   .49092   .48325   .47578   .46849
75............................................................   .55683   .54798   .53936   .53095   .52276   .51477   .50698   .49938   .49197   .48474
76............................................................   .57243   .56373   .55524   .54696   .53888   .53100   .52330   .51579   .50846   .50130
77............................................................   .58819   .57965   .57132   .56318   .55523   .54747   .53988   .53247   .52523   .51815
78............................................................   .60408   .59572   .58755   .57957   .57177   .56414   .55668   .54939   .54225   .53527
79............................................................   .62001   .61184   .60385   .59604   .58840   .58092   .57360   .56644   .55943   .55256
80............................................................   .63582   .62786   .62007   .61244   .60497   .59765   .59048   .58347   .57659   .56985
81............................................................   .65142   .64367   .63608   .62864   .62135   .61421   .60721   .60034   .59361   .58701
82............................................................   .66673   .65920   .65182   .64458   .63748   .63052   .62368   .61698   .61041   .60395
83............................................................   .68175   .67444   .66728   .66024   .65334   .64656   .63991   .63338   .62696   .62066
84............................................................   .69657   .68950   .68256   .67574   .66904   .66246   .65599   .64964   .64340   .63727
85............................................................   .71128   .70446   .69775   .69116   .68467   .67830   .67204   .66587   .65982   .65386
86............................................................   .72576   .71919   .71272   .70636   .70010   .69394   .68789   .68193   .67606   .67029
87............................................................   .73981   .73349   .72726   .72114   .71511   .70917   .70333   .69757   .69190   .68632
88............................................................   .75342   .74735   .74137   .73548   .72968   .72396   .71833   .71279   .70732   .70194
89............................................................   .76658   .76076   .75503   .74938   .74381   .73832   .73290   .72757   .72231   .71712
90............................................................   .77928   .77371   .76823   .76281   .75748   .75221   .74702   .74190   .73684   .73186
91............................................................   .79131   .78600   .78075   .77557   .77046   .76542   .76044   .75553   .75068   .74589
92............................................................   .80246   .79737   .79235   .78740   .78250   .77767   .77290   .76818   .76353   .75893
93............................................................   .81274   .80788   .80307   .79832   .79363   .78899   .78441   .77989   .77542   .77100
94............................................................   .82232   .81766   .81306   .80850   .80401   .79956   .79517   .79082   .78653   .78228

[[Page 387]]

 
95............................................................   .83141   .82695   .82254   .81818   .81387   .80961   .80539   .80122   .79710   .79302
96............................................................   .83996   .83569   .83147   .82729   .82316   .81907   .81503   .81103   .80707   .80315
97............................................................   .84787   .84378   .83973   .83573   .83176   .82784   .82396   .82012   .81632   .81255
98............................................................   .85530   .85138   .84750   .84366   .83985   .83609   .83236   .82867   .82502   .82140
99............................................................   .86255   .85880   .85508   .85140   .84776   .84415   .84057   .83703   .83353   .83005
100...........................................................   .86960   .86601   .86246   .85894   .85546   .85200   .84858   .84519   .84183   .83849
101...........................................................   .87655   .87313   .86974   .86638   .86305   .85975   .85648   .85324   .85003   .84684
102...........................................................   .88338   .88012   .87689   .87369   .87052   .86738   .86426   .86116   .85809   .85505
103...........................................................   .89015   .88706   .88399   .88095   .87793   .87494   .87197   .86903   .86611   .86321
104...........................................................   .89737   .89446   .89157   .88871   .88586   .88304   .88024   .87745   .87469   .87195
105...........................................................   .90443   .90170   .89898   .89628   .89360   .89094   .88830   .88568   .88307   .88049
106...........................................................   .91351   .91101   .90852   .90605   .90359   .90115   .89873   .89632   .89392   .89154
107...........................................................   .92452   .92230   .92010   .91791   .91573   .91356   .91141   .90927   .90714   .90502
108...........................................................   .94161   .93987   .93814   .93641   .93469   .93298   .93128   .92958   .92790   .92622
109...........................................................   .97081   .96992   .96904   .96816   .96729   .96642   .96555   .96468   .96382   .96296


--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Age                                 8.2%     8.4%     8.6%     8.8%     9.0%     9.2%     9.4%     9.6%     9.8%    10.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.............................................................   .01906   .01845   .01790   .01740   .01694   .01652   .01613   .01578   .01546   .01516
1.............................................................   .01098   .01034   .00977   .00924   .00876   .00833   .00793   .00756   .00722   .00691
2.............................................................   .01113   .01046   .00986   .00930   .00880   .00834   .00791   .00753   .00717   .00684
3.............................................................   .01155   .01084   .01020   .00962   .00909   .00860   .00816   .00775   .00737   .00702
4.............................................................   .01211   .01137   .01069   .01008   .00952   .00900   .00853   .00810   .00770   .00733
5.............................................................   .01279   .01201   .01130   .01065   .01006   .00952   .00902   .00856   .00814   .00775
6.............................................................   .01356   .01274   .01199   .01131   .01068   .01011   .00959   .00910   .00865   .00824
7.............................................................   .01442   .01356   .01277   .01205   .01140   .01079   .01023   .00972   .00925   .00881
8.............................................................   .01536   .01446   .01363   .01287   .01218   .01154   .01096   .01041   .00991   .00945
9.............................................................   .01641   .01546   .01460   .01380   .01307   .01240   .01178   .01120   .01068   .01019
10............................................................   .01758   .01659   .01567   .01484   .01407   .01336   .01270   .01210   .01154   .01103
11............................................................   .01886   .01781   .01686   .01598   .01517   .01442   .01373   .01310   .01251   .01196
12............................................................   .02024   .01915   .01814   .01721   .01636   .01558   .01485   .01419   .01357   .01299
13............................................................   .02168   .02054   .01948   .01851   .01762   .01679   .01603   .01533   .01467   .01407
14............................................................   .02313   .02193   .02083   .01981   .01887   .01801   .01721   .01646   .01578   .01514
15............................................................   .02456   .02330   .02214   .02107   .02009   .01918   .01834   .01756   .01684   .01617
16............................................................   .02593   .02462   .02340   .02229   .02126   .02030   .01942   .01860   .01785   .01714
17............................................................   .02728   .02590   .02463   .02346   .02238   .02138   .02046   .01960   .01880   .01806
18............................................................   .02861   .02717   .02584   .02462   .02348   .02243   .02146   .02056   .01972   .01894
19............................................................   .02998   .02847   .02708   .02580   .02461   .02351   .02249   .02154   .02066   .01984
20............................................................   .03142   .02984   .02839   .02704   .02580   .02465   .02357   .02258   .02165   .02079
21............................................................   .03295   .03130   .02978   .02837   .02706   .02585   .02473   .02368   .02271   .02180
22............................................................   .03455   .03283   .03124   .02976   .02839   .02712   .02594   .02484   .02382   .02286
23............................................................   .03626   .03446   .03279   .03124   .02981   .02847   .02723   .02608   .02500   .02400
24............................................................   .03809   .03620   .03446   .03283   .03133   .02993   .02863   .02741   .02628   .02522
25............................................................   .04005   .03808   .03625   .03456   .03298   .03151   .03014   .02887   .02768   .02656
26............................................................   .04216   .04010   .03819   .03641   .03476   .03322   .03178   .03044   .02919   .02802
27............................................................   .04444   .04229   .04029   .03843   .03670   .03508   .03357   .03217   .03085   .02962
28............................................................   .04687   .04463   .04254   .04059   .03877   .03708   .03550   .03402   .03263   .03133
29............................................................   .04946   .04712   .04493   .04289   .04099   .03922   .03756   .03600   .03455   .03318
30............................................................   .05221   .04976   .04748   .04534   .04335   .04149   .03975   .03812   .03659   .03515
31............................................................   .05511   .05255   .05017   .04794   .04585   .04390   .04208   .04037   .03876   .03725
32............................................................   .05818   .05551   .05302   .05069   .04851   .04647   .04455   .04276   .04107   .03948
33............................................................   .06144   .05866   .05606   .05363   .05135   .04921   .04720   .04532   .04355   .04188
34............................................................   .06489   .06200   .05928   .05674   .05436   .05212   .05002   .04805   .04619   .04444
35............................................................   .06857   .06555   .06273   .06007   .05758   .05524   .05304   .05097   .04902   .04718
36............................................................   .07246   .06932   .06638   .06361   .06101   .05856   .05626   .05409   .05205   .05012
37............................................................   .07659   .07332   .07025   .06737   .06466   .06210   .05969   .05742   .05528   .05325
38............................................................   .08098   .07758   .07439   .07138   .06855   .06588   .06336   .06099   .05874   .05662
39............................................................   .08563   .08210   .07878   .07565   .07270   .06992   .06729   .06480   .06245   .06023
40............................................................   .09059   .08692   .08347   .08021   .07714   .07423   .07149   .06889   .06643   .06411
41............................................................   .09586   .09206   .08848   .08509   .08189   .07886   .07600   .07329   .07072   .06828
42............................................................   .10147   .09753   .09381   .09029   .08696   .08381   .08083   .07800   .07531   .07277
43............................................................   .10742   .10334   .09948   .09583   .09237   .08909   .08598   .08304   .08024   .07758
44............................................................   .11373   .10950   .10551   .10172   .09813   .09472   .09148   .08841   .08549   .08272
45............................................................   .12035   .11599   .11185   .10792   .10420   .10066   .09730   .09410   .09106   .08817
46............................................................   .12732   .12281   .11853   .11447   .11061   .10694   .10345   .10013   .09696   .09395
47............................................................   .13460   .12995   .12553   .12133   .11733   .11353   .10991   .10646   .10317   .10004
48............................................................   .14223   .13743   .13287   .12853   .12439   .12046   .11671   .11313   .10972   .10646
49............................................................   .15020   .14526   .14056   .13608   .13181   .12774   .12385   .12015   .11661   .11322
50............................................................   .15855   .15347   .14862   .14401   .13960   .13540   .13138   .12754   .12388   .12037
51............................................................   .16727   .16205   .15707   .15232   .14777   .14344   .13929   .13532   .13153   .12789
52............................................................   .17634   .17098   .16587   .16097   .15630   .15183   .14755   .14345   .13953   .13577
53............................................................   .18576   .18027   .17501   .16999   .16518   .16057   .15616   .15194   .14789   .14400
54............................................................   .19552   .18990   .18451   .17935   .17441   .16968   .16514   .16078   .15661   .15260
55............................................................   .20564   .19989   .19437   .18908   .18402   .17915   .17449   .17001   .16571   .16157

[[Page 388]]

 
56............................................................   .21613   .21025   .20461   .19919   .19400   .18901   .18422   .17962   .17519   .17093
57............................................................   .22698   .22098   .21522   .20968   .20436   .19925   .19434   .18961   .18507   .18069
58............................................................   .23816   .23204   .22616   .22051   .21507   .20984   .20481   .19996   .19530   .19080
59............................................................   .24962   .24339   .23740   .23163   .22608   .22073   .21558   .21062   .20584   .20123
60............................................................   .26136   .25502   .24892   .24304   .23738   .23192   .22666   .22158   .21669   .21196
61............................................................   .27339   .26695   .26075   .25477   .24900   .24343   .23806   .23288   .22787   .22304
62............................................................   .28578   .27925   .27295   .26687   .26100   .25533   .24985   .24456   .23945   .23451
63............................................................   .29854   .29192   .28553   .27935   .27339   .26762   .26205   .25666   .25145   .24641
64............................................................   .31164   .30494   .29846   .29221   .28615   .28030   .27463   .26915   .26384   .25870
65............................................................   .32508   .31831   .31177   .30543   .29930   .29336   .28761   .28203   .27663   .27140
66............................................................   .33891   .33208   .32547   .31906   .31285   .30684   .30101   .29536   .28987   .28456
67............................................................   .35318   .34630   .33963   .33316   .32689   .32081   .31491   .30918   .30363   .29823
68............................................................   .36785   .36093   .35422   .34770   .34138   .33524   .32928   .32349   .31787   .31240
69............................................................   .38290   .37595   .36920   .36265   .35628   .35009   .34408   .33824   .33256   .32703
70............................................................   .39823   .39127   .38450   .37791   .37151   .36529   .35924   .35335   .34762   .34204
71............................................................   .41378   .40681   .40003   .39343   .38701   .38076   .37467   .36875   .36298   .35736
72............................................................   .42950   .42253   .41575   .40914   .40271   .39644   .39034   .38438   .37858   .37293
73............................................................   .44535   .43840   .43162   .42502   .41858   .41231   .40619   .40022   .39440   .38872
74............................................................   .46139   .45446   .44771   .44112   .43469   .42842   .42230   .41632   .41049   .40479
75............................................................   .47769   .47080   .46408   .45752   .45111   .44485   .43874   .43277   .42693   .42123
76............................................................   .49430   .48747   .48079   .47427   .46790   .46167   .45558   .44963   .44380   .43811
77............................................................   .51123   .50447   .49786   .49139   .48506   .47888   .47282   .46690   .46111   .45543
78............................................................   .52845   .52177   .51523   .50884   .50257   .49645   .49044   .48457   .47881   .47317
79............................................................   .54584   .53926   .53282   .52650   .52032   .51426   .50833   .50251   .49681   .49122
80............................................................   .56325   .55678   .55044   .54423   .53813   .53216   .52630   .52056   .51492   .50939
81............................................................   .58054   .57419   .56797   .56186   .55587   .54999   .54422   .53856   .53300   .52754
82............................................................   .59762   .59140   .58530   .57931   .57343   .56766   .56198   .55641   .55094   .54557
83............................................................   .61448   .60840   .60243   .59657   .59081   .58515   .57958   .57411   .56874   .56346
84............................................................   .63124   .62531   .61949   .61376   .60813   .60259   .59715   .59179   .58652   .58134
85............................................................   .64800   .64224   .63657   .63099   .62550   .62010   .61478   .60955   .60441   .59934
86............................................................   .66461   .65902   .65351   .64810   .64276   .63751   .63233   .62724   .62222   .61728
87............................................................   .68083   .67541   .67008   .66483   .65965   .65455   .64953   .64458   .63970   .63489
88............................................................   .69663   .69140   .68624   .68116   .67615   .67121   .66634   .66154   .65680   .65213
89............................................................   .71201   .70696   .70199   .69708   .69224   .68747   .68276   .67811   .67353   .66900
90............................................................   .72694   .72209   .71730   .71257   .70791   .70330   .69876   .69427   .68984   .68547
91............................................................   .74117   .73650   .73190   .72735   .72286   .71842   .71404   .70972   .70545   .70123
92............................................................   .75439   .74991   .74548   .74110   .73678   .73251   .72829   .72412   .72000   .71593
93............................................................   .76664   .76233   .75806   .75385   .74969   .74557   .74150   .73748   .73350   .72957
94............................................................   .77809   .77394   .76983   .76578   .76177   .75780   .75388   .75000   .74616   .74237
95............................................................   .78899   .78500   .78106   .77715   .77329   .76947   .76569   .76195   .75826   .75460
96............................................................   .79928   .79544   .79165   .78790   .78418   .78050   .77686   .77326   .76970   .76617
97............................................................   .80883   .80514   .80149   .79787   .79430   .79075   .78725   .78377   .78033   .77693
98............................................................   .81781   .81427   .81075   .80727   .80382   .80041   .79703   .79368   .79036   .78708
99............................................................   .82661   .82320   .81982   .81648   .81316   .80988   .80662   .80340   .80020   .79704
100...........................................................   .83519   .83192   .82868   .82547   .82228   .81913   .81600   .81290   .80982   .80678
101...........................................................   .84368   .84055   .83744   .83437   .83131   .82829   .82529   .82231   .81936   .81643
102...........................................................   .85203   .84904   .84607   .84313   .84021   .83731   .83444   .83159   .82876   .82596
103...........................................................   .86034   .85748   .85465   .85184   .84906   .84629   .84355   .84082   .83812   .83544
104...........................................................   .86923   .86653   .86385   .86119   .85855   .85593   .85333   .85074   .84818   .84563
105...........................................................   .87792   .87537   .87283   .87032   .86782   .86534   .86287   .86042   .85799   .85557
106...........................................................   .88918   .88683   .88450   .88218   .87987   .87758   .87530   .87304   .87079   .86855
107...........................................................   .90291   .90082   .89873   .89666   .89460   .89255   .89051   .88849   .88647   .88447
108...........................................................   .92455   .92288   .92123   .91958   .91794   .91630   .91468   .91306   .91145   .90984
109...........................................................   .96211   .96125   .96041   .95956   .95872   .95788   .95704   .95620   .95537   .95455


--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Age                                10.2%    10.4%    10.6%    10.8%    11.0%    11.2%    11.4%    11.6%    11.8%    12.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.............................................................   .01488   .01463   .01439   .01417   .01396   .01377   .01359   .01343   .01327   .01312
1.............................................................   .00662   .00636   .00612   .00589   .00568   .00548   .00530   .00513   .00497   .00482
2.............................................................   .00654   .00626   .00600   .00576   .00554   .00533   .00514   .00496   .00479   .00463
3.............................................................   .00670   .00641   .00613   .00588   .00564   .00542   .00522   .00502   .00484   .00468
4.............................................................   .00699   .00668   .00639   .00612   .00587   .00563   .00542   .00521   .00502   .00484
5.............................................................   .00739   .00706   .00675   .00646   .00620   .00595   .00571   .00550   .00529   .00510
6.............................................................   .00786   .00751   .00718   .00687   .00659   .00633   .00608   .00585   .00563   .00543
7.............................................................   .00841   .00803   .00769   .00736   .00706   .00678   .00652   .00627   .00604   .00582
8.............................................................   .00902   .00863   .00826   .00791   .00759   .00730   .00702   .00675   .00651   .00628
9.............................................................   .00973   .00931   .00892   .00856   .00822   .00790   .00760   .00733   .00706   .00682
10............................................................   .01055   .01010   .00969   .00930   .00894   .00861   .00829   .00799   .00772   .00746
11............................................................   .01146   .01099   .01055   .01014   .00976   .00940   .00907   .00875   .00846   .00818
12............................................................   .01246   .01196   .01150   .01106   .01066   .01028   .00993   .00960   .00928   .00899
13............................................................   .01351   .01298   .01249   .01204   .01161   .01121   .01084   .01049   .01016   .00985
14............................................................   .01455   .01400   .01348   .01300   .01255   .01213   .01173   .01136   .01102   .01069
15............................................................   .01555   .01497   .01443   .01392   .01345   .01300   .01259   .01220   .01183   .01148
16............................................................   .01648   .01587   .01530   .01477   .01427   .01380   .01336   .01295   .01257   .01220

[[Page 389]]

 
17............................................................   .01737   .01673   .01612   .01556   .01504   .01455   .01408   .01365   .01324   .01286
18............................................................   .01822   .01754   .01691   .01632   .01576   .01525   .01476   .01430   .01387   .01347
19............................................................   .01908   .01837   .01770   .01708   .01650   .01595   .01544   .01495   .01450   .01407
20............................................................   .01999   .01924   .01854   .01788   .01726   .01669   .01615   .01564   .01516   .01471
21............................................................   .02096   .02017   .01943   .01874   .01809   .01748   .01691   .01637   .01586   .01539
22............................................................   .02197   .02114   .02036   .01963   .01895   .01830   .01770   .01713   .01660   .01610
23............................................................   .02306   .02218   .02136   .02059   .01987   .01919   .01855   .01795   .01739   .01686
24............................................................   .02424   .02331   .02245   .02163   .02087   .02016   .01948   .01885   .01825   .01769
25............................................................   .02552   .02455   .02364   .02278   .02197   .02122   .02051   .01984   .01920   .01861
26............................................................   .02692   .02589   .02493   .02403   .02318   .02238   .02162   .02091   .02025   .01961
27............................................................   .02846   .02738   .02636   .02541   .02451   .02367   .02287   .02212   .02141   .02074
28............................................................   .03012   .02898   .02791   .02690   .02595   .02506   .02422   .02342   .02267   .02196
29............................................................   .03190   .03070   .02957   .02851   .02751   .02656   .02567   .02483   .02404   .02329
30............................................................   .03381   .03254   .03135   .03023   .02917   .02817   .02723   .02634   .02551   .02471
31............................................................   .03583   .03450   .03324   .03206   .03094   .02989   .02890   .02796   .02707   .02623
32............................................................   .03799   .03659   .03527   .03402   .03284   .03173   .03068   .02968   .02874   .02785
33............................................................   .04031   .03883   .03744   .03612   .03488   .03371   .03260   .03155   .03055   .02961
34............................................................   .04279   .04123   .03976   .03838   .03707   .03583   .03465   .03354   .03249   .03149
35............................................................   .04545   .04382   .04227   .04081   .03943   .03812   .03688   .03571   .03459   .03354
36............................................................   .04830   .04658   .04495   .04341   .04196   .04058   .03927   .03803   .03685   .03573
37............................................................   .05134   .04953   .04782   .04620   .04467   .04321   .04183   .04052   .03928   .03809
38............................................................   .05462   .05272   .05092   .04921   .04760   .04606   .04461   .04322   .04191   .04066
39............................................................   .05812   .05613   .05424   .05245   .05075   .04913   .04760   .04614   .04475   .04343
40............................................................   .06190   .05981   .05782   .05594   .05415   .05245   .05083   .04929   .04783   .04643
41............................................................   .06597   .06378   .06170   .05972   .05784   .05605   .05435   .05272   .05118   .04970
42............................................................   .07035   .06806   .06587   .06380   .06182   .05994   .05815   .05644   .05481   .05326
43............................................................   .07505   .07265   .07036   .06818   .06611   .06414   .06225   .06045   .05874   .05710
44............................................................   .08008   .07757   .07518   .07290   .07072   .06865   .06667   .06478   .06298   .06125
45............................................................   .08542   .08279   .08029   .07791   .07563   .07346   .07138   .06940   .06750   .06569
46............................................................   .09108   .08834   .08573   .08324   .08085   .07858   .07640   .07432   .07233   .07043
47............................................................   .09705   .09419   .09147   .08886   .08637   .08399   .08172   .07954   .07745   .07545
48............................................................   .10335   .10038   .09754   .09482   .09222   .08973   .08735   .08507   .08288   .08078
49............................................................   .10999   .10690   .10394   .10111   .09840   .09581   .09332   .09093   .08864   .08644
50............................................................   .11701   .11380   .11073   .10778   .10496   .10225   .09965   .09716   .09477   .09247
51............................................................   .12441   .12108   .11789   .11482   .11189   .10907   .10636   .10376   .10126   .09886
52............................................................   .13217   .12871   .12540   .12222   .11916   .11623   .11341   .11071   .10810   .10560
53............................................................   .14028   .13670   .13327   .12997   .12680   .12375   .12082   .11801   .11529   .11268
54............................................................   .14875   .14505   .14150   .13808   .13480   .13163   .12859   .12566   .12284   .12012
55............................................................   .15760   .15378   .15011   .14657   .14317   .13989   .13674   .13370   .13077   .12794
56............................................................   .16684   .16290   .15911   .15546   .15194   .14855   .14528   .14213   .13909   .13615
57............................................................   .17648   .17242   .16851   .16474   .16111   .15760   .15422   .15096   .14781   .14477
58............................................................   .18647   .18229   .17827   .17438   .17064   .16702   .16353   .16015   .15689   .15374
59............................................................   .19678   .19249   .18835   .18435   .18049   .17676   .17316   .16968   .16631   .16305
60............................................................   .20740   .20300   .19875   .19464   .19066   .18682   .18311   .17952   .17604   .17268
61............................................................   .21837   .21385   .20949   .20527   .20119   .19724   .19341   .18971   .18613   .18266
62............................................................   .22973   .22511   .22064   .21631   .21212   .20807   .20414   .20033   .19664   .19306
63............................................................   .24152   .23680   .23222   .22779   .22350   .21934   .21530   .21139   .20760   .20392
64............................................................   .25372   .24890   .24422   .23969   .23529   .23103   .22690   .22289   .21899   .21521
65............................................................   .26633   .26141   .25664   .25201   .24752   .24316   .23893   .23482   .23083   .22695
66............................................................   .27940   .27439   .26953   .26481   .26023   .25577   .25145   .24724   .24316   .23918
67............................................................   .29299   .28790   .28296   .27815   .27348   .26894   .26453   .26024   .25606   .25200
68............................................................   .30709   .30193   .29691   .29202   .28728   .28265   .27816   .27378   .26952   .26537
69............................................................   .32166   .31643   .31134   .30639   .30157   .29687   .29230   .28785   .28351   .27928
70............................................................   .33661   .33133   .32618   .32116   .31628   .31152   .30688   .30235   .29794   .29364
71............................................................   .35188   .34654   .34134   .33627   .33133   .32651   .32181   .31722   .31275   .30838
72............................................................   .36742   .36204   .35679   .35168   .34668   .34181   .33706   .33241   .32788   .32345
73............................................................   .38317   .37776   .37248   .36733   .36229   .35738   .35257   .34788   .34330   .33882
74............................................................   .39923   .39380   .38849   .38330   .37823   .37328   .36844   .36370   .35908   .35455
75............................................................   .41566   .41021   .40489   .39968   .39459   .38961   .38474   .37997   .37531   .37074
76............................................................   .43254   .42709   .42176   .41655   .41144   .40645   .40156   .39677   .39208   .38749
77............................................................   .44988   .44444   .43912   .43391   .42880   .42380   .41891   .41411   .40940   .40479
78............................................................   .46765   .46224   .45694   .45174   .44665   .44166   .43677   .43197   .42726   .42265
79............................................................   .48574   .48037   .47510   .46993   .46487   .45990   .45502   .45024   .44554   .44094
80............................................................   .50397   .49865   .49343   .48830   .48327   .47834   .47349   .46873   .46406   .45947
81............................................................   .52219   .51693   .51176   .50669   .50171   .49682   .49201   .48729   .48265   .47809
82............................................................   .54029   .53510   .53000   .52499   .52007   .51523   .51047   .50580   .50120   .49667
83............................................................   .55826   .55315   .54813   .54319   .53834   .53356   .52886   .52424   .51969   .51522
84............................................................   .57624   .57123   .56629   .56144   .55666   .55195   .54732   .54277   .53828   .53386
85............................................................   .59435   .58944   .58460   .57984   .57516   .57054   .56599   .56151   .55710   .55275
86............................................................   .61241   .60762   .60289   .59824   .59365   .58913   .58468   .58029   .57596   .57170
87............................................................   .63015   .62548   .62087   .61633   .61185   .60744   .60309   .59880   .59456   .59039
88............................................................   .64753   .64299   .63851   .63409   .62973   .62543   .62118   .61700   .61287   .60879
89............................................................   .66454   .66013   .65579   .65150   .64726   .64308   .63895   .63488   .63086   .62689
90............................................................   .68115   .67689   .67268   .66853   .66442   .66037   .65637   .65241   .64851   .64465

[[Page 390]]

 
91............................................................   .69706   .69294   .68887   .68486   .68089   .67696   .67309   .66925   .66547   .66173
92............................................................   .71190   .70792   .70399   .70011   .69627   .69247   .68872   .68501   .68134   .67771
93............................................................   .72569   .72184   .71804   .71429   .71057   .70689   .70326   .69967   .69611   .69259
94............................................................   .73861   .73490   .73123   .72759   .72400   .72044   .71692   .71344   .71000   .70659
95............................................................   .75097   .74739   .74384   .74033   .73686   .73342   .73002   .72665   .72331   .72001
96............................................................   .76267   .75922   .75579   .75240   .74905   .74572   .74243   .73917   .73595   .73275
97............................................................   .77356   .77022   .76691   .76363   .76039   .75718   .75399   .75084   .74772   .74463
98............................................................   .78382   .78059   .77740   .77423   .77110   .76799   .76491   .76186   .75884   .75584
99............................................................   .79390   .79079   .78771   .78465   .78162   .77862   .77565   .77270   .76978   .76688
100...........................................................   .80376   .80076   .79779   .79485   .79193   .78904   .78617   .78333   .78051   .77771
101...........................................................   .81353   .81066   .80780   .80497   .80217   .79938   .79662   .79388   .79117   .78847
102...........................................................   .82318   .82042   .81768   .81496   .81227   .80960   .80694   .80431   .80170   .79911
103...........................................................   .83278   .83014   .82752   .82491   .82233   .81977   .81723   .81470   .81220   .80971
104...........................................................   .84310   .84059   .83810   .83563   .83317   .83073   .82831   .82591   .82352   .82115
105...........................................................   .85318   .85079   .84843   .84607   .84374   .84142   .83911   .83682   .83455   .83229
106...........................................................   .86633   .86413   .86193   .85975   .85758   .85543   .85329   .85116   .84904   .84694
107...........................................................   .88247   .88049   .87852   .87656   .87460   .87266   .87073   .86881   .86690   .86500
108...........................................................   .90825   .90666   .90507   .90350   .90193   .90037   .89881   .89727   .89572   .89419
109...........................................................   .95372   .95290   .95208   .95126   .95045   .94964   .94883   .94803   .94723   .94643


--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Age                                12.2%    12.4%    12.6%    12.8%    13.0%    13.2%    13.4%    13.6%    13.8%    14.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.............................................................   .01298   .01285   .01273   .01261   .01250   .01240   .01230   .01221   .01212   .01203
1.............................................................   .00468   .00455   .00443   .00431   .00420   .00410   .00400   .00391   .00382   .00374
2.............................................................   .00448   .00435   .00421   .00409   .00398   .00387   .00376   .00366   .00357   .00348
3.............................................................   .00452   .00437   .00423   .00410   .00398   .00386   .00375   .00365   .00355   .00345
4.............................................................   .00468   .00452   .00437   .00423   .00410   .00397   .00386   .00375   .00364   .00354
5.............................................................   .00493   .00476   .00460   .00445   .00431   .00418   .00405   .00393   .00382   .00371
6.............................................................   .00524   .00506   .00489   .00473   .00458   .00444   .00430   .00418   .00406   .00394
7.............................................................   .00562   .00543   .00525   .00508   .00492   .00477   .00462   .00449   .00436   .00423
8.............................................................   .00606   .00586   .00566   .00548   .00531   .00515   .00499   .00485   .00471   .00458
9.............................................................   .00659   .00637   .00616   .00597   .00579   .00561   .00545   .00529   .00514   .00500
10............................................................   .00721   .00698   .00676   .00655   .00636   .00617   .00600   .00583   .00567   .00552
11............................................................   .00792   .00767   .00744   .00722   .00701   .00682   .00663   .00645   .00628   .00612
12............................................................   .00871   .00845   .00821   .00797   .00775   .00754   .00735   .00716   .00698   .00681
13............................................................   .00955   .00928   .00902   .00877   .00854   .00831   .00810   .00790   .00771   .00753
14............................................................   .01038   .01009   .00981   .00955   .00930   .00907   .00885   .00864   .00843   .00824
15............................................................   .01116   .01085   .01056   .01028   .01002   .00977   .00954   .00932   .00910   .00890
16............................................................   .01186   .01153   .01123   .01094   .01066   .01040   .01015   .00992   .00969   .00948
17............................................................   .01250   .01215   .01183   .01152   .01124   .01096   .01070   .01045   .01022   .00999
18............................................................   .01308   .01272   .01238   .01206   .01175   .01147   .01119   .01093   .01068   .01044
19............................................................   .01367   .01329   .01293   .01259   .01227   .01196   .01167   .01140   .01113   .01088
20............................................................   .01428   .01388   .01350   .01314   .01280   .01248   .01217   .01188   .01161   .01134
21............................................................   .01494   .01451   .01411   .01373   .01337   .01303   .01271   .01240   .01211   .01183
22............................................................   .01562   .01517   .01475   .01435   .01397   .01361   .01326   .01294   .01263   .01233
23............................................................   .01635   .01588   .01543   .01501   .01460   .01422   .01386   .01351   .01319   .01287
24............................................................   .01716   .01665   .01618   .01573   .01530   .01489   .01451   .01415   .01380   .01347
25............................................................   .01804   .01751   .01701   .01653   .01608   .01565   .01524   .01485   .01448   .01413
26............................................................   .01902   .01845   .01792   .01741   .01693   .01648   .01604   .01563   .01524   .01487
27............................................................   .02011   .01951   .01895   .01841   .01790   .01742   .01696   .01652   .01610   .01571
28............................................................   .02129   .02066   .02006   .01949   .01895   .01844   .01795   .01748   .01704   .01662
29............................................................   .02258   .02191   .02127   .02067   .02009   .01955   .01903   .01853   .01806   .01762
30............................................................   .02396   .02325   .02257   .02193   .02132   .02074   .02019   .01966   .01916   .01869
31............................................................   .02543   .02467   .02396   .02328   .02263   .02201   .02143   .02087   .02034   .01983
32............................................................   .02701   .02621   .02545   .02472   .02404   .02338   .02276   .02217   .02160   .02106
33............................................................   .02871   .02786   .02706   .02629   .02556   .02487   .02420   .02357   .02297   .02240
34............................................................   .03054   .02964   .02879   .02797   .02720   .02646   .02576   .02509   .02445   .02383
35............................................................   .03253   .03158   .03067   .02981   .02898   .02820   .02745   .02674   .02606   .02541
36............................................................   .03467   .03366   .03269   .03178   .03090   .03007   .02928   .02852   .02779   .02710
37............................................................   .03697   .03590   .03488   .03391   .03298   .03209   .03125   .03044   .02967   .02893
38............................................................   .03947   .03833   .03725   .03622   .03524   .03430   .03340   .03254   .03172   .03094
39............................................................   .04217   .04096   .03982   .03873   .03768   .03669   .03573   .03482   .03395   .03312
40............................................................   .04510   .04383   .04262   .04146   .04035   .03930   .03828   .03732   .03639   .03550
41............................................................   .04830   .04695   .04567   .04445   .04327   .04215   .04108   .04005   .03907   .03812
42............................................................   .05177   .05035   .04900   .04770   .04646   .04527   .04413   .04304   .04200   .04100
43............................................................   .05553   .05404   .05261   .05123   .04992   .04866   .04746   .04630   .04520   .04413
44............................................................   .05960   .05802   .05651   .05506   .05368   .05235   .05107   .04985   .04867   .04754
45............................................................   .06395   .06229   .06069   .05917   .05770   .05630   .05495   .05365   .05241   .05121
46............................................................   .06860   .06685   .06517   .06356   .06202   .06053   .05911   .05774   .05643   .05516
47............................................................   .07353   .07169   .06992   .06823   .06660   .06504   .06353   .06209   .06070   .05936
48............................................................   .07877   .07684   .07498   .07320   .07149   .06984   .06826   .06673   .06527   .06385
49............................................................   .08433   .08231   .08036   .07849   .07669   .07495   .07329   .07168   .07013   .06864
50............................................................   .09026   .08814   .08609   .08413   .08224   .08042   .07867   .07698   .07535   .07378
51............................................................   .09655   .09433   .09219   .09013   .08815   .08624   .08440   .08262   .08091   .07926

[[Page 391]]

 
52............................................................   .10318   .10086   .09863   .09647   .09439   .09239   .09046   .08860   .08680   .08506
53............................................................   .11017   .10774   .10541   .10315   .10098   .09888   .09686   .09491   .09302   .09120
54............................................................   .11750   .11498   .11254   .11019   .10792   .10572   .10361   .10156   .09958   .09767
55............................................................   .12522   .12258   .12005   .11759   .11522   .11294   .11072   .10859   .10652   .10451
56............................................................   .13332   .13059   .12794   .12539   .12292   .12054   .11823   .11599   .11383   .11174
57............................................................   .14183   .13899   .13624   .13359   .13102   .12853   .12613   .12380   .12154   .11936
58............................................................   .15070   .14775   .14490   .14215   .13948   .13689   .13439   .13197   .12962   .12734
59............................................................   .15990   .15685   .15389   .15103   .14826   .14558   .14298   .14046   .13801   .13564
60............................................................   .16942   .16626   .16321   .16024   .15737   .15459   .15189   .14927   .14673   .14426
61............................................................   .17929   .17603   .17287   .16981   .16684   .16395   .16115   .15844   .15580   .15324
62............................................................   .18960   .18623   .18297   .17980   .17673   .17375   .17085   .16803   .16530   .16264
63............................................................   .20035   .19688   .19352   .19025   .18708   .18400   .18100   .17809   .17525   .17250
64............................................................   .21154   .20797   .20451   .20114   .19787   .19469   .19159   .18859   .18566   .18281
65............................................................   .22318   .21951   .21595   .21249   .20912   .20584   .20265   .19955   .19652   .19358
66............................................................   .23532   .23156   .22790   .22434   .22088   .21751   .21422   .21102   .20791   .20487
67............................................................   .24804   .24419   .24044   .23679   .23324   .22977   .22640   .22311   .21990   .21678
68............................................................   .26133   .25740   .25356   .24983   .24618   .24263   .23917   .23579   .23250   .22929
69............................................................   .27516   .27114   .26723   .26341   .25969   .25605   .25251   .24905   .24567   .24237
70............................................................   .28945   .28536   .28137   .27747   .27367   .26996   .26633   .26279   .25934   .25596
71............................................................   .30412   .29996   .29590   .29193   .28806   .28427   .28057   .27696   .27343   .26998
72............................................................   .31913   .31491   .31078   .30675   .30281   .29895   .29519   .29150   .28790   .28438
73............................................................   .33444   .33016   .32597   .32188   .31788   .31396   .31013   .30638   .30271   .29913
74............................................................   .35012   .34579   .34155   .33741   .33335   .32938   .32549   .32168   .31795   .31430
75............................................................   .36628   .36190   .35762   .35343   .34932   .34530   .34136   .33750   .33372   .33001
76............................................................   .38299   .37858   .37427   .37004   .36589   .36183   .35784   .35394   .35011   .34636
77............................................................   .40028   .39585   .39151   .38725   .38307   .37898   .37496   .37103   .36716   .36337
78............................................................   .41812   .41368   .40933   .40506   .40086   .39675   .39271   .38874   .38485   .38103
79............................................................   .43641   .43198   .42762   .42334   .41914   .41502   .41096   .40698   .40308   .39924
80............................................................   .45496   .45054   .44619   .44192   .43772   .43360   .42954   .42556   .42164   .41779
81............................................................   .47360   .46920   .46487   .46061   .45643   .45231   .44827   .44429   .44038   .43653
82............................................................   .49223   .48785   .48355   .47932   .47516   .47106   .46703   .46307   .45916   .45532
83............................................................   .51081   .50648   .50221   .49802   .49388   .48982   .48581   .48187   .47799   .47416
84............................................................   .52951   .52523   .52101   .51686   .51277   .50874   .50477   .50086   .49701   .49321
85............................................................   .54847   .54425   .54009   .53600   .53196   .52798   .52406   .52019   .51638   .51262
86............................................................   .56749   .56335   .55926   .55523   .55126   .54734   .54348   .53966   .53591   .53220
87............................................................   .58627   .58221   .57820   .57425   .57035   .56650   .56270   .55895   .55526   .55161
88............................................................   .60477   .60079   .59688   .59301   .58919   .58542   .58170   .57802   .57439   .57081
89............................................................   .62297   .61909   .61527   .61149   .60776   .60408   .60044   .59685   .59330   .58979
90............................................................   .64084   .63707   .63335   .62968   .62604   .62246   .61891   .61540   .61194   .60851
91............................................................   .65803   .65437   .65076   .64719   .64366   .64017   .63672   .63330   .62993   .62659
92............................................................   .67412   .67058   .66707   .66360   .66017   .65678   .65342   .65010   .64682   .64357
93............................................................   .68911   .68567   .68227   .67890   .67557   .67227   .66901   .66578   .66258   .65942
94............................................................   .70321   .69988   .69657   .69330   .69006   .68686   .68369   .68055   .67744   .67437
95............................................................   .71674   .71351   .71031   .70713   .70399   .70088   .69781   .69476   .69174   .68875
96............................................................   .72959   .72646   .72335   .72028   .71724   .71422   .71123   .70828   .70534   .70244
97............................................................   .74156   .73853   .73552   .73254   .72959   .72666   .72376   .72089   .71804   .71522
98............................................................   .75287   .74993   .74702   .74413   .74126   .73842   .73561   .73282   .73006   .72732
99............................................................   .76401   .76117   .75834   .75555   .75277   .75002   .74730   .74459   .74191   .73926
100...........................................................   .77494   .77219   .76946   .76676   .76408   .76142   .75878   .75616   .75357   .75099
101...........................................................   .78580   .78315   .78052   .77791   .77532   .77275   .77021   .76768   .76517   .76268
102...........................................................   .79654   .79399   .79146   .78894   .78645   .78397   .78152   .77908   .77666   .77426
103...........................................................   .80724   .80479   .80236   .79994   .79755   .79517   .79280   .79046   .78813   .78582
104...........................................................   .81879   .81646   .81413   .81183   .80954   .80726   .80501   .80276   .80054   .79832
105...........................................................   .83005   .82782   .82560   .82340   .82121   .81904   .81688   .81474   .81260   .81049
106...........................................................   .84485   .84277   .84071   .83866   .83662   .83459   .83257   .83057   .82857   .82659
107...........................................................   .86311   .86124   .85937   .85751   .85566   .85382   .85199   .85017   .84835   .84655
108...........................................................   .89266   .89114   .88963   .88812   .88662   .88513   .88364   .88216   .88068   .87922
109...........................................................   .94563   .94484   .94405   .94326   .94248   .94170   .94092   .94014   .93937   .93860
--------------------------------------------------------------------------------------------------------------------------------------------------------


                       Table 90CM--Applicable After April 30, 1999, and Before May 1, 2009
----------------------------------------------------------------------------------------------------------------
            Age x  (1)              l(x)  (2)        Age x  (1)       l(x)  (2)       Age x  (1)       l(x)  (2)
----------------------------------------------------------------------------------------------------------------
0.................................     100000  37...................      95969  74..................      62852
1.................................      99064  38...................      95780  75..................      60449
2.................................      98992  39...................      95581  76..................      57955
3.................................      98944  40...................      95373  77..................      55373
4.................................      98907  41...................      95156  78..................      52704
5.................................      98877  42...................      94928  79..................      49943
6.................................      98850  43...................      94687  80..................      47084
7.................................      98826  44...................      94431  81..................      44129
8.................................      98803  45...................      94154  82..................      41091

[[Page 392]]

 
9.................................      98783  46...................      93855  83..................      37994
10................................      98766  47...................      93528  84..................      34876
11................................      98750  48...................      93173  85..................      31770
12................................      98734  49...................      92787  86..................      28687
13................................      98713  50...................      92370  87..................      25638
14................................      98681  51...................      91918  88..................      22658
15................................      98635  52...................      91424  89..................      19783
16................................      98573  53...................      90885  90..................      17046
17................................      98497  54...................      90297  91..................      14466
18................................      98409  55...................      89658  92..................      12066
19................................      98314  56...................      88965  93..................       9884
20................................      98215  57...................      88214  94..................       7951
21................................      98113  58...................      87397  95..................       6282
22................................      98006  59...................      86506  96..................       4868
23................................      97896  60...................      85537  97..................       3694
24................................      97784  61...................      84490  98..................       2745
25................................      97671  62...................      83368  99..................       1999
26................................      97556  63...................      82169  100.................       1424
27................................      97441  64...................      80887  101.................        991
28................................      97322  65...................      79519  102.................        672
29................................      97199  66...................      78066  103.................        443
30................................      97070  67...................      76531  104.................        284
31................................      96934  68...................      74907  105.................        175
32................................      96791  69...................      73186  106.................        105
33................................      96642  70...................      71357  107.................         60
34................................      96485  71...................      69411  108.................         33
35................................      96322  72...................      67344  109.................         17
36................................      96150  73...................      65154  110.................          0
----------------------------------------------------------------------------------------------------------------


[T.D. 8540, 59 FR 30151, June 10, 1994, as amended at 59 FR 30152, June 
10, 1994; T.D. 8819, 64 FR 23211, 23212, Apr. 30, 1999; 64 FR 33195, 
June 22, 1999; T.D. 8886, 65 FR 36943, June 12, 2000; T.D. 9448, 74 FR 
21509, May 7, 2009; T.D. 9540, 76 FR 49637, Aug. 10, 2011]

                             Taxable Estate



Sec. 20.2051-1  Definition of taxable estate.

    (a) General rule. The taxable estate of a decedent who was a citizen 
or resident (see Sec. 20.0-1(b)(1)) of the United States at death is 
determined by subtracting the total amount of the deductions authorized 
by sections 2053 through 2058 from the total amount which must be 
included in the gross estate under sections 2031 through 2044. These 
deductions are in general as follows--
    (1) Funeral and administration expenses and claims against the 
estate (including certain taxes and charitable pledges) (section 2053).
    (2) Losses from casualty or theft during the administration of the 
estate (section 2054).
    (3) Charitable transfers (section 2055).
    (4) The marital deduction (section 2056).
    (5) Qualified domestic trusts (section 2056A).
    (6) Family-owned business interests (section 2057) to the extent 
applicable to estates of decedents.
    (7) State death taxes (section 2058) to the extent applicable to 
estates of decedents.
    (b) Special rules. See section 2106 and the corresponding 
regulations for special rules regarding the computation of the taxable 
estate of a decedent who was not a citizen or resident of the United 
States. See also Sec. 1.642(g)-1 of this chapter concerning the 
disallowance for income tax purposes of certain deductions allowed for 
estate tax purposes.
    (c) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

[T.D. 9468, 74 FR 53657, Oct. 20, 2009]



Sec. 20.2052-1  Exemption.

    An exemption of $60,000 is allowed as a deduction under section 2052 
from the gross estate of a decedent who was a citizen or resident of the 
United States at the time of his death. For the

[[Page 393]]

amount of the exemption allowed as a deduction from the gross estate of 
a decedent who was a nonresident not a citizen of the United States, see 
paragraph (a)(3) of Sec. 20.2106-1.



Sec. 20.2053-1  Deductions for expenses, indebtedness, and taxes; in 
general.

    (a) General rule. In determining the taxable estate of a decedent 
who was a citizen or resident of the United States at death, there are 
allowed as deductions under section 2053(a) and (b) amounts falling 
within the following two categories (subject to the limitations 
contained in this section and in Sec. Sec. 20.2053-2 through 20.2053-
10)--
    (1) First category. Amounts which are payable out of property 
subject to claims and which are allowable by the law of the 
jurisdiction, whether within or without the United States, under which 
the estate is being administered for--
    (i) Funeral expenses;
    (ii) Administration expenses;
    (iii) Claims against the estate (including taxes to the extent set 
forth in Sec. 20.2053-6 and charitable pledges to the extent set forth 
in Sec. 20.2053-5); and
    (iv) Unpaid mortgages on, or any indebtedness in respect of, 
property, the value of the decedent's interest in which is included in 
the value of the gross estate undiminished by the mortgage or 
indebtedness.

As used in this subparagraph, the phrase ``allowable by the law of the 
jurisdiction'' means allowable by the law governing the administration 
of decedents' estates. The phrase has no reference to amounts allowable 
as deductions under a law which imposes a State death tax. See further 
Sec. Sec. 20.2053-2 through 20.2053-7.
    (2) Second category. Amounts representing expenses incurred in 
administering property which is included in the gross estate but which 
is not subject to claims and which--
    (i) Would be allowed as deductions in the first category if the 
property being administered were subject to claims; and
    (ii) Were paid before the expiration of the period of limitation for 
assessment provided in section 6501.

See further Sec. 20.2053-8.
    (b) Provisions applicable to both categories--(1) In general. If the 
item is not one of those described in paragraph (a) of this section, it 
is not deductible merely because payment is allowed by the local law. If 
the amount which may be expended for the particular purpose is limited 
by the local law no deduction in excess of that limitation is 
permissible.
    (2) Bona fide requirement--(i) In general. Amounts allowed as 
deductions under section 2053(a) and (b) must be expenses and claims 
that are bona fide in nature. No deduction is permissible to the extent 
it is founded on a transfer that is essentially donative in character (a 
mere cloak for a gift or bequest) except to the extent the deduction is 
for a claim that would be allowable as a deduction under section 2055 as 
a charitable bequest.
    (ii) Claims and expenses involving family members. Factors 
indicative (but not necessarily determinative) of the bona fide nature 
of a claim or expense involving a family member of a decedent, a related 
entity, or a beneficiary of a decedent's estate or revocable trust, in 
relevant instances, may include, but are not limited to, the following--
    (A) The transaction underlying the claim or expense occurs in the 
ordinary course of business, is negotiated at arm's length, and is free 
from donative intent.
    (B) The nature of the claim or expense is not related to an 
expectation or claim of inheritance.
    (C) The claim or expense originates pursuant to an agreement between 
the decedent and the family member, related entity, or beneficiary, and 
the agreement is substantiated with contemporaneous evidence.
    (D) Performance by the claimant is pursuant to the terms of an 
agreement between the decedent and the family member, related entity, or 
beneficiary and the performance and the agreement can be substantiated.
    (E) All amounts paid in satisfaction or settlement of a claim or 
expense are reported by each party for Federal income and employment tax 
purposes, to the extent appropriate, in a manner that is consistent with 
the reported nature of the claim or expense.

[[Page 394]]

    (iii) Definitions. The following definitions apply for purposes of 
this paragraph (b)(2):
    (A) Family members include the spouse of the decedent; the 
grandparents, parents, siblings, and lineal descendants of the decedent 
or of the decedent's spouse; and the spouse and lineal descendants of 
any such grandparent, parent, and sibling. Family members include 
adopted individuals.
    (B) A related entity is an entity in which the decedent, either 
directly or indirectly, had a beneficial ownership interest at the time 
of the decedent's death or at any time during the three-year period 
ending on the decedent's date of death. Such an entity, however, shall 
not include a publicly-traded entity nor shall it include a closely-held 
entity in which the combined beneficial interest, either direct or 
indirect, of the decedent and the decedent's family members, 
collectively, is less than 30 percent of the beneficial ownership 
interests (whether voting or non-voting and whether an interest in 
stock, capital and/or profits), as determined at the time a claim 
described in this section is being asserted. Notwithstanding the 
foregoing, an entity in which the decedent, directly or indirectly, had 
any managing interest (for example, as a general partner of a 
partnership or as a managing member of a limited liability company) at 
the time of the decedent's death shall be considered a related entity.
    (C) Beneficiaries of a decedent's estate include beneficiaries of a 
trust of the decedent.
    (3) Court decrees and settlements--(i) Court decree. If a court of 
competent jurisdiction over the administration of an estate reviews and 
approves expenditures for funeral expenses, administration expenses, 
claims against the estate, or unpaid mortgages (referred to in this 
section as a ``claim or expense''), a final judicial decision in that 
matter may be relied upon to establish the amount of a claim or expense 
that is otherwise deductible under section 2053 and these regulations 
provided that the court actually passes upon the facts on which 
deductibility depends. If the court does not pass upon those facts, its 
decree may not be relied upon to establish the amount of the claim or 
expense that is otherwise deductible under section 2053. It must appear 
that the court actually passed upon the merits of the claim. This will 
be presumed in all cases of an active and genuine contest. If the result 
reached appears to be unreasonable, this is some evidence that there was 
not such a contest, but it may be rebutted by proof to the contrary. Any 
amount meeting the requirements of this paragraph (b)(3)(i) is 
deductible to the extent it actually has been paid or will be paid, 
subject to any applicable limitations in this section.
    (ii) Claims and expenses where court approval not required under 
local law. A deduction for the amount of a claim or expense that is 
otherwise deductible under section 2053 and these regulations will not 
be denied under section 2053 solely because a local court decree has not 
been entered with respect to such amount, provided that no court decree 
is required under applicable law to determine the amount or allowability 
of the claim or expense.
    (iii) Consent decree. A local court decree rendered by consent may 
be relied on to establish the amount of a claim or expense that is 
otherwise deductible under section 2053 and these regulations provided 
that the consent resolves a bona fide issue in a genuine contest. 
Consent given by all parties having interests adverse to that of the 
claimant will be presumed to resolve a bona fide issue in a genuine 
contest. Any amount meeting the requirements of this paragraph 
(b)(3)(iii) is deductible to the extent it actually has been paid or 
will be paid, subject to any applicable limitations in this section.
    (iv) Settlements. A settlement may be relied on to establish the 
amount of a claim or expense (whether contingent or noncontingent) that 
is otherwise deductible under section 2053 and these regulations, 
provided that the settlement resolves a bona fide issue in a genuine 
contest and is the product of arm's-length negotiations by parties 
having adverse interests with respect to the claim or expense. A 
deduction will not be denied for a settlement amount paid by an estate 
if the estate can establish that the cost of defending or contesting the 
claim or expense, or

[[Page 395]]

the delay associated with litigating the claim or expense, would impose 
a higher burden on the estate than the payment of the amount paid to 
settle the claim or expense. Nevertheless, no deduction will be allowed 
for amounts paid in settlement of an unenforceable claim. For this 
purpose, to the extent a claim exceeds an applicable limit under local 
law, the claim is deemed to be unenforceable. However, as long as the 
enforceability of the claim is at issue in a bona fide dispute, the 
claim will not be deemed to be unenforceable for this purpose. Any 
amount meeting the requirements of this paragraph (b)(3)(iv) is 
deductible to the extent it actually has been paid or will be paid, 
subject to any applicable limitations in this section.
    (v) Additional rules. Notwithstanding paragraph (b)(3)(i) through 
(iv) of this section, additional rules may apply to the deductibility of 
certain claims and expenses. See Sec. 20.2053-2 for additional rules 
regarding the deductibility of funeral expenses. See Sec. 20.2053-3 for 
additional rules regarding the deductibility of administration expenses. 
See Sec. 20.2053-4 for additional rules regarding the deductibility of 
claims against the estate. See Sec. 20.2053-7 for additional rules 
regarding the deductibility of unpaid mortgages.
    (4) Examples. Unless otherwise provided, assume that the amount of 
any claim or expense is paid out of property subject to claims and is 
paid within the time prescribed for filing the ``United States Estate 
(and Generation-Skipping Transfer) Tax Return,'' Form 706. The following 
examples illustrate the application of this paragraph (b):

    Example 1. Consent decree at variance with the law of the State. 
Decedent's (D's) estate is probated in State. D's probate estate is 
valued at $100x. State law provides that the executor's commission shall 
not exceed 3 percent of the probate estate. A consent decree is entered 
allowing the executor's commission in the amount of $5x. The estate pays 
the executor's commission in the amount of $5x. For purposes of section 
2053, the executor may deduct only $3x of the $5x expense paid for the 
executor's commission because the amount approved by the consent decree 
in excess of $3x is in excess of the applicable limit for executor's 
commissions under local law. Therefore, for purposes of section 2053, 
the consent decree may not be relied upon to establish the amount of the 
expense for the executor's commission.
    Example 2. Decedent's (D's) estate is probated in State. State law 
grants authority to an executor to administer an estate without court 
approval, so long as notice of and a right to object to a proposed 
action is provided to interested persons. The executor of D's estate (E) 
proposes to sell property of the estate in order to pay the debts of D. 
E gives requisite notice to all interested parties and no interested 
person objects. E sells the real estate and pays a real estate 
commission of $20x to a professional real estate agent. The amount of 
the real estate commission paid does not exceed the applicable limit 
under State law. Provided that the sale of the property was necessary to 
pay D's debts, expenses of administration, or taxes, to preserve the 
estate, or to effect distribution, the executor may deduct the $20x 
expense for the real estate commission under section 2053 even though no 
court decree was entered approving the expense.
    Example 3. Claim by family member. For a period of three years prior 
to D's death, D's niece (N) provides accounting and bookkeeping services 
on D's behalf. N is a CPA and provides similar accounting and 
bookkeeping services to unrelated clients. At the end of each month, N 
presents an itemized bill to D for services rendered. The fees charged 
by N conform to the prevailing market rate for the services rendered and 
are comparable to the fees N charges other clients for similar services. 
The amount due is timely paid each month by D and is properly reported 
for Federal income and employment tax purposes by N. In the six months 
prior to D's death, D's poor health prevents D from making payments to N 
for the amount due. After D's death, N asserts a claim against the 
estate for $25x, an amount representing the amount due for the six-month 
period prior to D's death. D's estate pays $25x to N in satisfaction of 
the claim before the return is timely filed and N properly reports the 
$25x received by E for income tax purposes. Barring any other relevant 
facts or circumstances, E may rely on the following factors to establish 
that the claim is bona fide: (1) N's claim for services rendered arose 
in the ordinary course of business, as N is a CPA performing similar 
services for other clients; (2) the fees charged were deemed to be 
negotiated at arm's length, as the fees were consistent with the fees N 
charged for similar services to unrelated clients; (3) the billing 
records and the records of D's timely payments to N constitute 
contemporaneous evidence of an agreement between D and N for N's 
bookkeeping services; and (4) the amount of the payments to N is 
properly reported by N for Federal income and employment tax purposes. E 
may deduct the amount paid to N in satisfaction of the claim.

[[Page 396]]

    (c) Provision applicable to first category only. Deductions of the 
first category (described in paragraph (a)(1) of this section) are 
limited under section 2053(a) to amounts which would be property 
allowable out of property subject to claims by the law of the 
jurisdiction under which the decedent's estate is being administered. 
Further, the total allowable amount of deductions of the first category 
is limited by section 2053(c)(2) to the sum of--
    (1) The value of property included in the decedent's gross estate 
and subject to claims, plus
    (2) Amounts paid, out of property not subject to claims against the 
decedent's estate, within 9 months (15 months in the case of the estate 
of a decedent dying before January 1, 1971) after the decedent's death 
(the period within which the estate tax return must be filed under 
section 6075), or within any extension of time for filing the return 
granted under section 6081.

The term ``property subject to claims'' is defined in section 2053(c)(2) 
as meaning the property includible in the gross estate which, or the 
avails of which, under the applicable law, would bear the burden of the 
payment of these deductions in the final adjustment and settlement of 
the decedent's estate. However, for the purposes of this definition, the 
value of property subject to claims is first reduced by the amount of 
any deduction allowed under section 2054 for any losses from casualty or 
theft incurred during the settlement of the estate attributable to such 
property. The application of this paragraph may be illustrated by the 
following examples:

    Example (1). The only item in the gross estate is real property 
valued at $250,000 which the decedent and his surviving spouse held as 
tenants by the entirety. Under the local law this real property is not 
subject to claims. Funeral expenses of $1,200 and debts of the decedent 
in the amount of $1,500 are allowable under local law. Before the 
prescribed date for filing the estate tax return, the surviving spouse 
paid the funeral expenses and $1,000 of the debts. The remaining $500 of 
the debts was paid by her after the prescribed date for filing the 
return. The total amount allowable as deductions under section 2053 is 
limited to $2,200, the amount paid prior to the prescribed date for 
filing the return.
    Example (2). The only two items in the gross estate were a bank 
deposit of $20,000 and insurance in the amount of $150,000. The 
insurance was payable to the decedent's surviving spouse and under local 
law was not subject to claims. Funeral expenses of $1,000 and debts in 
the amount of $29,000 were allowable under local law. A son was executor 
of the estate and before the prescribed date for filing the estate tax 
return he paid the funeral expenses of $9,000 of the debts, using 
therefor $5,000 of the bank deposit and $5,000 supplied by the surviving 
spouse. After the prescribed date for filing the return, the executor 
paid the remaining $20,000 of the debts, using for that purpose the 
$15,000 left in the bank account plus an additional $5,000 supplied by 
the surviving spouse. The total amount allowable as deductions under 
section 2053 is limited to $25,000 ($20,000 of property subject to 
claims plus the $5,000 additional amount which, before the prescribed 
date for filing the return, was paid out of property not subject to 
claims).

    (d) Amount deductible--(1) General rule. To take into account 
properly events occurring after the date of a decedent's death in 
determining the amount deductible under section 2053 and these 
regulations, the deduction for any claim or expense described in 
paragraph (a) of this section is limited to the total amount actually 
paid in settlement or satisfaction of that item (subject to any 
applicable limitations in this section). However, see paragraph (d)(4) 
of this section for the rules for deducting certain ascertainable 
amounts; see Sec. 20.2053-4(b) and (c) for the rules regarding the 
deductibility of certain claims against the estate; and see Sec. 
20.2053-7 for the rules regarding the deductibility of unpaid mortgages 
and other indebtedness.
    (2) Application of post-death events. In determining whether and to 
what extent a deduction under section 2053 is allowable, events 
occurring after the date of a decedent's death will be taken into 
consideration--
    (i) Until the expiration of the applicable period of limitations on 
assessment prescribed in section 6501 (including without limitation at 
all times during which the running of the period of limitations is 
suspended); and
    (ii) During subsequent periods, in determining the amount (if any) 
of an overpayment of estate tax due in connection with a claim for 
refund filed within the time prescribed in section 6511(a).

[[Page 397]]

    (3) Reimbursements. A deduction is not allowed to the extent that a 
claim or expense described in paragraph (a) of this section is or could 
be compensated for by insurance or otherwise could be reimbursed. If the 
executor is able to establish that only a partial reimbursement could be 
collected, then only that portion of the potential reimbursement that 
reasonably could have been expected to be collected will reduce the 
estate's deductible portion of the total claim or expense. An executor 
may certify that the executor neither knows nor reasonably should have 
known of any available reimbursement for a claim or expense described in 
section 2053(a) or (b) on the estate's United States Estate (and 
Generation-Skipping Transfer) Tax Return (Form 706), in accordance with 
the instructions for that form. A potential reimbursement will not 
reduce the deductible amount of a claim or expense to the extent that 
the executor, on Form 706 and in accordance with the instructions for 
that form, provides a reasonable explanation for his or her reasonable 
determination that the burden of necessary collection efforts in pursuit 
of a right of reimbursement would outweigh the anticipated benefit from 
those efforts. Nevertheless, even if a reasonable explanation is 
provided, subsequent events (including without limitation an actual 
reimbursement) occurring within the period described in Sec. 20.2053-
1(d)(2) will be considered in determining the amount (if any) of a 
reduction under this paragraph (d)(3) in the deductible amount of a 
claim or expense.
    (4) Exception for certain ascertainable amounts--(i) General rule. A 
deduction will be allowed for a claim or expense that satisfies all 
applicable requirements even though it is not yet paid, provided that 
the amount to be paid is ascertainable with reasonable certainty and 
will be paid. For example, executors' commissions and attorneys' fees 
that are not yet paid, and that meet the requirements for deductibility 
under Sec. 20.2053-3(b) and (c), respectively, are deemed to be 
ascertainable with reasonable certainty and may be deducted if such 
expenses will be paid. However, no deduction may be taken upon the basis 
of a vague or uncertain estimate. To the extent a claim or expense is 
contested or contingent, such a claim or expense cannot be ascertained 
with reasonable certainty.
    (ii) Effect of post-death events. A deduction under this paragraph 
(d)(4) will be allowed to the extent the Commissioner is reasonably 
satisfied that the amount to be paid is ascertainable with reasonable 
certainty and will be paid. In making this determination, the 
Commissioner will take into account events occurring after the date of a 
decedent's death. To the extent the amount for which a deduction was 
claimed does not satisfy the requirements of this paragraph (d)(4), and 
is not otherwise deductible, the deduction will be disallowed by the 
Commissioner. If a deduction is claimed on Form 706 for an amount that 
is not yet paid and the deduction is disallowed in whole or in part (or 
if no deduction is claimed on Form 706), then if the claim or expense 
subsequently satisfies the requirements of this paragraph (d)(4) or is 
paid, relief may be sought by filing a claim for refund. To preserve the 
estate's right to claim a refund for amounts becoming deductible after 
the expiration of the period of limitation for the filing of a claim for 
refund, a protective claim for refund may be filed in accordance with 
paragraph (d)(5) of this section.
    (5) Protective claim for refund--(i) In general. A protective claim 
for refund under this section may be filed at any time before the 
expiration of the period of limitation prescribed in section 6511(a) for 
the filing of a claim for refund to preserve the estate's right to claim 
a refund by reason of claims or expenses that are not paid or do not 
otherwise meet the requirements of deductibility under section 2053 and 
these regulations until after the expiration of the period of limitation 
for filing a claim for refund. Such a protective claim shall be made in 
accordance with guidance that may be provided from time to time by 
publication in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2)(ii)(b)). Although the protective claim need not state a 
particular dollar amount or demand an immediate refund, a protective 
claim must identify each outstanding claim

[[Page 398]]

or expense that would have been deductible under section 2053(a) or (b) 
if such item already had been paid and must describe the reasons and 
contingencies delaying the actual payment of the claim or expense. 
Action on protective claims will proceed after the executor has notified 
the Commissioner within a reasonable period that the contingency has 
been resolved and that the amount deductible under Sec. 20.2053-1 has 
been established.
    (ii) Effect on marital and charitable deduction. To the extent that 
a protective claim for refund is filed with respect to a claim or 
expense that would have been deductible under section 2053(a) or (b) if 
such item already had been paid and that is payable out of a share that 
meets the requirements for a charitable deduction under section 2055 or 
a marital deduction under section 2056 or section 2056A, or from a 
combination thereof, neither the charitable deduction nor the marital 
deduction shall be reduced by the amount of such claim or expense until 
the amount is actually paid or meets the requirements of paragraph 
(d)(4) of this section for deducting certain ascertainable amounts or 
the requirements of Sec. 20.2053-4(b) or (c) for deducting certain 
claims against the estate.
    (6) [Reserved]
    (7) Examples. Assume that the amounts described in section 2053(a) 
are payable out of property subject to claims and are allowable by the 
law of the jurisdiction governing the administration of the estate, 
whether the applicable jurisdiction is within or outside of the United 
States. Assume that the claims against the estate are not deductible 
under Sec. 20.2053-4(b) or (c). Also assume, unless otherwise provided, 
that none of the limitations on the amount of the deduction described in 
this section apply to the deduction claimed under section 2053. The 
following examples illustrate the application of this paragraph (d):

    Example 1. Amount of expense ascertainable. Decedent's (D's) estate 
was probated in State. State law provides that the personal 
representative shall receive compensation equal to 2.5 percent of the 
value of the probate estate. The executor (E) may claim a deduction for 
estimated fees equal to 2.5 percent of D's probate estate on the Form 
706 filed for D's estate under the rule for deducting certain 
ascertainable amounts set forth in paragraph (d)(4) of this section, 
provided that the estimated amount will be paid. However, the 
Commissioner will disallow the deduction upon examination of the 
estate's Form 706 to the extent that the amount for which a deduction 
was claimed no longer satisfies the requirements of paragraph (d)(4) of 
this section. If this occurs, E may file a protective claim for refund 
in accordance with paragraph (d)(5) of this section in order to preserve 
the estate's right to claim a refund for the amount of the fee that is 
subsequently paid or that subsequently meets the requirements of 
paragraph (d)(4) of this section for deducting certain ascertainable 
amounts.
    Example 2. Amount of claim not ascertainable. Prior to death, 
Decedent (D) is sued by Claimant (C) for $100x in a tort proceeding and 
responds asserting affirmative defenses available to D under applicable 
local law. C and D are unrelated. D subsequently dies and D's Form 706 
is due before a final judgment is entered in the case. The executor of 
D's estate (E) may not claim a deduction with respect to C's claim on 
D's Form 706 under the special rule contained in paragraph (d)(4) of 
this section because the deductible amount cannot be ascertained with 
reasonable certainty. However, E may file a timely protective claim for 
refund in accordance with paragraph (d)(5) of this section in order to 
preserve the estate's right to subsequently claim a refund at the time a 
final judgment is entered in the case and the claim is either paid or 
meets the requirements of paragraph (d)(4) of this section for deducting 
certain ascertainable amounts.
    Example 3. Amount of claim payable out of property qualifying for 
marital deduction. The facts are the same as in Example 2 except that 
the applicable credit amount, under section 2010, against the estate tax 
was fully consumed by D's lifetime gifts, D is survived by Spouse (S), 
and D's estate passes entirely to S in a bequest that qualifies for the 
marital deduction under section 2056. Even though any amount D's estate 
ultimately pays with respect to C's claim will be paid from the assets 
qualifying for the marital deduction, in filing Form 706, E need not 
reduce the amount of the marital deduction claimed on D's Form 706. 
Instead, pursuant to the protective claim for refund filed by E, the 
marital deduction will be reduced by the claim once a final judgment is 
entered in the case. At that time, a deduction will be allowed for the 
amount that is either paid or meets the requirements of paragraph (d)(4) 
of this section for deducting certain ascertainable amounts.
    (e) Disallowance of double deductions. See section 642(g) and Sec. 
1.642(g)-1 with respect to the disallowance for income

[[Page 399]]

tax purposes of certain deductions unless the right to take such 
deductions for estate tax purposes is waived.
    (f) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7238, 37 FR 
28719, Dec. 29, 1972; T.D. 9468, 74 FR 53657, Oct. 20, 2009; T.D. 9468, 
74 FR 61525, Nov. 25, 2009]



Sec. 20.2053-2  Deduction for funeral expenses.

    Such amounts for funeral expenses are allowed as deductions from a 
decedent's gross estate as (a) are actually expended, (b) would be 
properly allowable out of property subject to claims under the laws of 
the local jurisdiction, and (c) satisfy the requirements of paragraph 
(c) of Sec. 20.2053-1. A reasonable expenditure for a tombstone, 
monument, or mausoleum, or for a burial lot, either for the decedent or 
his family, including a reasonable expenditure for its future care, may 
be deducted under this heading, provided such an expenditure is 
allowable by the local law. Included in funeral expenses is the cost of 
transportation of the person bringing the body to the place of burial.



Sec. 20.2053-3  Deduction for expenses of administering estate.

    (a) In general. The amounts deductible from a decedent's gross 
estate as ``administration expenses'' of the first category (see 
paragraphs (a) and (c) of Sec. 20.2053-1) are limited to such expenses 
as are actually and necessarily, incurred in the administration of the 
decedent's estate; that is, in the collection of assets, payment of 
debts, and distribution of property to the persons entitled to it. The 
expenses contemplated in the law are such only as attend the settlement 
of an estate and the transfer of the property of the estate to 
individual beneficiaries or to a trustee, whether the trustee is the 
executor or some other person. 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. 
Administration expenses include (1) executor's commissions; (2) 
attorney's fees; and (3) miscellaneous expenses. Each of these classes 
is considered separately in paragraphs (b) through (d) of this section.
    (b) Executor's commissions (1) Executors' commissions are deductible 
to the extent permitted by Sec. 20.2053-1 and this section, but no 
deduction may be taken if no commissions are to be paid. In addition, 
the amount of the commissions claimed as a deduction must be in 
accordance with the usually accepted standards and practice of allowing 
such an amount in estates of similar size and character in the 
jurisdiction in which the estate is being administered, or any deviation 
from the usually accepted standards or range of amounts (permissible 
under applicable local law) must be justified to the satisfaction of the 
Commissioner.
    (2) A bequest or devise to the executor in lieu of commissions is 
not deductible. If, however, the terms of the will set forth the 
compensation payable to the executor for services to be rendered in the 
administration of the estate, a deduction may be taken to the extent 
that the amount so fixed does not exceed the compensation allowable by 
the local law or practice and to the extent permitted by Sec. 20.2053-
1.
    (3) Except to the extent that a trustee is in fact performing 
services with respect to property subject to claims which would normally 
be performed by an executor, amounts paid as trustees' commissions do 
not constitute expenses of administration under the first category, and 
are only deductible as expenses of the second category to the extent 
provided in Sec. 20.2053-8.
    (c) Attorney's fees--(1) Attorney's fees are deductible to the 
extent permitted by Sec. 20.2053-1 and this section. Further, the 
amount of the fees claimed as a deduction may not exceed a reasonable 
remuneration for the services rendered, taking into account the size and 
character of the estate, the law and practice in the jurisdiction in 
which the estate is being administered, and the skill and expertise of 
the attorneys.
    (2) A deduction for attorneys' fees incurred in contesting an 
asserted deficiency or in prosecuting a claim for refund should be 
claimed at the time the deficiency is contested or the refund claim is 
prosecuted. A deduction for

[[Page 400]]

reasonable attorney's fees actually incurred in contesting an asserted 
deficiency or in prosecuting a claim for refund will be allowed to the 
extent permitted by Sec. 20.2053-1 even though the deduction, as such, 
was not claimed on the estate tax return or in the claim for refund. A 
deduction for these fees shall not be denied, and the sufficiency of a 
claim for refund shall not be questioned, solely by reason of the fact 
that the amount of the fees to be paid was not established at the time 
that the right to the deduction was claimed.
    (3) Attorneys' fees incurred by beneficiaries incident to litigation 
as to their respective interests are not deductible if the litigation is 
not essential to the proper settlement of the estate within the meaning 
of paragraph (a) of this section. An attorney's fee not meeting this 
test is not deductible as an administration expense under section 2053 
and this section, even if it is approved by a probate court as an 
expense payable or reimbursable by the estate.
    (d) Miscellaneous administration expenses. (1) Miscellaneous 
administration expenses include such expenses as court costs, 
surrogates' fees, accountants' fees, appraisers' fees, clerk hire, etc. 
Expenses necessarily incurred in preserving and distributing the estate, 
including the cost of storing or maintaining property of the estate if 
it is impossible to effect immediate distribution to the beneficiaries, 
are deductible to the extent permitted by Sec. 20.2053-1. Expenses for 
preserving and caring for the property may not include outlays for 
additions or improvements; nor will such expenses be allowed for a 
longer period than the executor is reasonably required to retain the 
property.
    (2) Expenses for selling property of the estate are deductible to 
the extent permitted by Sec. 20.2053-1 if the sale is necessary in 
order to pay the decedent's debts, expenses of administration, or taxes, 
to preserve the estate, or to effect distribution. The phrase ``expenses 
for selling property'' includes brokerage fees and other expenses 
attending the sale, such as the fees of an auctioneer if it is 
reasonably necessary to employ one. Where an item included in the gross 
estate is disposed of in a bona fide sale (including a redemption) to a 
dealer in such items at a price below its fair market value, for 
purposes of this paragraph there shall be treated as an expense for 
selling the item whichever of the following amounts is the lesser: (i) 
The amount by which the fair market value of the property on the 
applicable valuation date exceeds the proceeds of the sale, or (ii) the 
amount by which the fair market value of the property on the date of the 
sale exceeds the proceeds of the sale. The principles used in 
determining the value at which an item of property is included in the 
gross estate shall be followed in arriving at the fair market value of 
the property for purposes of this paragraph. See Sec. Sec. 20.2031-1 
through 20.2031-9.
    (3) Expenses incurred in defending the estate against claims 
described in section 2053(a)(3) are deductible to the extent permitted 
by Sec. 20.2053-1 if the expenses are incurred incident to the 
assertion of defenses to the claim available under the applicable law, 
even if the estate ultimately does not prevail. For purposes of this 
paragraph (d)(3), ``expenses incurred in defending the estate against 
claims'' include costs relating to the arbitration and mediation of 
contested issues, costs associated with defending the estate against 
claims (whether or not enforceable), and costs associated with reaching 
a negotiated settlement of the issues.
    (e) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6826, 30 FR 
7708, June 15, 1965; 44 FR 23525, Apr. 20, 1979; T.D. 9468, 74 FR 53660, 
Oct. 20, 2009]



Sec. 20.2053-4  Deduction for claims against the estate.

    (a) In general--(1) General rule. For purposes of this section, 
liabilities imposed by law or arising out of contracts or torts are 
deductible if they meet the applicable requirements set forth in Sec. 
20.2053-1 and this section. To be deductible, a claim against a 
decedent's estate must represent a personal obligation of the decedent 
existing at the time of the decedent's death. Except as otherwise 
provided in paragraphs (b) and (c) of this section and to the extent

[[Page 401]]

permitted by Sec. 20.2053-1, the amounts that may be deducted as claims 
against a decedent's estate are limited to the amounts of bona fide 
claims that are enforceable against the decedent's estate (and are not 
unenforceable when paid) and claims that--
    (i) Are actually paid by the estate in satisfaction of the claim; or
    (ii) Meet the requirements of Sec. 20.2053-1(d)(4) for deducting 
certain ascertainable amounts.
    (2) Effect of post-death events. Events occurring after the date of 
a decedent's death shall be considered in determining whether and to 
what extent a deduction is allowable under section 2053. See Sec. 
20.2053-1(d)(2).
    (b) Exception for claims and counterclaims in related matter--(1) 
General rule. If a decedent's gross estate includes one or more claims 
or causes of action and there are one or more claims against the 
decedent's estate in the same or a substantially-related matter, or, if 
a decedent's gross estate includes a particular asset and there are one 
or more claims against the decedent's estate integrally related to that 
particular asset, the executor may deduct on the estate's United States 
Estate (and Generation-Skipping Transfer) Tax Return (Form 706) the 
current value of the claim or claims against the estate, even though 
payment has not been made, provided that--
    (i) Each such claim against the estate otherwise satisfies the 
applicable requirements set forth in Sec. 20.2053-1;
    (ii) Each such claim against the estate represents a personal 
obligation of the decedent existing at the time of the decedent's death;
    (iii) Each such claim is enforceable against the decedent's estate 
(and is not unenforceable when paid);
    (iv) The value of each such claim against the estate is determined 
from a ``qualified appraisal'' performed by a ``qualified appraiser'' 
within the meaning of section 170 of the Internal Revenue Code and the 
corresponding regulations;
    (v) The value of each such claim against the estate is subject to 
adjustment for post-death events; and
    (vi) The aggregate value of the related claims or assets included in 
the decedent's gross estate exceeds 10 percent of the decedent's gross 
estate.
    (2) Limitation on deduction. The deduction under this paragraph (b) 
is limited to the value of the related claims or particular assets 
included in decedent's gross estate.
    (3) Effect of post-death events. If, under this paragraph (b), a 
deduction is claimed on Form 706 for a claim against the estate and, 
during the period described in Sec. 20.2053-1(d)(2), the claim is paid 
or meets the requirements of Sec. 20.2053-1(d)(4) for deducting certain 
ascertainable amounts, the claimed deduction is subject to adjustment to 
reflect, and may not exceed, the amount paid on the claim or the amount 
meeting the requirements of Sec. 20.2053-1(d)(4). If, under this 
paragraph (b), a deduction is claimed on Form 706 for a claim against 
the estate and, during the period described in Sec. 20.2053-1(d)(2), 
the claim remains unpaid (and does not meet the requirements of Sec. 
20.2053-1(d)(4) for deducting certain ascertainable amounts), the 
claimed deduction is subject to adjustment to reflect, and may not 
exceed, the current valuation of the claim. A valuation of the claim 
will be considered current if it reflects events occurring after the 
decedent's death. With regard to any amount in excess of the amount 
deductible under this paragraph (b), an estate may preserve the estate's 
right to claim a refund for claims that are paid or that meet the 
requirements of Sec. 20.2053-(1)(d)(4) after the expiration of the 
period of limitation for filing a claim for refund by filing a 
protective claim for refund in accordance with the rules in Sec. 
20.2053-1(d)(5).
    (c) Exception for claims totaling not more than $500,000--(1) 
General rule. An executor may deduct on Form 706 the current value of 
one or more claims against the estate even though payment has not been 
made on the claim or claims to the extent that--
    (i) Each such claim against the estate otherwise satisfies the 
applicable requirements for deductibility set forth in Sec. 20.2053-1;
    (ii) Each such claim against the estate represents a personal 
obligation of the decedent existing at the time of the decedent's death;

[[Page 402]]

    (iii) Each such claim is enforceable against the decedent's estate 
(and is not unenforceable when paid);
    (iv) The value of each such claim against the estate is determined 
from a ``qualified appraisal'' performed by a ``qualified appraiser'' 
within the meaning of section 170 of the Internal Revenue Code and the 
corresponding regulations;
    (v) The total amount deducted by the estate under this paragraph (c) 
does not exceed $500,000;
    (vi) The full value of each claim, rather than just a portion of 
that amount, must be deductible under this paragraph (c) and, for this 
purpose, the full value of each such claim is deemed to be the unpaid 
amount of that claim that is not deductible after the application of 
Sec. Sec. 20.2053-1 and 20.2053-4(b); and
    (vii) The value of each claim deducted under this paragraph (c) is 
subject to adjustment for post-death events.
    (2) Effect of post-death events. If, under this paragraph (c), a 
deduction is claimed for a claim against the estate and, during the 
period described in Sec. 20.2053-1(d)(2), the claim is paid or meets 
the requirements of Sec. 20.2053-1(d)(4) for deducting certain 
ascertainable amounts, the amount of the allowable deduction for that 
claim is subject to adjustment to reflect, and may not exceed, the 
amount paid on the claim or the amount meeting the requirements of Sec. 
20.2053-1(d)(4). If, under this paragraph (c), a deduction is claimed 
for a claim against the estate and, during the period described in Sec. 
20.2053-1(d)(2), the claim remains unpaid (and does not meet the 
requirements of Sec. 20.2053-1(d)(4) for deducting certain 
ascertainable amounts), the amount of the allowable deduction for that 
claim is subject to adjustment to reflect, and may not exceed, the 
current value of the claim. The value of the claim will be considered 
current if it reflects events occurring after the decedent's death. To 
claim a deduction for amounts in excess of the amount deductible under 
this paragraph (c), the estate may preserve the estate's right to claim 
a refund for claims that are not paid or that do not meet the 
requirements of Sec. 20.2053-1(d)(4) until after the expiration of the 
period of limitation for the filing of a claim for refund by filing a 
protective claim for refund in accordance with the rules in Sec. 
20.2053-1(d)(5).
    (3) Examples. The following examples illustrate the application of 
this paragraph (c). Assume that the value of each claim is determined 
from a ``qualified appraisal'' performed by a ``qualified appraiser'' 
and reflects events occurring after the death of the decedent (D). Also 
assume that each claim represents a personal obligation of D that 
existed at D's death, that each claim is enforceable against the 
decedent's estate (and is not unenforceable when paid), and that each 
claim otherwise satisfies the requirements for deductibility of Sec. 
20.2053-1.
    (d) Special rules--(1) Potential and unmatured claims. Except as 
provided in Sec. 20.2053-1(d)(4) and in paragraphs (b) and (c) of this 
section, no estate tax deduction may be taken for a claim against the 
decedent's estate while it remains a potential or unmatured claim. 
Claims that later mature may be deducted (to the extent permitted by 
Sec. 20.2053-1) in connection with a timely claim for refund. To 
preserve the estate's right to claim a refund for claims that mature and 
become deductible after the expiration of the period of limitation for 
filing a claim for refund, a protective claim for refund may be filed in 
accordance with Sec. 20.2053-1(d)(5). See Sec. 20.2053-1(b)(3) for 
rules relating to the treatment of court decrees and settlements.
    (2) Contested claims. Except as provided in paragraphs (b) and (c) 
of this section, no estate tax deduction may be taken for a claim 
against the decedent's estate to the extent the estate is contesting the 
decedent's liability. Contested claims that later mature may be deducted 
(to the extent permitted by Sec. 20.2053-1) in connection with a claim 
for refund filed within the time prescribed in section 6511(a). To 
preserve the estate's right to claim a refund for claims that mature and 
become deductible after the expiration of the period of limitation for 
filing a claim for refund, a protective claim for refund may be filed in 
accordance with Sec. 20.2053-1(d)(5). See Sec. 20.2053-1(b)(3) for 
rules relating to the treatment of court decrees and settlements.

[[Page 403]]

    (3) Claims against multiple parties. If the decedent or the 
decedent's estate is one of two or more parties against whom the claim 
is being asserted, the estate may deduct only the portion of the total 
claim due from and paid by the estate, reduced by the total of any 
reimbursement received from another party, insurance, or otherwise. The 
estate's deductible portion also will be reduced by the contribution or 
other amount the estate could have collected from another party or an 
insurer but which the estate declines or fails to attempt to collect. 
See further Sec. 20.2053-1(d)(3).
    Example 1. There are three claims against the estate of the decedent 
(D) that are not paid and are not deductible under Sec. 20.2053-1(d)(4) 
or paragraph (b) of this section: $25,000 of Claimant A, $35,000 of 
Claimant B, and $1,000,000 of Claimant C. The executor of D's estate (E) 
may not claim a deduction under this paragraph with respect to any 
portion of the claim of Claimant C because the value of that claim 
exceeds $500,000. E may claim a deduction under this paragraph for the 
total amount of the claims filed by Claimant A and Claimant B ($60,000) 
because the aggregate value of the full amount of those claims does not 
exceed $500,000.
    Example 2. There are three claims against the estate of the decedent 
(D) that are not paid and are not deductible under Sec. 20.2053-1(d)(4) 
or paragraph (b) of this section; specifically, a separate $200,000 
claim of each of three claimants, A, B and C. The executor of D's estate 
(E) may claim a deduction under this paragraph for any two of these 
three claims because the aggregate value of the full amount of any two 
of the claims does not exceed $500,000. E may not deduct any part of the 
value of the remaining claim under this paragraph because the aggregate 
value of the full amount of all three claims would exceed $500,000.
    Example 3. As a result of an automobile accident involving the 
decedent (D) and A, D's gross estate includes a claim against A that is 
valued at $750,000. In the same matter, A files a counterclaim against 
D's estate that is valued at $1,000,000. A's claim against D's estate is 
not paid and is not deductible under Sec. 20.2053-1(d)(4). All other 
section 2053 claims and expenses of D's estate have been paid and are 
deductible. The executor of D's estate (E) deducts $750,000 of A's claim 
against the estate under Sec. 20.2053-4(b). E may claim a deduction 
under this paragraph (c) for the total value of A's claim not deducted 
under Sec. 20.2053-4(b), or $250,000. If, instead, the value of A's 
claim against D's estate is $1,500,000, so that the amount not 
deductible under Sec. 20.2053-4(b) exceeds $500,000, no deduction is 
available under this paragraph (c).
    (4) Unenforceable claims. Claims that are unenforceable prior to or 
at the decedent's death are not deductible, even if they are actually 
paid. Claims that become unenforceable during the administration of the 
estate are not deductible to the extent that they are paid (or will be 
paid) after they become unenforceable. However, see Sec. 20.2053-
1(b)(3)(iv) regarding a claim whose enforceability is at issue.
    (5) Claims founded upon a promise. Except with regard to pledges or 
subscriptions (see Sec. 20.2053-5), section 2053(c)(1)(A) provides that 
the deduction for a claim founded upon a promise or agreement is limited 
to the extent that the promise or agreement was bona fide and in 
exchange for adequate and full consideration in money or money's worth; 
that is, the promise or agreement must have been bargained for at arm's 
length and the price must have been an adequate and full equivalent 
reducible to a money value.
    (6) Recurring payments--(i) Noncontingent obligations. If a decedent 
is obligated to make recurring payments on an enforceable and certain 
claim that satisfies the requirements for deductibility under this 
section and the payments are not subject to a contingency, the amount of 
the claim will be deemed ascertainable with reasonable certainty for 
purposes of the rule for deducting certain ascertainable amounts set 
forth in Sec. 20.2053-1(d)(4). If the recurring payments will be paid, 
a deduction will be allowed under the rule for deducting certain 
ascertainable amounts set forth in Sec. 20.2053-1(d)(4) (subject to any 
applicable limitations in Sec. 20.2053-1). Recurring payments for 
purposes of this section exclude those payments made in connection with 
a mortgage or indebtedness described in and governed by Sec. 20.2053-7. 
If a decedent's obligation to make a recurring payment is contingent on 
the death or remarriage of the claimant and otherwise satisfies the 
requirements of this paragraph (d)(6)(i), the amount of the claim 
(measured according to actuarial principles, using factors set forth in 
the transfer tax regulations or otherwise provided by the IRS) will be 
deemed ascertainable with reasonable certainty for purposes of

[[Page 404]]

the rule for deducting certain ascertainable amounts set forth in Sec. 
20.2053-1(d)(4).
    (ii) Contingent obligations. If a decedent has a recurring 
obligation to pay an enforceable and certain claim but the decedent's 
obligation is subject to a contingency or is not otherwise described in 
paragraph (d)(6)(i) of this section, the amount of the claim is not 
ascertainable with reasonable certainty for purposes of the rule for 
deducting certain ascertainable amounts set forth in Sec. 20.2053-
1(d)(4). Accordingly, the amount deductible is limited to amounts 
actually paid by the estate in satisfaction of the claim in accordance 
with Sec. 20.2053-1(d)(1) (subject to any applicable limitations in 
Sec. 20.2053-1).
    (iii) Purchase of commercial annuity to satisfy recurring obligation 
to pay. If a decedent has a recurring obligation (whether or not 
contingent) to pay an enforceable and certain claim and the estate 
purchases a commercial annuity from an unrelated dealer in commercial 
annuities in an arm's-length transaction to satisfy the obligation, the 
amount deductible by the estate (subject to any applicable limitations 
in Sec. 20.2053-1) is the sum of--
    (A) The amount paid for the commercial annuity, to the extent that 
the amount paid is not refunded, or expected to be refunded, to the 
estate;
    (B) Any amount actually paid to the claimant by the estate prior to 
the purchase of the commercial annuity; and
    (C) Any amount actually paid to the claimant by the estate in excess 
of the annuity amount as is necessary to satisfy the recurring 
obligation.
    (7) Examples. The following examples illustrate the application of 
paragraph (d) of this section. Except as is otherwise provided in the 
examples, assume--
    (i) A claim satisfies the applicable requirements set forth in Sec. 
20.2053-1 and paragraph (a) of this section, is payable from property 
subject to claims, and the amount of the claim is not subject to any 
other applicable limitations in Sec. 20.2053-1;
    (ii) A claim is not deductible under paragraphs (b) or (c) of this 
section as an exception to the general rule contained in paragraph (a) 
of this section; and
    (iii) The claimant (C) is not a family member, related entity or 
beneficiary of the estate of decedent (D) and is not the executor (E).

    Example 1. Contested claim, single defendant, no decision. D is sued 
by C for $100x in a tort proceeding and responds asserting affirmative 
defenses available to D under applicable local law. D dies and E is 
substituted as defendant in the suit. D's Form 706 is due before a 
judgment is reached in the case. D's gross estate exceeds $100x. E may 
not take a deduction on Form 706 for the claim against the estate. 
However, E may claim a deduction under Sec. 20.2053-3(c) or Sec. 
20.2053-3(d)(3) for expenses incurred in defending the estate against 
the claim if the expenses have been paid in accordance with Sec. 
20.2053-1(d)(1) or if the expenses meet the requirements of Sec. 
20.2053-1(d)(4) for deducting certain ascertainable amounts. E may file 
a protective claim for refund before the expiration of the period of 
limitation prescribed in section 6511(a) in order to preserve the 
estate's right to claim a refund, if the amount of the claim will not be 
paid or cannot be ascertained with reasonable certainty by the 
expiration of this limitation period. If payment is subsequently made 
pursuant to a court decision or a settlement, the payment, as well as 
expenses incurred incident to the claim and not previously deducted, may 
be deducted and relief may be sought in connection with a timely-filed 
claim for refund.
    Example 2. Contested claim, single defendant, final court decree and 
payment. The facts are the same as in Example 1 except that, before the 
Form 706 is timely filed, the court enters a decision in favor of C, no 
timely appeal is filed, and payment is made. E may claim a deduction on 
Form 706 for the amount paid in satisfaction of the claim against the 
estate pursuant to the final decision of the local court, including any 
interest accrued prior to D's death. In addition, E may claim a 
deduction under Sec. 20.2053-3(c) or Sec. 20.2053-3(d)(3) for expenses 
incurred in defending the estate against the claim and in processing 
payment of the claim if the expenses have been paid in accordance with 
Sec. 20.2053-1(d)(1) or if the expenses meet the requirements of Sec. 
20.2053-1(d)(4) for deducting certain ascertainable amounts.
    Example 3. Contested claim, single defendant, settlement and 
payment. The facts are the same as in Example 1 except that a settlement 
is reached between E and C for $80x and payment is made before Form 706 
is timely filed. E may claim a deduction on Form 706 for the amount paid 
to C ($80x) in satisfaction of the claim against the estate. In 
addition, E may claim a deduction under Sec. 20.2053-3(c) or Sec. 
20.2053-3(d)(3) for expenses

[[Page 405]]

incurred in defending the estate, reaching a settlement, and processing 
payment of the claim if the expenses have been paid in accordance with 
Sec. 20.2053-1(d)(1) or if the expenses meet the requirements of Sec. 
20.2053-1(d)(4) for deducting certain ascertainable amounts.
    Example 4. Contested claim, multiple defendants. The facts are the 
same as in Example 1 except that the suit filed by C lists D and an 
unrelated third-party (K) as defendants. If the claim against the estate 
is not resolved prior to the time the Form 706 is filed, E may not take 
a deduction for the claim on Form 706. If payment is subsequently made 
of D's share of the claim pursuant to a court decision holding D liable 
for 40 percent of the amount due and K liable for 60 percent of the 
amount due, then E may claim a deduction for the amount paid in 
satisfaction of the claim against the estate representing D's share of 
the liability as assigned by the court decree ($40x), plus any interest 
on that share accrued prior to D's death. If the court decision finds D 
and K jointly and severally liable for the entire $100x and D's estate 
pays the entire $100x but could have reasonably collected $50x from K in 
reimbursement, E may claim a deduction of $50x together with the 
interest on $50x accrued prior to D's death. In both instances, E also 
may claim a deduction under Sec. 20.2053-3(c) or Sec. 20.2053-3(d)(3) 
for expenses incurred and not previously deducted in defending the 
estate against the claim and processing payment of the amount due from D 
if the expenses have been paid in accordance with Sec. 20.2053-1(d)(1) 
or if the expenses meet the requirements of Sec. 20.2053-1(d)(4) for 
deducting certain ascertainable amounts.
    Example 5. Contested claim, multiple defendants, settlement and 
payment. The facts are the same as in Example 1 except that the suit 
filed by C lists D and an unrelated third-party (K) as defendants. D's 
estate settles with C for $10x and payment is made before Form 706 is 
timely filed. E may take a deduction on Form 706 for the amount paid to 
C ($10x) in satisfaction of the claim against the estate. In addition, E 
may claim a deduction under Sec. 20.2053-3(c) or Sec. 20.2053-3(d)(3) 
for expenses incurred in defending the estate, reaching a settlement, 
and processing payment of the claim if the expenses have been paid in 
accordance with Sec. 20.2053-1(d)(1) or if the expenses meet the 
requirements of Sec. 20.2053-1(d)(4) for deducting certain 
ascertainable amounts.
    Example 6. Mixed claims. During life, D contracts with C to perform 
specific work on D's home for $75x. Under the contract, additional work 
must be approved in advance by D. C performs additional work and sues D 
for $100x for work completed including the $75x agreed to in the 
contract. D dies and D's Form 706 is due before a judgment is reached in 
the case. E accepts liability of $75x but contests liability of $25x. E 
may take a deduction of $75x on Form 706 if the amount has been paid or 
meets the requirements of Sec. 20.2053-1(d)(4) for deducting certain 
ascertainable amounts. In addition, E may claim a deduction under Sec. 
20.2053-3(c) or Sec. 20.2053-3(d)(3) for expenses incurred in defending 
the estate against the claim if the expenses have been paid or if the 
expenses meet the requirements of Sec. 20.2053-1(d)(4) for deducting 
certain ascertainable amounts. E may file a protective claim for refund 
before the expiration of the period of limitation prescribed in section 
6511(a) in order to preserve the estate's right to claim a refund for 
any amount in excess of $75x that is subsequently paid to resolve the 
claim against the estate. To the extent that any unpaid expenses 
incurred in defending the estate against the claim are not deducted as 
an ascertainable amount pursuant to Sec. 20.2053-1(d)(4), they may be 
included in the protective claim for refund.
    Example 7. Claim having issue of enforceability. D is sued by C for 
$100x in a tort proceeding in which there is an issue as to whether the 
claim is barred by the applicable period of limitations. After D's death 
but prior to the decision of the court, a settlement meeting the 
requirements of Sec. 20.2053-1(b)(3)(iv) is reached between E and C in 
the amount of $50x. E pays C this amount before the Form 706 is timely 
filed. E may take a deduction on Form 706 for the amount paid to C 
($50x) in satisfaction of the claim. If, subsequent to E's payment to C, 
facts develop to indicate that the claim was, in fact, unenforceable, 
the deduction will not be denied provided the enforceability of the 
claim was at issue in a bona dispute at the time of the payment. See 
Sec. 20.2053-1(b)(3)(iv). A deduction may be available under Sec. 
20.2053-3(d)(3) for expenses incurred in defending the estate, reaching 
a settlement, and processing payment of the claim if the expenses have 
been paid in accordance with Sec. 20.2053-1(d)(1) or if the expenses 
meet the requirements of Sec. 20.2053-1(d)(4) for deducting certain 
ascertainable amounts.
    Example 8. Noncontingent and recurring obligation to pay, binding on 
estate. D's property settlement agreement incident to D's divorce, 
signed three years prior to D's death, obligates D or D's estate to pay 
to S, D's former spouse, $20x per year until S's death or remarriage. 
Prior to D's death, D made payments in accordance with the agreement 
and, after D's death, E continues to make the payments in accordance 
with the agreement. D's obligation to pay S under the property 
settlement agreement is deemed to be a claim against the estate that is 
ascertainable with reasonable certainty for purposes of Sec. 20.2053-
1(d)(4). To the extent the obligation to make the recurring payment is a 
claim that will be paid, E may deduct the amount of the claim (measured 
according to actuarial principles, using factors set forth

[[Page 406]]

in the transfer tax regulations or otherwise provided by the IRS) under 
the rule for deducting certain ascertainable amounts set forth in Sec. 
20.2053-1(d)(4).
    Example 9. Recurring obligation to pay, estate purchases a 
commercial annuity in satisfaction. D's settlement agreement with T, the 
claimant in a suit against D, signed three years prior to D's death, 
obligates D or D's estate to pay to T $20x per year for 10 years, 
provided that T does not reveal the details of the claim or of the 
settlement during that period. D dies in Year 1. In Year 2, D's estate 
purchases a commercial annuity from an unrelated issuer of commercial 
annuities, XYZ, to fund the obligation to T. E may deduct the entire 
amount paid to XYZ to obtain the annuity, even though the obligation to 
T was contingent.

    (e) Interest on claim--(1) Subject to any applicable limitations in 
Sec. 20.2053-1, the interest on a deductible claim is itself deductible 
as a claim under section 2053 to the extent of the amount of interest 
accrued at the decedent's death (even if the executor elects the 
alternate valuation method under section 2032), but only to the extent 
of the amount of interest actually paid or meeting the requirements of 
Sec. 20.2053-1(d)(4) for deducting certain ascertainable amounts.
    (2) Post-death accrued interest may be deductible in appropriate 
circumstances either as an estate tax administration expense under 
section 2053 or as an income tax deduction.
    (f) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

[T.D. 9468, 74 FR 53660, Oct. 20, 2009, as amended at T.D. 9468, 74 FR 
61525, Nov. 25, 2009]



Sec. 20.2053-5  Deductions for charitable, etc., pledges or 
subscriptions.

    (a) A pledge or a subscription, evidenced by a promissory note or 
otherwise, even though enforceable against the estate, is deductible 
(subject to any applicable limitations in Sec. 20.2053-1) only to the 
extent that--
    (1) Liability therefor was contracted bona fide and for an adequate 
and full consideration in cash or its equivalent, or
    (2) It would have constituted an allowable deduction under section 
2055 (relating to charitable, etc., deductions) if it had been a 
bequest.
    (b) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended at T.D. 9468, 74 FR 
53664, Oct. 20, 2009]



Sec. 20.2053-6  Deduction for taxes.

    (a) In general--(1) Taxes are deductible in computing a decedent's 
gross estate--
    (i) Only as claims against the estate (except to the extent that 
excise taxes may be allowable as administration expenses);
    (ii) Only to the extent not disallowed by section 2053(c)(1)(B) and 
this section; and
    (iii) Subject to any applicable limitations in Sec. 20.2053-1.
    (2) See Sec. Sec. 20.2053-9 and 20.2053-10 with respect to the 
deduction allowed for certain state and foreign death taxes.
    (b) Property taxes. Property taxes are not deductible unless they 
accrued before the decedent's death. However, they are not deductible 
merely because they have accrued in an accounting sense. Property taxes 
in order to be deductible must be an enforceable obligation of the 
decedent at the time of his death.
    (c) Death taxes--(1) For the estates of decedents dying on or before 
December 31, 2004, no estate, succession, legacy or inheritance tax 
payable by reason of the decedent's death is deductible, except as 
provided in Sec. Sec. 20.2053-9 and 20.2053-10 with respect to certain 
state and foreign death taxes on transfers for charitable, etc., uses. 
However, see sections 2011 and 2014 and the corresponding regulations 
with respect to credits for death taxes.
    (2) For the estates of decedents dying after December 31, 2004, see 
section 2058 to determine the deductibility of state death taxes.
    (d) Gift taxes. Unpaid gift taxes on gifts made by a decedent before 
his death are deductible. If a gift is considered as made one-half by 
the decedent and one-half by his spouse under section 2513, the entire 
amount of the gift tax, unpaid at the decedent's death, attributable to 
a gift in fact made by the decedent is deductible. No portion of the tax 
attributable to a gift in fact

[[Page 407]]

made by the decedent's spouse is deductible except to the extent that 
the obligation is enforced against the decedent's estate and his estate 
has no effective right of contribution against his spouse. (See section 
2012 and Sec. 20.2012-1 with respect to credit for gift taxes paid upon 
gifts of property included in a decedent's gross estate.)
    (e) Excise taxes. Excise taxes incurred in selling property of a 
decedent's estate are deductible as an expense of administration if the 
sale is necessary in order to (1) pay the decedent's debts, expenses of 
administration, or taxes, (2) preserve the estate, or (3) effect 
distribution. Excise taxes incurred in distributing property of the 
estate in kind are also deductible.
    (f) Income taxes. Unpaid income taxes are deductible if they are on 
income property includible in an income tax return of the decedent for a 
period before his death. Taxes on income received after the decedent's 
death are not deductible. If income received by a decedent during his 
lifetime is included in a joint income tax return filed by the decedent 
and his spouse, or by the decedent's estate and his surviving spouse, 
the portion of the joint liability for the period covered by the return 
for which a deduction will be allowed is the amount for which the 
decedent's estate would be liable under local law, as between the 
decedent and his spouse, after enforcement of any effective right of 
reimbursement or contribution. In the absence of evidence to the 
contrary, the deductible amount is presumed to be an amount bearing the 
same ratio to the total joint tax liability for the period covered by 
the return that the amount of income tax for which the decedent would 
have been liable if he had filed a separate return for that period bears 
to the total of the amounts for which the decedent and his spouse would 
have been liable if they had both filed separate returns for that 
period. Thus, in the absence of evidence to the contrary, the deductible 
amount equals: Decedent's separate tax/Both separate taxesxJoint tax.

However, the deduction cannot in any event exceed the lesser of--
    (1) The decedent's liability for the period (as determined in this 
paragraph) reduced by the amounts already contributed by the decedent 
toward payment of the joint liability, or
    (2) If there is an enforceable agreement between the decedent and 
his spouse or between the executor and the spouse relative to the 
payment of the joint liability, the amount which pursuant to the 
agreement is to be contributed by the estate toward payment of the joint 
liability.

If the decedent's estate and his surviving spouse are entitled to a 
refund on account of an overpayment of a joint income tax liability, the 
overpayment is an asset includible in the decedent's gross estate under 
section 2033 in the amount to which the estate would be entitled under 
local law, as between the estate and the surviving spouse. In the 
absence of evidence to the contrary, the includible amount is presumed 
to be the amount by which the decedent's contributions toward payment of 
the joint tax exceeds his liability determined in accordance with the 
principles set forth in this paragraph (other than subparagraph (1) of 
this paragraph).
    (g) Post-death adjustments of deductible tax liability. Post-death 
adjustments increasing a tax liability accrued prior to the decedent's 
death, including increases of taxes deducted under this section, will 
increase the amount of the deduction available under section 2053(a)(3) 
for that tax liability. Similarly, any refund subsequently determined to 
be due to and received by the estate or its successor in interest with 
respect to taxes deducted by the estate under this section reduce the 
amount of the deduction taken for that tax liability under section 
2053(a)(3). Expenses associated with defending the estate against the 
increase in tax liability or with obtaining the refund may be deductible 
under Sec. 20.2053-3(d)(3). A protective claim for refund of estate 
taxes may be filed before the expiration of the period of limitation for 
filing a claim for refund in order to preserve the estate's right to 
claim a refund if the amount of a deductible tax liability may be 
affected by such an adjustment or refund. The application of this 
section may be illustrated by the following examples:


[[Page 408]]


    Example 1. Increase in tax due. After the decedent's death, the 
Internal Revenue Service examines the gift tax return filed by the 
decedent in the year before the decedent's death and asserts a 
deficiency of $100x. The estate pays attorney's fees of $30x in a non-
frivolous defense against the increased deficiency. The final 
determination of the deficiency, in the amount of $90x, is paid by the 
estate prior to the expiration of the limitation period for filing a 
claim for refund. The estate may deduct $90x under section 2053(a)(3) 
and $30x under Sec. 20.2053-3(c)(2) or (d)(3) in connection with a 
timely claim for refund.
    Example 2. Refund of taxes paid. Decedent's estate timely files D's 
individual income tax return for the year in which the decedent died. 
The estate timely pays the entire amount of the tax due, $50x, as shown 
on that return. The entire $50x was attributable to income received 
prior to the decedent's death. Decedent's estate subsequently discovers 
an error on the income tax return and timely files a claim for refund of 
income tax. Decedent's estate receives a refund of $10x. The estate is 
allowed a deduction of only $40x under section 2053(a)(3) for the income 
tax liability accrued prior to the decedent's death. If D's estate had 
claimed a deduction of $50x on D's United States Estate (and Generation-
Skipping Transfer) Tax Return (Form 706), the deduction claimed under 
section 2053(a)(3) will be allowed only to the extent of $40x upon 
examination by the Commissioner.

    (h) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended at T.D. 9468, 74 FR 
53664, Oct. 20, 2009]



Sec. 20.2053-7  Deduction for unpaid mortgages.

    A deduction is allowed from a decedent's gross estate of the full 
unpaid amount of a mortgage upon, or of any other indebtedness in 
respect of, any property of the gross estate, including interest which 
had accrued thereon to the date of death, provided the value of the 
property, undiminished by the amount of the mortgage or indebtedness, is 
included in the value of the gross estate. If the decedent's estate is 
liable for the amount of the mortgage or indebtedness, the full value of 
the property subject to the mortgage or indebtedness must be included as 
part of the value of the gross estate; the amount of the mortgage or 
indebtedness being in such case allowed as a deduction. But if the 
decedent's estate is not so liable, only the value of the equity of 
redemption (or the value of the property, less the mortgage or 
indebtedness) need be returned as part of the value of the gross estate. 
In no case may the deduction on account of the mortgage or indebtedness 
exceed the liability therefor contracted bona fide and for an adequate 
and full consideration in money or money's worth. See Sec. 20.2043-1. 
Only interest accrued to the date of the decedent's death is allowable 
even though the alternate valuation method under section 2032 is 
selected. In any case where real property situated outside the United 
States no deduction may be taken of any mortgage thereon or any other 
indebtedness does not form a part of the gross estate, in respect 
thereof.

[T.D. 6684, 28 FR 11409, Oct. 24, 1963]



Sec. 20.2053-8  Deduction for expenses in administering property not
subject to claims.

    (a) Expenses incurred in administering property included in a 
decedent's gross estate but not subject to claims fall within the second 
category of deductions set forth in Sec. 20.2053-1, and may be allowed 
as deductions if they--
    (1) Would be allowed as deductions in the first category if the 
property being administered were subject to claims; and
    (2) Were paid before the expiration of the period of limitation for 
assessment provided in section 6501.

Usually, these expenses are incurred in connection with the 
administration of a trust established by a decedent during his lifetime. 
They may also be incurred in connection with the collection of other 
assets or the transfer or clearance of title to other property included 
in a decedent's gross estate for estate tax purposes but not included in 
his probate estate.
    (b) These expenses may be allowed as deductions only to the extent 
that they would be allowed as deductions under the first category if the 
property were subject to claims. See Sec. 20.2053-3. The

[[Page 409]]

only expenses in administering property not subject to claims which are 
allowed as deductions are those occasioned by the decedent's death and 
incurred in settling the decedent's interest in the property or vesting 
good title to the property in the beneficiaries. Expenses not coming 
within the description in the preceding sentence but incurred on behalf 
of the transferees are not deductible.
    (c) The principles set forth in paragraphs (b), (c), and (d) of 
Sec. 20.2053-3 (relating to the allowance of executor's commissions, 
attorney's fees, and miscellaneous administration expenses of the first 
category) are applied in determining the extent to which trustee's 
commissions, attorney's and accountant's fees, and miscellaneous 
administration expenses are allowed in connection with the 
administration of property not subject to claims.
    (d) The application of this section may be illustrated by the 
following examples:

    Example (1). In 1940, the decedent made an irrevocable transfer of 
property to the X Trust Company, as trustee. The instrument of transfer 
provided that the trustee should pay the income from the property to the 
decedent for the duration of his life and upon his death, distribute the 
corpus of the trust among designated beneficiaries. The property was 
included in the decedent's gross estate under the provisions of section 
2036. Three months after the date of death, the trustee distributed the 
trust corpus among the beneficiaries, except for $6,000 which it 
withheld. The amount withheld represented $5,000 which it retained as 
trustee's commissions in connection with the termination of the trust 
and $1,000 which it had paid to an attorney for representing it in 
connection with the termination. Both the trustee's commissions and the 
attorney's fees were allowable under the law of the jursidiction in 
which the trust was being administered, were reasonable in amount, and 
were in accord with local custom. Under these circumstances, the estate 
is allowed a deduction of $6,000.
    Example (2). In 1945, the decedent made an irrevocable transfer of 
property to Y Trust Company, as trustee. The instrument of transfer 
provided that the trustee should pay the income from the property to the 
decedent during his life. If the decedent's wife survived him, the trust 
was to continue for the duration of her life, with Y Trust Company and 
the decedent's son as co-trustees, and with income payable to the 
decedent's wife for the duration of her life. Upon the death of both the 
decedent and his wife, the corpus is to be distributed among designated 
remaindermen. The decedent was survived by his wife. The property was 
included in the decedent's gross estate under the provisions of section 
2036. In accordance with local custom, the trustee made an accounting to 
the court as of the date of the decedent's death. Following the death of 
the decedent, a controversy arose among the remaindermen as to their 
respective rights under the instrument of transfer, and a suit was 
brought in court to which the trustee was made a party. As part of the 
accounting, the court approved the following expenses which the trustee 
had paid within 3 years following the date of death: $10,000, trustee's 
commissions; $5,000, accountant's fees; $25,000, attorney's fees; and 
$2,500, representing fees paid to the guardian of a remainderman who was 
a minor. The trustee's commissions and accountant's fees were for 
services in connection with the usual issues involved in a trust 
accounting as also were one-half of the attorney's and guardian's fees. 
The remainder of the attorney's and guardian's fees were for services 
performed in connection with the suit brought by the remaindermen. The 
amount allowed as a deduction is the $28,750 ($10,000, trustee's 
commissions; $5,000, accountant's fees; $12,500, attorney's fees; and 
$1,250, guardian's fees) incurred as expenses in connection with the 
usual issues involved in a trust accounting. The remaining expenses are 
not allowed as deductions since they were incurred on behalf of the 
transferees.
    Example (3). Decedent in 1950 made an irrevocable transfer of 
property to the Z Trust Company, as trustee. The instrument of transfer 
provided that the trustee should pay the income from the property to the 
decedent's wife for the duration of her life. If the decedent survived 
his wife the trust corpus was to be returned to him but if he did not 
survive her, then upon the death of the wife, the trust corpus was to be 
distributed among their children. The decedent predeceased his wife and 
the transferred property, less the value of the wife's outstanding life 
estate, was included in his gross estate under the provisions of section 
2037 since his reversionary interest therein immediately before his 
death was in excess of 5 percent of the value of the property. At the 
wife's request, the court ordered the trustee to render an accounting of 
the trust property as of the date of the decedent's death. No deduction 
will be allowed the decedent's estate for any of the expenses incurred 
in connection with the trust accounting, since the expenses were 
incurred on behalf of the wife.
    Example (4). If, in the preceding example, the decedent died without 
other property and no executor or administrator of his estate was 
appointed, so that it was necessary

[[Page 410]]

for the trustee to prepare an estate tax return and participate in its 
audit, or if the trustee required accounting proceedings for its own 
protection in accordance with local custom, trustees', attorneys', and 
guardians' fees in connection with the estate tax or accounting 
proceedings would be deductible to the same extent that they would be 
deductible if the property were subject to claims. Deductions incurred 
under similar circumstances by a surviving joint tenant or the recipient 
of life insurance proceeds would also be deductible.



Sec. 20.2053-9  Deduction for certain State death taxes.

    (a) General rule. A deduction is allowed a decedent's estate under 
section 2053(d) for the amount of any estate, succession, legacy, or 
inheritance tax imposed by a State, Territory, or the District of 
Columbia, or, in the case of a decedent dying before September 3, 1958, 
a possession of the United States upon a transfer by the decedent for 
charitable, etc., uses described in section 2055 or 2106(a)(2) (relating 
to the estates of nonresidents not citizens), but only if (1) the 
conditions stated in paragraph (b) of this section are met, and (2) an 
election is made in accordance with the provisions of paragraph (c) of 
this section. See section 2011(e) and Sec. 20.2011-2 for the effect 
which the allowance of this deduction has upon the credit for State 
death taxes. However, see section 2058 to determine the deductibility of 
state death taxes by estates to which section 2058 is applicable.
    (b) Condition for allowance of deduction. (1) The deduction is not 
allowed unless either--
    (i) The entire decrease in the Federal estate tax resulting from the 
allowance of the deduction inures solely to the benefit of a charitable, 
etc., transferee described in section 2055 or 2106(a)(2), or
    (ii) The Federal estate tax is equitably apportioned among all the 
transferees (including the decedent's surviving spouse and the 
charitable, etc., transferees) of property included in the decedent's 
gross estate.

For allowance of the credit, it is sufficient if either of these 
conditions is satisfied. Thus, in a case where the entire decrease in 
Federal estate tax inures to the benefit of a charitable transferee, the 
deduction is allowable even though the Federal estate tax is not 
equitably apportioned among all the transferees of property included in 
the decedent's gross estate. Similarly, if the Federal estate tax is 
equitably apportioned among all the transferees of property included in 
the decedent's gross estate, the deduction is allowable even though a 
noncharitable transferee receives some benefit from the allowance of the 
deduction.
    (2) For purposes of this paragraph, the Federal estate tax is 
considered to be equitably apportioned among all the transferees 
(including the decedent's surviving spouse and the charitable, etc., 
transferees) of property included in the decedent's gross estate only if 
each transferee's share of the tax is based upon the net amount of his 
transfer subjected to the tax (taking into account any exemptions, 
credits, or deductions allowed by Chapter 11). See examples (2) through 
(5) of paragraph (e) of this section.
    (c) Exercise of election. The election to take a deduction for a 
state death tax imposed upon a transfer for charitable, etc., uses shall 
be exercised by the executor by the filing of a written notification to 
that effect with the Commissioner. The notification shall be filed 
before the expiration of the period of limitation for assessment 
provided in section 6501 (usually 3 years from the last day for filing 
the return). The election may be revoked by the executor by the filing 
of a written notification to that effect with the Commissioner at any 
time before the expiration of such period.
    (d) Amount of State death tax imposed upon a transfer. If a State 
death tax is imposed upon the transfer of the decedent's entire estate 
and not upon the transfer of a particular share thereof, the State death 
tax imposed upon a transfer for charitable, etc., uses is deemed to be 
an amount, E, which bears the same ratio to F (the amount of the State 
death tax imposed with respect to the transfer of the entire estate) as 
G (the value of the charitable, etc., transfer, reduced as provided in 
the next sentence) bears to H (the total value of the properties, 
interests, and benefits subjected to the State death tax received by all 
persons interested

[[Page 411]]

in the estate, reduced as provided in the last sentence of this 
paragraph). In arriving at amount G of the ratio, the value of the 
charitable, etc., transfer is reduced by the amount of any deduction or 
exclusion allowed with respect to such property in determining the 
amount of the State death tax. In arriving at amount H of the ratio, the 
total value of the properties, interests, and benefits subjected to 
State death tax received by all persons interested in the estate is 
reduced by the amount of all deductions and exclusions allowed in 
determining the amount of the State death tax on account of the nature 
of a beneficiary or a beneficiary's relationship to the decedent.
    (e) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). The decedent's gross estate was valued at $200,000. He 
bequeathed $90,000 to a nephew, $10,000 to Charity A, and the remainder 
of his estate to Charity B. State inheritance tax in the amount of 
$13,500 was imposed upon the bequest to the nephew, $1,500 upon the 
bequest to Charity A, and $15,000 upon the bequest to Charity B. Under 
the will and local law, each legatee is required to pay the State 
inheritance tax on his bequest, and the Federal estate tax is to be paid 
out of the residuary estate. Since the entire burden of paying the 
Federal estate tax falls on Charity B, it follows that the decrease in 
the Federal estate tax resulting from the allowance of deductions for 
State death taxes in the amounts of $1,500 and $15,000 would inure 
solely for the benefit of Charity B. Therefore, deductions of $1,500 and 
$15,000 are allowable under section 2053(d). If, in this example, the 
State death taxes as well as the Federal estate tax were to be paid out 
of the residuary estate, the result would be the same.
    Example (2). The decedent's gross estate was valued at $350,000. 
Expenses, indebtedness, etc., amounted to $50,000. The entire estate was 
bequeathed in equal shares to a son, a daughter, and Charity C. State 
inheritance tax in the amount of $2,000 was imposed upon the bequest to 
the son, $2,000 upon the bequest to the daughter, and $5,000 upon the 
bequest to Charity C. Under the will and local law, each legatee is 
required to pay his own State inheritance tax and his proportionate 
share of the Federal estate tax determined by taking into consideration 
the net amount of his bequest subjected to the tax. Since each legatee's 
share of the Federal estate tax is based upon the net amount of his 
bequest subjected to the tax (note that the deductions under sections 
2053(d) and 2055 will have the effect of reducing Charity C's 
proportionate share of the tax), the tax is considered to be equitably 
apportioned. Thus, a deduction of $5,000 is allowable under section 
2053(d). This deduction together with a deduction of $95,000 under 
section 2055 (charitable deduction) will mean that none of Charity C's 
bequest is subjected to Federal estate tax. Hence, the son and the 
daughter will bear the entire estate tax.
    Example (3). The decedent bequeathed his property in equal shares, 
after payment of all expenses, to a son, a daughter, and a charity. 
State inheritance tax of $2,000 was imposed upon the bequest to the son, 
$2,000 upon the bequest to the daughter, and $15,000 upon the bequest to 
the charity. Under the will and local law, each beneficiary pays the 
State inheritance tax on his bequest and the Federal estate tax is to be 
paid out of the estate as an administration expense. If the deduction 
for State death tax on the charitable bequest is allowed in this case, 
some portion of the decrease in the Federal estate tax would inure to 
the benefit of the son and the daughter. The Federal estate tax is not 
considered to be equitably apportioned in this case since each legatee's 
share of the Federal estate tax is not based upon the net amount of his 
bequest subjected to the tax (note that the deductions under sections 
2053(d) and 2055 will not have the effect of reducing the charity's 
proportionate share of the tax). Inasmuch as some of the decrease in the 
Federal estate tax payable would inure to the benefit of the son and the 
daughter, and inasmuch as there is no equitable apportionment of the 
tax, no deduction is allowable under section 2053(d).
    Example (4). The decedent bequeathed his entire residuary estate in 
trust to pay the income to X for life with remainder to charity. The 
State imposed inheritance taxes of $2,000 upon the bequest to X and 
$10,000 upon the bequest to charity. Under the will and local law, all 
State and Federal taxes are payable out of the residuary estate and 
therefore they would reduce the amount which would become the corpus of 
the trust. If the deduction for the State death tax on the charitable 
bequest is allowed in this case, some portion of the decrease in the 
Federal estate tax would inure to the benefit of X since the allowance 
of the deduction would increase the size of the corpus from which X is 
to receive the income for life. Also, the Federal estate tax is not 
considered to be equitably apportioned in this case since each legatee's 
share of the Federal estate tax is not based upon the net amount of his 
bequest subjected to the tax (note that the deductions under sections 
2053(d) and 2055 will not have the effect of reducing the charity's 
proportionate share of the tax). Inasmuch as some of the decrease in the 
Federal estate tax payable would inure to the benefit of X,

[[Page 412]]

and inasmuch as there is no equitable apportionment of the tax, no 
deduction is allowable under section 2053(d).
    Example (5). The decedent's gross estate was valued at $750,000. 
Expenses, indebtedness, etc., amounted to $500,000. The decedent 
bequeathed $350,000 of his estate to his surviving spouse and the 
remainder of his estate equally to his son and Charity D. State 
inheritance tax in the amount of $7,000 was imposed upon the bequest to 
the surviving spouse, $26,250 upon the bequest to the son, and $26,250 
upon the bequest to Charity D. The will was silent concerning the 
payment of taxes. In such a case, the local law provides that each 
legatee shall pay his own State inheritance tax. The local law further 
provides for an apportionment of the Federal estate tax among the 
legatees of the estate. Under the apportionment provisions, the 
surviving spouse is not required to bear any part of the Federal estate 
tax with respect to her $350,000 bequest. It should be noted, however, 
that the marital deduction allowed to the decedent's estate by reason of 
the bequest to the surviving spouse is limited to $343,000 ($350,000 
bequest less $7,000 State inheritance tax payable by the surviving 
spouse). Thus, the bequest to the surviving spouse is subjected to the 
Federal estate tax in the net amount of $7,000. If the deduction for 
State death tax on the charitable bequest is allowed in this case, some 
portion of the decrease in the Federal estate tax would inure to the 
benefit of the son. The Federal estate tax is not considered to be 
equitably apportioned in this case since each legatee's share of the 
Federal estate tax is not based upon the net amount of his bequest 
subjected to the tax (note that the surviving spouse is to pay no tax). 
Inasmuch as some of the decrease in the Federal estate tax payable would 
inure to the benefit of the son, and inasmuch as there is no equitable 
apportionment of the tax, no deduction is allowable under section 
2053(d).
    (f) Effective/applicability date--(1) The last sentence of paragraph 
(a) of this section applies to the estates of decedents dying on or 
after October 20, 2009, to which section 2058 is applicable.
    (2) The other provisions of this section apply to the estates of 
decedents dying on or after October 20, 2009, to which section 2058 is 
not applicable.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6526, 26 FR 
417, Jan. 19, 1961; T.D. 6666, 28 FR 7251, July 16, 1963; T.D. 9468, 74 
FR 53664, Oct. 20, 2009]



Sec. 20.2053-10  Deduction for certain foreign death taxes.

    (a) General rule. A deduction is allowed the estate of a decedent 
dying on or after July 1, 1955, under section 2053(d) for the amount of 
any estate, succession, legacy, or inheritance tax imposed by and 
actually paid to any foreign country, in respect of any property 
situated within such foreign country and included in the gross estate of 
a citizen or resident of the United States, upon a transfer by the 
decedent for charitable, etc., uses described in section 2055, but only 
if (1) the conditions stated in paragraph (b) of this section are met, 
and (2) an election is made in accordance with the provisions of 
paragraph (c) of this section. The determination of the country within 
which property is situated is made in accordance with the rules 
contained in sections 2104 and 2105 in determining whether property is 
situated within or without the United States. See section 2014(f) and 
Sec. 20.2014-7 for the effect which the allowance of this deduction has 
upon the credit for foreign death taxes.
    (b) Condition for allowance of deduction. (1) The deduction is not 
allowed unless either--
    (i) The entire decrease in the Federal estate tax resulting from the 
allowance of the deduction inures solely to the benefit of a charitable, 
etc., transferee described in section 2055, or
    (ii) The Federal estate tax is equitably apportioned among all the 
transferees (including the decedent's surviving spouse and the 
charitable, etc., transferees) of property included in the decedent's 
gross estate.


For allowance of the deduction, it is sufficient if either of these 
conditions is satisfied. Thus, in a case where the entire decrease in 
Federal estate tax inures to the benefit of a charitable transferee, the 
deduction is allowable even though the Federal estate tax is not 
equitably apportioned among all the transferees of property included in 
the decedent's gross estate. Similarly, if the Federal estate tax is 
equitably apportioned among all the transferees of property included in 
the decedent's gross estate, the deduction is allowable even though a 
noncharitable transferee receives some benefit from the allowance of the 
deduction.
    (2) For purposes of this paragraph, the Federal estate tax is 
considered to be equitably apportioned among all the

[[Page 413]]

transferees (including the decedent's surviving spouse and the 
charitable, etc., transferees) of property included in the decedent's 
gross estate only if each transferee's share of the tax is based upon 
the net amount of his transfer subjected to the tax (taking into account 
any exemptions, credits, or deductions allowed by Chapter 11). See 
examples (2) through (5) of paragraph (e) of Sec. 20.2053-9.
    (c) Exercise of election. The election to take a deduction for a 
foreign death tax imposed upon a transfer for charitable, etc., uses 
shall be exercised by the executor by the filing of a written 
notification to that effect with the Commissioner of internal revenue in 
whose district the estate tax return for the decedent's estate was 
filed. An election to take the deduction for foreign death taxes is 
deemed to be a waiver of the right to claim a credit under a treaty with 
any foreign country for any tax or portion thereof claimed as a 
deduction under this section. The notification shall be filed before the 
expiration of the period of limitation for assessment provided in 
section 6501 (usually 3 years from the last day for filing the return). 
The election may be revoked by the executor by the filing of a written 
notification to that effect with the Commissioner at any time before the 
expiration of such period.
    (d) Amount of foreign death tax imposed upon a transfer. If a 
foreign death tax is imposed upon the transfer of the entire part of the 
decedent's estate subject to such tax and not upon the transfer of a 
particular share thereof, the foreign death tax imposed upon a transfer 
for charitable, etc., uses is deemed to be an amount, J, which bears the 
same ratio to K (the amount of the foreign death tax imposed with 
respect to the transfer of the entire part of the decedent's estate 
subject to such tax) as M (the value of the charitable, etc., transfer, 
reduced as provided in the next sentence) bears to N (the total value of 
the properties, interests, and benefits subjected to the foreign death 
tax received by all persons interested in the estate, reduced as 
provided in the last sentence of this paragraph). In arriving at amount 
M of the ratio, the value of the charitable, etc., transfer is reduced 
by the amount of any deduction or exclusion allowed with respect to such 
property in determining the amount of the foreign death tax. In arriving 
at amount N of the ratio, the total value of the properties, interests, 
and benefits subjected to foreign death tax received by all persons 
interested in the estate is reduced by the amount of all deductions and 
exclusions allowed in determining the amount of the foreign death tax on 
account of the nature of a beneficiary or a beneficiary's relationship 
to the decedent.

[T.D. 6600, 27 FR 4985, May 29, 1962, as amended at T.D. 9468, 74 FR 
53665, Oct. 20, 2009]



Sec. 20.2054-1  Deduction for losses from casualties or theft.

    A deduction is allowed for losses incurred during the settlement of 
the estate arising from fires, storms, shipwrecks, or other casualties, 
or from theft, if the losses are not compensated for by insurance or 
otherwise. If the loss is partly compensated for, the excess of the loss 
over the compensation may be deducted. Losses which are not of the 
nature described are not deductible. In order to be deductible a loss 
must occur during the settlement of the estate. If a loss with respect 
to an asset occurs after its distribution to the distributee it may not 
be deducted. Notwithstanding the foregoing, no deduction is allowed 
under this section if the estate has waived its right to take such a 
deduction pursuant to the provisions of section 642(g) in order to 
permit its allowance for income tax purposes. See further Sec. 
1.642(g)-1.



Sec. 20.2055-1  Deduction for transfers for public, charitable, and 
religious uses; in general.

    (a) General rule. A deduction is allowed under section 2055(a) from 
the gross estate of a decedent who was a citizen or resident of the 
United States at the time of his death for the value of property 
included in the decedent's gross estate and transferred by the decedent 
during his lifetime or by will--
    (1) To or for the use of the United States, any State, Territory, 
any political subdivision thereof, or the District of Columbia, for 
exclusively public purposes;

[[Page 414]]

    (2) To or for the use of any corporation or association organized 
and operated exclusively for religious, charitable, scientific, 
literary, or educational purposes (including the encouragement of art 
and for the prevention of cruelty to children or animals), if no part of 
the net earnings of the corporation or association inures to the benefit 
of any private stockholder or individual (other than as a legitimate 
object of such purposes), if the organization is not disqualified for 
tax exemption under section 501(c)(3) by reason of attempting to 
influence legislation, and if, in the case of transfers made after 
December 31, 1969, it does not participate in, or intervene in 
(including the publishing or distributing of statements), any political 
campaign on behalf of or in opposition to any candidate for public 
office.
    (3) To a trustee or trustees, or a fraternal society, order, or 
association operating under the lodge system, if the transferred 
property is to be used exclusively for religious, charitable, 
scientific, literary, or educational purposes (or for the prevention of 
cruelty to children or animals), if no substantial part of the 
activities of such transferree is carrying on propaganda, or otherwise 
attempting, to influence legislation, and if, in the case of transfers 
made after December 31, 1969, such transferee does not participate in, 
or intervene in (including the publishing or distributing of 
statements), any political campaign on behalf of any candidate for 
public office; or
    (4) To or for the use of any veterans' organization incorporated by 
act of Congress, or of any of its departments, local chapters, or posts, 
no part of the net earnings of which inures to the benefit of any 
private shareholder or individual.

The deduction is not limited, in the case of estates of citizens or 
residents of the United States, to transfers to domestic corporations or 
associations, or to trustees for use within the United States. Nor is 
the deduction subject to percentage limitations such as are applicable 
to the charitable deduction under the income tax. An organization will 
not be considered to meet the requirements of subparagraph (2) or (3) of 
this paragraph if such organization engages in any activity which would 
cause it to be classified as an ``action'' organization under paragraph 
(c)(3) of Sec. 1.501(c)(3)-1 of this chapter (Income Tax Regulations). 
See Sec. Sec. 20.2055-4 and 20.2055-5 for rules relating to the 
disallowance of deductions to trusts and organizations which engage in 
certain prohibited transactions or whose governing instruments do not 
contain certain specified requirements.
    (b) Powers of appointment--(1) General rule. A deduction is 
allowable under section 2055(b) for the value of property passing to or 
for the use of a transferee described in paragraph (a) of this section 
by the exercise, failure to exercise, release or lapse of a power of 
appointment by reason of which the property is includible in the 
decedent's gross estate under section 2041.
    (2) Certain bequests subject to power of appointment. For the 
allowance of a deduction in the case of a bequest in trust where the 
decedent's surviving spouse (i) was over 80 years of age at the date of 
decedent's death, (ii) was entitled for life to all of the net income 
from the trust, and (iii) had a power of appointment over the corpus of 
the trust exercisable by will in favor of, among others, a charitable 
organization, see section 2055(b)(2). See also section 6503(e) for 
suspension of the period of limitations for assessment or collection of 
any deficiency attributable to the allowance of the deduction.
    (c) Submission of evidence. In establishing the right of the estate 
to the deduction authorized by section 2055, the executor should submit 
the following with the return:
    (1) A copy of any instrument in writing by which the decedent made a 
transfer of property in his lifetime the value of which is required by 
statute to be included in his gross estate, for which a deduction under 
section 2055 is claimed. If the instrument is of record the copy should 
be certified, and if not of record, the copy should be verified.
    (2) A written statement by the executor containing a declaration 
that it is made under penalties of perjury and stating whether any 
action has been instituted to construe or to contest the decedent's will 
or any provision thereof affecting the charitable deduction claimed and 
whether, according to his

[[Page 415]]

information and belief, any such action is designed or contemplated.

The executor shall also submit such other documents or evidence as may 
be requested by the district director.
    (d) Cross references. (1) See section 2055(f) for certain cross 
references relating to section 2055.
    (2) For treatment of bequests accepted by the Secretary of State or 
the Secretary of Commerce, for the purpose of organizing and holding an 
international conference to negotiate a Patent Corporation Treaty, as 
bequests to or for the use of the United States, see section 3 of Joint 
Resolution of December 24, 1969 (Pub. L. 91-160, 83 Stat. 443).
    (3) For treatment of bequests accepted by the Secretary of the 
Department of Housing and Urban Development, for the purpose of aiding 
or facilitating the work of the Department, as bequests to or for the 
use of the United States, see section 7(k) of the Department of Housing 
and Urban Development Act (42 U.S.C. 3535), as added by section 905 of 
Pub. L. 91-609 (84 Stat. 1809).
    (4) For treatment of certain property accepted by the Chairman of 
the Administrative Conference of the United States, for the purposes of 
aiding and facilitating the work of the Conference, as a devise or 
bequest to the United States, see 5 U.S.C. 575(c)(12), as added by 
section 1(b) of the Act of October 21, 1972 (Pub. L. 92-526, 86 Stat. 
1048).
    (5) For treatment of the Board for International Broadcasting as a 
corporation described in section 2055(a)(2), see section 7 of the Board 
for International Broadcasting Act of 1973 (Pub. L. 93-129, 87 Stat. 
459).

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960 as 
amended by T.D. 8318, 39 FR 25452, July 11, 1974; T.D. 8308, 55 FR 
35593, Aug. 31, 1990]



Sec. 20.2055-2  Transfers not exclusively for charitable purposes.

    (a) Remainders and similar interests. If a trust is created or 
property is transferred for both a charitable and a private purpose, 
deduction may be taken of the value of the charitable beneficial 
interest only insofar as that interest is presently ascertainable, and 
hence severable from the noncharitable interest. Thus, in the case of 
decedent's dying before January 1, 1970, if money or property is placed 
in trust to pay the income to an individual during his life, or for a 
term of years, and then to pay the principal to a charitable 
organization, the present value of the remainder is deductible. See 
paragraph (e) of this section for limitations applicable to decedent's 
dying after December 31, 1969. See paragraph (f) of this section for 
rules relating to valuation of partial interests in property passing for 
charitable purposes.
    (b) Transfers subject to a condition or a power. (1) If, as of the 
date of a decedent's death, a transfer for charitable purposes is 
dependent upon the performance of some act or the happening of a 
precedent event in order that it might become effective, no deduction is 
allowable unless the possibility that the charitable transfer will not 
become effective is so remote as to be negligible. If an estate or 
interest has passed to, or is vested in, charity at the time of a 
decedent's death and the estate or interest would be defeated by the 
subsequent performance of some act or the happening of some event, the 
possibility of occurrence of which appeared at the time of the 
decedent's death to be so remote as to be negligible, the deduction is 
allowable. If the legatee, devisee, donee, or trustee is empowered to 
divert the property or fund, in whole or in part, to a use or purpose 
which would have rendered it, to the extent that it is subject to such 
power, not deductible had it been directly so bequeathed, devised, or 
given by the decedent, the deduction will be limited to that portion, if 
any, of the property or fund which is exempt from an exercise of the 
power.
    (2) The application of this paragraph may be illustrated by the 
following examples:

    Example (1). In 1965, A dies leaving certain property in trust in 
which charity is to receive the income for the life of his widow. The 
assets placed in trust by the decedent consist of stock in a corporation 
the fiscal policies of which are controlled by the decedent and his 
family. The trustees of the trust and the remaindermen are members of 
the decedent's family, and the governing instrument contains no adequate 
guarantee of the

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request income to the charitable organization. Under such circumstances, 
no deduction will be allowed. Similarly, if the trustees are not members 
of the decedent's family but have no power to sell or otherwise dispose 
of the closely held stock, or otherwise insure the requisite enjoyment 
of income to the charitable organization, no deduction will be allowed.
    Example (2). C dies leaving a tract of land to a city government for 
as long as the land is used by the city for a public park. If the city 
accepts the tract and if, on the date of C's death, the possibility that 
the city will not use the land for a public park is so remote as to be 
negligible, a deduction will be allowed.

    (c) Disclaimers--(1) Decedents dying after December 31, 1976. In the 
case of a bequest, devise, or transfer made by a decedent dying after 
December 31, 1976, the amount of a bequest, devise or transfer for which 
a deduction is allowable under section 2055 includes an interest which 
falls into the bequest, devise or transfer as the result of either--
    (i) A qualified disclaimer (see section 2518 and the corresponding 
regulations for rules relating to a qualified disclaimer), or
    (ii) The complete termination of a power to consume, invade, or 
appropriate property for the benefit of an individual by reason of the 
death of such individual or for any other reason, if the termination 
occurs within the period of time (including extensions) for filing the 
decedent's Federal estate tax return and before such power has been 
exercised.
    (2) Decedents dying before January 1, 1977. In the case of a 
bequest, devise or transfer made by a decedent dying before January 1, 
1977, the amount of a bequest, devise or transfer, for which a deduction 
is allowable under section 2055 includes an interest which falls into 
the bequest, devise or transfer as a result of either--
    (i) A disclaimer of a bequest, devise, transfer, or power, if the 
disclaimer is made within 9 months (15 months if the decedent died on or 
before December 31, 1970) after the decedent's death (the period of time 
within which the estate tax return must be filed under section 6075) or 
within any extension of time for filing the return, granted pursuant to 
section 6081, and the disclaimer is irrevocable at the time the 
deduction is allowed, or
    (ii) The complete termination of a power to consume, invade, or 
appropriate property for the benefit of an individual (whether the 
termination occurs by reason of the death of the individual, or 
otherwise) if the termination occurs within the period described in 
paragraph (c)(2)(i) of this section and before the power has been 
exercised. Ordinarily, a disclaimer made by a person not under any legal 
disability will be considered irrevocable when filed with the probate 
court. A disclaimer is a complete and unqualified refusal to accept the 
right to which one is entitled. Thus, if a beneficiary uses these rights 
for his own purposes, as by receiving a consideration for his formal 
disclaimer, he has not refused the rights to which he was entitled. 
There can be no disclaimer after an acceptance of these rights, 
expressly or impliedly. The disclaimer of a power is to be distinguished 
from the release or exercise of a power. The release or exercise of a 
power by the donee of the power in favor of a person or object described 
in paragraph (a) of Sec. 20.2055-1 does not result in any deduction 
under section 2055 in the estate of the donor of a power (but see 
paragraph (b)(1) of Sec. 20.2055-1 with respect to the donee's estate).
    (d) Payments in compromise. If a charitable organization assigns or 
surrenders a part of a transfer to it pursuant to a compromise agreement 
in settlement of a controversy, the amount so assigned or surrendered is 
not deductible as a transfer to that charitable organization.
    (e) Limitation applicable to decedents dying after December 31, 
1969--(1) Disallowance of deduction--(i) In general. In the case of 
decedents dying after December 31, 1969, where an interest in property 
passes or has passed from the decedent for charitable purposes and an 
interest (other than an interest which is extinguished upon the 
decedent's death) in the same property passes or has passed from the 
decedent for private purposes (for less than an adequate and full 
consideration in money or money's worth) after October 9, 1969, no 
deduction is allowed under section 2055 for the value of the interest 
which passes or has passed for charitable purposes unless the interest 
in property is

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a deductible interest described in subparagraph (2) of this paragraph. 
The principles of section 2056 and the regulations thereunder shall 
apply for purposes of determining under this paragraph (e)(1)(i) whether 
an interest in property passes or has passed from the decedent. If 
however, as of the date of a decedent's death, a transfer for a private 
purpose is dependent upon the performance of some act on the happening 
of a precedent event in order that it might become effective, an 
interest in property will be considered to pass for a private purpose 
unless the possibility of occurrence of such act or event is so remote 
as to be negligible. The application of this paragraph (e)(1)(i) may be 
illustrated by the following examples, in each of which it is assumed 
that the interest in property which passes for private purposes does not 
pass for an adequate and full consideration in money or money's worth:

    Example (1). In 1973, H creates a trust which is to pay the income 
of the trust to W for her life, the reversionary interest in the trust 
being retained by H. H predeceases W in 1975. H's will provide that the 
residue of his estate (including the reversionary interest in the trust) 
is to be transferred to charity. For purposes of this paragraph 
(e)(1)(i), interests in the same property have passed from H for 
charitable purposes and for private purposes.
    Example (2). In 1973, H creates a trust which is to pay the income 
of the trust to W for her life and upon termination of the life estate 
to transfer the remainder to S. S predeceases W in 1975. S's will 
provides that the residue of his estate (including the remainder 
interest in the trust) is to be transferred to charity. For purposes of 
this paragraph (e)(1)(i), interests in the same property have not passed 
from H or S for charitable purposes and for private purposes.
    Example (3). H transfers Blackacre to A by gift, reserving the right 
to the rentals of Blackacre for a term of 20 years. H dies within the 
20-year term, bequeathing the right to the remaining rentals to charity. 
For purposes of this paragraph (e)(1)(i) the term ``property'' refers to 
Blackacre, and the right to rentals from Blackacre consist of an 
interest in Blackacre. An interest in Blackacre has passed from H for 
charitable purposes and for private purposes.
    Example (4). H bequeaths the residue of his estate in trust for the 
benefit of A and a charity. An annuity of $5,000 a year is to be paid to 
charity for 20 years. Upon termination of the 20-year term the corpus is 
to be distributed to A if living. However, if A should die during the 
20-year term, the corpus is to be distributed to charity upon 
termination of the term. An interest in the residue of the estate has 
passed from H for charitable purposes. In addition, an interest in the 
residue of the estate has passed from H for private purposes, unless the 
possibility that A will survive the 20-year term is so remote as to be 
negligible.
    Example (5). H bequeaths the residue of his estate in trust. Under 
the terms of the trust an annuity of $5,000 a year is to be paid to 
charity for 20 years. Upon termination of the term, the corpus is to 
pass to such of A's children and their issue as A may appoint. However, 
if A should die during the 20-year term without exercising the power of 
appointment, the corpus is to be distributed to charity upon termination 
of the term. Since the possible appointees include private persons, an 
interest in the residue of the estate is considered to have passed from 
H for private purposes.
    Example (6). H devises Blackacre to X charity. Under applicable 
local law, W, H's widow, is entitled to elect a dower interest in 
Blackacre. W elects to take her dower interest in Blackacre. For 
purposes of this paragraph (e)(1)(i), interests in the same property 
have passed from H for charitable purposes and for private purposes. If, 
however, W does not elect to take her dower interest in Blackacre, then, 
for purposes of this paragraph (e)(1)(i), interests in the same property 
have not passed from H for charitable purposes and for private purposes.

    (ii) Works of art and copyrights treated as separate properties--(a) 
In general. For purposes of paragraphs (e)(1)(i) and (e)(2) of this 
section, in the case of decedents dying after December 31, 1981, if a 
decedent makes a qualified contribution of a work of art, the work of 
art and the copyright on such work of art shall be treated as separate 
properties. Thus, a deduction is allowable under section 2055 for a 
qualified contribution of a work of art, whether or not the related 
copyright is simultaneously transferred to a charitable organization.
    (b) Work of art defined. for purposes of paragraph (e)(1)(ii)(a) of 
this section, the term ``work of art'' means any tangible personal 
property with respect to which a copyright exists under Federal law.
    (c) Qualified contribution defined. For purposes of paragraph 
(e)(1)(ii)(a) of this section, the term ``qualified contribution'' means 
any transfer of property to a qualified organization (as defined in 
paragraph (e)(1)(ii)(d) of this section) if the use of the property by

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the organization is related to the purpose or function constituting the 
basis for its exemption under section 501. The rules contained in Sec. 
1.170A-4(b)(3) shall apply in determining if the use of property by an 
organization is related to such purpose or function.
    (d) Qualified organization defined. For purposes of paragraph 
(e)(1)(ii)(c) of this section, the term ``qualified organization'' means 
any organization described in section 501(c)(3) other than a private 
foundation (as defined in section 509). A private operating foundation 
(as defined in section 4942(j)(3)) shall be considered a qualified 
organization under this paragraph.
    (e) Examples. The application of paragraphs (e)(1)(i) and (e)(1)(ii) 
(a) through (d) of this section may be illustrated by the following 
examples:

    Example (1). A, an artist, died in 1983. A work of art created by A 
and the copyright interest in that work of art were included in A's 
estate. Under the terms of A's will, the work of art is transferred to X 
charity, the only charitable beneficiary under A's will. X has no 
suitable use for the work of art and sells it. It is determined under 
the rules of Sec. 1.170A-4(b)(3) that the property is put to an 
unrelated use by X charity. Therefore, the rule of paragraph 
(e)(1)(ii)(a), which treats works of art and their copyrights as 
separate properties, does not apply because the transfer of the work of 
art to X is not a qualified contribution. To determine whether paragraph 
(e)(1)(i) of this section applies to disallow a deduction under section 
2055, it must be determined which interests are treated as passing to X 
under local law.
    (i) If under local law A's will is treated as fully transferring 
both the work of art and the copyright interest to X, then paragraph 
(e)(1)(i) of this section does not apply to disallow a deduction under 
section 2055 for the value of the work of art and the copyright 
interest.
    (ii) If under local law A's will is treated as transferring only the 
work of art to X, and the copyright interest is treated as part of the 
residue of the estate, no deduction is allowable under section 2055 to 
A's estate for the value of the work of art because the transfer of the 
work of art is not a qualified contribution and paragraph (e)(1)(i) of 
this section applies to disallow the deduction.
    Example (2). B, a collector of art, purchased a work of art from an 
artist who retained the copyright interest. B died in 1983. Under the 
terms of B's will the work of art is given to Y charity. Since B did not 
own the copyright interest, paragraph (e)(1)(i) of this section does not 
apply to disallow a deduction under section 2055 for the value of the 
work of art, regardless of whether or not the contribution is a 
qualified contribution under paragraph (e)(1)(ii)(c) of this section.

    (2) Deductible interests. A deductible interest for purposes of 
subparagraph (1) of this paragraph is a charitable interest in property 
where--
    (i) Undivided portion of decedent's entire interest. The charitable 
interest is an undivided portion, not in trust, of the decedent's entire 
interest in property. An undivided portion of a decedent's entire 
interest in property must consist of a fraction or percentage of each 
and every substantial interest or right owned by the decedent in such 
property and must extend over the entire term of the decedent's interest 
in such property and in other property into which such property is 
converted. For example, if the decedent transferred a life estate in an 
office building to his wife for her life and retained a reversionary 
interest in the office building, the devise by the decedent of one-half 
of that reversionary interest to charity while his wife is still alive 
will not be considered the transfer of a deductible interest; because an 
interest in the same property has already passed from the decedent for 
private purposes, the reversionary interest will not be considered the 
decedent's entire interest in the property. If, on the other hand, the 
decedent had been given a life estate in Blackacre for the life of his 
wife and the decedent had no other interest in Blackacre at any time 
during his life, the devise by the decedent of one-half of that life 
estate to charity would be considered the transfer of a deductible 
interest; because the life estate would be considered the decedent's 
entire interest in the property, the devise would be of an undivided 
portion of such entire interest. An undivided portion of a decedent's 
entire interest in the property includes an interest in property whereby 
the charity is given the right, as a tenant in common with the 
decedent's devisee or legatee, to possession, dominion, and control of 
the property for a portion of each year appropriate to its interest in 
such property. However, except as provided in paragraphs (e)(2) (ii), 
(iii), and (iv) of this section, for

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purposes of this subdivision a charitable contribution of an interest in 
property not in trust where the decedent transfers some specific rights 
to one party and transfers other substantial rights to another party 
will not be considered a contribution of an undivided portion of the 
decedent's entire interest in property. A bequest to charity made on or 
before December 17, 1980, of an open space easement in gross in 
perpetuity shall be considered the transfer to charity of an undivided 
portion of the decedent's entire interest in the property. For the 
definition of an open space easement in gross in perpetuity, see Sec. 
1.170 A-7(b)(1)(ii) of this chapter (Income Tax Regulations).
    (ii) Remainder interest in personal residence. The charitable 
interest is a remainder interest, not in trust, in a personal residence. 
Thus, for example, if the decedent devises to charity a remainder 
interest in a personal residence and bequeaths to his surviving spouse a 
life estate in such property, the value of the remainder interest is 
deductible under section 2055. For purposes of this subdivision, the 
term ``personal residence'' means any property which was used by the 
decedent as his personal residence even though it was not used as his 
principal residence. For example, a decedent's vacation home may be a 
personal residence for purposes of this subdivision. The term ``personal 
residence'' also includes stock owned by the decedent as a tenant-
stockholder in a cooperative housing corporation (as those terms are 
defined in section 216(b) (1) and (2)) if the dwelling which the 
decedent was entitled to occupy as such stockholder was used by him as 
his personal residence.
    (iii) Remainder interest in a farm. The charitable interest is a 
remainder interest, not in trust, in a farm. Thus, for example, if the 
decedent devises to charity a remainder interest in a farm and bequeaths 
to his daughter a life estate in such property, the value of the 
remainder interest is deductible under section 2055. For purposes of 
this subdivision, the term ``farm'' means any land used by the decedent 
or his tenant for the production of crops, fruits, or other agricultural 
products or for the sustenance of livestock. The term ``livestock'' 
includes cattle, hogs, horses, mules, donkeys, sheep, goats, captive 
furbearing animals, chickens, turkeys, pigeons, and other poultry. A 
farm includes the improvements thereon.
    (iv) Qualified conservation contribution. The charitable interest is 
a qualified conservation contribution. For the definition of a qualified 
conservation contribution, see Sec. 1.170A-14.
    (v) Charitable remainder trusts and pooled income funds. The 
charitable interest is a remainder interest in a trust which is a 
charitable remainder annuity trust, as defined in section 664(d)(1) and 
Sec. 1.664-2 of this chapter; a charitable remainder unitrust, as 
defined in section 664(d) (2) and (3) and Sec. 1.664-3 of this chapter; 
or a pooled income fund, as defined in section 642(c)(5) and Sec. 
1.642(c)-5 of this chapter. The charitable organization to or for the 
use of which the remainder interest passes must meet the requirements of 
both section 2055(a) and section 642(c)(5)(A), section 664(d)(1)(C), or 
section 664(d)(2)(C), whichever applies. For example, the charitable 
organization to which the remainder interest in a charitable remainder 
annuity trust passes may not be a foreign corporation.
    (vi) Guaranteed annuity interest. (a) The charitable interest is a 
guaranteed annuity interest, whether or not such interest is in trust. 
For purposes of this subdivision (vi), the term ``guaranteed annuity 
interest'' means the right pursuant to the instrument of transfer to 
receive a guaranteed annuity. A guaranteed annuity is an arrangement 
under which a determinable amount is paid periodically, but not less 
often than annually, for a specified term of years or for the life or 
lives of certain individuals, each of whom must be living at the date of 
death of the decedent and can be ascertained at such date. Only one or 
more of the following individuals may be used as measuring lives: the 
decedent's spouse, and an individual who, with respect to all remainder 
beneficiaries (other than charitable organizations described in section 
170, 2055, or 2522), is either a lineal ancestor or the spouse of a 
lineal ancestor of those beneficiaries. A trust will satisfy the 
requirement that all noncharitable remainder beneficiaries are lineal 
descendants of the individual

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who is the measuring life, or that individual's spouse, if there is less 
than a 15% probability that individuals who are not lineal descendants 
will receive any trust corpus. This probability must be computed, based 
on the current applicable Life Table contained in Sec. 20.2031-7, as of 
the date of the decedent's death taking into account the interests of 
all primary and contingent remainder beneficiaries who are living at 
that time. An interest payable for a specified term of years can qualify 
as a guaranteed annuity interest even if the governing instrument 
contains a savings clause intended to ensure compliance with a rule 
against perpetuities. The savings clause must utilize a period for 
vesting of 21 years after the deaths of measuring lives who are selected 
to maximize, rather than limit, the term of the trust. The rule in this 
paragraph that a charitable interest may be payable for the life or 
lives of only certain specified individuals does not apply in the case 
of a charitable guaranteed annuity interest payable under a charitable 
remainder trust described in section 664. An amount is determinable if 
the exact amount which must be paid under the conditions specified in 
the instrument of transfer can be ascertained as of the appropriate 
valuation date. For example, the amount to be paid may be a stated sum 
for a term of years, or for the life of the decedent's spouse, at the 
expiration of which it may be changed by a specified amount, but it may 
not be redetermined by reference to a fluctuating index such as the cost 
of living index. In further illustration, the amount to be paid may be 
expressed in terms of a fraction or a percentage of the net fair market 
value, as finally determined for Federal estate tax purposes, of the 
residue of the estate on the appropriate valuation date, or it may be 
expressed in terms of a fraction or percentage of the cost of living 
index on the appropriate valuation date.
    (b) A charitable interest is a guaranteed annuity interest only if 
it is a guaranteed annuity interest in every respect. For example, if 
the charitable interest is the right to receive from a trust each year a 
payment equal to the lesser of a sum certain or a fixed percentage of 
the net fair market value of the trust assets, determined annually, such 
interest is not a guaranteed annuity interest.
    (c) Where a charitable interest in the form of a guaranteed annuity 
interest is not in trust, the interest will be considered a guaranteed 
annuity interest only if it is to be paid by an insurance company or by 
an organization regularly engaged in issuing annuity contracts.
    (d) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust, the governing instrument of the trust may provide 
that income of the trust which is in excess of the amount required to 
pay the guaranteed annuity interest shall be paid to or for the use of a 
charity. Nevertheless, the amount of the deduction under section 2055 
shall be limited to the fair market value of the guaranteed annuity 
interest as determined under paragraph (f)(2)(iv) of this section.
    (e) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust and the present value, on the appropriate valuation 
date, of all the income interests for a charitable purpose exceeds 60 
percent of the aggregate fair market value of all amounts in such trust 
(after the payment of estate taxes and all other liabilities), the 
charitable interest will not be considered a guaranteed annuity interest 
unless the governing instrument of the trust prohibits both the 
acquisition and the retention of assets which would give rise to a tax 
under section 4944 if the trustee had acquired such assets.
    (f) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust, the charitable interest generally is not a 
guaranteed annuity interest if any amount may be paid by the trust for a 
private purpose before the expiration of all the charitable annuity 
interests. There are two exceptions to this general rule. First, the 
charitable interest is a guaranteed annuity interest if the amount 
payable for a private purpose is in the form of a guaranteed annuity 
interest and the trust's governing instrument does not provide for any 
preference or priority in the payment of the private annuity as opposed 
to the charitable annuity. Second, the charitable interest is a

[[Page 421]]

guaranteed annuity interest if under the trust's governing instrument 
the amount that may be paid for a private purpose is payable only from a 
group of assets that are devoted exclusively to private purposes and to 
which section 4947(a)(2) is inapplicable by reason of section 
4947(a)(2)(B). For purposes of this paragraph (e)(2)(vi)(f), an amount 
is not paid for a private purpose if it is paid for an adequate and full 
consideration in money or money's worth. See Sec. 53.4947-1(c) of this 
chapter for rules relating to the inapplicability of section 4947(a)(2) 
to segregated amounts in a split-interest trust.
    (g) Neither the requirement in (e) of this subdivision (vi) for a 
prohibition in the governing instrument against the retention of assets 
which would give rise to a tax under section 4944 if the trustee had 
acquired the assets nor the provisions of (f) of this subdivision (v) 
shall apply to--
    (1) A trust executed on or before May 21, 1972, if--
    (i) The trust is irrevocable on such date,
    (ii) The trust is revocable on such date and the decedent dies 
within 3 years after such date without having amended any dispositive 
provision of the trust after such date, or
    (iii) The trust is revocable on such date and no dispositive 
provision of the trust is amended within a period ending 3 years after 
such date and the decedent is, at the end of such 3-year period and at 
all times thereafter, under a mental disability (as defined in Sec. 
1.642(c)-2(b)(3)(ii) of this chapter) to amend the trust, or
    (2) A will executed on or before May 21, 1972, if--
    (i) The testator dies within 3 years after such date without having 
amended any dispositive provision of the will after such date, by 
codicil or otherwise,
    (ii) The testator at no time after such date has the right to change 
the provisions of the will which pertain to the trust, or
    (iii) No dispositive provision of the will is amended by the 
decedent, by codicil or otherwise, within a period ending 3 years after 
such date and the decedent is, at the end of such 3-year period and at 
all times thereafter, under a mental disability (as defined in Sec. 
1.642(c)-2(b)(3)(ii) of this chapter) to amend the will by codicil or 
otherwise.
    (h) For purposes of this subdivision (vi) and paragraph (f) of this 
section, the term ``appropriate valuation date'' means the date of death 
or the alternate valuation date determined pursuant to an election under 
section 2032.
    (i) For rules relating to certain governing instrument requirements 
and to the imposition of certain excise taxes where the guaranteed 
annuity interest is in trust and for rules governing payment of private 
income interests by split-interest trusts, see section 4947(a)(2) and 
(b)(3)(A), and the regulations thereunder.
    (vii) Unitrust interest. (a) The charitable interest is a unitrust 
interest, whether or not such interest is in trust. For purposes of this 
subdivision (vii), the term ``unitrust interest'' means the right 
pursuant to the instrument of transfer to receive payment, not less 
often than annually, of a fixed percentage of the net fair market value, 
determined annually, of the property which funds the unitrust interest. 
In computing the net fair market value of the property which funds the 
unitrust interest, all assets and liabilities shall be taken into 
account without regard to whether particular items are taken into 
account in determining the income from the property. The net fair market 
value of the property which funds the unitrust interest may be 
determined on any one date during the year or by taking the average of 
valuations made on more than one date during the year, provided that the 
same valuation date or dates and valuation methods are used each year. 
Where the charitable interest is a unitrust interest to be paid by a 
trust and the governing instrument of the trust does not specify the 
valuation date or dates, the trustee shall select such date or dates and 
shall indicate his selection on the first return on Form 1041 which the 
trust is required to file. Payments under a unitrust interest may be 
paid for a specified term of years or for the life or lives of certain 
individuals, each of whom must be living at the date of death of the 
decedent and can be ascertained at such date. Only one or more of the 
following individuals may be used as measuring

[[Page 422]]

lives: the decedent's spouse, and an individual who, with respect to all 
remainder beneficiaries (other than charitable organizations described 
in section 170, 2055, or 2522), is either a lineal ancestor or the 
spouse of a lineal ancestor of those beneficiaries. A trust will satisfy 
the requirement that all noncharitable remainder beneficiaries are 
lineal descendants of the individual who is the measuring life, or that 
individual's spouse, if there is less than a 15% probability that 
individuals who are not lineal descendants will receive any trust 
corpus. This probability must be computed, based on the current 
applicable Life Table contained in Sec. 20.2031-7, as of the date of 
the decedent's death taking into account the interests of all primary 
and contingent remainder beneficiaries who are living at that time. An 
interest payable for a specified term of years can qualify as a unitrust 
interest even if the governing instrument contains a savings clause 
intended to ensure compliance with a rule against perpetuities. The 
savings clause must utilize a period for vesting of 21 years after the 
deaths of measuring lives who are selected to maximize, rather than 
limit, the term of the trust. The rule in this paragraph that a 
charitable interest may be payable for the life or lives of only certain 
specified individuals does not apply in the case of a charitable 
unitrust interest payable under a charitable remainder trust described 
in section 664.
    (b) A charitable interest is a unitrust interest only if it is a 
unitrust interest in every respect. For example, if the charitable 
interest is the right to receive from a trust each year a payment equal 
to the lesser of a sum certain or a fixed percentage of the net fair 
market value of the trust assets, determined annually, such interest is 
not a unitrust interest.
    (c) Where a charitable interest in the form of a unitrust interest 
is not in trust, the interest will be considered a unitrust interest 
only if it is to be paid by an insurance company or by an organization 
regularly engaged in issuing interests otherwise meeting the 
requirements of a unitrust interest.
    (d) Where a charitable interest in the form of a unitrust interest 
is in trust, the governing instrument of the trust may provide that 
income of the trust which is in excess of the amount required to pay the 
unitrust interest shall be paid to or for the use of a charity. 
Nevertheless, the amount of the deduction under section 2055 shall be 
limited to the fair market value of the unitrust interest as determined 
under paragraph (f)(2)(v) of this section.
    (e) Where a charitable interest in the form of a unitrust interest 
is in trust, the charitable interest generally is not a unitrust 
interest if any amount may be paid by the trust for a private purpose 
before the expiration of all the charitable unitrust interests. There 
are two exceptions to this general rule. First, the charitable interest 
is a unitrust interest if the amount payable for a private purpose is in 
the form of a unitrust interest and the trust's governing instrument 
does not provide for any preference or priority in the payment of the 
private unitrust interest as opposed to the charitable unitrust 
interest. Second, the charitable interest is a unitrust interest if 
under the trust's governing instrument the amount that may be paid for a 
private purpose is payable only from a group of assets that are devoted 
exclusively to private purposes and to which section 4947(a)(2) is 
inapplicable by reason of section 4947(a)(2)(B). For purposes of this 
paragraph (e)(2)(vii)(e), an amount is not paid for a private purpose if 
it is paid for an adequate and full consideration in money or money's 
worth. See Sec. 53.4947-1(c) of this chapter for rules relating to the 
inapplicability of section 4947(a)(2) to segregated amounts in a split-
interest trust.
    (f) For rules relating to certain governing instrument requirements 
and to the imposition of certain excise taxes where the unitrust 
interest is in trust and for rules governing payment of private income 
interests by a split-interest trust, see section 4947(a)(2) and 
(b)(3)(A), and the regulations thereunder.
    (3) Effective/applicability date. The provisions of this paragraph 
apply only in the case of decedents dying after December 31, 1969, 
except that they do not apply--
    (i) In the case of property passing under the terms of a will 
executed on or before October 9, 1969--

[[Page 423]]

    (a) If the decedent dies after October 9, 1969, but before October 
9, 1972, without having amended any dispositive provision of the will 
after October 9, 1969, by codicil or otherwise,
    (b) If the decedent dies after October 9, 1969, and at no time after 
that date had the right to change the portions of the will which pertain 
to the passing of the property to, or for the use of, an organization 
described in section 2055(a), or
    (c) If no dispositive provision of the will is amended by the 
decedent, by codicil or otherwise, after October 9, 1969, and before 
October 9, 1972, and the decedent is on October 9, 1972, and at all 
times thereafter under a mental disability (as defined in Sec. 
1.642(c)-2(b)(3)(ii) of this chapter (Income Tax Regulations)) to amend 
the will by codicil or otherwise, or
    (ii) In the case of property transferred in trust on or before 
October 9, 1969--
    (a) If the decedent dies after October 9, 1969, but before October 
9, 1972, without having amended, after October 9, 1969, any dispositive 
provision of the instrument governing the disposition of the property,
    (b) If the property transferred was an irrevocable interest to, or 
for the use of, an organization described in section 2055(a), or
    (c) If no dispositive provision of the instrument governing the 
disposition of the property is amended by the decedent after October 9, 
1969, and before October 9, 1972, and the decedent is on October 9, 
1972, and at all times thereafter under a mental disability (as defined 
in Sec. 1.642(c)-2(b)(3)(ii) of this chapter) to change the disposition 
of the property, and
    (iii) The rule in paragraphs (e)(2)(vi)(a) and (e)(2)(vii)(a) of 
this section that guaranteed annuity interests or unitrust interests, 
respectively, may be payable for a specified term of years or for the 
life or lives of only certain individuals is generally effective in the 
case of transfers pursuant to wills and revocable trusts when the 
decedent dies on or after April 4, 2000. Two exceptions from the 
application of this rule in paragraphs (e)(2)(vi)(a) and(e)(2)(vii)(a) 
of this section are provided in the case of transfers pursuant to a will 
or revocable trust executed before April 4, 2000. One exception is for a 
decedent who dies on or before July 5, 2001, without having republished 
the will (or amended the trust) by codicil or otherwise. The other 
exception is for a decedent who was on April 4, 2000, under a mental 
disability that prevented a change in the disposition of the decedent's 
property, and who either does not regain competence to dispose of such 
property before the date of death, or dies prior to the later of 90 days 
after the date on which the decedent first regains competence, or July 
5, 2001, without having republished the will (or amended the trust) by 
codicil or otherwise. If a guaranteed annuity interest or unitrust 
interest created pursuant to a will or revocable trust of a decedent 
dying on or after April 4, 2000, uses an individual other than one 
permitted in paragraphs (e)(2)(vi)(a) and (e)(2)(vii)(a) of this 
section, and the interest does not qualify for this transitional relief, 
the interest may be reformed into a lead interest payable for a 
specified term of years. The term of years is determined by taking the 
factor for valuing the annuity or unitrust interest for the named 
individual measuring life and identifying the term of years (rounded up 
to the next whole year) that corresponds to the equivalent term of years 
factor for an annuity or unitrust interest. For example, in the case of 
an annuity interest payable for the life of an individual age 40 at the 
time of the transfer on or after May 1, 2009, assuming an interest rate 
of 7.4 percent under section 7520, the annuity factor from column 1 of 
Table S(7.4), contained in IRS Publication 1457, ``Actuarial Valuations 
Version 3A'', for the life of an individual age 40 is 12.1519 (1.000000 
minus .10076, divided by .074). Based on Table B(7.4), contained in 
Publication 1457, ``Actuarial Valuations Version 3A'', the factor 
12.1519 corresponds to a term of years between 32 and 33 years. 
Accordingly, the annuity interest must be reformed into an interest 
payable for a term of 33 years. A judicial reformation must be commenced 
prior to the later of July 5, 2001, or the date prescribed by section 
2055(e)(3)(C)(iii). Any judicial reformation must be completed within a 
reasonable time after it is

[[Page 424]]

commenced. A non-judicial reformation is permitted if effective under 
state law, provided it is completed by the date on which a judicial 
reformation must be commenced. In the alternative, if a court, in a 
proceeding that is commenced on or before July 5, 2001, declares any 
transfer made pursuant to a will or revocable trust where the decedent 
dies on or after April 4, 2000, and on or before March 6, 2001, null and 
void ab initio, the Internal Revenue Service will treat such transfers 
in a manner similar to that described in section 2055(e)(3)(J).
    (4) Amendment of dispositive provisions. For purposes of 
subparagraphs (2) and (3) of this paragraph, an amendment shall 
generally be considered as one which amends the dispositive provisions 
of a will or trust if it results in a change in the persons to whom the 
funds are to be given or makes changes in the conditions under which the 
funds are given. Examples of amendments which do not amend the 
dispositive provisions of a will or trust include the substitution of 
one fiduciary for another to act in the capacity of executor or trustee 
and the change in the name of a legatee or beneficiary by reason of the 
legatee's or beneficiary's marriage. On the other hand, examples of 
amendments which do amend the dispositive provisions of a will or trust 
include an increase or decrease in the amount of a general bequest, an 
amendment which increases or decreases the power of a trustee to 
determine an allocation of income or corpus in such a way as to change 
the beneficiaries of the funds or a beneficiary's share of the funds, or 
a change in the allocation of, or in the right to allocate, receipts and 
expenditures between income and principal in such a way as to change the 
beneficiaries of the funds or a beneficiary's share of the funds.
    (5) Amendment of wills providing for pour-over into trusts. For 
purposes of subparagraphs (2) and (3) of this paragraph, an amendment of 
a dispositive provision of a trust to which assets are to be transferred 
under a will shall be considered a dispositive amendment of such will.
    (f) Valuation of charitable interest--(1) In general. The amount of 
the deduction in the case of a contribution of a partial interest in 
property to which this section applies is the fair market value of the 
partial interest at the appropriate valuation date, as defined in 
paragraph (e)(2)(vi)(h) of this section. The fair market value of an 
annuity, life estate, term for years, remainder, reversion, (or) 
unitrust interest is its present value.
    (2) Certain decedents dying after July 31, 1969. In the case of a 
transfer of an interest described in subdivision (v), (vi), or (vii) of 
paragraph (e)(2) of this section by decedents dying after July 31, 1969, 
the present value of such interest is to be determined under the 
following rules:
    (i) The present value of a remainder interest in a charitable 
remainder annuity trust is to be determined under Sec. 1.664-2(c) of 
this chapter (Income Tax Regulations).
    (ii) The present value of a remainder interest in a charitable 
remainder unitrust is to be determined under Sec. 1.664-4 of this 
chapter.
    (iii) The present value of a remainder interest in a pooled income 
fund is to be determined under Sec. 1.642(c)-6 of this chapter.
    (iv) The present value of a guaranteed annuity interest described in 
paragraph (e)(2)(vi) of this section is to be determined under Sec. 
20.2031-7 or, for certain prior periods, Sec. 20.2031-7A, except that, 
if the annuity is issued by a company regularly engaged in the sale of 
annuities, the present value is to be determined under Sec. 20.2031-8. 
If by reason of all the conditions and circumstances surrounding a 
transfer of an income interest in property in trust it appears that the 
charity may not receive the beneficial enjoyment of the interest, a 
deduction will be allowed under section 2055 only for the minimum amount 
it is evident the charity will receive.

    Example (1). In 1975, B dies bequeathing $20,000 in trust with the 
requirement that a designated charity be paid a guaranteed annuity 
interest (as defined in paragraph (e)(2)(vi) of this section) of $4,100 
a year, payable annually at the end of each year, for a period of 6 
years and that the remainder be paid to his children. The fair market 
value of an annuity of $4,100 a year for a period of 6 years is 
$20,160.93 ($4,100x4.9173), as determined under Table B in Sec. 
20.2031-7A(d). The

[[Page 425]]

deduction with respect to the guaranteed annuity interest will be 
limited to $20,000, which is the minimum amount it is evident the 
charity will receive.
    Example (2). In 1975, C dies bequeathing $40,000 in trust with the 
requirement that D, an individual, and X Charity be paid simultaneously 
guaranteed annuity interests (as defined in paragraph (e)(2)(vi) of this 
section) of $5,000 a year each, payable annually at the end of each 
year, for a period of 5 years and that the remainder be paid to C's 
children. The fair market value of two annuities of $5,000 each a year 
for a period of 5 years is $42,124 ([$5,000x4.2124]x2), as determined 
under Table B in Sec. 20.2031-7A(d). The trust instrument provides that 
in the event the trust fund is insufficient to pay both annuities in a 
given year, the trust fund will be evenly divided between the charitable 
and private annuitants. The deduction with respect to the charitable 
annuity will be limited to $20,000, which is the minimum amount it is 
evident the charity will receive.
    Example (3). In 1975, D dies bequeathing $65,000 in trust with the 
requirement that a guaranteed annuity interest (as defined in paragraph 
(e)(2)(vi) of this section) of $5,000 a year, payable annually at the 
end of each year, be paid to Y Charity for a period of 10 years and that 
a guaranteed annuity interest (as defined in paragraph (e)(2)(vi) of 
this section) of $5,000 a year, payable annually at the end of each 
year, be paid to W, his widow, aged 62, for 10 years or until her prior 
death. The annuities are to be paid simultaneously, and the remainder is 
to be paid to D's children. The fair market value of the private annuity 
is $33,877 ($5,000x6.7754), as determined pursuant to Sec. 20.2031-
7A(c) and by the use of factors involving one life and a term of years 
as published in Publication 723A (12-70). The fair market value of the 
charitable annuity is $36,800.50 ($5,000x7.3601), as determined under 
Table B in Sec. 20.2031-7A(d). It is not evident from the governing 
instrument of the trust or from local law that the trustee would be 
required to apportion the trust fund between the widow and charity in 
the event the fund were insufficient to pay both annuities in a given 
year. Accordingly, the deduction with respect to the charitable annuity 
will be limited to $31,123 ($65,000 less $33,877 [the value of the 
private annuity]), which is the minimum amount it is evident the charity 
will receive.

    (v) The present value of a unitrust interest described in paragraph 
(e)(2)(vii) of this section is to be determined by subtracting the 
present value of all interests in the transferred property other than 
the unitrust interest from the fair market value of the transferred 
property.
    (3) Certain decedents dying before August 1, 1969. In the case of 
decedents dying before August 1, 1969, the present value of an interest 
described in subparagraph (2) of this paragraph is to be determined 
under Sec. 20.2031-7 except that, if the interest is an annuity issued 
by a company regularly engaged in the sale of annuities, the present 
value is to be determined under Sec. 20.2031-8.
    (4) Other decedents. The present value of an interest not described 
in paragraph (f)(2) of this section is to be determined under Sec. 
20.2031-7(d) in the case of decedents where the valuation date of the 
gross estate is on or after May 1, 2009, or under Sec. 20.2031-7A in 
the case of decedents where the valuation date of the gross estate is 
before May 1, 2009.
    (5) Special computations. If the interest transferred is such that 
its present value is to be determined by a special computation, a 
request for a special factor, accompanied by a statement of the date of 
birth and sex of each individual the duration of whose life may affect 
the value of the interest, and by copies of the relevant instruments, 
may be submitted by the fiduciary to the Commissioner who may, if 
conditions permit, supply the factor requested. If the Commissioner 
furnishes the factor, a copy of the letter supplying the factor must be 
attached to the tax return in which the deduction is claimed. If the 
Commissioner does not furnish the factor, the claim for deduction must 
be supported by a full statement of the computation of the present value 
made in accordance with the principles set forth in this paragraph.
    (6) Effective/applicability date. Paragraphs (e)(3)(iii) and (f)(4) 
of this section apply on and after May 1, 2009.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7318, 39 FR 
25453, July 11, 1974, 39 FR 26154, July 17, 1974; T.D. 7340, 40 FR 1240, 
Jan. 7, 1975; T.D. 7955, 49 FR 19995, May 11, 1984; T.D. 7957, 49 FR 
20811, May 17, 1984; T.D. 8069, 51 FR 1507, Jan. 14, 1986; 51 FR 5323, 
Feb. 13, 1986; T.D. 8095, 51 FR 28368, Aug. 7, 1986; 51 FR 32071, Sept. 
9, 1986; T.D. 8540, 59 FR 30103, 30170, June 10, 1994; T.D. 8819, 64 FR 
23222, 23229, Apr. 30, 1999; 64 FR 33196, June 22, 1999; T.D. 8886, 65 
FR 36943, June 12, 2000; T.D. 8923, 66 FR 1042, Jan. 5, 2001; T.D. 9068, 
68 FR 40131, July 7, 2003; T.D. 9448, 74 FR 21510, May 7, 2009; T.D. 
9540, 76 FR 49637, Aug. 10, 2011]

[[Page 426]]



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

    (a) Death taxes--(1) If under the terms of the will or other 
governing instruments, the law of the jurisdiction under which the 
estate is administered, or the law of the jurisdiction imposing the 
particular tax, the Federal estate tax, or any estate, succession, 
legacy, or inheritance tax is payable in whole or in part out of any 
property the transfer of which would otherwise be allowable as a 
deduction under section 2055, section 2055(c) provides that the sum 
deductible is the amount of the transferred property reduced by the 
amount of the tax. Section 2055(c) in effect provides that the deduction 
is based on the amount actually available for charitable uses, that is, 
the amount of the fund remaining after the payment of all death taxes. 
Thus, if $50,000 is bequeathed for a charitable purpose and is subjected 
to a State inheritance tax of $5,000, payable out of the $50,000, the 
amount deductible is $45,000. If a life estate is bequeathed to an 
individual with remainder over to a charitable organization, and by the 
local law the inheritance tax upon the life estate is paid out of the 
corpus with the result that the charitable organization will be entitled 
to receive only the amount of the fund less the tax, the deduction is 
limited to the present value, as of the date of the testator's death, of 
the remainder of the fund so reduced. If a testator bequeaths his 
residuary estate, or a portion of it, to charity, and his will contains 
a direction that certain inheritance taxes, otherwise payable from 
legacies upon which they were imposed, shall be payable out of the 
residuary estate, the deduction may not exceed the bequest to charity 
thus reduced pursuant to the direction of the will. If a residuary 
estate, or a portion of it, is bequested to charity, and by the local 
law the Federal estate tax is payable out of the residuary estate, the 
deduction may not exceed that portion of the residuary estate bequeathed 
to charity as reduced by the Federal estate tax. The return should fully 
disclose the computation of the amount to be deducted. If the amount to 
be deducted is dependent upon the amount of any death tax which has not 
been paid before the filing of the return, there should be submitted 
with the return a computation of that tax.
    (2) It should be noted that if the Federal estate tax is payable out 
of a charitable transfer so that the amount of the transfer otherwise 
passing to charity is reduced by the amount of the tax, the resultant 
decrease in the amount passing to charity will further reduce the 
allowable deduction. In such a case, the amount of the charitable 
deduction can be obtained only by a series of trial-and-error 
computations, or by a formula. If, in addition, interdependent State and 
Federal taxes are involved, the computation becomes highly complicated. 
Examples of methods of computation of the charitable deduction and the 
marital deduction (with which similar problems are encountered) in 
various situations are contained in supplemental instructions to the 
estate tax return.
    (3) For the allowance of a deduction to a decedent's estate for 
certain State death taxes imposed upon charitable transfers, see section 
2053(d) and Sec. 20.2053-9.
    (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, or maintenance of the 
assets), probate fees, expenses incurred in construction proceedings and 
defending

[[Page 427]]

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.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8846, 64 FR 67764, Dec. 3, 1999; 64 FR 71022, Dec. 20, 
1999]



Sec. 20.2055-4  Disallowance of charitable, etc., deductions because of
``prohibited transactions'' in the case of decedents dying before 

January 1, 1970.

    (a) Sections 503(e) and 681(b)(5) provides that no deduction which 
would otherwise be allowable under section 2055 for the value of 
property transferred by the decedent during his lifetime or by will for 
religious, charitable, scientific, literary, or educational purposes 
(including the encouragement of art and the prevention of cruelty to 
children or animals) is allowed if (1) the transfer is made in trust, 
and, for income tax purposes for the taxable year of the trust in which 
the transfer is made, the deduction otherwise allowable to the trust 
under section 642(c) is limited by section 681(b)(1) by reason of the 
trust having engaged in a prohibited transaction described in section 
681(b)(2), or (2) the transfer is made to a corporation, community 
chest, fund or foundation which, for its taxable year in which the 
transfer is made, is not exempt from income tax under section 501(a) by 
reason of having engaged in a prohibited transaction described in 
section 503(c).

[[Page 428]]

    (b) For purposes of section 681(b)(5) and section 503(e), the term 
``transfer'' includes any gift, contribution, bequest, devise, legacy, 
or other disposition. In applying such sections for estate tax purposes, 
a transfer, whether made during the decedent's lifetime or by will, is 
considered as having been made at the moment of the decedent's death.
    (c) The income tax regulations contain the rules for the 
determination of the taxable year of the trust for which the deduction 
under section 642(c) is limited by section 681(b) and for the 
determination of the taxable year of the organization for which an 
exemption is denied under section 503(a). Generally, such taxable year 
is a taxable year subsequent to the taxable year during which the trust 
or organization has been notified by the Commissioner of Internal 
Revenue that it has engaged in a prohibited transaction. However, if the 
trust or organization during or prior to the taxable year entered into 
the prohibited transaction for the purpose of diverting its corpus or 
income from the charitable or other purposes by reason of which it is 
entitled to a deduction or exemption, and the transaction involves a 
substantial part of the income or corpus, then the deduction of the 
trust under section 642(c) for such taxable year is limited by section 
681(b), or exemption of the organization for such taxable year is denied 
under section 503(a), whether or not the organization has previously 
received notification by the Commissioner of Internal Revenue that it is 
engaged in a prohibited transaction. In certain cases, the limitation of 
section 681 or 503 may be removed or the exemption may be reinstated for 
certain subsequent taxable years under the rules set forth in the income 
tax regulations under sections 681 and 503. In cases in which prior 
notification by the Commissioner of Internal Revenue is not required in 
order to limit the deduction of the trust under section 681(d) or to 
deny exemption of the organization under section 503, the deduction 
otherwise allowable under section 2055 is not disallowed in respect of 
transfers made during the same taxable year of the trust or organization 
in which a prohibited transaction occurred or in a prior taxable year 
unless the decedent or a member of his family was a party to the 
prohibited transaction. For the purpose of the preceding sentence, the 
members of the decedent's family include only his brothers and sisters, 
whether by whole or half blood, spouse, ancestors, and lineal 
descendants.
    (d) This section applies only in the case of decedents dying before 
January 1, 1970. In the case of decedents dying after December 31, 1969, 
see Sec. 20.2055-5.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960 as 
amended by T.D. 7318, 39 FR 25456, July 11, 1974]



Sec. 20.2055-5  Disallowance of charitable, etc., deductions in the case
of decedents dying after December 31, 1969.

    (a) Organizations subject to section 507(c) tax. Section 508(d)(1) 
provides that, in the case of decedents dying after December 31, 1969, a 
deduction which would otherwise be allowable under section 2055 for the 
value of property transferred by the decedent to or for the use of an 
organization upon which the tax provided by section 507(c) has been 
imposed shall not be allowed if the transfer is made by the decedent 
after notification is made under section 507(a) or if the decedent is a 
substantial contributor (as defined in section 507(d)(2)) who dies on or 
after the first day on which action is taken by such organization that 
culminates in the imposition of the tax under section 507(c). This 
paragraph does not apply if the entire amount of the unpaid portion of 
the tax imposed by section 507(c) is abated under section 507(g) by the 
Commissioner or his delegate.
    (b) Taxable private foundations, section 4947 trusts, etc.--(1) In 
general. Section 508(d)(2) provides that, in the case of decedents dying 
after December 31, 1969, a deduction which would otherwise be allowable 
under section 2055 for the value of property transferred by the decedent 
shall not be allowed if the transfer is made to or for the use of--
    (i) A private foundation or a trust described in section 4947(a)(2) 
in a taxable year of such organization for which such organization fails 
to meet the governing instrument requirements of

[[Page 429]]

section 508(e) (determined without regard to section 508(e)(2) (B) and 
(C)), or
    (ii) Any organization in a period for which it is not treated as an 
organization described in section 501(c)(3) by reason of its failure to 
give notification under section 508(a) of its status to the 
Commissioner.

For additional rules, see Sec. 1.508-2(b) (1) of this chapter (Income 
Tax Regulations).
    (2) Transfers not covered by section 508(d)(2)(A)--(i) In general. 
Any deduction which would otherwise be allowable under section 2055 for 
the value of property transferred by a decedent dying after December 31, 
1969, will not be disallowed under section 508(d)(2)(A) and subparagraph 
(1)(i) of this paragraph--
    (a) In the case of property passing under the terms of a will 
executed on or before October 9, 1969--
    (1) If the decedent dies after October 9, 1969, but before October 
9, 1972, without having amended any dispositive provision of the will 
after October 9, 1969, by codicil or otherwise,
    (2) If the decedent dies after October 9, 1969, and at no time after 
that date had the right to change the portions of the will which pertain 
to the passing of the property to, or for the use of, an organization 
described in section 2055(a), or
    (3) If no dispositive provision of the will is amended by the 
decedent, by codicil or otherwise, after October 9, 1969, and before 
October 9, 1972, and the decedent is on October 9, 1972, and at all 
times thereafter under a mental disability (as defined in Sec. 
1.642(c)-2(b)(3)(ii) of this chapter) to amend the will by codicil or 
otherwise, or
    (b) In the case of property transferred in trust on or before 
October 9, 1969--
    (1) If the decedent dies after October 9, 1969, but before October 
9, 1972, without having amended, after October 9, 1969, any dispositive 
provision of the instrument governing the disposition of the property,
    (2) If the property transferred was an irrevocable interest to, or 
for the use of, an organization described in section 2055(a), or
    (3) If no dispositive provision of the instrument governing the 
disposition of the property is amended by the decedent after October 9, 
1969, and before October 9, 1972, and the decedent is on October 9, 
1972, and at all times thereafter under a mental disability (as defined 
in Sec. 1.642(c)-2(b)(3)(ii) of this chapter) to change the disposition 
of the property.
    (ii) Amendment of dispositive provisions. For purposes of 
subdivision (i) of this subparagraph, the provisions of paragraph (e) 
(4) and (5) of Sec. 20.2055-2 shall apply in determining whether an 
amendment will be considered as one which amends the dispositive 
provisions of a will or trust.
    (c) Foreign organization with substantial support from foreign 
sources. Section 4948(c)(4) provides that, in the case of decedents 
dying after December 31, 1969, a deduction which would otherwise be 
allowable under section 2055 for the value of property transferred by 
the decedent to or for the use of a foreign organization which has 
received substantially all of its support (other than gross investment 
income) from sources without the United States shall not be allowed if 
the transfer is made (1) after the date on which the Commissioner has 
published notice that he has notified such organization that it has 
engaged in a prohibited transaction, or (2) in a taxable year of such 
organization for which it is not exempt from taxation under section 
501(a) because it has engaged in a prohibited transaction after December 
31, 1969.

[T.D. 7318, 39 FR 25456, July 11, 1974]



Sec. 20.2055-6  Disallowance of double deduction in the case of 
qualified terminable interest property.

    No deduction is allowed from the decedent's gross estate under 
section 2055 for property with respect to which a deduction is allowed 
by reason of section 2056(b)(7). See section 2056(b)(9) and Sec. 
20.2056(b)-9.

[T.D. 8522, 59 FR 9647, Mar. 1, 1994]



Sec. 20.2056-0  Table of contents.

    This section lists the captions that appear in the regulations under 
Sec. Sec. 20.2056(a)-1 through 20.2056(d)-3.

Sec. 20.2056(a)-1 Marital deduction; in general.
    (a) In general.
    (b) Requirements for marital deduction.

[[Page 430]]

    (1) In general.
    (2) Burden of establishing requisite facts.
    (c) Marital deduction; limitation on aggregate deductions.
    (1) Estates of decedents dying before 1977.
    (2) Estates of decedents dying after December 31, 1976, and before 
January 1, 1982.
    (3) Estates of decedents dying after December 31, 1981.
Sec. 20.2056(a)-2 Marital deduction; deductible interests and 
nondeductible interests.
    (a) In general.
    (b) Deductible interests.
Sec. 20.2056(b)-1 Marital deduction; limitation in case of life estate 
or other ``terminable interest.''
    (a) In general.
    (b) Terminable interests.
    (c) Nondeductible terminable interests.
    (d) Exceptions.
    (e) Miscellaneous principles.
    (f) Direction to acquire a terminable interest.
    (g) Examples.
Sec. 20.2056(b)-2 Marital deduction; interest in unidentified assets.
    (a) In general.
    (b) Application of section 2056(b)(2).
    (c) Interest nondeductible if circumstances present.
    (d) Example.
Sec. 20.2056(b)-3 Marital deduction; interest of spouse conditioned on 
survival for limited period.
    (a) In general.
    (b) Six months' survival.
    (c) Common disaster.
    (d) Examples.
Sec. 20.2056(b)-4 Marital deduction; valuation of interest passing to 
surviving spouse.
    (a) In general.
    (b) Property interest subject to an encumbrance or obligation.
    (c) Effect of death taxes.
    (d) Remainder interests.
Sec. 20.2056(b)-5 Marital deduction; life estate with power of 
appointment in surviving spouse.
    (a) In general.
    (b) Specific portion; deductible amount.
    (c) Meaning of specific portion.
    (1) In general.
    (2) Fraction or percentage share.
    (3) Special rule in the case of estates of decedents dying on or 
before October 24, 1992, and certain decedents dying after October 24, 
1992, with wills or revocable trusts executed on or prior to that date.
    (4) Local law.
    (5) Examples.
    (d) Meaning of entire interest.
    (e) Application of local law.
    (f) Right to income.
    (g) Power of appointment in surviving spouse.
    (h) Requirement of survival for a limited period.
    (j) Existence of power in another.
Sec. 20.2056(b)-6 Marital deduction; life insurance or annuity payments 
with power of appointment in surviving spouse.
    (a) In general.
    (b) Specific portion; deductible interest.
    (c) Applicable principles.
    (d) Payments of installments or interest.
    (e) Powers of appointment.
Sec. 20.2056(b)-7 Election with respect to life estate for surviving 
spouse.
    (a) In general.
    (b) Qualified terminable interest property.
    (1) In general.
    (2) Property for which an election may be made.
    (3) Persons permitted to make the election.
    (4) Manner and time of making the election.
    (c) Protective elections.
    (1) In general.
    (2) Protective election irrevocable.
    (d) Qualifying income interest for life.
    (1) In general.
    (2) Entitled for life to all income.
    (3) Contingent income interests.
    (4) Income between last distribution date and spouse's date of 
death.
    (5) Pooled income funds.
    (6) Power to distribute principal to spouse.
    (e) Annuities payable from trusts in the case of estates of 
decedents dying on or before October 24, 1992, and certain decedents 
dying after October 24, 1992, with wills or revocable trusts executed on 
or prior to that date.
    (1) In general.
    (2) Deductible interest.
    (3) Distributions permissible only to surviving spouse.
    (4) Applicable interest rate.
    (5) Effective dates.
    (f) Joint and survivor annuities. [Reserved]
    (g) Application of local law.
    (h) Examples.
Sec. 20.2056(b)-8 Special rule for charitable remainder trusts.
    (a) In general.
    (1) Surviving spouse only noncharitable beneficiary.
    (2) Interest for life or term of years.
    (3) Payment of state death taxes.
    (b) Charitable trusts where surviving spouse is not the only 
noncharitable beneficiary.
Sec. 20.2056(b)-9 Denial of double deduction.
Sec. 20.2056(b)-10 Effective dates.
Sec. 20.2056(c)-1 Marital deduction; definition of passed from the 
decedent.
    (a) In general.
    (b) Expectant interest in property under community property laws.
Sec. 20.2056(c)-2 Marital deduction; definition of ``passed from the 
decedent to his surviving spouse.''
    (a) In general.
    (b) Examples.

[[Page 431]]

    (c) Effect of election by surviving spouse.
    (d) Will contests.
    (e) Survivorship.
Sec. 20.2056(c)-3 Marital deduction; definition of passed from the 
decedent to a person other than his surviving spouse.
Sec. 20.2056(d)-1 Marital deduction; special rules for marital 
deduction if surviving spouse is not a United States citizen.
Sec. 20.2056(d)-2 Marital deduction; effect of disclaimers of post-
December 31, 1976 transfers.
    (a) Disclaimer by a surviving spouse.
    (b) Disclaimer by a person other than a surviving spouse.
Sec. 20.2056(d)-3 Marital deduction; effect of disclaimers of pre-
January 1, 1977 transfers.
    (a) Disclaimers by a surviving spouse.
    (b) Disclaimer by a person other than a surviving spouse.
    (1) Decedents dying after October 3, 1966, and before January 1, 
1977.
    (2) Decedents dying after September 30, 1963, and before October 4, 
1966.
    (3) Decedents dying before October 4, 1966.

[T.D. 8522, 59 FR 9647, Mar. 1, 1994, as amended by T.D. 8612, 60 FR 
43538, Aug. 22, 1995]



Sec. 20.2056(a)-1  Marital deduction; in general.

    (a) In general. A deduction is allowed under section 2056 from the 
gross estate of a decedent for the value of any property interest which 
passes from the decedent to the decedent's surviving spouse if the 
interest is a deductible interest as defined in Sec. 20.2056(a)-2. With 
respect to decedents dying in certain years, a deduction is allowed 
under section 2056 only to the extent that the total of the deductible 
interests does not exceed the applicable limitations set forth in 
paragraph (c) of this section. The deduction allowed under section 2056 
is referred to as the marital deduction. See also sections 2056(d) and 
2056A for special rules applicable in the case of decedents dying after 
November 10, 1988, if the decedent's surviving spouse is not a citizen 
of the United States at the time of the decedent's death. In such cases, 
the marital deduction may not be allowed unless the property passes to a 
qualified domestic trust as described in section 2056A(a).
    (b) Requirements for marital deduction--(1) In general. To obtain 
the marital deduction with respect to any property interest, the 
executor must establish the following facts--
    (i) The decedent was survived by a spouse (see Sec. 20.2056(c)-
2(e));
    (ii) The property interest passed from the decedent to the spouse 
(see Sec. Sec. 20.2056(b)-5 through 20.2056(b)-8 and 20.2056(c)-1 
through 20.2056(c)-3);
    (iii) The property interest is a deductible interest (see Sec. 
20.2056(a)-2); and
    (iv) The value of the property interest (see Sec. 20.2056(b)-4).
    (2) Burden of establishing requisite facts. The executor must 
provide the facts relating to any applicable limitation on the amount of 
the allowable marital deduction under Sec. 20.2056(a)-1(c), and must 
submit proof necessary to establish any fact required under paragraph 
(b)(1), including any evidence requested by the district director.
    (c) Marital deduction; limitation on aggregate deductions--(1) 
Estates of decedents dying before 1977. In the case of estates of 
decedents dying before January 1, 1977, the marital deduction is limited 
to one-half of the value of the adjusted gross estate, as that term was 
defined under section 2056(c)(2) prior to repeal by the Economic 
Recovery Tax Act of 1981.
    (2) Estates of decedents dying after December 31, 1976, and before 
January 1, 1982-- Except as provided in Sec. 2002(d)(1) of the Tax 
Reform Act of 1976 (Pub. L. 94-455), in the case of decedents dying 
after December 31, 1976, and before January 1, 1982, the marital 
deduction is limited to the greater of--
    (i) $250,000; or
    (ii) One-half of the value of the decedent's adjusted gross estate, 
adjusted for intervivos gifts to the spouse as prescribed by section 
2056(c)(1)(B) prior to repeal by the Economic Recovery Tax Act of 1981 
(Pub. L. 97-34).
    (3) Estates of decedents dying after December 31, 1981. In the case 
of estates of decedents dying after December 31, 1981, the marital 
deduction is limited as prescribed in paragraph (c)(2) of this section 
if the provisions of Sec. 403(e)(3) of Pub. L. 97-34 are satisfied.

[T.D. 8522, 59 FR 9648, Mar. 1, 1994]



Sec. 20.2056(a)-2  Marital deduction; ``deductible interests'' and 
``nondeductible interests''.

    (a) In general. Property interests which passed from a decedent to 
his surviving spouse fall within two general categories:

[[Page 432]]

    (1) Those with respect to which the marital deduction is authorized, 
and
    (2) Those with respect to which the marital deduction is not 
authorized.

These categories are referred to in this section and other sections of 
the regulations under section 2056 as ``deductible interests'' and 
``nondeductible interests'', respectively (see paragraph (b) of this 
section). Subject to any applicable limitations set forth in Sec. 
20.2056(a)-1(c), the amount of the marital deduction is the aggregate 
value of the deductible interests.
    (b) Deductible interests. An interest passing to a decedent's 
surviving spouse is a ``deductible interest'' if it does not fall within 
one of the following categories of ``nondeductible interests'';
    (1) Any property interest which passed from the decedent to his 
surviving spouse is a ``nondeductible interest'' to the extent it is not 
included in the decedent's gross estate.
    (2) If a deduction is allowed under section 2053 (relating to 
deductions for expenses and indebtedness) by reason of the passing of a 
property interest from the decedent to his surviving spouse, such 
interest is, to the extent of the deduction under section 2053, a 
``nondeductible interest.'' Thus, a property interest which passed from 
the decedent to his surviving spouse in satisfaction of a deductible 
claim of the spouse against the estate is, to the extent of the claim, a 
``nondeductible interest'' (see Sec. 20.2056(b)-4). Similarly, amounts 
deducted under section 2053(a)(2) for commissioners allowed to the 
surviving spouse as executor are ``nondeductible interests''. As to the 
valuation, for the purpose of the marital deduction, of any property 
interest which passed from the decedent to his surviving spouse subject 
to a mortgage or other encumbrance, see Sec. 20.2056(b)-4.
    (3) If during settlement of the estate a loss deductible under 
section 2054 occurs with respect to a property interest, then that 
interest is, to the extent of the deductible loss, a ``nondeductible 
interest'' for the purpose of the marital deduction.
    (4) A property interest passing to a decedent's surviving spouse 
which is a ``terminable interest'', as defined in Sec. 20.2056(b)-1, is 
a ``nondeductible interest'' to the extent specified in that section.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8522, 59 FR 9649, Mar. 1, 1994]



Sec. 20.2056(b)-1  Marital deduction; limitation in case of life 
estate or other ``terminable interest''.

    (a) In general. Section 2056(b) provides that no marital deduction 
is allowed with respect to certain property interests, referred to 
generally as ``terminable interests'', passing from a decedent to his 
surviving spouse. The phrase ``terminable interest'' is defined in 
paragraph (b) of this section. However, the fact that an interest in 
property passing to a decedent's surviving spouse is a ``terminable 
interest'' makes it nondeductible only (1) under the circumstances 
described in paragraph (c) of this section, and (2) if it does not come 
within one of the exceptions referred to in paragraph (d) of this 
section.
    (b) Terminable interests. A ``terminable interest'' in property is 
an interest which will terminate or fail on the lapse of time or on the 
occurrence or the failure to occur of some contingency. Life estates, 
terms for years, annuities, patents, and copyrights are therefore 
terminable interests. However, a bond, note, or similar contractual 
obligation, the discharge of which would not have the effect of an 
annuity or a term for years, is not a terminable interest.
    (c) Nondeductible terminable interests. (1) A property interest 
which constitutes a terminable interest, as defined in paragraph (b) of 
this section, is nondeductible if--
    (i) Another interest in the same property passed from the decedent 
to some other person for less than an adequate and full consideration in 
money or money's worth, and
    (ii) By reason of its passing, the other person or his heirs or 
assigns may possess or enjoy any part of the property after the 
termination or failure of the spouse's interest.
    (2) Even though a property interest which constitutes a terminable 
interest is not nondeductible by reason of the rules stated in 
subparagraph (1) of

[[Page 433]]

this paragraph, such an interest is nondeductible if--
    (i) The decedent has directed his executor or a trustee to acquire 
such an interest for the decedent's surviving spouse (see further 
paragraph (f) of this section), or
    (ii) Such an interest passing to the decedent's surviving spouse may 
be satisfied out of a group of assets which includes a nondeductible 
interest (see further Sec. 20.2056(b)-2. In this case, however, full 
nondeductibility may not result.
    (d) Exceptions. A property interest passing to a decedent's 
surviving spouse is deductible (if it is not otherwise disqualified 
under Sec. 20.2056(a)-2) even though it is a terminable interest, and 
even though an interest therein passed from the decedent to another 
person, if it is a terminable interest only because--
    (1) It is conditioned on the spouse's surviving for a limited 
period, in the manner described in Sec. 20.2056(b)-3;
    (2) It is a right to income for life with a general power of 
appointment, meeting the requirements set forth in Sec. 20.2056(b)-5;
    (3) It consists of life insurance or annuity payments held by the 
insurer with a general power of appointment in the spouse, meeting the 
requirements set forth in Sec. 20.2056(b)-6;
    (4) It is qualified terminable interest property, meeting the 
requirements set forth in Sec. 20.2056(b)-7; or
    (5) It is an interest in a qualified charitable remainder trust in 
which the spouse is the only noncharitable beneficiary, meeting the 
requirements set forth in Sec. 20.2056(b)-8.
    (e) Miscellaneous principles. (1) In determining whether an interest 
passed from the decedent to some other person, it is immaterial whether 
interests in the same property passed to the decedent's spouse and 
another person at the same time, or under the same instrument.
    (2) In determining whether an interest in the same property passed 
from the decedent both to his surviving spouse and to some other person, 
a distinction is to be drawn between ``property'', as such term is used 
in section 2056, and an ``interest in property''. The term ``property'' 
refers to the underlying property in which various interests exist; each 
such interest is not for this purpose to be considered as ``property''.
    (3) Whether or not an interest is nondeductible because it is a 
terminable interest is to be determined by reference to the property 
interests which actually passed from the decedent. Subsequent 
conversions of the property are immaterial for this purpose. Thus, where 
a decedent bequeathed his estate to his wife for life with remainder to 
his children, the interest which passed to his wife is a nondeductible 
interest, even though the wife agrees with the children to take a 
fractional share of the estate in fee in lieu of the life interest in 
the whole, or sells the life estate for cash, or acquires the remainder 
interest of the children either by purchase or gift.
    (4) The terms passed from the decedent, passed from the decedent to 
his surviving spouse and passed from the decedent to a person other than 
his surviving spouse are defined in Sec. Sec. 20.2056(c)-1 through 
20.2056(c)-3.
    (f) Direction to acquire a terminable interest. No marital deduction 
is allowed with respect to a property interest which a decedent directs 
his executor or a trustee to covert after his death into a terminable 
interest for his surviving spouse. The marital deduction is not allowed 
even though no interest in the property subject to the terminable 
interest passes to another person and even though the interest would 
otherwise come within the exceptions described in Sec. Sec. 20.2056(b)-
5 and 20.2056(b)-6 (relating to life estates and life insurance and 
annuity payments with powers of appointment). However, a general 
investment power, authorizing investments in both terminable interests 
and other property, is not a direction to invest in a terminable 
interest.
    (g) Examples. The application of this section may be illustrated by 
the following examples. In each example, it is assumed that the executor 
made no election under section 2056(b)(7) (even if under the specific 
facts the election would have been available), that any property 
interest passing from the decedent to a person other than the surviving 
spouse passed for less than full and adequate consideration in money

[[Page 434]]

or money's worth, and that section 2056(b)(8) is inapplicable.

    Example (1). H (the decedent) devised real property to W (his 
surviving wife) for life, with remainder to A and his heirs. The 
interest which passed from H to W is a nondeductible interest since it 
will terminate upon her death and A (or his heirs or assigns) will 
thereafter possess or enjoy the property.
    Example (2). H bequeathed the residue of his estate in trust for the 
benefit of W and A. The trust income is to be paid to W for life, and 
upon her death the corpus is to be distributed to A or his issue. 
However, if A should die without issue, leaving W surviving, the corpus 
is then to be distributed to W. The interest which passed from H to W is 
a nondeductible interest since it will terminate in the event of her 
death if A or his issue survive, and A or his issue will thereafter 
possess or enjoy the property.
    Example (3). H during his lifetime purchased an annuity contract 
providing for payments to himself for life and then to W for life if she 
should survive him. Upon the death of the survivor of H and W, the 
excess, if any, of the cost of the contract over the annuity payments 
theretofore made was to be refunded to A. The interest which passed from 
H to W is a nondeductible interest since A may possess or enjoy a part 
of the property following the termination of the interest of W. If, 
however, the contract provided for no refund upon the death of the 
survivor of H and W, or provided that any refund was to go to the estate 
of the survivor, then the interest which passed from H to W is (to the 
extent it is included in H's gross estate) a deductible interest.
    Example (4). H, in contemplation of death, transferred a residence 
to A for life with remainder to W provided W survives A, but if W 
predeceases A, the property is to pass to B and his heirs. If it is 
assumed that H died during A's lifetime, and the value of the residence 
was included in determining the value of his gross estate, the interest 
which passed from H to W is a nondeductible interest since it will 
terminate if W predeceases A and the property will thereafter be 
possessed or enjoyed by B (or his heirs or assigns). This result is not 
affected by B's assignment of his interest during H's lifetime, whether 
made in favor of W or another person, since the term ``assigns'' (as 
used in section 2056(b)(1)(B)) includes such an assignee. However, if it 
is assumed that A predeceased H, the interest of B in the property was 
extinguished, and, viewed as of the time of the subsequent death of H, 
the interest which passed from him to W is the entire interest in the 
property and, therefore, a deductible interest.
    Example (5). H transferred real property to A by gift (reserving the 
right to the rentals of the property for a term of 20 years. H died 
within the 20-year term, bequeathing the right to the remaining rentals 
to a trust for the benefit of W. The terms of the trust satisfy the five 
conditions stated in Sec. 20.2056(b)-5, so that the property interest 
which passed in trust is considered to have passed from H to W. However, 
the interest is a nondeductible interest since it will terminate upon 
the expiration of the term and A will thereafter possess or enjoy the 
property.
    Example (6). H bequeathed a patent to W and A as tenants in common. 
In this case, the interest of W will terminate upon the expiration of 
the term of the patent, but possession or enjoyment of the property by A 
must necessarily cease at the same time. Therefore, since A's possession 
or enjoyment cannot outlast the termination of W's interest, the latter 
is a deductible interest.
    Example (7). A decedent bequeathed $100,000 to his wife, subject to 
a direction to his executor to use the bequest for the purchase of an 
annuity for the wife. The bequest is a nondeductible interest.
    Example (8). Assume that pursuant to local law an allowance for 
support is payable to the decedent's surviving spouse during the period 
of the administration of the decedent's estate, but that upon her death 
or remarriage during such period her right to any further allowance will 
terminate. Assume further that the surviving spouse is sole beneficiary 
of the decedent's estate. Under such circumstances, the allowance 
constitutes a deductible interest since any part of the allowance not 
receivable by the surviving spouse during her lifetime will pass to her 
estate under the terms of the decedent's will. If, in this example, the 
decedent bequeathed only one-third of his residuary estate to his 
surviving spouse, then two-thirds of the allowance for support would 
constitute a nondeductible terminable interest.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8522, 59 FR 9649, Mar. 1, 1994]



Sec. 20.2056(b)-2  Marital deduction; interest in unidentified assets.

    (a) In general. Section 2056(b)(2) provides that if an interest 
passing to a decedent's surviving spouse may be satisfied out of assets 
(or their proceeds) which include a particular asset that would be a 
nondeductible interest if it passed from the decedent to his spouse, the 
value of the interest passing to the spouse is reduced, for the purpose 
of the marital deduction, by the value of the particular asset.
    (b) Application of section 2056(b)(2). In order for section 
2056(b)(2) to apply, two circumstances must coexist, as follows:

[[Page 435]]

    (1) The property interest which passed from the decedent to his 
surviving spouse must be payable out of a group of assets included in 
the gross estate. Examples of property interests payable out of a group 
of assets are a general legacy, a bequest of the residue of the 
decedent's estate or of a proportion of the residue, and a right to a 
share of the corpus of a trust upon its termination.
    (2) The group of assets out of which the property interest is 
payable must include one or more particular assets which, if passing 
specifically to the surviving spouse, would be nondeductible interests. 
Therefore, section 2056(b)(2) is not applicable merely because the group 
of assets includes a terminable interest, but would only be applicable 
if the terminable interest were nondeductible under the provisions of 
Sec. 20.2056(b)-1.
    (c) Interest nondeductible if circumstances present. If both of the 
circumstances set forth in paragraph (b) of this section are present, 
the property interest payable out of the group of assets is (except as 
to any excess of its value over the aggregate value of the particular 
asset or assets which would not be deductible if passing specifically to 
the surviving spouse) a nondeductible interest.
    (d) Example. The application of this section may be illustrated by 
the following example:

    Example. A decedent bequeathed one-third of the residue of his 
estate to his wife. The property passing under the decedent's will 
included a right to the rentals of an office building for a term of 
years, reserved by the decedent under a deed of the building by way of 
gift to his son. The decedent did not make a specific bequest of the 
right to such rentals. Such right, if passing specifically to the wife, 
would be a nondeductible interest (see example (5) of paragraph (g) of 
Sec. 20.2056(b)-1). It is assumed that the value of the bequest of one-
third of the residue of the estate to the wife was $85,000, and that the 
right to the rentals was included in the gross estate at a value of 
$60,000. If the decedent's executor had the right under the decedent's 
will or local law to assign the entire lease in satisfaction of the 
bequest, the bequest is a nondeductible interest to the extent of 
$60,000. If the executor could only assign a one-third interest in the 
lease in satisfaction of the bequest, the bequest is a nondeductible 
interest to the extent of $20,000. If the decedent's will provided that 
his wife's bequest could not be satisfied with a nondeductible interest, 
the entire bequest is a deductible interest. If, in this example, the 
asset in question had been foreign real estate not included in the 
decedent's gross estate, the results would be the same.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8522, 59 FR 9649, Mar. 1, 1994]



Sec. 20.2056(b)-3  Marital deduction; interest of spouse conditioned 
on survival for limited period.

    (a) In general. Generally, no marital deduction is allowable if the 
interest passing to the surviving spouse is a terminable interest as 
defined in paragraph (b) of Sec. 20.2056(b)(1). However, section 
2056(b)(3) provides an exception to this rule so as to allow a deduction 
if (1) the only condition under which it will terminate is the death of 
the surviving spouse within 6 months after the decedent's death, or her 
death as a result of a common disaster which also resulted in the 
decedent's death, and (2) the condition does not in fact occur.
    (b) Six months' survival. If the only condition which will cause the 
interest taken by the surviving spouse to terminate is the death of the 
surviving spouse and the condition is of such nature that it can occur 
only within 6 months following the decedent's death, the exception 
provided by section 2056(b)(3) will apply, provided the condition does 
not in fact occur. However, if the condition (unless it relates to death 
as a result of a common disaster) is one which may occur either within 
the 6-month period or thereafter, the exception provided by section 
2056(b)(3) will not apply.
    (c) Common disaster. If a property interest passed from the decedent 
to his surviving spouse subject to the condition that she does not die 
as a result of a common disaster which also resulted in the decedent's 
death, the exception provided by section 2056(b)(3) will not be applied 
in the final audit of the return if there is still a possibility that 
the surviving spouse may be deprived of the property interest by 
operation of the common disaster provision as given effect by the local 
law.
    (d) Examples. The application of this section may be illustrated by 
the following examples:


[[Page 436]]


    Example (1). A decedent bequeathed his entire estate to his spouse 
on condition that she survive him by 6 months. In the event his spouse 
failed to survive him by 6 months, his estate was to go to his niece and 
her heirs. The decedent was survived by his spouse. It will be observed 
that, as of the time of the decedent's death, it was possible that the 
niece would, by reason of the interest which passed to her from the 
decedent possess or enjoy the estate after the termination of the 
interest which passed to the spouse. Hence, under the general rule set 
forth in Sec. 20.2056(b)-1, the interest which passed to the spouse 
would be regarded as a nondeductible interest. If the surviving spouse 
in fact died within 6 months after the decedent's death, that general 
rule is to be applied, and the interest which passed to the spouse is a 
nondeductible interest. However, if the spouse in fact survived the 
decedent by 6 months, thus extinguishing the interest of the niece, the 
case comes within the exception provided by section 2056(b)(3), and the 
interest which passed to the spouse is a deductible interest. (It is 
assumed for the purpose of this example that no other factor which would 
cause the interest to be nondeductible is present.)
    Example (2). The facts are the same as in example (1) except that 
the will provided that the estate was to go to the niece either in case 
the decedent and his spouse should both die as a result of a common 
disaster, or in case the spouse should fail to survive the decedent by 3 
months. It is assumed that the decedent was survived by his spouse. In 
this example, the interest which passed from the decedent to his 
surviving spouse is to be regarded as a nondeductible interest if the 
surviving spouse in fact died either within 3 months after the 
decedent's death or as a result of a common disaster which also resulted 
in the decedent's death. However, if the spouse in fact survived the 
decedent by 3 months, and did not thereafter die as a result of a common 
disaster which also resulted in the decedent's death, the exception 
provided under section 2056(b)(3) will apply and the interest will be 
deductible.
    Example (3). The facts are the same as in example (1) except that 
the will provided that the estate was to go to the niece if the decedent 
and his spouse should both die as a result of a common disaster and if 
the spouse failed to survive the decedent by 3 months. If the spouse in 
fact survived the decedent by 3 months, the interest of the niece is 
extinguished, and the interest passing to the spouse is a deductible 
interest.
    Example (4). A decedent devised and bequeathed his residuary estate 
to his wife if she was living on the date of distribution of his estate. 
The devise and bequest is a nondeductible interest even though 
distribution took place within 6 months after the decedent's death and 
the surviving spouse in fact survived the date of distribution.



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

    (a) In general. The value, for the purpose of the marital deduction, 
of any deductible interest which passed from the decedent to his 
surviving spouse is to be determined as of the date of the decedent's 
death, except that if the executor elects the alternate valuation method 
under section 2032 the valuation is to be determined as of the date of 
the decedent's death but with the adjustment described in paragraph 
(a)(3) of Sec. 20.2032-1. The marital deduction may be taken only with 
respect to the net value of any deductible interest which passed from 
the decedent to his surviving spouse, the same principles being 
applicable as if the amount of a gift to the spouse were being 
determined.
    (b) Property interest subject to an encumbrance or obligation. If a 
property interest passed from the decedent to his surviving spouse 
subject to a mortgage or other encumbrance, or if an obligation is 
imposed upon the surviving spouse by the decedent in connection with the 
passing of a property interest, the value of the property interest is to 
be reduced by the amount of the mortgage, other encumbrance, or 
obligation. However, if under the terms of the decedent's will or under 
local law the executor is required to discharge, out of other assets of 
the decedent's estate, a mortgage or other encumbrance on property 
passing from the decedent to his surviving spouse, or is required to 
reimburse the surviving spouse for the amount of the mortgage or other 
encumbrance, the payment or reimbursement constitutes an additional 
interest passing to the surviving spouse. The passing of a property 
interest subject to the imposition of an obligation by the decedent does 
not include a bequest, devise, or transfer in lieu of dower, curtesy, or 
of a statutory estate created in lieu of dower or curtesy, or of other 
marital rights in the decedent's property or estate. The passing of a 
property interest subject to the imposition of an obligation by the 
decedent does, however, include a bequest, etc., in lieu of the interest 
of his surviving spouse under community property laws unless such 
interest was,

[[Page 437]]

immediately prior to the decedent's death, a mere expectancy. The 
following examples are illustrative of property interests which passed 
from the decedent to his surviving spouse subject to the imposition of 
an obligation by the decedent:

    Example (1). A decedent devised a residence valued at $25,000 to his 
wife, with a direction that she pay $5,000 to his sister. For the 
purpose of the marital deduction, the value of the property interest 
passing to the wife is only $20,000.
    Example (2). A decedent devised real property to his wife in 
satisfaction of a debt owing to her. The debt is a deductible claim 
under section 2053. Since the wife is obligated to relinquish the claim 
as a condition to acceptance of the devise, the value of the devise is, 
for the purpose of the marital deduction, to be reduced by the amount of 
the claim.
    Example (3). A decedent bequeathed certain securities to his wife in 
lieu of her interest in property held by them as community property 
under the law of the State of their residence. The wife elected to 
relinquish her community property interest and to take the bequest. For 
the purpose of the marital deduction, the value of the bequest is to be 
reduced by the value of the community property interest relinquished by 
the wife.

    (c) Effect of death taxes. (1) In the determination of the value of 
any property interest which passed from the decedent to his surviving 
spouse, there must be taken into account the effect which the Federal 
estate tax, or any estate, succession, legacy, or inheritance tax, has 
upon the net value to the surviving spouse of the property interest.
    (2) For example, assume that the only bequest to the surviving 
spouse is $100,000 and the spouse is required to pay a State inheritance 
tax in the amount of $1,500. If no other death taxes affect the net 
value of the bequest, the value, for the purpose of the marital 
deduction, is $98,500.
    (3) As another example, assume that a decedent devised real property 
to his wife having a value for Federal estate tax purposes of $100,000 
and also bequeathed to her a nondeductible interest for life under a 
trust. The State of residence valued the real property at $90,000 and 
the life interest at $30,000, and imposed an inheritance tax (at 
graduated rates) of $4,800 with respect to the two interests. If it is 
assumed that the inheritance tax on the devise is required to be paid by 
the wife, the amount of tax to be ascribed to the devise is:

(90,000/120,000)x$4,800=$3,600.


Accordingly, if no other death taxes affect the net value of the 
bequest, the value, for the purpose of the marital deduction, is 
$100,000 less $3,600, or $96,400.
    (4) If the decedent bequeaths his residuary estate, or a portion of 
it, to his surviving spouse, and his will contains a direction that all 
death taxes shall be payable out of the residuary estate, the value of 
the bequest, for the purpose of the marital deduction, is based upon the 
amount of the residue as reduced pursuant to such direction, if the 
residuary estate, or a portion of it, is bequeathed to the surviving 
spouse, and by the local law the Federal estate tax is payable out of 
the residuary estate, the value of the bequest, for the purpose of the 
marital deduction, may not exceed its value as reduced by the Federal 
estate tax. Methods of computing the deduction, under such 
circumstances, are set forth in supplemental instructions to the estate 
tax return.
    (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 
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

[[Page 438]]

extent of commissions or fees specifically related to investment, 
preservation, or maintenance of the assets), probate fees, expenses 
incurred in construction proceedings and defending against will 
contests, and appraisal fees.
    (iii) Marital share. The marital share is the property or interest 
in property that passed from the decedent for which a deduction is 
allowable under section 2056(a). The marital share 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 surviving spouse 
or is to be added to the principal of the property interest passing to, 
or for the benefit of, the surviving spouse.
    (2) Effect of transmission expenses. For purposes of determining the 
marital deduction, the value of the marital share shall be reduced by 
the amount of the estate transmission expenses paid from the marital 
share.
    (3) Effect of management expenses attributable to the marital share. 
For purposes of determining the marital deduction, the value of the 
marital share shall not be reduced by the amount of the estate 
management expenses attributable to and paid from the marital share. 
Pursuant to section 2056(b)(9), however, the amount of the allowable 
marital 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 marital 
share. For purposes of determining the marital deduction, the value of 
the marital share shall be reduced by the amount of the estate 
management expenses paid from the marital share but attributable to a 
property interest not included in the marital share.
    (5) Examples. The following examples illustrate the application of 
this paragraph (d):

    Example 1. The decedent dies after 2006 having made no lifetime 
gifts. The decedent makes a bequest of shares of ABC Corporation stock 
to the decedent's child. The bequest provides that the child is to 
receive the income from the shares from the date of the decedent's 
death. The value of the bequeathed shares on the decedent's date of 
death is $3,000,000. The residue of the estate is bequeathed to a trust 
for which the executor properly makes an election under section 
2056(b)(7) to treat as qualified terminable interest property. The value 
of the residue on the decedent's date of death, before the payment of 
administration expenses and Federal and State estate taxes, is 
$6,000,000. Under applicable local law, the executor has the discretion 
to pay administration expenses from the income or principal of the 
residuary estate. All estate taxes are to be paid from the residue. The 
State estate tax equals the State death tax credit available under 
section 2011.
    During the period of administration, the estate incurs estate 
transmission expenses of $400,000, which the executor charges to the 
residue. For purposes of determining the marital deduction, the value of 
the residue is reduced by the Federal and State estate taxes and by the 
estate transmission expenses. If the transmission expenses are deducted 
on the Federal estate tax return, the marital deduction is $3,500,000 
($6,000,000 minus $400,000 transmission expenses and minus $2,100,000 
Federal and State estate taxes). If the transmission expenses are 
deducted on the estate's Federal income tax return rather than on the 
estate tax return, the marital deduction is $3,011,111 ($6,000,000 minus 
$400,000 transmission expenses and minus $2,588,889 Federal and State 
estate taxes).
    Example 2. The facts are the same as in Example 1, except that, 
instead of incurring estate transmission expenses, the estate incurs 
estate management expenses of $400,000 in connection with the residue 
property passing for the benefit of the spouse. The executor charges 
these management expenses to the residue. In determining the value of 
the residue passing to the spouse for marital deduction purposes, a 
reduction is made for Federal and State estate taxes payable from the 
residue but no reduction is made for the estate management expenses. If 
the management expenses are deducted on the estate's income tax return, 
the net value of the property passing to the spouse is $3,900,000 
($6,000,000 minus $2,100,000 Federal and State estate taxes). A marital 
deduction is claimed for that amount, and the taxable estate is 
$5,100,000.
    Example 3. The facts are the same as in Example 1, except that the 
estate management expenses of $400,000 are incurred in connection with 
the bequest of ABC Corporation stock to the decedent's child. The 
executor charges these management expenses to the residue. For purposes 
of determining the marital deduction, the value of the residue is 
reduced by the Federal and State estate taxes and by the management 
expenses. The management expenses reduce the value of

[[Page 439]]

the residue because they are charged to the property passing to the 
spouse even though they were incurred with respect to stock passing to 
the child. If the management expenses are deducted on the estate's 
Federal income tax return, the marital deduction is $3,011,111 
($6,000,000 minus $400,000 management expenses and minus $2,588,889 
Federal and State estate taxes). If the management expenses are deducted 
on the estate's Federal estate tax return, rather than on the estate's 
Federal income tax return, the marital deduction is $3,500,000 
($6,000,000 minus $400,000 management expenses and minus $2,100,000 in 
Federal and State estate taxes).
    Example 4. The decedent, who dies in 2000, has a gross estate of 
$3,000,000. Included in the gross estate are proceeds of $150,000 from a 
policy insuring the decedent's life and payable to the decedent's child 
as beneficiary. The applicable credit amount against the tax was fully 
consumed by the decedent's lifetime gifts. Applicable State law requires 
the child to pay any estate taxes attributable to the life insurance 
policy. Pursuant to the decedent's will, the rest of the decedent's 
estate passes outright to the surviving spouse. During the period of 
administration, the estate incurs estate management expenses of $150,000 
in connection with the property passing to the spouse. The value of the 
property passing to the spouse is $2,850,000 ($3,000,000 less the 
insurance proceeds of $150,000 passing to the child). For purposes of 
determining the marital deduction, if the management expenses are 
deducted on the estate's income tax return, the marital deduction is 
$2,850,000 ($3,000,000 less $150,000) and there is a resulting taxable 
estate of $150,000 ($3,000,000 less a marital deduction of $2,850,000). 
Suppose, instead, the management expenses of $150,000 are deducted on 
the estate's estate tax return under section 2053 as expenses of 
administration. In such a situation, claiming a marital deduction of 
$2,850,000 would be taking a deduction for the same $150,000 in property 
under both sections 2053 and 2056 and would shield from estate taxes the 
$150,000 in insurance proceeds passing to the decedent's child. 
Therefore, in accordance with section 2056(b)(9), the marital deduction 
is limited to $2,700,000, and the resulting taxable estate is $150,000.
    Example 5. The decedent dies after 2006 having made no lifetime 
gifts. The value of the decedent's residuary estate on the decedent's 
date of death is $3,000,000, before the payment of administration 
expenses and Federal and State estate taxes. The decedent's will 
provides a formula for dividing the decedent's residuary estate between 
two trusts to reduce the estate's Federal estate taxes to zero. Under 
the formula, one trust, for the benefit of the decedent's child, is to 
be funded with that amount of property equal in value to so much of the 
applicable exclusion amount under section 2010 that would reduce the 
estate's Federal estate tax to zero. The other trust, for the benefit of 
the surviving spouse, satisfies the requirements of section 2056(b)(7) 
and is to be funded with the remaining property in the estate. The State 
estate tax equals the State death tax credit available under section 
2011. During the period of administration, the estate incurs 
transmission expenses of $200,000. The transmission expenses of $200,000 
reduce the value of the residue to $2,800,000. If the transmission 
expenses are deducted on the Federal estate tax return, then the formula 
divides the residue so that the value of the property passing to the 
child's trust is $1,000,000 and the value of the property passing to the 
marital trust is $1,800,000. The allowable marital deduction is 
$1,800,000. The applicable exclusion amount shields from Federal estate 
tax the entire $1,000,000 passing to the child's trust so that the 
amount of Federal and State estate taxes is zero. Alternatively, if the 
transmission expenses are deducted on the estate's Federal income tax 
return, the formula divides the residue so that the value of the 
property passing to the child's trust is $800,000 and the value of the 
property passing to the marital trust is $2,000,000. The allowable 
marital deduction is $2,000,000. The applicable exclusion amount shields 
from Federal estate tax the entire $800,000 passing to the child's trust 
so that the amount of Federal and State estate taxes remains zero.
    Example 6. The facts are the same as in Example 5, except that the 
decedent's will provides that the child's trust is to be funded with 
that amount of property equal in value to the applicable exclusion 
amount under section 2010 allowable to the decedent's estate. The 
residue of the estate, after the payment of any debts, expenses, and 
Federal and State estate taxes, is to pass to the marital trust. The 
applicable exclusion amount in this case is $1,000,000, so the value of 
the property passing to the child's trust is $1,000,000. After deducting 
the $200,000 of transmission expenses, the residue of the estate is 
$1,800,000 less any estate taxes. If the transmission expenses are 
deducted on the Federal estate tax return, the allowable marital 
deduction is $1,800,000, the taxable estate is zero, and the Federal and 
State estate taxes are zero. Alternatively, if the transmission expenses 
are deducted on the estate's Federal income tax return, the net value of 
the property passing to the spouse is $1,657,874 ($1,800,000 minus 
$142,106 estate taxes). A marital deduction is claimed for that amount, 
the taxable estate is $1,342,106, and the Federal and State estate taxes 
total $142,106.
    Example 7. The decedent, who dies in 2000, makes an outright 
pecuniary bequest of $3,000,000 to the decedent's surviving spouse, and 
the residue of the estate, after the payment of all debts, expenses, and 
Federal and

[[Page 440]]

State estate taxes, passes to the decedent's child. Under the terms of 
the governing instrument and applicable local law, a beneficiary of a 
pecuniary bequest is not entitled to any income on the bequest. During 
the period of administration, the estate pays estate transmission 
expenses from the income earned by the property that will be distributed 
to the surviving spouse in satisfaction of the pecuniary bequest. The 
income earned on this property is not part of the marital share. 
Therefore, the allowable marital deduction is $3,000,000, unreduced by 
the amount of the estate transmission expenses.

    (6) Effective date. The provisions of this paragraph (d) apply to 
estates of decedents dying on or after December 3, 1999.
    (e) Remainder interests. If the income from property is made payable 
to another individual for life, or for a term of years, with remainder 
absolutely to the surviving spouse or to her estate, the marital 
deduction is based upon the present value of the remainder. The present 
value of the remainder is to be determined in accordance with the rules 
stated in Sec. 20.2031-7. For example, if the surviving spouse is to 
receive $50,000 upon the death of a person aged 31 years, the present 
value of the remainder is $14,466. If the remainder is such that its 
value is to be determined by a special computation (see paragraph (b) of 
Sec. 20.2031-7), a request for a specific factor may be submitted to 
the Commissioner. The request should be accompanied by a statement of 
the date of birth of each person, the duration of whose life may affect 
the value of the remainder, and copies of the relevant instruments. The 
Commissioner may, if conditions permit, supply the factor requested. If 
the Commissioner does not furnish the factor, the claim for deduction 
must be supported by a full statement of the computation of the present 
value made in accordance with the principles set forth in the applicable 
paragraphs of Sec. 20.2031-7.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8522, 59 FR 9649, Mar. 1, 1994; T.D. 8540, 59 FR 30103, 
June 10, 1994; T.D. 8846, 64 FR 67765, Dec. 3, 1999; 64 FR 71022, Dec. 
20, 1999]



Sec. 20.2056(b)-5  Marital deduction; life estate with power of 
appointment in surviving spouse.

    (a) In general. Section 2056(b)(5) provides that if an interest in 
property passes from the decedent to his surviving spouse (whether or 
not in trust) and the spouse is entitled for life to all the income from 
the entire interest or all the income from a specific portion of the 
entire interest, with a power in her to appoint the entire interest or 
the specific portion, the interest which passes to her is a deductible 
interest, to the extent that it satisfies all five of the conditions set 
forth below (see paragraph (b) of this section if one or more of the 
conditions is satisfied as to only a portion of the interest):
    (1) The surviving spouse must be entitled for life to all of the 
income from the entire interest or a specific portion of the entire 
interest, or to a specific portion of all the income from the entire 
interest.
    (2) The income payable to the surviving spouse must be payable 
annually or at more frequent intervals.
    (3) The surviving spouse must have the power to appoint the entire 
interest or the specific portion to either herself or her estate.
    (4) The power in the surviving spouse must be exercisable by her 
alone and (whether exercisable by will or during life) must be 
exercisable in all events.
    (5) The entire interest or the specific portion must not be subject 
to a power in any other person to appoint any part to any person other 
than the surviving spouse.
    (b) Specific portion; deductible amount. If either the right to 
income or the power of appointment passing to the surviving spouse 
pertains only to a specific portion of a property interest passing from 
the decedent, the marital deduction is allowed only to the extent that 
the rights in the surviving spouse meet all of the five conditions 
described in paragraph (a) of this section. While the rights over the 
income and the power must coexist as to the same interest in property, 
it is not necessary that the rights over the income or the power as to 
such interest be in the same proportion. However, if the rights over 
income meeting the required conditions set forth in paragraph (a) (1)

[[Page 441]]

and (2) of the section extend over a smaller share of the property 
interest than the share with respect to which the power of appointment 
requirements set forth in paragraph (a) (3) through (5) of this section 
are satisfied, the deductible interest is limited to the smaller share. 
Correspondingly, if a power of appointment meeting all the requirements 
extends to a smaller portion of the property interest than the portion 
over which the income rights pertain, the deductible interest cannot 
exceed the value of the portion to which such power of appointment 
applies. Thus, if the decedent leaves to his surviving spouse the right 
to receive annually all of the income from a particular property 
interest and a power of appointment meeting the specifications 
prescribed in paragraph (a) (3) through (5) of this section as to only 
one-half of the property interest, then only one-half of the property 
interest is treated as a deductible interest. Correspondingly, if the 
income interest of the spouse satisfying the requirements extends to 
only one-fourth of the property interest and a testamentary power of 
appointment satisfying the requirements extends to all of the property 
interest, then only one-fourth of the interest in the spouse qualifies 
as a deductible interest. Further, if the surviving spouse has no right 
to income from a specific portion of a property interest but a 
testamentary power of appointment which meets the necessary conditions 
over the entire interest, then none of the interest qualifies for the 
deduction. In addition, if, from the time of the decedent's death, the 
surviving spouse has a power of appointment meeting all of the required 
conditions over three-fourths of the entire property interest and the 
prescribed income rights over the entire interest, but with a power in 
another person to appoint one-half of the entire interest, the value of 
the interest in the surviving spouse over only one-half of the property 
interest will qualify as a deductible interest.
    (c) Meaning of specific portion--(1) In general. Except as provided 
in paragraphs (c)(2) and (c)(3) of this section, a partial interest in 
property is not treated as a specific portion of the entire interest. In 
addition, any specific portion of an entire interest in property is 
nondeductible to the extent the specific portion is subject to invasion 
for the benefit of any person other than the surviving spouse, except in 
the case of a deduction allowable under section 2056(b)(5), relating to 
the exercise of a general power of appointment by the surviving spouse.
    (2) Fraction or percentage share. Under section 2056(b)(10), a 
partial interest in property is treated as a specific portion of the 
entire interest if the rights of the surviving spouse in income, and the 
required rights as to the power described in Sec. 20.2056(b)-5(a), 
constitute a fractional or percentage share of the entire property 
interest, so that the surviving spouse's interest reflects its 
proportionate share of the increase or decrease in the value of the 
entire property interest to which the income rights and the power 
relate. Thus, if the spouse's right to income and the spouse's power 
extend to a specified fraction or percentage of the property, or the 
equivalent, the interest is in a specific portion of the property. In 
accordance with paragraph (b) of this section, if the spouse has the 
right to receive the income from a specific portion of the trust 
property (after applying paragraph (c)(3) of this section) but has a 
power of appointment over a different specific portion of the property 
(after applying paragraph (c)(3) of this section), the marital deduction 
is limited to the lesser specific portion.
    (3) Special rule in the case of estates of decedents dying on or 
before October 24, 1992, and certain decedents dying after October 24, 
1992, with wills or revocable trusts executed on or prior to that date. 
(i) In the case of estates of decedents within the purview of the 
effective date and transitional rules contained in paragraphs (c)(3) 
(ii) and (iii) of this section:
    (A) A specific sum payable annually, or at more frequent intervals, 
out of the property and its income that is not limited by the income of 
the property is treated as the right to receive the income from a 
specific portion of the property. The specific portion, for purposes of 
paragraph (c)(2) of this section, is the portion of the property that, 
assuming the interest rate generally applicable for the valuation of 
annuities

[[Page 442]]

at the time of the decedent's death, would produce income equal to such 
payments. However, a pecuniary amount payable annually to a surviving 
spouse is not treated as a right to the income from a specific portion 
of the trust property for purposes of this paragraph (c)(3)(i)(A) if any 
person other than the surviving spouse may receive, during the surviving 
spouse's lifetime, any distribution of the property. To determine the 
applicable interest rate for valuing annuities, see sections 2031 and 
7520 and the regulations under those sections.
    (B) The right to appoint a pecuniary amount out of a larger fund (or 
trust corpus) is considered the right to appoint a specific portion of 
such fund or trust for purposes of paragraph (c)(2) in an amount equal 
to such pecuniary amount.
    (ii) The rules contained in paragraphs (c)(3)(i) (A) and (B) of this 
section apply with respect to estates of decedents dying on or before 
October 24, 1992.
    (iii) The rules contained in paragraphs (c)(3)(i) (A) and (B) of 
this section apply in the case of decedents dying after October 24, 
1992, if property passes to the spouse pursuant to a will or revocable 
trust agreement executed on or before October 24, 1992, and either--
    (A) On that date, the decedent was under a mental disability to 
change the disposition of the property and did not regain competence to 
dispose of such property before the date of death; or
    (B) The decedent dies prior to October 24, 1995.
    (iv) Notwithstanding paragraph (c)(3)(iii) of this section, 
paragraphs (c)(3)(i) (A) and (B) of this section do not apply if the 
will or revocable trust is amended after October 24, 1992, in any 
respect that increases the amount of the transfer qualifying for the 
marital deduction or alters the terms by which the interest so passes to 
the surviving spouse of the decedent.
    (4) Local law. A partial interest in property is treated as a 
specific portion of the entire interest if it is shown that the 
surviving spouse has rights under local law that are identical to those 
the surviving spouse would have acquired had the partial interest been 
expressed in terms satisfying the requirements of paragraph (c)(2) (or 
paragraph (c)(3) if applicable) of this section.
    (5) Examples. The following examples illustrate the application of 
paragraphs (a) through (c)(4) of this section:

    Example 1. Spouse entitled to the lesser of an annuity or a fraction 
of trust income. The decedent, D, died prior to October 24, 1992. D 
bequeathed in trust 500 identical shares of X company stock, valued for 
estate tax purposes at $500,000. The trust provides that during the 
lifetime of D's spouse, S, the trustee is to pay annually to S the 
lesser of one-half of the trust income or $20,000. Any trust income not 
paid to S is to be accumulated in the trust and may not be distributed 
during S's lifetime. S has a testamentary general power of appointment 
over the entire trust principal. The applicable interest rate for 
valuing annuities as of D's date of death under section 7520 is 10 
percent. For purposes of paragraphs (a) through (c) of this section, S 
is treated as receiving all of the income from the lesser of--
    (i) One half of the stock ($250,000); or
    (ii) $200,000, the specific portion of the stock which, as 
determined in accordance with Sec. 20.2056(b)-5(c)(3)(i)(A), would 
produce annual income of $20,000 (20,000/.10). Accordingly, the marital 
deduction is limited to $200,000 (200,000/500,000 or \2/5\ of the value 
of the trust).
    Example 2. Spouse possesses power and income interest over different 
specific portions of trust. The facts are the same as in Example 1 
except that S's testamentary general power of appointment is exercisable 
over only \1/4\ of the trust principal. Consequently, under section 
2056(b)(5), the marital deduction is allowable only for the value of \1/
4\ of the trust ($125,000); i.e., the lesser of the value of the portion 
with respect to which S is deemed to be entitled to all of the income 
(\2/5\ of the trust or $200,000), or the value of the portion with 
respect to which S possesses the requisite power of appointment (\1/4\ 
of the trust or $125,000).
    Example 3. Power of appointment over pecuniary amount. The decedent, 
D, died prior to October 24, 1992. D bequeathed property valued at 
$400,000 for estate tax purposes in trust. The trustee is to pay 
annually to D's spouse, S, one-fourth of the trust income. Any trust 
income not paid to S is to be accumulated in the trust and may not be 
distributed during S's lifetime. The will gives S a testamentary general 
power of appointment over the sum of $160,000. Because D died prior to 
October 24, 1992, S's power of appointment over $160,000 is treated as a 
power of appointment over a specific portion of the entire trust 
interest. The marital deduction allowable under section 2056(b)(5) is 
limited to $100,000; that is, the lesser of--

[[Page 443]]

    (1) The value of the trust corpus ($400,000);
    (2) The value of the trust corpus over which S has a power of 
appointment ($160,000); or
    (3) That specific portion of the trust with respect to which S is 
entitled to all the income ($100,000).
    Example 4. Power of appointment over shares of stock constitutes a 
power over a specific portion. Under D's will, 250 shares of Y company 
stock were bequeathed in trust pursuant to which all trust income was 
payable annually to S, D's spouse, for life. S was given a testamentary 
general power of appointment over 100 shares of stock. The trust 
provides that if the trustee sells the Y company stock, S's general 
power of appointment is exercisable with respect to the sale proceeds or 
the property in which the proceeds are reinvested. Because the amount of 
property represented by a single share of stock would be altered if the 
corporation split its stock, issued stock dividends, made a distribution 
of capital, etc., a power to appoint 100 shares at the time of S's death 
is not necessarily a power to appoint the entire interest that the 100 
shares represented on the date of D's death. If it is shown that, under 
local law, S has a general power to appoint not only the 100 shares 
designated by D but also 100/250 of any distributions by the corporation 
that are included in trust principal, the requirements of paragraph 
(c)(2) of this section are satisfied and S is treated as having a 
general power to appoint 100/250 of the entire interest in the 250 
shares. In that case, the marital deduction is limited to 40 percent of 
the trust principal. If local law does not give S that power, the 100 
shares would not constitute a specific portion under Sec. 20.2056(b)-
5(c) (including Sec. 20.2056(b)-5(c)(3)(i)(B)). The nature of the asset 
is such that a change in the capitalization of the corporation could 
cause an alteration in the original value represented by the shares at 
the time of D's death and, thus, it does not represent a specific 
portion of the trust.

    (d) Meaning of entire interest. Because a marital deduction is 
allowed for each separate qualifying interest in property passing from 
the decedent to the decedent's surviving spouse (subject to any 
applicable limitations in Sec. 20.2056(a)-l(c)), for purposes of 
paragraphs (a) and (b) of this section, each property interest with 
respect to which the surviving spouse received any rights is considered 
separately in determining whether the surviving spouse's rights extend 
to the entire interest or to a specific portion of the entire interest. 
A property interest which consists of several identical units of 
property (such as a block of 250 shares of stock, whether the ownership 
is evidenced by one or several certificates) is considered one property 
interest, unless certain of the units are to be segregated and accorded 
different treatment, in which case each segregated group of items is 
considered a separate property interest. The bequest of a specified sum 
of money constitutes the bequest of a separate property interest if 
immediately following distribution by the executor and thenceforth it, 
and the investments made with it, must be so segregated or accounted for 
as to permit its identification as a separate item of property. The 
application of this paragraph may be illustrated by the following 
examples:

    Example (1). The decedent transferred to a trustee three adjoining 
farms, Blackacre, Whiteacre, and Greenacre. His will provided that 
during the lifetime of the surviving spouse the trustee should pay her 
all of the income from the trust. Upon her death, all of Blackacre, a 
one-half interest in White- acre, and a one-third interest in Greenacre 
were to be distributed to the person or persons appointed by her in her 
will. The surviving spouse is considered as being entitled to all of the 
income from the entire interest in Blackacre, all of the income from the 
entire interest in Whiteacre, and all of the income from the entire 
interest in Greenacre. She also is considered as having a power of 
appointment over the entire interest in Blackacre, over one-half of the 
entire interest in Whiteacre, and over one-third of the entire interest 
in Greenacre.
    Example (2). The decedent bequeathed $250,000 to C, as trustee. C is 
to invest the money and pay all of the income from the investments to W, 
the decedent's surviving spouse, annually. W was given a general power, 
exercisable by will, to appoint one-half of the corpus of the trust. 
Here, immediately following distribution by the executor, the $250,000 
will be sufficiently segregated to permit its identification as a 
separate item, and the $250,000 will constitute an entire property 
interest. Therefore, W has a right to income and a power of appointment 
such that one-half of the entire interest is a deductible interest.
    Example (3). The decedent bequeathed 100 shares of Z corporation 
stock to D, as trustee. W, the decedent's surviving spouse, is to 
receive all of the income of the trust annually and is given a general 
power, exercisable by will, to appoint out of the trust corpus the sum 
of $25,000. In this case the $25,000 is not, immediately following 
distribution, sufficiently segregated to permit its identification as a 
separate item of property in which the surviving spouse has the entire 
interest.

[[Page 444]]

Therefore, the $25,000 does not constitute the entire interest in a 
property for the purpose of paragraphs (a) and (b) of this section.

    (e) Application of local law. In determining whether or not the 
conditions set forth in paragraph (a) (1) through (5) of this section 
are satisfied by the instrument of transfer, regard is to be had to the 
applicable provisions of the law of the jursidiction under which the 
interest passes and, if the transfer is in trust, the applicable 
provisions of the law governing the administration of the trust. For 
example, silence of a trust instrument as to the frequency of payment 
will not be regarded as a failure to satisfy the condition set forth in 
paragraph (a)(2) of this section that income must be payable to the 
surviving spouse annually or more frequently unless the applicable law 
permits payment to be made less frequently than annually. The principles 
outlined in this paragraph and paragraphs (f) and (g) of this section 
which are applied in determining whether transfers in trust meet such 
conditions are equally applicable in ascertaining whether, in the case 
of interests not in trust, the surviving spouse has the equivalent in 
rights over income and over the property.
    (f) Right to income. (1) If an interest is transferred in trust, the 
surviving spouse is ``entitled for life to all of the income from the 
entire interest or a specific portion of the entire interest'', for the 
purpose of the condition set forth in paragraph (a)(1) of this section, 
if the effect of the trust is to give her substantially that degree of 
beneficial enjoyment of the trust property during her life which the 
principles of the law of trusts accord to a person who is unqualifiedly 
designated as the life beneficiary of a trust. Such degree of enjoyment 
is given only if it was the decedent's intention, as manifested by the 
terms of the trust instrument and the surrounding circumstances, that 
the trust should produce for the surviving spouse during her life such 
an income, or that the spouse should have such use of the trust property 
as is consistent with the value of the trust corpus and with its 
preservation. The designation of the spouse as sole income beneficiary 
for life of the entire interest or a specific portion of the entire 
interest will be sufficient to qualify the trust unless the terms of the 
trust and the surrounding circumstances considered as a whole evidence 
an intention to deprive the spouse of the requisite degree of enjoyment. 
In determining whether a trust evidences that intention, the treatment 
required or permitted with respect to individual items must be 
considered in relation to the entire system provided for the 
administration of the trust. In addition, the surviving spouse's 
interest shall meet the condition set forth in paragraph (a)(1) of this 
section if the spouse is entitled to income as determined by applicable 
local law that provides for a reasonable apportionment between the 
income and remainder beneficiaries of the total return of the trust and 
that meets the requirements of Sec. 1.643(b)-1 of this chapter.
    (2) If the over-all effect of a trust is to give to the surviving 
spouse such enforceable rights as will preserve to her the requisite 
degree of enjoyment, it is immaterial whether that result is effected by 
rules specifically stated in the trust instrument, or, in their absence, 
by the rules for the management of the trust property and the allocation 
of receipts and expenditures supplied by the State law. For example, a 
provision in the trust instrument for amortization of bond premium by 
appropriate periodic charges to interest will not disqualify the 
interest passing in trust even though there is no State law specifically 
authorizing amortization, or there is a State law denying amortization 
which is applicable only in the absence of such a provision in the trust 
instrument.
    (3) In the case of a trust, the rules to be applied by the trustee 
in allocation of receipts and expenses between income and corpus must be 
considered in relation to the nature and expected productivity of the 
assets passing in trust, the nature and frequency of occurrence of the 
expected receipts, and any provisions as to change in the form of 
investments. If it is evident from the nature of the trust assets and 
the rules provided for management of the trust that the allocation to 
income of such receipts as rents, ordinary cash dividends, and interest 
will give to the

[[Page 445]]

spouse the substantial enjoyment during life required by the statute, 
provisions that such receipts as stock dividends and proceeds from the 
conversion of trust assets shall be treated as corpus will not 
disqualify the interest passing in trust. Similarly, provision for a 
depletion charge against income in the case of trust assets which are 
subject to depletion will not disqualify the interest passing in trust, 
unless the effect is to deprive the spouse of the requisite beneficial 
enjoyment. The same principle is applicable in the case of depreciation, 
trustees' commissions, and other charges.
    (4) Provisions granting administrative powers to the trustee will 
not have the effect of disqualifying an interest passing in trust unless 
the grant of powers evidences the intention to deprive the surviving 
spouse of the beneficial enjoyment required by the statute. Such an 
intention will not be considered to exist if the entire terms of the 
instrument are such that the local courts will impose reasonable 
limitations upon the exercise of the powers. Among the powers which if 
subject to reasonable limitations will not disqualify the interest 
passing in trust are the power to determine the allocation or 
apportionment of receipts and disbursements between income and corpus, 
the power to apply the income or corpus for the benefit of the spouse, 
and the power to retain the assets passing to the trust. For example, a 
power to retain trust assets which consist substantially of unproductive 
property will not disqualify the interest if the applicable rules for 
the administration of the trust require, or permit the spouse to 
require, that the trustee either make the property productive or convert 
it within a reasonable time. Nor will such a power disqualify the 
interest if the applicable rules for administration of the trust require 
the trustee to use the degree of judgment and care in the exercise of 
the power which a prudent man would use if he were owner of the trust 
assets. Further, a power to retain a residence or other property for the 
personal use of the spouse will not disqualify the interest passing in 
trust.
    (5) An interest passing in trust will not satisfy the condition set 
forth in paragraph (a)(1) of this section that the surviving spouse be 
entitled to all the income if the primary purpose of the trust is to 
safeguard property without providing the spouse with the required 
beneficial enjoyment. Such trusts include not only trusts which 
expressly provide for the accumulation of the income but also trusts 
which indirectly accomplish a similar purpose. For example, assume that 
the corpus of a trust consists substantially of property which is not 
likely to be income producing during the life of the surviving spouse 
and that the spouse cannot compel the trustee to convert or otherwise 
deal with the property as described in subparagraph (4) of this 
paragraph. An interest passing to such a trust will not qualify unless 
the applicable rules for the administration require, or permit the 
spouse to require, that the trustee provide the required beneficial 
enjoyment such as by payments to the spouse out of other assets of the 
trust.
    (6) If a trust is created during the decedent's life, it is 
immaterial whether or not the interest passing in trust satisfied the 
conditions set forth in paragraph (a) (1) through (5) of this section 
prior to the decedent's death. If a trust may be terminated during the 
life of the surviving spouse, under her exercise of a power of 
appointment or by distribution of the corpus to her, the interest 
passing in trust satisfies the condition set forth in paragraph (a)(1) 
of this section (that the spouse be entitled to all the income) if she 
(i) is entitled to the income until the trust terminates, or (ii) has 
the right, exercisable in all events, to have the corpus distributed to 
her at any time during her life.
    (7) An interest passing in trust fails to satisfy the condition set 
forth in paragraph (a)(1) of this section, that the spouse be entitled 
to all the income, to the extent that the income is required to be 
accumulated in whole or in part or may be accumulated in the discretion 
of any person other than the surviving spouse; to the extent that the 
consent of any person other than the surviving spouse is required as a 
condition precedent to distribution of the income; or to the extent that 
any person other than the surviving spouse

[[Page 446]]

has the power to alter the terms of the trust so as to deprive her of 
her right to the income. An interest passing in trust will not fail to 
satisfy the condition that the spouse be entitled to all the income 
merely because its terms provide that the right of the surviving spouse 
to the income shall not be subject to assignment, alienation, pledge, 
attachment or claims of creditors.
    (8) In the case of an interest passing in trust, the terms 
``entitled for life'' and ``payable annually or at more frequent 
intervals,'' as used in the conditions set forth in paragraph (a) (1) 
and (2) of this section, require that under the terms of the trust the 
income referred to must be currently (at least annually; see paragraph 
(e) of this section) distributable to the spouse or that she must have 
such command over the income that it is virtually hers. Thus, the 
conditions in paragraph (a) (1) and (2) of this section are satisfied in 
this respect if, under the terms of the trust instrument, the spouse has 
the right exercisable annually (or more frequently) to require 
distribution to herself of the trust income, and otherwise the trust 
income is to be accumulated and added to corpus. Similarly, as respects 
the income for the period between the last distribution date and the 
date of the spouse's death, it is sufficient if that income is subject 
to the spouse's power to appoint. Thus, if the trust instrument provides 
that income accrued or undistributed on the date of the spouse's death 
is to be disposed of as if it had been received after her death, and if 
the spouse has a power of appointment over the trust corpus, the power 
necessarily extends to the undistributed income.
    (9) An interest is not to be regarded as failing to satisfy the 
conditions set forth in paragraph (a) (1) and (2) of this section (that 
the spouse be entitled to all the income and that it be payable annually 
or more frequently) merely because the spouse is not entitled to the 
income from estate assets for the period before distribution of those 
assets by the executor, unless the executor is, by the decedent's will, 
authorized or directed to delay distribution beyond the period 
reasonably required for administration of the decedent's estate. As to 
the valuation of the property interest passing to the spouse in trust 
where the right to income is expressly postponed, see Sec. 20.2056(b)-
4.
    (g) Power of appointment in surviving spouse. (1) The conditions set 
forth in paragraph (a) (3) and (4) of this section, that is, that the 
surviving spouse must have a power of appointment exercisable in favor 
of herself or her estate and exercisable alone and in all events are not 
met unless the power of the surviving spouse to appoint the entire 
interest or a specific portion of it falls within one of the following 
categories:
    (i) A power so to appoint fully exercisable in her own favor at any 
time following the decedent's death (as, for example, an unlimited power 
to invade); or
    (ii) A power so to appoint exercisable in favor of her estate. Such 
a power, if exercisable during life, must be fully exercisable at any 
time during life, or, if exercisable by will, must be fully exercisable 
irrespective of the time of her death (subject in either case to the 
provisions of Sec. 20.2053(b)-3, relating to interests conditioned on 
survival for a limited period); or
    (iii) A combination of the powers described under subdivisions (i) 
and (ii) of this subparagraph. For example, the surviving spouse may, 
until she attains the age of 50 years, have a power to appoint to 
herself and thereafter have a power to appoint to her estate. However, 
the condition that the spouse's power must be exercisable in all events 
is not satisfied unless irrespective of when the surviving spouse may 
die the entire interest or a specific portion of it will at the time of 
her death be subject to one power or the other (subject to the exception 
in Sec. 20.2053(b)-3, relating to interests contingent on survival for 
a limited period).
    (2) The power of the surviving spouse must be a power to appoint the 
entire interest or a specific portion of it as unqualified owner (and 
free of the trust if a trust is involved, or free of the joint tenancy 
if a joint tenancy is involved) or to appoint the entire interest or a 
specific portion of it as a part of her estate (and free of the trust if 
a trust is involved), that is, in effect, to dispose of it to whomsoever 
she pleases. Thus, if the decedent devised property to a son and the 
surviving spouse

[[Page 447]]

as joint tenants with right of survivorship and under local law the 
surviving spouse has a power of severance exercisable without consent of 
the other joint tenant, and by exercising this power could acquire a 
one-half interest in the property as a tenant in common, her power of 
severance will satisfy the conditions set forth in paragraph (a)(3) of 
this section that she have a power of appointment in favor of herself or 
her estate. However, if the surviving spouse entered into a binding 
agreement with the decedent to exercise the power only in favor of their 
issue, that condition is not met. An interest passing in trust will not 
be regarded as failing to satisfy the condition merely because takers in 
default of the surviving spouse's exercise of the power are designated 
by the decedent. The decedent may provide that, in default of exercise 
of the power, the trust shall continue for an additional period.
    (3) A power is not considered to be a power exercisable by a 
surviving spouse alone and in all events as required by paragraph (a)(4) 
of this section if the exercise of the power in the surviving spouse to 
appoint the entire interest or a specific portion of it to herself or to 
her estate requires the joinder or consent of any other person. The 
power is not ``exercisable in all events'', if it can be terminated 
during the life of the surviving spouse by any event other than her 
complete exercise or release of it. Further, a power is not 
``exercisable in all events'' if it may be exercised for a limited 
purpose only. For example, a power which is not exercisable in the event 
of the spouse's remarriage is not exercisable in all events. Likewise, 
if there are any restrictions, either by the terms of the instrument or 
under applicable local law, on the exercise of a power to consume 
property (whether or not held in trust) for the benefit of the spouse, 
the power is not exercisable in all events. Thus, if a power of invasion 
is exercisable only for the spouse's support, or only for her limited 
use, the power is not exercisable in all events. In order for a power of 
invasion to be exercisable in all events, the surviving spouse must have 
the unrestricted power exercisable at any time during her life to use 
all or any part of the property subject to the power, and to dispose of 
it in any manner, including the power to dispose of it by gift (whether 
or not she has power to dispose of it by will).
    (4) The power in the surviving spouse is exercisable in all events 
only if it exists immediately following the decedent's death. For 
example, if the power given to the surviving spouse is exercisable 
during life, but cannot be effectively exercised before distribution of 
the assets by the executor, the power is not exercisable in all events. 
Similarly, if the power is exercisable by will, but cannot be 
effectively exercised in the event the surviving spouse dies before 
distribution of the assets by the executor, the power is not exercisable 
in all events. However, an interest will not be disqualified by the mere 
fact that, in the event the power is exercised during administration of 
the estate, distribution of the property to the appointee will be 
delayed for the period of administration. If the power is in existence 
at all times following the decedent's death, limitations of a formal 
nature will not disqualify an interest. Examples of formal limitations 
on a power exercisable during life are requirements that an exercise 
must be in a particular form, that it must be filed with a trustee 
during the spouse's life, that reasonable notice must be given, or that 
reasonable intervals must elapse between successive partial exercises. 
Examples of formal limitations on a power exercisable by will are that 
it must be exercised by a will executed by the surviving spouse after 
the decedent's death or that exercise must be by specific reference to 
the power.
    (5) If the surviving spouse has the requisite power to appoint to 
herself or her estate, it is immaterial that she also has one or more 
lesser powers. Thus, if she has a testamentary power to appoint to her 
estate, she may also have a limited power of withdrawal or of 
appointment during her life. Similarly, if she has an unlimited power of 
withdrawal, she may have a limited testamentary power.
    (h) Requirement of survival for a limited period. A power of 
appointment in the surviving spouse will not be treated as failing to 
meet the requirements of paragraph (a)(3) of this section even

[[Page 448]]

though the power may terminate, if the only conditions which would cause 
the termination are those described in paragraph (a) of Sec. 
20.2056(b)-3, and if those conditions do not in fact occur. Thus, the 
entire interest or a specific portion of it will not be disqualified by 
reason of the fact that the exercise of the power in the spouse is 
subject to a condition of survivorship described in Sec. 20.2056(b)-3 
if the terms of the condition, that is, the survivorship of the 
surviving spouse, or the failure to die in a common disaster, are 
fulfilled.
    (i) [Reserved]
    (j) Existence of a power in another. Paragraph (a)(5) of this 
section provides that a transfer described in paragraph (a) is 
nondeductible to the extent that the decedent created a power in the 
trustee or in any other person to appoint a part of the interest to any 
person other than the surviving spouse. However, only powers in other 
persons which are in opposition to that of the surviving spouse will 
cause a portion of the interest to fail to satisfy the condition set 
forth in paragraph (a)(5) of this section. Thus, a power in a trustee to 
distribute corpus to or for the benefit of a surviving spouse will not 
disqualify the trust. Similarly, a power to distribute corpus to the 
spouse for the support of minor children will not disqualify the trust 
if she is legally obligated to support such children. The application of 
this paragraph may be illustrated by the following examples:

    Example (1). Assume that a decedent created a trust, designating his 
surviving spouse as income beneficiary for life with an unrestricted 
power in the spouse to appoint the corpus during her life. The decedent 
further provided that in the event the surviving spouse should die 
without having exercised the power, the trust should continue for the 
life of his son with a power in the son to appoint the corpus. Since the 
power in the son could become exercisable only after the death of the 
surviving spouse, the interest is not regarded as failing to satisfy the 
condition set forth in paragraph (a)(5) of this section.
    Example (2). Assume that the decedent created a trust, designating 
his surviving spouse as income beneficiary for life and as donee of a 
power to appoint by will the entire corpus. The decedent further 
provided that the trustee could distribute 30 percent of the corpus to 
the decedent's son when he reached the age of 35 years. Since the 
trustee has a power to appoint 30 percent of the entire interest for the 
benefit of a person other than the surviving spouse, only 70 percent of 
the interest placed in trust satisfied the condition set forth in 
paragraph (a)(5) of this section. If, in this case, the surviving spouse 
had a power, exercisable by her will, to appoint only one-half of the 
corpus as it was constituted at the time of her death, it should be 
noted that only 35 percent of the interest placed in the trust would 
satisfy the condition set forth in paragraph (a)(3) of this section.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8522, 59 FR 9649, Mar. 1, 1994; T.D. 9102, 69 FR 20, 
Jan. 2, 2004]



Sec. 20.2056(b)-6  Marital deduction; life insurance or annuity 
payments with power of appointment in surviving spouse.

    (a) In general. Section 2056(b)(6) provides that an interest in 
property passing from a decedent to his surviving spouse, which consists 
of proceeds held by an insurer under the terms of a life insurance, 
endowment, or annuity contract, is a ``deductible interest'' to the 
extent that is satisfied all five of the following conditions (see 
paragraph (b) of this section if one or more of the conditions is 
satisfied as to only a portion of the proceeds):
    (1) The proceeds, or a specific portion of the proceeds, must be 
held by the insurer subject to an agreement either to pay the entire 
proceeds or a specific portion thereof in installments, or to pay 
interest thereon, and all or a specific portion of the installments or 
interest payable during the life of the surviving spouse must be payable 
only to her.
    (2) The installments or interest payable to the surviving spouse 
must be payable annually, or more frequently, commencing not later than 
13 months after the decedent's death.
    (3) The surviving spouse must have the power to appoint all or a 
specific portion of the amounts so held by the insurer to either herself 
or her estate.
    (4) The power in the surviving spouse must be exercisable by her 
alone and (whether exercisable by will or during life) must be 
exercisable in all events.
    (5) The amounts or the specific portion of the amounts payable under 
such contract must not be subject to a power in any other person to 
appoint

[[Page 449]]

any part thereof to any person other than the surviving spouse.
    (b) Specific portion; deductible interest. If the right to receive 
interest or installment payments or the power of appointment passing to 
the surviving spouse pertains only to a specific portion of the proceeds 
held by the insurer, the marital deduction is allowed only to the extent 
that the rights of the surviving spouse in the specific portion meet the 
five conditions described in paragraph (a) of this section. While the 
rights to interest, or to receive payment in installments, and the power 
must coexist as to the proceeds of the same contract, it is not 
necessary that the rights to each be in the same proportion. If the 
rights to interest meeting the required conditions set forth in 
paragraph (a) (1) and (2) of this section extend over a smaller share of 
the proceeds than the share with respect to which the power of 
appointment requirements set forth in paragraph (a) (3) through (5) of 
this section are satisfied, the deductible interest is limited to the 
smaller share. Similarly, if the portion of the proceeds payable in 
installments is a smaller portion of the proceeds than the portion to 
which the power of appointment meeting such requirements relates, the 
deduction is limited to the smaller portion. In addition, if a power of 
appointment meeting all the requirements extends to a smaller portion of 
the proceeds than the portion over which the interest or installment 
rights pertain, the deductible interest cannot exceed the value of the 
portion to which such power of appointment applies. Thus, if the 
contract provides that the insurer is to retain the entire proceeds and 
pay all of the interest thereon annually to the surviving spouse and if 
the surviving spouse has a power of appointment meeting the 
specifications prescribed in paragraph (a) (3) through (5) of this 
section, as to only one-half of the proceeds held, then only one-half of 
the proceeds may be treated as a deductible interest. Correspondingly, 
if the rights of the spouse to receive installment payments or interest 
satisfying the requirements extend to only one-fourth of the proceeds 
and a testamentary power of appointment satisfying the requirements of 
paragraph (a) (3) through (5) of this section extends to all of the 
proceeds, then only one-fourth of the proceeds qualifies as a deductible 
interest. Further, if the surviving spouse has no right to installment 
payments (or interest) over any portion of the proceeds but a 
testamentary power of appointment which meets the necessary conditions 
over the entire remaining proceeds, then none of the proceeds qualifies 
for the deduction. In addition, if, from the time of the decedent's 
death, the surviving spouse has a power of appointment meeting all of 
the required conditions over three-fourths of the proceeds and the right 
to receive interest from the entire proceeds, but with a power in 
another person to appoint one-half of the entire proceeds, the value of 
the interest in the surviving spouse over only one-half of the proceeds 
will qualify as a deductible interest.
    (c) Applicable principles. (1) The principles set forth in paragraph 
(c) of Sec. 20.2056(b)-5 for determining what constitutes a ``specific 
portion of the entire interest'' for the purpose of section 2056(b)(5) 
are applicable in determining what constitutes a ``specific portion of 
all such amounts'' for the purpose of section 2056(b)(6). However, the 
interest in the proceeds passing to the surviving spouse will not be 
disqualified by the fact that the installment payments or interest to 
which the spouse is entitled or the amount of the proceeds over which 
the power of appointment is exercisable may be expressed in terms of a 
specific sum rather than a fraction or a percentage of the proceeds 
provided it is shown that such sums are a definite or fixed percentage 
or fraction of the total proceeds.
    (2) The provisions of paragraph (a) of this section are applicable 
with respect to a property interest which passed from the decedent in 
the form of proceeds of a policy of insurance upon the decedent's life, 
a policy of insurance upon the life of a person who predeceased the 
decedent, a matured endowment policy, or an annuity contract, but only 
in case the proceeds are to be held by the insurer. With respect to 
proceeds under any such contract which are to be held by a trustee, with 
power of appointment in the surviving spouse, see Sec. 20.2056(b)-5. As 
to the

[[Page 450]]

treatment of proceeds not meeting the requirements of Sec. 20.2056(b)-5 
or of this section, see Sec. 20.2056(a)-2.
    (3) In the case of a contract under which payments by the insurer 
commenced during the decedent's life, it is immaterial whether or not 
the conditions in subparagraphs (1) through (5) of paragraph (a) of this 
section were satisfied prior to the decedent's death.
    (d) Payments of installments or interest. The conditions in 
subparagraphs (1) and (2) of paragraph (a) of this section relative to 
the payments of installments or interest to the surviving spouse are 
satisfied if, under the terms of the contract, the spouse has the right 
exercisable annually (or more frequently) to require distribution to 
herself of installments of the proceeds or a specific portion thereof, 
as the case may be, and otherwise such proceeds or interest are to be 
accumulated and held by the insurer pursuant to the terms of the 
contract. A contract which otherwise requires the insurer to make annual 
or more frequent payments to the surviving spouse following the 
decedent's death, will not be disqualified merely because the surviving 
spouse must comply with certain formalities in order to obtain the first 
payment. For example, the contract may satisfy the conditions in 
subparagraphs (1) and (2) of paragraph (a) of this section even though 
it requires the surviving spouse to furnish proof of death before the 
first payment is made. The condition in paragraph (a)(1) of this section 
is satisfied where interest on the proceeds or a specific portion 
thereof is payable, annually or more frequently, for a term, or until 
the occurrence of a specified event, following which the proceeds or a 
specific portion thereof are to be paid in annual or more frequent 
installments.
    (e) Powers of appointment. (1) In determining whether the terms of 
the contract satisfy the conditions in subparagraph (3), (4), or (5) of 
paragraph (a) of this section relating to a power of appointment in the 
surviving spouse or any other person, the principles stated in Sec. 
20.2056(b)-5 are applicable. As stated in Sec. 20.2056(b)-5, the 
surviving spouse's power to appoint is ``exercisable in all events'' 
only if it is in existence immediately following the decedent's death, 
subject, however, to the operation of Sec. 20.2056(b)-3 relating to 
interests conditioned on survival for a limited period.
    (2) For examples of formal limitations on the power which will not 
disqualify the contract, see paragraph (g)(4) of Sec. 20.2056(b)-5. If 
the power is exercisable from the moment of the decedent's death, the 
contract is not disqualified merely because the insurer may require 
proof of the decedent's death as a condition to making payment to the 
appointee. If the submission of proof of the decedent's death is a 
condition to the exercise of the power, the power will not be considered 
``exercisable in all events'' unless in the event the surviving spouse 
had died immediately following the decedent, her power to appoint would 
have been considered to exist at the time of her death, within the 
meaning of section 2041(a)(2). See paragraph (b) of Sec. 20.2041-3.
    (3) It is sufficient for the purposes of the condition in paragraph 
(a)(3) of this section that the surviving spouse have the power to 
appoint amounts held by the insurer to herself or her estate if the 
surviving spouse has the unqualified power, exercisable in favor of 
herself or her estate, to appoint amounts held by the insurer which are 
payable after her death. Such power to appoint need not extend to 
installments or interest which will be paid to the spouse during her 
life. Further, the power to appoint need not be a power to require 
payment in a single sum. For example, if the proceeds of a policy are 
payable in installments, and if the surviving spouse has the power to 
direct that all installments payable after her death be paid to her 
estate, she has the requisite power.
    (4) It is not necessary that the phrase ``power to appoint'' be used 
in the contract. For example, the condition in paragraph (a)(3) of this 
section that the surviving spouse have the power to appoint amounts held 
by the insurer to herself or her estate is satisfied by terms of a 
contract which give the surviving spouse a right which is, in substance 
and effect, a power to appoint to herself or her estate, such as a right 
to withdraw the amount remaining in the fund held by the insurer, or a 
right to

[[Page 451]]

direct that any amount held by the insurer under the contract at her 
death shall be paid to her estate.



Sec. 20.2056(b)-7  Election with respect to life estate for surviving
spouse.

    (a) In general. Subject to section 2056(d), a marital deduction is 
allowed under section 2056(b)(7) with respect to estates of decedents 
dying after December 31, 1981, for qualified terminable interest 
property as defined in paragraph (b) of this section. All of the 
property for which a deduction is allowed under this paragraph (a) is 
treated as passing to the surviving spouse (for purposes of Sec. 
20.2056(a)-1), and no part of the property is treated as passing to any 
person other than the surviving spouse (for purposes of Sec. 
20.2056(b)-1).
    (b) Qualified terminable interest property--(1) In general. Section 
2056(b)(7)(B)(i) provides the definition of qualified terminable 
interest property.
    (i) Terminable interests described in section 2056(b)(1)(C) cannot 
qualify as qualified terminable interest property. Thus, if the decedent 
directs the executor to purchase a terminable interest with estate 
assets, the terminable interest acquired will not qualify as qualified 
terminable interest property.
    (ii) For purposes of section 2056(b)(7)(B)(i), the term property 
generally means the entire interest in property (within the meaning of 
Sec. 20.2056(b)-5(d)) or a specific portion of the entire interest 
(within the meaning of Sec. 20.2056(b)-5(c)).
    (2) Property for which an election may be made--(i) In general. The 
election may relate to all or any part of property that meets the 
requirements of section 2056(b)(7)(B)(i), provided that any partial 
election must be made with respect to a fractional or percentage share 
of the property so that the elective portion reflects its proportionate 
share of the increase or decrease in value of the entire property for 
purposes of applying sections 2044 or 2519. The fraction or percentage 
may be defined by formula.
    (ii) Division of trusts--(A) In general. A trust may be divided into 
separate trusts to reflect a partial election that has been made, or is 
to be made, if authorized under the governing instrument or otherwise 
permissible under local law. Any such division must be accomplished no 
later than the end of the period of estate administration. If, at the 
time of the filing of the estate tax return, the trust has not yet been 
divided, the intent to divide the trust must be unequivocally signified 
on the estate tax return.
    (B) Manner of dividing and funding trust. The division of the trust 
must be done on a fractional or percentage basis to reflect the partial 
election. However, the separate trusts do not have to be funded with a 
pro rata portion of each asset held by the undivided trust.
    (C) Local law. A trust may be divided only if the fiduciary is 
required, either by applicable local law or by the express or implied 
provisions of the governing instrument, to divide the trust on the basis 
of the fair market value of the assets of the trust at the time of the 
division.
    (3) Persons permitted to make the election. The election referred to 
in section 2056(b)(7)(B)(i)(III) must be made by the executor that is 
appointed, qualified, and acting within the United States, within the 
meaning of section 2203, regardless of whether the property with respect 
to which the election is to be made is in the executor's possession. If 
there is no executor appointed, qualified, and acting within the United 
States, the election may be made by any person with respect to property 
in the actual or constructive possession of that person and may also be 
made by that person with respect to other property not in the actual or 
constructive possession of that person if the person in actual or 
constructive possession of such other property does not make the 
election. For example, in the absence of an appointed executor, the 
trustee of an intervivos trust (that is included in the gross estate of 
the decedent) can make the election.
    (4) Manner and time of making the election--(i) In general. The 
election referred to in section 2056(b)(7)(B)(i)(III) and (v) is made on 
the return of tax imposed by section 2001 (or section 2101). For 
purposes of this paragraph, the term return of tax imposed by section 
2001 means the last estate tax return filed by the executor on or before 
the

[[Page 452]]

due date of the return, including extensions or, if a timely return is 
not filed, the first estate tax return filed by the executor after the 
due date.
    (ii) Election irrevocable. The election, once made, is irrevocable, 
provided that an election may be revoked or modified on a subsequent 
return filed on or before the due date of the return, including 
extensions actually granted. If an executor appointed under local law 
has made an election on the return of tax imposed by section 2001 (or 
section 2101) with respect to one or more properties, no subsequent 
election may be made with respect to other properties included in the 
gross estate after the return of tax imposed by section 2001 is filed. 
An election under section 2056(b)(7)(B)(v) is separate from any 
elections made under section 2056A(a)(3).
    (c) Protective elections--(1) In general. A protective election may 
be made to treat property as qualified terminable interest property only 
if, at the time the federal estate tax return is filed, the executor of 
the decedent's estate reasonably believes that there is a bona fide 
issue that concerns whether an asset is includible in the decedent's 
gross estate, or the amount or nature of the property the surviving 
spouse is entitled to receive, i.e., whether property that is includible 
is eligible for the qualified terminable interest property election. The 
protective election must identify either the specific asset, group of 
assets, or trust to which the election applies and the specific basis 
for the protective election.
    (2) Protective election irrevocable. The protective election, once 
made on the return of tax imposed by section 2001, cannot be revoked. 
For example, if a protective election is made on the basis that a bona 
fide question exists regarding the inclusion of a trust corpus in the 
gross estate and it is later determined that the trust corpus is so 
includible, the protective election becomes effective with respect to 
the trust corpus and cannot thereafter be revoked.
    (d) Qualifying income interest for life--(1) In general. Section 
2056(b)(7)(B)(ii) provides the definition of qualifying income interest 
for life. For purposes of section 2056(b)(7)(B)(ii)(II), the surviving 
spouse is included within the prohibited class of powerholders referred 
to therein. A power under applicable local law that permits the trustee 
to adjust between income and principal to fulfill the trustee's duty of 
impartiality between the income and remainder beneficiaries that meets 
the requirements of Sec. 1.643(b)-1 of this chapter will not be 
considered a power to appoint trust property to a person other than the 
surviving spouse.
    (2) Entitled for life to all income. The principles of Sec. 
20.2056(b)-5(f), relating to whether the spouse is entitled for life to 
all of the income from the entire interest, or a specific portion of the 
entire interest, apply in determining whether the surviving spouse is 
entitled for life to all of the income from the property regardless of 
whether the interest passing to the spouse is in trust.
    (3) Contingent income interests. (i) An income interest for a term 
of years, or a life estate subject to termination upon the occurrence of 
a specified event (e.g., remarriage), is not a qualifying income 
interest for life. However, a qualifying income interest for life that 
is contingent upon the executor's election under section 
2056(b)(7)(B)(v) will not fail to be a qualifying income interest for 
life because of such contingency or because the portion of the property 
for which the election is not made passes to or for the benefit of 
persons other than the surviving spouse. This paragraph (d)(3)(i) 
applies with respect to estates of decedents whose estate tax returns 
are due after February 18, 1997. This paragraph (d)(3)(i) also applies 
to estates of decedents whose estate tax returns were due on or before 
February 18, 1997, that meet the requirements of paragraph (d)(3)(ii) of 
this section.
    (ii) Estates of decedents whose estate tax returns were due on or 
before February 18, 1997, that did not make the election under section 
2056(b)(7)(B)(v) because the surviving spouse's income interest in the 
property was contingent upon the election or because the nonelected 
portion of the property was to pass to a beneficiary other than the 
surviving spouse are granted an extension of time to make the QTIP 
election

[[Page 453]]

if the following requirements are satisfied:
    (A) The period of limitations on filing a claim for credit or refund 
under section 6511(a) has not expired.
    (B) A claim for credit or refund is filed on Form 843 with a revised 
Recapitulation and Schedule M, Form 706 (or 706NA) that signifies the 
QTIP election. Reference to this section should be made on the Form 843.
    (C) The following statement is included with the Form 843: ``The 
undersigned certifies that the property with respect to which the QTIP 
election is being made will be included in the gross estate of the 
surviving spouse as provided in section 2044 of the Internal Revenue 
Code, in determining the federal estate tax liability on the spouse's 
death.'' The statement must be signed, under penalties of perjury, by 
the surviving spouse, the surviving spouse's legal representative (if 
the surviving spouse is legally incompetent), or the surviving spouse's 
executor (if the surviving spouse is deceased).
    (4) Income between last distribution date and date of spouse's 
death. An income interest does not fail to constitute a qualifying 
income interest for life solely because income between the last 
distribution date and the date of the surviving spouse's death is not 
required to be distributed to the surviving spouse or to the estate of 
the surviving spouse. See Sec. 20.2044-1 relating to the inclusion of 
such undistributed income in the gross estate of the surviving spouse.
    (5) Pooled income funds. An income interest in a pooled income fund 
described in section 642(c)(5) constitutes a qualifying income interest 
for life for purposes of section 2056(b)(7)(B)(ii).
    (6) Power to distribute principal to spouse. An income interest in a 
trust will not fail to constitute a qualifying income interest for life 
solely because the trustee has a power to distribute principal to or for 
the benefit of the surviving spouse. The fact that property distributed 
to a surviving spouse may be transferred by the spouse to another person 
does not result in a failure to satisfy the requirement of section 
2056(b)(7)(B)(ii)(II). However, if the surviving spouse is legally bound 
to transfer the distributed property to another person without full and 
adequate consideration in money or money's worth, the requirement of 
section 2056(b)(7)(B)(ii)(II) is not satisfied.
    (e) Annuities payable from trusts in the case of estates of 
decedents dying on or before October 24, 1992, and certain decedents 
dying after October 24, 1992, with wills or revocable trusts executed on 
or prior to that date--(1) In general. In the case of estates of 
decedents within the purview of the effective date and transitional 
rules contained in Sec. 20.2056(b)-7(e)(5), a surviving spouse's 
lifetime annuity interest payable from a trust or other group of assets 
passing from the decedent is treated as a qualifying income interest for 
life for purposes of section 2056(b)(7)(B)(ii).
    (2) Deductible interest. The deductible interest, for purposes of 
Sec. 20.2056(a)-2(b), is the specific portion of the property that, 
assuming the applicable interest rate for valuing annuities, would 
produce income equal to the minimum amount payable annually to the 
surviving spouse. If, based on the applicable interest rate, the entire 
property from which the annuity may be satisfied is insufficient to 
produce income equal to the minimum annual payment, the value of the 
deductible interest is the entire value of the property. The value of 
the deductible interest may not exceed the value of the property from 
which the annuity is payable. If the annual payment may increase, the 
increased amount is not taken into account in valuing the deductible 
interest.
    (3) Distributions permissible only to surviving spouse. An annuity 
interest is not treated as a qualifying income interest for life for 
purposes of section 2056(b)(7)(B)(ii) if any person other than the 
surviving spouse may receive, during the surviving spouse's lifetime, 
any distribution of the property or its income (including any 
distribution under an annuity contract) from which the annuity is 
payable.
    (4) Applicable interest rate. To determine the applicable interest 
rate for valuing annuities, see sections 2031 and 7520 and the 
regulations under those sections.

[[Page 454]]

    (5) Effective dates. (i) The rules contained in Sec. 20.2056(b)-
7(e) apply with respect to estates of decedents dying on or before 
October 24, 1992.
    (ii) The rules contained in Sec. 20.2056(b)-7(e) apply in the case 
of decedents dying after October 24, 1992, if property passes to the 
spouse pursuant to a will or revocable trust executed on or before 
October 24, 1992, and either--
    (A) On that date, the decedent was under a mental disability to 
change the disposition of his property and did not regain his competence 
to dispose of such property before the date of death; or
    (B) The decedent dies prior to October 24, 1995.
    (iii) Notwithstanding the foregoing, the rules contained in Sec. 
20.2056(b)-7(e) do not apply if the will or revocable trust is amended 
after October 24, 1992, in any respect that increases the amount of the 
transfer qualifying for the marital deduction or alters the terms by 
which the interest so passes to the surviving spouse.
    (f) Joint and survivor annuities. [Reserved]
    (g) Application of local law. The provisions of local law are taken 
into account in determining whether the conditions of section 
2056(b)(7)(B)(ii)(I) are satisfied. For example, silence of a trust 
instrument as to the frequency of payment is not regarded as a failure 
to satisfy the requirement that the income must be payable to the 
surviving spouse annually or more frequently unless applicable local law 
permits payments less frequently.
    (h) Examples. The following examples illustrate the application of 
paragraphs (a) through (g) of this section. In each example, it is 
assumed that the decedent, D, was survived by S, D's spouse and that, 
unless stated otherwise, S is not the trustee of any trust established 
for S's benefit.

    Example 1. Life estate in residence. D owned a personal residence 
valued at $250,000 for estate tax purposes. Under D's will, the 
exclusive and unrestricted right to use the residence (including the 
right to continue to occupy the property as a personal residence or to 
rent the property and receive the income) passes to S for life. At S's 
death, the property passes to D's children. Under applicable local law, 
S must consent to any sale of the property. If the executor elects to 
treat all of the personal residence as qualified terminable interest 
property, the deductible interest is $250,000, the value of the 
residence for estate tax purposes.
    Example 2. Power to make property productive. D's will established a 
trust funded with property valued for estate tax purposes at $500,000. 
The assets include both income producing assets and non-productive 
assets. S was given the power, exercisable annually, to require 
distribution of all of the trust income to herself. No trust property 
may be distributed during S's lifetime to any person other than S. 
Applicable local law permits S to require that the trustee either make 
the trust property productive or sell the property and reinvest in 
productive property within a reasonable time after D's death. If the 
executor elects to treat all of the trust as qualified terminable 
interest property, the deductible interest is $500,000. If the executor 
elects to treat only 20 percent of the trust as qualified terminable 
interest property, the deductible interest is $100,000, i.e., 20 percent 
of $500,000.
    Example 3. Power of distribution over fraction of trust income. The 
facts are the same as in Example 2 except that S is given the right 
exercisable annually for S's lifetime to require distribution to herself 
of only 50 percent of the trust income for life. The remaining trust 
income is to be accumulated or distributed among S and the decedent's 
children in the trustee's discretion. The maximum amount that D's 
executor may elect to treat as qualified terminable interest property is 
$250,000; i.e., the estate tax value of the trust ($500,000) multiplied 
by the percentage of the trust in which S has a qualifying income 
interest for life (50 percent). If D's executor elects to treat only 20 
percent of the portion of the trust in which S has a qualifying income 
interest as qualified terminable interest property, the deductible 
interest is $50,000, i.e., 20 percent of $250,000.
    Example 4. Power to distribute trust corpus to other beneficiaries. 
D's will established a trust providing that S is entitled to receive at 
least annually all the trust income. The trustee is given the power to 
use annually during S's lifetime $5,000 from the trust for the 
maintenance and support of S's minor child, C. Any such distribution 
does not necessarily relieve S of S's obligation to support and maintain 
C. S does not have a qualifying income interest for life in any portion 
of the trust because the bequest fails to satisfy the condition that no 
person have a power, other than a power the exercise of which takes 
effect only at or after S's death, to appoint any part of the property 
to any person other than S. The trust would also be nondeductible under 
section 2056(b)(7) if S, rather than the trustee, held the power to 
appoint a portion of the principal to C. However, in the latter case, if 
S made a qualified disclaimer (within the meaning of section 2518) of 
the

[[Page 455]]

power to appoint to C, the trust could qualify for the marital deduction 
pursuant to section 2056(b)(7), assuming that the power is personal to S 
and S's disclaimer terminates the power. Similarly, in either case, if C 
made a qualified disclaimer of C's right to receive distributions from 
the trust, the trust would qualify under section 2056(b)(7), assuming 
that C's disclaimer effectively negates the trustee's power under local 
law.
    Example 5. Spouse's income interest terminable on remarriage. D's 
will established a trust providing that all of the trust income is 
payable at least annually to S for S's lifetime, provided that, if S 
remarries, S's interest in the trust will pass to X. The trust is not 
deductible under section 2056(b)(7). S's income interest is not a 
qualifying income interest for life because it is not for life but, 
rather, is terminable upon S's remarriage.
    Example 6. Spouse's qualifying income interest for life contingent 
on executor's election. D's will established a trust providing that S is 
entitled to receive the income, payable at least annually, from that 
portion of the trust that the executor elects to treat as qualified 
terminable interest property. The portion of the trust which the 
executor does not elect to treat as qualified terminable interest 
property passes as of D's date of death to a trust for the benefit of C, 
D's child. Under these facts, the executor is not considered to have a 
power to appoint any part of the trust property to any person other than 
S during S's life.
    Example 7. Formula partial election. D's will established a trust 
funded with the residue of D's estate. Trust income is to be paid 
annually to S for life, and the principal is to be distributed to D's 
children upon S's death. S has the power to require that all the trust 
property be made productive. There is no power to distribute trust 
property during S's lifetime to any person other than S. D's executor 
elects to deduct a fractional share of the residuary estate under 
section 2056(b)(7). The election specifies that the numerator of the 
fraction is the amount of deduction necessary to reduce the Federal 
estate tax to zero (taking into account final estate tax values) and the 
denominator of the fraction is the final estate tax value of the 
residuary estate (taking into account any specific bequests or 
liabilities of the estate paid out of the residuary estate). The formula 
election is of a fractional share. The value of the share qualifies for 
the marital deduction even though the executor's determinations to claim 
administration expenses as estate or income tax deductions and the final 
estate tax values will affect the size of the fractional share.
    Example 8. Formula partial election. The facts are the same as in 
Example 7 except that, rather than defining a fraction, the executor's 
formula states: ``I elect to treat as qualified terminable interest 
property that portion of the residuary trust, up to 100 percent, 
necessary to reduce the Federal estate tax to zero, after taking into 
account the available unified credit, final estate tax values and any 
liabilities and specific bequests paid from the residuary estate.'' The 
formula election is of a fractional share. The share is equivalent to 
the fractional share determined in Example 7.
    Example 9. Severance of QTIP trust. D's will established a trust 
funded with the residue of D's estate. Trust income is to be paid 
annually to S for life, and the principal is to be distributed to D's 
children upon S's death. S has the power to require that all of the 
trust property be made productive. There is no power to distribute trust 
property during S's lifetime to any person other than S. D's will 
authorizes the executor to make the election under section 2056(b)(7) 
only with respect to the minimum amount of property necessary to reduce 
estate taxes on D's estate to zero, authorizes the executor to divide 
the residuary estate into two separate trusts to reflect the election, 
and authorizes the executor to charge any payment of principal to S to 
the qualified terminable interest trust. S is the sole beneficiary of 
both trusts during S's lifetime. The authorizations in the will do not 
adversely affect the allowance of the marital deduction. Only the 
property remaining in the marital deduction trust, after payment of 
principal to S, is subject to inclusion in S's gross estate under 
section 2044 or subject to gift tax under section 2519.
    Example 10. Payments to spouse from individual retirement account. S 
is the life beneficiary of sixteen remaining annual installments payable 
from D's individual retirement account. The terms of the account provide 
for the payment of the account balance in nineteen annual installments 
that commenced when D reached age 70\1/2\. Each installment is equal to 
all the income earned on the remaining principal in the account plus a 
share of the remaining principal equal to \1/19\ in the first year, \1/
18\ in the second year, \1/17\ in the third year, etc. Under the terms 
of the account, S has no right to withdraw any other amounts from the 
account. Any payments remaining after S's death pass to D's children. 
S's interest in the account qualifies as a qualifying income interest 
for life under section 2056(b)(7)(B)(ii), without regard to the 
provisions of section 2056(b)(7)(C).
    Example 11. Spouse's interest in trust in the form of an annuity. D 
died prior to October 24, 1992. D's will established a trust funded with 
income producing property valued at $500,000 for estate tax purposes. 
The trustee is required by the trust instrument to pay $20,000 a year to 
S for life. Trust income in excess of the annuity amount is to be 
accumulated in the trust and may not be distributed during S's lifetime. 
S's lifetime annuity interest is treated as a qualifying income interest 
for life. If the executor elects to treat the entire

[[Page 456]]

portion of the trust in which S has a qualifying income interest as 
qualified terminable interest property, the value of the deductible 
interest is (assuming that 10 percent is the applicable interest rate 
under section 7520 for valuing annuities on the appropriate valuation 
date) $200,000, because that amount would yield an income to S of 
$20,000 a year.
    Example 12. Value of spouse's annuity exceeds value of trust corpus. 
The facts are the same as in Example 11 except that the trustee is 
required to pay S $70,000 a year for life. If the executor elects to 
treat the entire portion of the trust in which S has a qualifying income 
interest as qualified terminable interest property, the value of the 
deductible interest is $500,000, which is the lesser of the entire value 
of the property ($500,000), or the amount of property that (assuming a 
10 percent interest rate) would yield an income to S of $70,000 a year 
($700,000).
    Example 13. Pooled income fund. D's will provides for a bequest of 
$200,000 to a pooled income fund described in section 642(c)(5), 
designating S as the income beneficiary for life. If D's executor elects 
to treat the entire $200,000 as qualified terminable interest property, 
the deductible interest is $200,000.
    Example 14. Funding severed QTIP trusts. D's will established a 
trust satisfying the requirements of section 2056(b)(7). Pursuant to the 
authority in D's will and Sec. 20.2056(b)-7(b)(2)(ii), D's executor 
indicates on the Federal estate tax return that an election under 
section 2056(b)(7) is being made with respect to 50 percent of the 
trust, and that the trust will subsequently be divided to reflect the 
partial election on the basis of the fair market value of the property 
at the time of the division. D's executor funds the trust at the end of 
the period of estate administration. At that time, the property 
available to fund the trusts consists of 100 shares of X Corporation 
stock with a current value of $400,000 and 200 shares of Y Corporation 
stock with a current value of $400,000. D may fund each trust with the 
stock of either or both corporations, in any combination, provided that 
the aggregate value of the stock allocated to each trust is $400,000.

[T.D. 8522, 59 FR 9651, Mar. 1, 1994, as amended by T.D. 8779, 63 FR 
44393, Aug. 19, 1998; T.D. 9102, 69 FR 21, Jan. 2, 2004]



Sec. 20.2056(b)-8  Special rule for charitable remainder trusts.

    (a) In general--(1) Surviving spouse only noncharitable beneficiary. 
With respect to estates of decedents dying after December 31, 1981, 
subject to section 2056(d), if the surviving spouse of the decedent is 
the only noncharitable beneficiary of a charitable remainder annuity 
trust or a charitable remainder unitrust described in section 664 
(qualified charitable remainder trust), section 2056(b)(1) does not 
apply to the interest in the trust that is transferred to the surviving 
spouse. Thus, the value of the annuity or unitrust interest passing to 
the spouse qualifies for a marital deduction under section 2056(b)(8) 
and the value of the remainder interest qualifies for a charitable 
deduction under section 2055. If an interest in property qualifies for a 
marital deduction under section 2056(b)(8), no election may be made with 
respect to the property under section 2056(b)(7). For purposes of this 
section, the term non-charitable beneficiary means any beneficiary of 
the qualified charitable remainder trust other than an organization 
described in section 170(c).
    (2) Interest for life or term of years. The surviving spouse's 
interest need not be an interest for life to qualify for a marital 
deduction under section 2056(b)(8). However, for purposes of section 
664, an annuity or unitrust interest payable to the spouse for a term of 
years cannot be payable for a term that exceeds 20 years.
    (3) Payment of state death taxes. A deduction is allowed under 
section 2056(b)(8) even if the transfer to the surviving spouse is 
conditioned on the spouse's payment of state death taxes, if any, 
attributable to the qualified charitable remainder trust. See Sec. 
20.2056(b)-4(c) for the effect of such a condition on the amount of the 
deduction allowable.
    (b) Charitable remainder trusts where the surviving spouse is not 
the only noncharitable beneficiary. In the case of a charitable 
remainder trust where the decedent's spouse is not the only 
noncharitable beneficiary (for example, where the noncharitable interest 
is payable to the decedent's spouse for life and then to another 
individual for life), the qualification of the interest as qualified 
terminable interest property is determined solely under section 
2056(b)(7) and not under section 2056(b)(8). Accordingly, if the 
decedent died on or before October 24, 1992, or the trust otherwise 
comes within the purview of the transitional rules contained in Sec. 
20.2056(b)-7(e)(5), the spousal

[[Page 457]]

annuity or unitrust interest may qualify under Sec. 20.2056(b)-(7)(e) 
as a qualifying income interest for life.

[T.D. 8522, 59 FR 9653, Mar. 1, 1994]



Sec. 20.2056(b)-9  Denial of double deduction.

    The value of an interest in property may not be deducted for Federal 
estate tax purposes more than once with respect to the same decedent. 
For example, where a decedent transfers a life estate in a farm to the 
spouse with a remainder to charity, the entire property is, pursuant to 
the executor's election under section 2056(b)(7), treated as passing to 
the spouse. The entire value of the property qualifies for the marital 
deduction. No part of the value of the property qualifies for a 
charitable deduction under section 2055 in the decedent's estate.

[T.D. 8522, 59 FR 9654, Mar. 1, 1994]



Sec. 20.2056(b)-10  Effective dates.

    Except as specifically provided in Sec. Sec. 20.2056(b)-5(c)(3) 
(ii) and (iii), 20.2056(b)-7(d)(3), 20.2056(b)-7(e)(5), and 20.2056(b)-
8(b), the provisions of Sec. Sec. 20.2056(b)-5(c), 20.2056(b)-7, 
20.2056(b)-8, and 20.2056(b)-9 are applicable with respect to estates of 
decedents dying after March 1, 1994. With respect to decedents dying on 
or before such date, the executor of the decedent's estate may rely on 
any reasonable interpretation of the statutory provisions. In addition, 
the rule in the last sentence of Sec. 20.2056(b)-5(f)(1) and the rule 
in the last sentence of Sec. 20.2056(b)-7(d)(1) regarding the effect on 
the spouse's right to income if applicable local law provides for the 
reasonable apportionment between the income and remainder beneficiaries 
of the total return of the trust are applicable with respect to trusts 
for taxable years ending after January 2, 2004.

[T.D. 8779, 63 FR 44393, Aug. 19, 1998, as amended by T.D. 9102, 69 FR 
21, Jan. 2, 2004]



Sec. 20.2056(c)-1  Marital deduction; definition of ``passed from the
decedent.''

    (a) In general. The following rules are applicable in determining 
the person to whom any property interest ``passed from the decedent'':
    (1) Property interests devolving upon any person (or persons) as 
surviving coowner with the decedent under any form of joint ownership 
under which the right of survivorship existed are considered as having 
passed from the decedent to such person (or persons).
    (2) Property interests at any time subject to the decedent's power 
to appoint (whether alone or in conjunction with any person) are 
considered as having passed from the decedent to the appointee under his 
exercise of the power, or, in case of the lapse, release or nonexercise 
of the power, as having passed from the decedent to the taker in default 
of exercise.
    (3) The dower or curtesy interest (or statutory interest in lieu 
thereof) of the decedent's surviving spouse is considered as having 
passed from the decedent to his spouse.
    (4) The proceeds of insurance upon the life of the decedent are 
considered as having passed from the decedent to the person who, at the 
time of the decedent's death, was entitled to receive the proceeds.
    (5) Any property interest transferred during life, bequeathed or 
devised by the decedent, or inherited from the decedent, is considered 
as having passed to the person to whom he transferred, bequeathed, or 
devised the interest, or to the person who inherited the interest from 
him.
    (6) The survivor's interest in an annuity or other payment described 
in section 2039 (see Sec. Sec. 20.2039-1 and 20.2039-2) is considered 
as having passed from the decedent to the survivor only to the extent 
that the value of such interest is included in the decedent's gross 
estate under that section. If only a portion of the entire annuity or 
other payment is included in the decedent's gross estate and the annuity 
or other payment is payable to more than one beneficiary, then the value 
of the interest considered to have passed to each beneficiary is that 
portion of the amount payable to each beneficiary that the amount of the 
annuity or other payment included in the decedent's gross estate bears 
to the total value of the annuity or other payment payable to all 
beneficiaries.
    (b) Expectant interest in property under community property laws. If 
before the

[[Page 458]]

decedent's death the decedent's surviving spouse had merely an expectant 
interest in property held by her and the decedent under community 
property laws, that interest is considered as having passed from the 
decedent to the spouse.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960. 
Redesignated and amended by T.D. 8522, 59 FR 9654, Mar. 1, 1994]



Sec. 20.2056(c)-2  Marital deduction; definition of ``passed from the
decedent to his surviving spouse.''

    (a) In general. In general, the definition stated in Sec. 
20.2056(c)-1 is applicable in determining the property interests which 
``passed from the decedent to his surviving spouse''. Special rules are 
provided, however, for the following:
    (1) In the case of certain interests with income for life to the 
surviving spouse with power of appointment in her (see Sec. 20.2056(b)-
5);
    (2) In the case of certain interests with income for life to the 
surviving spouse that the executor elects to treat as qualified 
terminable interest property (see Sec. 20.2056(b)-7);
    (3) In the case of proceeds held by the insurer under a life 
insurance, endowment, or annuity contract with power of appointment in 
the surviving spouse (see Sec. 20.2056(b)-6);
    (4) In case of the disclaimer of an interest by the surviving spouse 
or by any other person (see Sec. 20.2056(d)-1);
    (5) In case of an election by the surviving spouse (see paragraph 
(c) of this section); and
    (6) In case of a controversy involving the decedent's will, see 
paragraph (d) of this section.

A property interest is treated as passing to the surviving spouse only 
if it passes to the spouse as beneficial owner, except to the extent 
otherwise provided in Sec. Sec. 20.2056(b)-5 through 20.2056(b)-7. For 
this purpose, where a property interest passed from the decedent in 
trust, such interest is considered to have passed from him to his 
surviving spouse to the extent of her beneficial interest therein. The 
deduction may not be taken with respect to a property interest which 
passed to such spouse merely as trustee, or subject to a binding 
agreement by the spouse to dispose of the interest in favor of a third 
person. An allowance or award paid to a surviving spouse pursuant to 
local law for her support during the administration of the decedent's 
estate constitutes a property interest passing from the decedent to his 
surviving spouse. In determining whether or not such an interest is 
deductible, however, see generally the terminable interest rules of 
Sec. 20.2056(b)-1 and especially example (8) of paragraph (g) of that 
section.
    (b) Examples. The following illustrate the provisions of paragraph 
(a) of this section:
    (1) A property interest bequeathed in trust by H (the decedent) is 
considered as having passed from him to W (his surviving spouse)--
    (i) If the trust income is payable to W for life and upon her death 
the corpus is distributable to her executors or administrators;
    (ii) If W is entitled to the trust income for a term of years 
following which the corpus is to be paid to W or her estate;
    (iii) If the trust income is to be accumulated for a term of years 
or for W's life and the augmented fund paid to W or her estate; or
    (iv) If the terms of the transfer satisfy the requirements of Sec. 
20.2056(b)-5 or Sec. 20.2056(b)-7.
    (2) If H devised property--
    (i) To A for life with remainder absolutely to W or her estate, the 
remainder interest is considered to have passed from H to W;
    (ii) To W for life with remainder to her estate, the entire property 
is considered as having passed from H to W; or
    (iii) Under conditions which satisfy the provisions of Sec. 
20.2056(b)-5 or 20.2056(b)-7, the entire property is considered as 
having passed from H to W.
    (3) Proceeds of insurance upon the life of H are considered as 
having passed from H to W if the terms of the contract--
    (i) Meet the requirements of Sec. 20.2056(b)-6;
    (ii) Provide that the proceeds are payable to W in a lump sum;
    (iii) Provide that the proceeds are payable in installments to W for 
life and after her death any remaining installments are payable to her 
estate;

[[Page 459]]

    (iv) Provide that interest on the proceeds is payable to W for life 
and upon her death the principal amount is payable to her estate; or
    (v) Provide that the proceeds are payable to a trustee under an 
arrangement whereby the requirements of Sec. 20.2056(b)-5 or 
20.2056(b)-7 are satisfied.
    (c) Effect of election by surviving spouse. This paragraph contains 
rules applicable if the surviving spouse may elect between a property 
interest offered to her under the decedent's will or other instrument 
and a property interest to which she is otherwise entitled (such as 
dower, a right in the decedent's estate, or her interest under community 
property laws) of which adverse disposition was attempted by the 
decedent under the will or other instrument. If the surviving spouse 
elects to take against the will or other instrument, then the property 
interests offered thereunder are not considered as having ``passed from 
the decedent to his surviving spouse'' and the dower or other property 
interest retained by her is considered as having so passed (if it 
otherwise so qualifies under this section). If the surviving spouse 
elects to take under the will or other instrument, then the dower or 
other property interest relinquished by her is not considered as having 
``passed from the decedent to his surviving spouse'' (irrespective of 
whether it otherwise comes within the definition stated in paragraph (a) 
of this section) and the interest taken under the will or other 
instrument is considered as having so passed (if it otherwise so 
qualifies). As to the valuation of the property interest taken under the 
will or other instrument, see paragraph (b) of Sec. 20.2056(b)-4.
    (d) Will contests. (1) If as a result of a controversy involving the 
decedent's will, or involving any bequest or devise thereunder, his 
surviving spouse assigns or surrenders a property interest in settlement 
of the controversy, the interest so assigned or surrendered is not 
considered as having ``passed from the decedent to his surviving 
spouse.''
    (2) If as a result of the controversy involving the decedent's will, 
or involving any bequest or devise thereunder, a property interest is 
assigned or surrendered to the surviving spouse, the interest so 
acquired will be regarded as having ``passed from the decedent to his 
surviving spouse'' only if the assignment or surrender as a bona fide 
recognition of enforceable rights of the surviving spouse in the 
decedent's estate. Such a bona fide recognition will be presumed where 
the assignment or surrender was pursuant to a decision of a local court 
upon the merits in an adversary proceeding following a genuine and 
active contest. However, such a decree will be accepted only to the 
extent that the court passed upon the facts upon which deductibility of 
the property interest depends. If the assignment or surrender was 
pursuant to a decree rendered by consent, or pursuant to an agreement 
not to contest the will or not to probate the will, it will not 
necessarily be accepted as a bona fide evaluation of the rights of the 
spouse.
    (e) Survivorship. If the order of deaths of the decedent and his 
spouse cannot be established by proof, a presumption (whether supplied 
by local law, the decedent's will, or otherwise) that the decedent was 
survived by his spouse will be recognized as satisfying paragraph (b)(1) 
of Sec. 20.2056(a)-1, but only to the extent that it has the effect of 
giving to the spouse an interest in property includible in her gross 
estate under Part III of Subchapter A of Chapter 11. Under these 
circumstances, if an estate tax return is required to be filed for the 
estate of the decedent's spouse, the marital deduction will not be 
allowed in the final audit of the estate tax return of the decedent's 
estate with respect to any property interest which has not been finally 
determined to be includible in the gross estate of his spouse.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960. 
Redesignated and amended by T.D. 8522, 59 FR 9654, Mar. 1, 1994]



Sec. 20.2056(c)-3  Marital deduction; definition of ``passed from the
decedent to a person other than his surviving spouse''.

    The expression ``passed from the decedent to a person other than his 
surviving spouse'' refers to any property interest which, under the 
definition stated in Sec. 20.2056(c)-1 is considered as

[[Page 460]]

having ``passed from the decedent'' and which under the rules referred 
to in Sec. 20.2056(c)-2 is not considered as having ``passed from the 
decedent to his surviving spouse.'' Interests which passed to a person 
other than the surviving spouse include interests so passing under the 
decedent's exercise, release, or nonexercise of a nontaxable power to 
appoint. It is immaterial whether the property interest which passed 
from the decedent to a person other than his surviving spouse is 
included in the decedent's gross estate. The term ``person other than 
his surviving spouse'' includes the possible unascertained takers of a 
property interest, as, for example, the members of a class to be 
ascertained in the future. As another example, assume that the decedent 
created a power of appointment over a property interest, which does not 
come within the purview of Sec. 20.2056(b)-5 or Sec. 20.2056(b)-6. In 
such a case, the term ``person other than his surviving spouse'' refers 
to the possible appointees and possible takers in default (other than 
the spouse) of such property interest. Whether or not there is a 
possibility that the ``person other than his surviving spouse'' (or the 
heirs or assigns of such person) may possess or enjoy the property 
following termination or failure of the interest therein which passed 
from the decedent to his surviving spouse is to be determined as of the 
time of the decedent's death.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960. 
Redesignated and amended by T.D. 8522, 59 FR 9654, Mar. 1, 1994]



Sec. 20.2056(d)-1  Marital deduction; special rules for marital 
deduction if surviving spouse is not a United States citizen.

    Rules pertaining to the application of section 2056(d), including 
certain transition rules, are contained in Sec. Sec. 20.2056A-1 through 
20.2056A-13.

[T.D. 8612, 60 FR 43538, Aug. 22, 1995]



Sec. 20.2056(d)-2  Marital deduction; effect of disclaimers of 
post-December 31, 1976 transfers.

    (a) Disclaimer by a surviving spouse. If a surviving spouse 
disclaims an interest in property passing to such spouse from the 
decedent, which interest was created in a transfer made after December 
31, 1976, the effectiveness of the disclaimer will be determined by 
section 2518 and the corresponding regulations. For rules relating to 
when the transfer creating the interest occurs, see Sec. 25.2518-
2(c)(3) and (c)(4) of this chapter. If a qualified disclaimer is 
determined to have been made by the surviving spouse, the property 
interest disclaimed is treated as if such interest had never been 
transferred to the surviving spouse.
    (b) Disclaimer by a person other than a surviving spouse. If an 
interest in property passes from a decedent to a person other than the 
surviving spouse, and the interest is created in a transfer made after 
December 31, 1976, and--
    (1) The person other than the surviving spouse makes a qualified 
disclaimer with respect to such interest; and
    (2) The surviving spouse is entitled to such interest in property as 
a result of such disclaimer, the disclaimed interest is treated as 
passing directly from the decedent to the surviving spouse. For rules 
relating to when the transfer creating the interest occurs, see Sec. 
25.2518-2(c)(3) and (c)(4) of this chapter.
    (c) Effective date. The first and second sentences of paragraphs (a) 
and (b) of this section are applicable for transfers creating the 
interest to be disclaimed made on or after December 31, 1997.

[T.D. 8095, 51 FR 28368, Aug. 7, 1986. Redesignated by T.D. 8612, 60 FR 
43538, Aug. 22, 1995, as amended by T.D. 8744, 62 FR 68184, Dec. 31, 
1997]



Sec. 20.2056(d)-3  Marital deduction; effect of disclaimers of 
pre-January 1, 1977 transfers.

    (a) Disclaimer by a surviving spouse. If an interest in property 
passes to a decedent's surviving spouse in a taxable transfer made by a 
decedent dying before January 1, 1977, and the decedent's surviving 
spouse makes a disclaimer of this property interest the disclaimed 
interest is considered as passing from the decedent to the person or 
persons entitled to receive the interest as a result of the disclaimer. 
A disclaimer is a complete and unqualified refusal to accept the rights 
to which one is entitled. It is, therefore, necessary to distinguish 
between the surviving spouse's

[[Page 461]]

disclaimer of a property interest and such surviving spouse's acceptance 
and subsequent disposal of a property interest. For example, if proceeds 
of insurance are payable to the surviving spouse and the proceeds are 
refused so that they consequently pass to an alternate beneficiary 
designated by the decedent, the proceeds are considered as having passed 
from the decedent to the alternate beneficiary. On the other hand, if 
the insurance company is directed by the surviving spouse to hold the 
proceeds at interest during such spouse's life and, upon this spouse's 
death, to pay the principal sum to another person designated by the 
surviving spouse, thus effecting a transfer of a remainder interest, the 
proceeds are considered as having passed from the decedent to the 
surviving spouse. See paragraph (c) of Sec. 20.2056(e)-2 with respect 
to a spouse's exercise or failure to exercise a right to take against a 
decedent's will.
    (b) Disclaimer by a person other than a surviving spouse--(1) 
Decedents dying after October 3, 1966 and before January 1, 1977. This 
paragraph (b)(1) applies in the case of a disclaimer of property passing 
to one other than the surviving spouse from a decedent dying after 
October 3, 1966 and before January 1, 1977. If a surviving spouse is 
entitled to receive property from the decedent as a result of the timely 
disclaimer made by the disclaimant, the property received by the 
surviving spouse is to be treated as passing to the surviving spouse 
from the decedent. Both a disclaimer of property passing by the laws of 
intestacy or otherwise, as by insurance or by trust, and a disclaimer of 
bequests and devises under the will of a decedent are to be fully 
effective for purposes of computing the marital deduction under section 
2056. A disclaimer is a complete and unqualified refusal to accept some 
or all of the rights to which one is entitled. It must be a valid 
refusal under State law and must be made without consideration. For 
example, a disclaimer for the benefit of a surviving spouse who promises 
to give or bequeath property to a child of the person who disclaims is 
not a disclaimer within the meaning of this paragraph (b)(1). The 
disclaimer must be made before the person disclaiming accepts any 
property under the disclaimed interest. In the case of property 
transferred by a decedent dying after December 31, 1970, and before 
January 1, 1977, the disclaimer must be made within 9 months after the 
decedent's death (or within any extension of time for filing the estate 
tax return granted pursuant to section 6081). In the case of property 
transferred by a decedent dying after October 3, 1966, and before 
January 1, 1971, the disclaimer must be made within 15 months after the 
decedent's death (or within any extension of time for filing the estate 
tax return granted pursuant to section 6081). If the disclaimer does not 
satisfy the requirements of this paragraph (b)(1), for the purpose of 
the marital deduction, the property is considered as passing from the 
decedent to the person who made the disclaimer as if the disclaimer had 
not been made.
    (2) Decedents dying after September 30, 1963 and before October 4, 
1966. This paragraph (b)(2) applies in the case of a disclaimer of 
property passing to one other than the surviving spouse from a decedent 
dying after September 30, 1963 and before October 4, 1966. If, as a 
result of the disclaimer by the disclaimant, the surviving spouse is 
entitled to receive the disclaimed property interest, then such interest 
shall, for the purposes of this paragraph (b)(2), be considered as 
passing from the decedent to the surviving spouse if the following 
conditions are met. First, the interest disclaimed was bequeathed or 
devised to the disclaimant. Second, the disclaimant disclaimed all 
bequests and devises under the will before the date prescribed for the 
filing of the estate tax return. Third, the disclaimant did not accept 
any property under the bequest or devise before making the disclaimer.

The interests passing by disclaimer to the surviving spouse under this 
paragraph (b)(2) are to qualify for the marital deduction only to the 
extent that, when added to any other allowable marital deduction without 
regard to this paragraph (b)(2), they do not exceed the greater of the 
deductions which would be allowable for the marital deduction without 
regard to the disclaimer if the surviving spouse exercised the election 
under State law to

[[Page 462]]

take against the will, or an amount equal to one-third of the decedent's 
adjusted gross estate. If the disclaimer does not satisfy the 
requirements of this paragraph (b)(2), the property is treated as 
passing from the decedent to the person who made the disclaimer, in the 
same manner as if the disclaimer had not been made.
    (3) Decedents dying before October 4, 1966. Unless the rule of 
paragraph (b)(2) of this section applies, this paragraph (b)(3) applies 
in the case of a disclaimer of property passing to one other than the 
surviving spouse from a decedent dying before October 4, 1966. For the 
purpose of these transfers, it is unnecessary to distinguish for the 
purpose of the marital deduction between a disclaimer by a person other 
than the surviving spouse and a transfer by such person. If the 
surviving spouse becomes entitled to receive an interest in property 
from the decedent as a result of a disclaimer made by some other person, 
the interest is, nevertheless, considered as having passed from the 
decedent, not to the surviving spouse, but to the person who made the 
disclaimer, as though the disclaimer had not been made. If, as a result 
of a disclaimer made by a person other than the surviving spouse, a 
property interest passes to the surviving spouse under circumstances 
which meet the conditions set forth in Sec. 20.2056(b)-5 (relating to a 
life estate with a power of appointment), the rule stated in the 
preceding sentence applies, not only with respect to the portion of the 
interest which beneficially vests in the surviving spouse, but also with 
respect to the portion over which such spouse acquires a power to 
appoint. The rule applies also in the case of proceeds under a life 
insurance, endowment, or annuity contract which, as a result of a 
disclaimer made by a person other than the surviving spouse, are held by 
the insurer subject to the conditions set forth in Sec. 20.2056(b)-6.

[T.D. 8095, 51 FR 28368, Aug. 7, 1986. Redesignated by T.D. 8612, 60 FR 
43538, Aug. 22, 1995]



Sec. 20.2056A-0  Table of contents.

    This section lists the captions that appear in the final regulations 
under Sec. Sec. 20.2056A-1 through 20.2056A-13.

Sec. 20.2056A-1 Restrictions on allowance of marital deduction if 
surviving spouse is not a United States citizen.
    (a) General rule.
    (b) Marital deduction allowed if resident spouse becomes citizen.
    (c) Special rules in the case of certain transfers subject to estate 
and gift tax treaties.
Sec. 20.2056A-2 Requirements for qualified domestic trust.
    (a) In general.
    (b) Qualified marital interest requirements.
    (1) Property passing to QDOT.
    (2) Property passing outright to spouse.
    (3) Property passing under a nontransferable plan or arrangement.
    (c) Statutory requirements.
    (d) Additional requirements to ensure collection of the section 
2056A estate tax.
    (1) Security and other arrangements for payment of estate tax 
imposed under section 2056A(b)(1).
    (2) Individual trustees.
    (3) Annual reporting requirements.
    (4) Request for alternate arrangement or waiver.
    (5) Adjustment of dollar threshold and exclusion.
    (6) Effective date and special rules.
Sec. 20.2056A-3 QDOT election.
    (a) General rule.
    (b) No partial elections.
    (c) Protective elections.
    (d) Manner of election.
Sec. 20.2056A-4 Procedures for conforming marital trusts and nontrust 
marital transfers to the requirements of a qualified domestic trust.
    (a) Marital trusts.
    (1) In general.
    (2) Judicial reformations.
    (3) Tolling of statutory assessment period.
    (b) Nontrust marital transfers.
    (1) In general.
    (2) Form of transfer or assignment.
    (3) Assets eligible for transfer or assignment.
    (4) Pecuniary assignment--special rules.
    (5) Transfer tax treatment of transfer or assignment.
    (6) Period for completion of transfer.
    (7) Retirement accounts and annuities.
    (8) Protective assignment.
    (c) Nonassignable annuities and other arrangements.
    (1) Definition and general rule.
    (2) Agreement to remit section 2056A estate tax on corpus portion of 
each annuity payment.
    (3) Agreement to roll over corpus portion of annuity payment to 
QDOT.
    (4) Determination of corpus portion.
    (5) Information Statement.
    (6) Agreement to pay section 2056A estate tax.

[[Page 463]]

    (7) Agreement to roll over annuity payments.
    (d) Examples.
Sec. 20.2056A-5 Imposition of section 2056A estate tax.
    (a) In general.
    (b) Amounts subject to tax.
    (1) Distribution of principal during the spouse's lifetime.
    (2) Death of surviving spouse.
    (3) Trust ceases to qualify as QDOT.
    (c) Distributions and dispositions not subject to tax.
    (1) Distributions of principal on account of hardship.
    (2) Distributions of income to the surviving spouse.
    (3) Certain miscellaneous distributions and dispositions.
Sec. 20.2056A-6 Amount of tax.
    (a) Definition of tax.
    (b) Benefits allowed in determining amount of section 2056A estate 
tax.
    (1) General rule.
    (2) Treatment as resident.
    (3) Special rule in the case of trusts described in section 
2056(b)(8).
    (4) Credit for state and foreign death taxes.
    (5) Alternate valuation and special use valuation.
    (c) Miscellaneous rules.
    (d) Examples.
Sec. 20.2056A-7 Allowance of prior transfer credit under section 2013.
    (a) Property subject to QDOT election.
    (b) Property not subject to QDOT election.
    (c) Example.
Sec. 20.2056A-8 Special rules for joint property.
    (a) Inclusion in gross estate.
    (1) General rule.
    (2) Consideration furnished by surviving spouse.
    (3) Amount allowed to be transferred to QDOT.
    (b) Surviving spouse becomes citizen.
    (c) Examples.
Sec. 20.2056A-9 Designated Filer.
Sec. 20.2056A-10 Surviving spouse becomes citizen after QDOT 
established.
    (a) Section 2056A estate tax no longer imposed under certain 
circumstances.
    (b) Special election by spouse.
Sec. 20.2056A-11 Filing requirements and payment of the section 2056A 
estate tax.
    (a) Distributions during surviving spouse's life.
    (b) Tax at death of surviving spouse.
    (c) Extension of time for paying section 2056A estate tax.
    (1) Extension of time for paying tax under section 6161(a)(2).
    (2) Extension of time for paying tax under section 6161(a)(1).
    (d) Liability for tax.
Sec. 20.2056A-12 Increased basis for section 2056A estate tax paid with 
respect to distribution from a QDOT.
Sec. 20.2056A-13 Effective date.

[T.D. 8612, 60 FR 43538, Aug. 22, 1995, as amended by T.D. 8686, 61 FR 
60553, Nov. 29, 1996]



Sec. 20.2056A-1  Restrictions on allowance of marital deduction if 
surviving spouse is not a United States citizen.

    (a) General rule. Subject to the special rules provided in section 
7815(d)(14) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 
101-239; 103 Stat. 2106), in the case of a decedent dying after November 
10, 1988, the federal estate tax marital deduction is not allowed for 
property passing to or for the benefit of a surviving spouse who is not 
a United States citizen at the date of the decedent's death (whether or 
not the surviving spouse is a resident of the United States) unless--
    (1) The property passes from the decedent to (or pursuant to)--
    (i) A qualified domestic trust (QDOT) described in section 2056A and 
Sec. 20.2056A-2;
    (ii) A trust that, although not meeting all of the requirements for 
a QDOT, is reformed after the decedent's death to meet the requirements 
of a QDOT (see Sec. 20.2056A-4(a));
    (iii) The surviving spouse not in trust (e.g., by outright bequest 
or devise, by operation of law, or pursuant to the terms of an annuity 
or other similar plan or arrangement) and, prior to the date that the 
estate tax return is filed and on or before the last date prescribed by 
law that the QDOT election may be made (no more than one year after the 
time prescribed by law, including extensions, for filing the return), 
the surviving spouse either actually transfers the property to a QDOT or 
irrevocably assigns the property to a QDOT (see Sec. 20.2056A-4(b)); or
    (iv) A plan or other arrangement that would have qualified for the 
marital deduction but for section 2056(d)(1)(A), and whose payments are 
not assignable or transferable to a QDOT, if the requirements of Sec. 
20.2056A-4(c) are met; and
    (2) The executor makes a timely QDOT election under Sec. 20.2056A-
3.

[[Page 464]]

    (b) Marital deduction allowed if resident spouse becomes citizen. 
For purposes of section 2056(d)(1) and paragraph (a) of this section, 
the surviving spouse is treated as a citizen of the United States at the 
date of the decedent's death if the requirements of section 2056(d)(4) 
are satisfied. For purposes of section 2056(d)(4)(A) and notwithstanding 
Sec. 20.2056A-3(a), a return filed prior to the due date (including 
extensions) is considered filed on the last date that the return is 
required to be filed (including extensions), and a late return filed at 
any time after the due date is considered filed on the date that it is 
actually filed. A surviving spouse is a resident only if the spouse is a 
resident under chapter 11 of the Internal Revenue Code. See Sec. 20.0-
1(b)(1). The status of the spouse as a resident under section 7701(b) is 
not relevant to this determination except to the extent that the income 
tax residency of the spouse is pertinent in applying Sec. 20.0-1(b)(1).
    (c) Special rules in the case of certain transfers subject to estate 
and gift tax treaties. Under section 7815(d)(14) of the Omnibus Budget 
Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2106) certain 
special rules apply in the case of transfers governed by certain estate 
and gift tax treaties to which the United States is a party. In the case 
of the estate of, or gift by, an individual who was not a citizen or 
resident of the United States but was a resident of a foreign country 
with which the United States has a tax treaty with respect to estate, 
inheritance, or gift taxes, the amendments made by section 5033 of the 
Technical and Miscellaneous Revenue Act of 1988 (Pub. L. 100-647, 102 
Stat. 3342) do not apply to the extent such amendments would be 
inconsistent with the provisions of such treaty relating to estate, 
inheritance, or gift tax marital deductions. Under this rule, the estate 
may choose either the statutory deduction under section 2056A or the 
marital deduction allowed under the treaty. Thus, the estate may not 
avail itself of both the marital deduction under the treaty and the 
marital deduction under the QDOT provisions of section 2056A and chapter 
11 of the Internal Revenue Code with respect to the remainder of the 
marital property that is not deductible under the treaty.

[T.D. 8612, 60 FR 43539, Aug. 22, 1995]



Sec. 20.2056A-2  Requirements for qualified domestic trust.

    (a) In general. In order to qualify as a qualified domestic trust 
(QDOT), the requirements of paragraphs (b) and (c) of this section, and 
the requirements of Sec. 20.2056A-2T(d), must be satisfied. The 
executor of the decedent's estate and the U.S. Trustee shall establish 
in such manner as may be prescribed by the Commissioner on the estate 
tax return and applicable instructions that these requirements have been 
satisfied or are being complied with. In order to constitute a QDOT, the 
trust must be maintained under the laws of a state of the United States 
or the District of Columbia, and the administration of the trust must be 
governed by the laws of a particular state of the United States or the 
District of Columbia. For purposes of this paragraph (a), a trust is 
maintained under the laws of a state of the United States or the 
District of Columbia if the records of the trust (or copies thereof) are 
kept in that state (or the District of Columbia). The trust may be 
established pursuant to an instrument executed under either the laws of 
a state of the United States or the District of Columbia or pursuant to 
an instrument executed under the laws of a foreign jurisdiction, such as 
a foreign will or trust, provided that such foreign instrument 
designates the law of a particular state of the United States or the 
District of Columbia as governing the administration of the trust, and 
such designation is effective under the law of the designated 
jurisdiction. In addition, the trust must constitute an ordinary trust, 
as defined in Sec. 301.7701-4(a) of this chapter, and not any other 
type of entity. For purposes of this paragraph, a trust will not fail to 
constitute an ordinary trust solely because of the nature of the assets 
transferred to that trust, regardless of its classification under 
Sec. Sec. 301.7701-2 through 301.7701-4 of this chapter.
    (b) Qualified marital interest requirements--(1) Property passing to 
QDOT. If property passes from a decedent to a QDOT, the trust must 
qualify for the federal estate tax marital deduction

[[Page 465]]

under section 2056(b)(5) (life estate with power of appointment), 
section 2056(b)(7) (qualified terminable interest property, including 
joint and survivor annuities under section 2056(b)(7)(C)), or section 
2056(b)(8) (surviving spouse is the only noncharitable beneficiary of a 
charitable remainder trust), or meet the requirements of an estate trust 
as defined in Sec. 20.2056(c)-2(b)(1)(i) through (iii).
    (2) Property passing outright to spouse. If property does not pass 
from a decedent to a QDOT, but passes to a noncitizen surviving spouse 
in a form that meets the requirements for a marital deduction without 
regard to section 2056(d)(1)(A), and that is not described in paragraph 
(b)(1) of this section, the surviving spouse must either actually 
transfer the property, or irrevocably assign the property, to a trust 
(whether created by the decedent, the decedent's executor or by the 
surviving spouse) that meets the requirements of paragraph (c) of this 
section and the requirements of Sec. 20.2056A-2T(d) (pertaining, 
respectively, to statutory requirements and regulatory requirements 
imposed to ensure collection of tax) prior to the filing of the estate 
tax return for the decedent's estate and on or before the last date 
prescribed by law that the QDOT election may be made (see Sec. 
20.2056A-3(a)).
    (3) Property passing under a nontransferable plan or arrangement. If 
property does not pass from a decedent to a QDOT, but passes under a 
plan or other arrangement that meets the requirements for a marital 
deduction without regard to section 2056(d)(1)(A) and whose payments are 
not assignable or transferable (see Sec. 20.2056A-4(c)), the property 
is treated as meeting the requirements of this section, and the 
requirements of Sec. 20.2056A-2T(d), if the requirements of Sec. 
20.2056A-4(c) are satisfied. In addition, where an annuity or similar 
arrangement is described above except that it is assignable or 
transferable, see Sec. 20.2056A-4(b)(7).
    (c) Statutory requirements. The requirements of section 
2056A(a)(1)(A) and (B) must be satisfied. For purposes of that section, 
a domestic corporation is a corporation that is created or organized 
under the laws of the United States or under the laws of any state of 
the United States or the District of Columbia. The trustee required 
under that section is referred to herein as the ``U.S. Trustee''.
    (d) Additional requirements to ensure collection of the section 
2056A estate tax--(1) Security and other arrangements for payment of 
estate tax imposed under section 2056A(b)(1)--(i) QDOTs with assets in 
excess of $2 million. If the fair market value of the assets passing, 
treated, or deemed to have passed to the QDOT (or in the form of a 
QDOT), determined without reduction for any indebtedness with respect to 
the assets, as finally determined for federal estate tax purposes, 
exceeds $2 million as of the date of the decedent's death or, if 
applicable, the alternate valuation date (adjusted as provided in 
paragraph (d)(1)(iii) of this section), the trust instrument must meet 
the requirements of either paragraph (d)(1)(i) (A), (B), or (C) of this 
section at all times during the term of the QDOT. The QDOT may alternate 
between any of the arrangements provided in paragraphs (d)(1)(i) (A), 
(B), and (C) of this section provided that, at any given time, one of 
the arrangements must be operative. See paragraph (d)(1)(iii) of this 
section for the definition of finally determined. The QDOT may provide 
that the trustee has the discretion to use any one of the security 
arrangements or may provide that the trustee is limited to using only 
one or two of the arrangements specified in the trust instrument. A 
trust instrument that specifically states that the trust must be 
administered in compliance with paragraph (d)(1)(i) (A), (B), or (C) of 
this section is treated as meeting the requirements of paragraphs 
(d)(1)(i) (A), (B), or (C) of this section for purposes of paragraphs 
(d)(1)(i) and, if applicable, (d)(1)(ii) of this section.
    (A) Bank Trustee. Except as otherwise provided in paragraph (d)(6) 
(ii) or (iii) of this section, the trust instrument must provide that 
whenever the Bank Trustee security alternative is used for the QDOT, at 
least one U.S. Trustee must be a bank as defined in section 581. 
Alternatively, except as otherwise provided in paragraph (d)(6) (ii) or 
(iii) of this section, at least one trustee must be a United States 
branch of a foreign bank, provided that, in such

[[Page 466]]

cases, during the entire term of the QDOT a U.S. Trustee must act as a 
trustee with the foreign bank trustee.
    (B) Bond. Except as otherwise provided in paragraph (d)(6) (ii) or 
(iii) of this section, the trust instrument must provide that whenever 
the bond security arrangement alternative is used for the QDOT, the U.S. 
Trustee must furnish a bond in favor of the Internal Revenue Service in 
an amount equal to 65 percent of the fair market value of the trust 
assets (determined without regard to any indebtedness with respect to 
the assets) as of the date of the decedent's death (or alternate 
valuation date, if applicable), as finally determined for federal estate 
tax purposes (and as further adjusted as provided in paragraph 
(d)(1)(iv) of this section). If, after examination of the estate tax 
return, the fair market value of the trust assets, as originally 
reported on the estate tax return, is adjusted (pursuant to a judicial 
proceeding or otherwise) resulting in a final determination of the value 
of the assets as reported on the return, the U.S. Trustee has a 
reasonable period of time (not exceeding sixty days after the conclusion 
of the proceeding or other action resulting in a final determination of 
the value of the assets) to adjust the amount of the bond accordingly. 
But see, paragraph (d)(1)(i)(D) of this section for a special rule in 
the case of a substantial undervaluation of QDOT assets. Unless an 
alternate arrangement under paragraph (d)(1)(i) (A), (B), or (C) of this 
section, or an arrangement prescribed under paragraph (d)(4) of this 
section, is provided, or the trust is otherwise no longer subject to the 
requirements of section 2056A pursuant to section 2056A(b)(12), the bond 
must remain in effect until the trust ceases to function as a QDOT and 
any tax liability finally determined to be due under section 2056A(b) is 
paid, or is finally determined to be zero.
    (1) Requirements for the bond. The bond must be with a satisfactory 
surety, as prescribed under section 7101 and Sec. 301.7101-1 of this 
chapter (Regulations on Procedure and Administration), and is subject to 
Internal Revenue Service review as may be prescribed by the 
Commissioner. The bond may not be cancelled. The bond must be for a term 
of at least one year and must be automatically renewable at the end of 
that term, on an annual basis thereafter, unless notice of failure to 
renew is mailed to the U.S. Trustee and the Internal Revenue Service at 
least 60 days prior to the end of the term, including periods of 
automatic extensions. Any notice of failure to renew required to be sent 
to the Internal Revenue Service must be sent to the Estate and Gift Tax 
Group in the District Office of the Internal Revenue Service that has 
examination jurisdiction over the decedent's estate (Internal Revenue 
Service, District Director, [specify location] District Office, Estate 
and Gift Tax Examination Group, [specify Street Address, City, State, 
Zip Code]) (or in the case of noncitizen decedents and United States 
citizens who die domiciled outside the United States, Estate Tax Group, 
Assistant Commissioner (International), 950 L'Enfant Plaza, 
CP:IN:D:C:EX:HQ:1114, Washington, DC 20024). The Internal Revenue 
Service will not draw on the bond if, within 30 days of receipt of the 
notice of failure to renew, the U.S. Trustee notifies the Internal 
Revenue Service (at the same address to which notice of failure to renew 
is to be sent) that an alternate arrangement under paragraph (d)(1)(i) 
(A), (B), or (C) or (d)(4) of this section, has been secured and that 
the arrangement will take effect immediately prior to or upon expiration 
of the bond.
    (2) Form of bond. The bond must be in the following form (or in a 
form that is the same as the following form in all material respects), 
or in such alternative form as the Commissioner may prescribe by 
guidance published in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2) of this chapter):

    Bond in Favor of the Internal Revenue Service To Secure Payment of 
Section 2056A Estate Tax Imposed Under Section 2056A(b) of the Internal 
Revenue Code.
    KNOW ALL PERSONS BY THESE PRESENTS, That the undersigned, --------, 
the SURETY, and --------, the PRINCIPAL, are irrevocably held and firmly 
bound to pay the Internal Revenue Service upon written demand that 
amount of any tax up to $[amount determined under paragraph (d)(1)(i)(B) 
of this section], imposed under section 2056A(b)(1) of the Internal 
Revenue Code (including penalties and interest on said tax) determined

[[Page 467]]

by the Internal Revenue Service to be payable with respect to the 
principal as trustee for: [Identify trust and governing instrument, name 
and address of trustee], a qualified domestic trust as defined in 
section 2056A(a) of the Internal Revenue Code, for the payment of which 
the said Principal and said Surety, bind themselves, their heirs, 
executors, administrators, successors and assigns, jointly and 
severally, firmly by these presents.
    WHEREAS, The Internal Revenue Service may demand payment under this 
bond at any time if the Internal Revenue Service in its sole discretion 
determines that a taxable event with respect to the trust has occurred; 
the trust no longer qualifies as a qualified domestic trust as described 
in section 2056A(a) of the Internal Revenue Code and the regulations 
promulgated thereunder, or a distribution subject to the tax imposed 
under section 2056A(b)(1) has been made. Demand by the Internal Revenue 
Service for payment may be made whether or not the tax and tax return 
(Form 706-QDT) with respect to the taxable event is due at the time of 
such demand, or an assessment has been made by the Internal Revenue 
Service with respect to the tax.
    NOW THEREFORE, The condition of this obligation is such that it must 
not be cancelled and, if payment of all tax liability finally determined 
to be imposed under section 2056A(b) is made, then this obligation is 
null and void; otherwise, this obligation is to remain in full force and 
effect for one year from its effective date and is to be automatically 
renewable on an annual basis unless, at least 60 days prior to the 
expiration date, including periods of automatic renewals, the surety 
mails to the U.S. Trustee and the Internal Revenue Service by Registered 
or Certified Mail, return receipt requested, notice of the failure to 
renew. Receipt of this notice of failure to renew by the Internal 
Revenue Service may be considered a taxable event. The Internal Revenue 
Service will not draw upon the bond if, within 30 days of receipt of the 
notice of failure to renew, the trustee notifies the Internal Revenue 
Service that an alternate security arrangement has been secured and that 
the arrangement will take effect immediately prior to or upon expiration 
of the bond. The surety remains liable for all taxable events occurring 
prior to the date of expiration. All notices required to be sent to the 
Internal Revenue Service under this instrument should be sent to 
District Director, [specify location] District Office, Estate and Gift 
Tax Examination Group, Street Address, City, State, Zip Code. (In the 
case of nonresident noncitizen decedents and United States citizens who 
die domiciled outside the United States, all notices should be sent to 
Estate Tax Group, Assistant Commissioner (International), 950 L'Enfant 
Plaza, CP:IN:D:C:EX:HQ:1114, Washington, DC 20024).
    This bond shall be effective as of --------------. Principal ------ 
Date ------------ Surety ------ Date ------------

    (3) Additional governing instrument requirements. The trust 
instrument must provide that in the event the Internal Revenue Service 
draws on the bond, in accordance with its terms, neither the U.S. 
Trustee nor any other person will seek a return of any part of the 
remittance until after April 15th of the calendar year following the 
year in which the bond is drawn upon. After that date, any such 
remittance will be treated as a deposit and returned (without interest) 
upon request of the U.S. Trustee, unless it is determined that 
assessment or collection of the tax imposed by section 2056A(b)(1) is in 
jeopardy, within the meaning of section 6861. If an assessment under 
section 6861 is made, the remittance will first be credited to any tax 
liability reported on the Form 706-QDT, then to any unpaid balance of a 
section 2056A(b)(1)(A) tax liability (plus interest and penalties) for 
any prior taxable years, and any balance will then be returned to the 
U.S. Trustee.
    (4) Procedure. The bond is to be filed with the decedent's federal 
estate tax return, Form 706 or 706NA (unless an extension for filing the 
bond is granted under Sec. 301.9100 of this chapter). The U.S. Trustee 
must provide a written statement with the bond that provides a list of 
the assets that will be used to fund the QDOT and the respective values 
of the assets. The written statement must also indicate whether any 
exclusions under paragraph (d)(1)(iv) of this section are claimed.
    (C) Letter of credit. Except as otherwise provided in paragraph 
(d)(6) (ii) or (iii) of this section, the trust instrument must provide 
that whenever the letter of credit security arrangement is used for the 
QDOT, the U.S. Trustee must furnish an irrevocable letter of credit 
issued by a bank as defined in section 581, a United States branch of a 
foreign bank, or a foreign bank with a confirmation by a bank as defined 
in section 581. The letter of credit must be for an amount equal to 65 
percent of the fair market value of the trust assets (determined without 
regard to any indebtedness with respect to the assets) as of the date of 
the decedent's

[[Page 468]]

death (or alternate valuation date, if applicable), as finally 
determined for federal estate tax purposes (and as further adjusted as 
provided in paragraph (d)(1)(iv) of this section). If, after examination 
of the estate tax return, the fair market value of the trust assets, as 
originally reported on the estate tax return, is adjusted (pursuant to a 
judicial proceeding or otherwise) resulting in a final determination of 
the value of the assets as reported on the return, the U.S. Trustee has 
a reasonable period of time (not exceeding 60 days after the conclusion 
of the proceeding or other action resulting in a final determination of 
the value of the assets) to adjust the amount of the letter of credit 
accordingly. But see, paragraph (d)(1)(i)(D) of this section for a 
special rule in the case of a substantial undervaluation of QDOT assets. 
Unless an alternate arrangement under paragraph (d)(1)(i) (A), (B), or 
(C) of this section, or an arrangement prescribed under paragraph (d)(4) 
of this section, is provided, or the trust is otherwise no longer 
subject to the requirements of section 2056A pursuant to section 
2056A(b)(12), the letter of credit must remain in effect until the trust 
ceases to function as a QDOT and any tax liability finally determined to 
be due under section 2056A(b) is paid or is finally determined to be 
zero.
    (1) Requirements for the letter of credit. The letter of credit must 
be irrevocable and provide for sight payment. The letter of credit must 
have a term of at least one year and must be automatically renewable at 
the end of the term, at least on an annual basis, unless notice of 
failure to renew is mailed to the U.S. Trustee and the Internal Revenue 
Service at least sixty days prior to the end of the term, including 
periods of automatic renewals. If the letter of credit is issued by the 
U.S. branch of a foreign bank and the U.S. branch is closing, the branch 
(or foreign bank) must notify the U.S. Trustee and the Internal Revenue 
Service of the closure and the notice of closure must be mailed at least 
60 days prior to the date of closure. Any notice of failure to renew or 
closure of a U.S. branch of a foreign bank required to be sent to the 
Internal Revenue Service must be sent to the Estate and Gift Tax Group 
in the District Office of the Internal Revenue Service that has 
examination jurisdiction over the decedent's estate (Internal Revenue 
Service, District Director, [specify location] District Office, Estate 
and Gift Tax Examination Group, [Street Address, City State, Zip Code]) 
(or in the case of noncitizen decedents and United States citizens who 
die domiciled outside the United States, Estate Tax, Assistant 
Commissioner (International), 950 L'Enfant Plaza, CP:IN:D:C:EX:HQ:1114, 
Washington, DC 20024). The Internal Revenue Service will not draw on the 
letter of credit if, within 30 days of receipt of the notice of failure 
to renew or closure of the U.S. branch of a foreign bank, the U.S. 
Trustee notifies the Internal Revenue Service (at the same address to 
which notice is to be sent) that an alternate arrangement under 
paragraph (d)(1)(i) (A), (B), or (C), or (d)(4) of this section, has 
been secured and that the arrangement will take effect immediately prior 
to or upon expiration of the letter of credit or closure of the U.S. 
branch of the foreign bank.
    (2) Form of letter of credit. The letter of credit must be made in 
the following form (or in a form that is the same as the following form 
in all material respects), or an alternative form that the Commissioner 
prescribes by guidance published in the Internal Revenue Bulletin (see 
Sec. 601.601(d)(2) of this chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director, [specify location] District Office
Estate and Gift Tax Examination Group [Street Address, City, State, ZIP 
Code]

[Or in the case of nonresident noncitizen decedents and United States 
citizens who die domiciled outside the United States,

To: Estate Tax Group, Assistant Commissioner (International) 950 
L'Enfant Plaza CP:IN:D:C:EX:HQ:1114 Washington, DC 20024].

    Dear Sirs: We hereby establish our irrevocable Letter of Credit No. 
---- in your favor for drawings up to U.S. $[Applicant should provide 
bank with amount which Applicant determined under paragraph 
(d)(1)(i)(C)] effective immediately. This Letter of Credit is issued, 
presentable and payable at our office at -------- and expires at 3:00 
p.m. [EDT, EST, CDT, CST, MDT, MST, PDT, PST] on ---- at said office.
    For information and reference only, we are informed that this Letter 
of Credit relates to

[[Page 469]]

[Applicant should provide bank with the identity of qualified domestic 
trust and governing instrument], and the name, address, and identifying 
number of the trustee is [Applicant should provide bank with the trustee 
name, address and the QDOT's TIN number, if any].
    Drawings on this Letter of Credit are available upon presentation of 
the following documents:
    1. Your draft drawn at sight on us bearing our Letter of Credit No. 
----; and
    2. Your signed statement as follows:
    The amount of the accompanying draft is payable under [identify 
bank] irrevocable Letter of Credit No. ------ pursuant to section 2056A 
of the Internal Revenue Code and the regulations promulgated thereunder, 
because the Internal Revenue Service in its sole discretion has 
determined that a ``taxable event'' with respect to the trust has 
occurred; e.g., the trust no longer qualifies as a qualified domestic 
trust as described in section 2056A of the Internal Revenue Code and 
regulations promulgated thereunder, or a distribution subject to the tax 
imposed under section 2056A(b)(1) of the Internal Revenue Code has been 
made.
    Except as expressly stated herein, this undertaking is not subject 
to any agreement, requirement or qualification. The obligation of [Name 
of Issuing Bank] under this Letter of Credit is the individual 
obligation of [Name of Issuing Bank] and is in no way contingent upon 
reimbursement with respect thereto.
    It is a condition of this Letter of Credit that it is deemed to be 
automatically extended without amendment for a period of one year from 
the expiration date hereof, or any future expiration date, unless at 
least 60 days prior to any expiration date, we mail to you and to the 
U.S. Trustee notice by Registered Mail or Certified Mail, return receipt 
requested, or by courier to your and the trustee's address indicated 
above, that we elect not to consider this Letter of Credit renewed for 
any such additional period. Upon receipt of this notice, you may draw 
hereunder on or before the then current expiration date, by presentation 
of your draft and statement as stipulated above.
    [In the case of a letter of credit issued by a U.S. branch of a 
foreign bank the following language must be added]. It is a further 
condition of this Letter of Credit that if the U.S. branch of [name of 
foreign bank] is to be closed, that at least sixty days prior to 
closing, we mail to you and the U.S. Trustee notice by Registered Mail 
or Certified Mail, return receipt requested, or by courier to your and 
the U.S. Trustee's address indicated above, that this branch will be 
closing. This notice will specify the actual date of closing. Upon 
receipt of the notice, you may draw hereunder on or before the date of 
closure, by presentation of your draft and statement as stipulated 
above.
    Except where otherwise stated herein, this Letter of Credit is 
subject to the Uniform Customs and Practice for Documentary Credits, 
1993 Revision, ICC Publication No. 500. If we notify you of our election 
not to consider this Letter of Credit renewed and the expiration date 
occurs during an interruption of business described in Article 17 of 
said Publication 500, unless you had consented to cancellation prior to 
the expiration date, the bank hereby specifically agrees to effect 
payment if this Letter of Credit is drawn against within 30 days after 
the resumption of business.
    Except as stated herein, this Letter of Credit cannot be modified or 
revoked without your consent.
    Authorized Signature ------ Date ------

    (3) Form of confirmation. If the requirements of this paragraph 
(d)(1)(i)(C) are satisfied by the issuance of a letter of credit by a 
foreign bank with confirmation by a bank as defined in section 581, the 
confirmation must be made in the following form (or in a form that is 
the same as the following form in all material respects), or an 
alternative form as the Commissioner prescribes by guidance published in 
the Internal Revenue Bulletin (see Sec. 602.101(d)(2) of this chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director, [specify location] District Office Estate 
          and Gift Tax Examination Group [State Address, City, State, 
          ZIP Code]

[or in the case of nonresident noncitizen decedents and United States 
citizens who die domiciled outside the United States,

To: Estate Tax Group, Assistant Commissioner (International) 950 
          L'Enfant Plaza CP:IN:D:C:EX:HQ:1114, Washington, DC 20024].

    Dear Sirs: We hereby confirm the enclosed irrevocable Letter of 
Credit No. ------, and amendments thereto, if any, in your favor by ----
---- [Issuing Bank] for drawings up to U.S. -------- [same amount as in 
initial Letter of Credit] effective immediately. This confirmation is 
issued, presentable and payable at our office at -------- and expires at 
3:00 p.m. [EDT, EST, CDT, CST, MDT, MST, PDT, PST] on ------ at said 
office.
    For information and reference only, we are informed that this 
Confirmation relates to [Applicant should provide bank with the identity 
of qualified domestic trust and governing instrument], and the name, 
address, and identifying number of the trustee is [Applicant should 
provide bank with the trustee name, address and the QDOT's TIN number, 
if any].

[[Page 470]]

    We hereby undertake to honor your sight draft(s) drawn as specified 
in the Letter of Credit.
    Except as expressly stated herein, this undertaking is not subject 
to any agreement, condition or qualification. The obligation of [Name of 
Confirming Bank] under this Confirmation is the individual obligation of 
[Name of Confirming Bank] and is in no way contingent upon reimbursement 
with respect thereto.
    It is a condition of this Confirmation that it is deemed to be 
automatically extended without amendment for a period of one year from 
the expiry date hereof, or any future expiration date, unless at least 
sixty days prior to the expiration date, we send to you and to the U.S. 
Trustee notice by Registered Mail or Certified Mail, return receipt 
requested, or by courier to your and the trustee's addresses, 
respectively, indicated above, that we elect not to consider this 
Confirmation renewed for any additional period. Upon receipt of this 
notice by you, you may draw hereunder on or before the then current 
expiration date, by presentation of your draft and statement as 
stipulated above.
    Except where otherwise stated herein, this Confirmation is subject 
to the Uniform Customs and Practice for Documentary Credits, 1993 
Revision, ICC Publication No. 500. If we notify you of our election not 
to consider this Confirmation renewed and the expiration date occurs 
during an interruption of business described in Article 17 of said 
Publication 500, unless you had consented to cancellation prior to the 
expiration date, the bank hereby specifically agrees to effect payment 
if this Confirmation is drawn against within 30 days after the 
resumption of business.
    Except as stated herein, this Confirmation cannot be modified or 
revoked without your consent.
    Authorized Signature -------- Date ------

    (4) Additional governing instrument requirements. The trust 
instrument must provide that if the Internal Revenue Service draws on 
the letter of credit (or confirmation) in accordance with its terms, 
neither the U.S. Trustee nor any other person will seek a return of any 
part of the remittance until April 15th of the calendar year following 
the year in which the letter of credit (or confirmation) is drawn upon. 
After that date, any such remittance will be treated as a deposit and 
returned (without interest) upon request of the U.S. Trustee after the 
date specified above, unless it is determined that assessment or 
collection of the tax imposed by section 2056A(b)(1) is in jeopardy, 
within the meaning of section 6861. If an assessment under section 6861 
is made, the remittance will first be credited to any tax liability 
reported on the Form 706-QDT, then to any unpaid balance of a section 
2056A(b)(1)(A) tax liability (plus interest and penalties) for any prior 
taxable years, and any balance will then be returned to the U.S. 
Trustee.
    (5) Procedure. The letter of credit (and confirmation, if 
applicable) is to be filed with the decedent's federal estate tax 
return, Form 706 or 706NA (unless an extension for filing the letter of 
credit is granted under Sec. 301.9100 of this chapter). The U.S. 
Trustee must provide a written statement with the letter of credit that 
provides a list of the assets that will be used to fund the QDOT and the 
respective values of the assets. The written statement must also 
indicate whether any exclusions under paragraph (d)(1)(iv) of this 
section are claimed.
    (D) Disallowance of marital deduction for substantial undervaluation 
of QDOT property in certain situations. (1) If either--
    (i) The bond or letter of credit security arrangement under 
paragraph (d)(1)(i) (B) or (C) of this section is chosen by the U.S. 
Trustee; or
    (ii) The QDOT property as originally reported on the decedent's 
estate tax return is valued at $2 million or less but, as finally 
determined for federal estate tax purposes, the QDOT property is 
determined to be in excess of $2 million, then the marital deduction 
will be disallowed in its entirety for failure to comply with the 
requirements of section 2056A if the value of the QDOT property reported 
on the estate tax return is 50 percent or less of the amount finally 
determined to be the correct value of the property for federal estate 
tax purposes.
    (2) The preceding sentence does not apply if--
    (i) There was reasonable cause for the undervaluation; and
    (ii) The fiduciary of the estate acted in good faith with respect to 
the undervaluation. For this purpose, Sec. 1.6664-4(b) of this chapter 
applies, to the extent applicable, with respect to the facts and 
circumstances to be taken into account in making this determination.

[[Page 471]]

    (ii) QDOTs with assets of $2 million or less. If the fair market 
value of the assets passing, treated, or deemed to have passed to the 
QDOT (or in the form of a QDOT), determined without reduction for any 
indebtedness with respect to the assets, as finally determined for 
federal estate tax purposes, is $2 million or less as of the date of the 
decedent's death or, if applicable, the alternate valuation date 
(adjusted as provided in paragraph (d)(1)(iv) of this section), the 
trust instrument must provide that either no more than 35 percent of the 
fair market value of the trust assets, determined annually on the last 
day of the taxable year of the trust (or on the last day of the calendar 
year if the QDOT does not have a taxable year), will consist of real 
property located outside of the United States, or the trust will meet 
the requirements prescribed by paragraph (d)(1)(i)(A), (B), or (C) of 
this section. See paragraph (d)(1)(ii)(D) of this section for special 
rules in the case of principal distributions from a QDOT, fluctuations 
in the value of foreign real property held by a QDOT due to changes in 
value of foreign currency, and fluctuations in the fair market value of 
assets held by the QDOT. See paragraph (d)(1)(iv) of this section for a 
special rule for personal residences. If the fair market value, as 
originally reported on the decedent's estate tax return, of the assets 
passing or deemed to have passed to the QDOT (determined without 
reduction for any indebtedness with respect to the assets) is $2 million 
or less, but the fair market value of the assets as finally determined 
for federal estate tax purposes is more than $2 million, the U.S. 
Trustee has a reasonable period of time (not exceeding sixty days after 
the conclusion of the proceeding or other action resulting in a final 
determination of the value of the assets) to meet the requirements 
prescribed by paragraph (d)(1)(i) (A), (B), or (C) of this section. 
However, see paragraph (d)(1)(i)(D) of this section in the case of a 
substantial undervaluation of QDOT assets. See Sec. 20.2056A-
2(d)(1)(iii) for the definition of finally determined.
    (A) Multiple QDOTs. For purposes of this paragraph (d)(1)(ii), if 
more than one QDOT is established for the benefit of the surviving 
spouse, the fair market value of all the QDOTs are aggregated in 
determining whether the $2 million threshold under this paragraph 
(d)(1)(ii) is exceeded.
    (B) Look-through rule. For purposes of determining whether no more 
than 35 percent of the fair market value of the QDOT assets consists of 
foreign real property, if the QDOT owns more than 20% of the voting 
stock or value in a corporation with 15 or fewer shareholders, or more 
than 20% of the capital interest of a partnership with 15 or fewer 
partners, then all assets owned by the corporation or partnership are 
deemed to be owned directly by the QDOT to the extent of the QDOT's pro 
rata share of the assets of that corporation or partnership. For a 
partnership, the QDOT partner's pro rata share is based on the greater 
of its interest in the capital or profits of the partnership. For 
purposes of this paragraph, all stock in the corporation, or interests 
in the partnership, as the case may be, owned by or held for the benefit 
of the surviving spouse, or any members of the surviving spouse's family 
(within the meaning of section 267(c)(4)), are treated as owned by the 
QDOT solely for purposes of determining the number of partners or 
shareholders in the entity and the QDOT's percentage voting interest or 
value in the corporation or capital interest in the partnership, but not 
for the purpose of determining the QDOT's pro rata share of the assets 
of the entity.
    (C) Interests in other entities. Interests owned by the QDOT in 
other entities (such as an interest in a trust) are accorded treatment 
consistent with that described in paragraph (d)(1)(ii)(B) of this 
section.
    (D) Special rule for foreign real property. For purposes of this 
paragraph (d)(1)(ii), if, on the last day of any taxable year during the 
term of the QDOT (or the last day of the calendar year if the QDOT does 
not have a taxable year), the value of foreign real property owned by 
the QDOT exceeds 35 percent of the fair market value of the trust assets 
due to: distributions of QDOT principal during that year; fluctuations 
in the value of the foreign currency in the jurisdiction where the

[[Page 472]]

real estate is located; or fluctuations in the fair market value of any 
assets held in the QDOT, then the QDOT will not be treated as failing to 
meet the requirements of this paragraph (d)(1). Accordingly, the QDOT 
will not cease to be a QDOT within the meaning of Sec. 20.2056A-5(b)(3) 
if, by the end of the taxable year (or the last day of the calendar year 
if the QDOT does not have a taxable year) of the QDOT immediately 
following the year in which the 35 percent limit was exceeded, the value 
of the foreign real property held by the QDOT does not exceed 35 percent 
of the fair market value of the trust assets or, alternatively, the QDOT 
meets the requirements of either paragraph (d)(1)(i) (A), (B), or (C) of 
this section on or before the close of that succeeding year.
    (iii) Definition of finally determined. For purposes of Sec. 
20.2056A-2(d)(1) (i) and (ii), the fair market value of assets will be 
treated as finally determined on the earliest to occur of--
    (A) The entry of a decision, judgment, decree, or other order by any 
court of competent jurisdiction that has become final;
    (B) The execution of a closing agreement made under section 7121;
    (C) Any final disposition by the Internal Revenue Service of a claim 
for refund;
    (D) The issuance of an estate tax closing letter (Form L-154 or 
equivalent) if no claim for refund is filed; or
    (E) The expiration of the period of assessment.
    (iv) Special rules for personal residence and related personal 
effects--(A) Two million dollar threshold. For purposes of determining 
whether the $2 million threshold under paragraphs (d)(1)(i) and (ii) of 
this section has been exceeded, the executor of the estate may elect to 
exclude up to $600,000 in value attributable to real property (and 
related furnishings) owned directly by the QDOT that is used by, or held 
for the use of the surviving spouse as a personal residence and that 
passes, or is treated as passing, to the QDOT under section 2056(d). The 
election may be made regardless of whether the real property is situated 
within or without the United States. The election is made by attaching 
to the estate tax return on which the QDOT election is made a written 
statement claiming the exclusion. The statement must clearly identify 
the property or properties (i.e. address and location) for which the 
election is being made.
    (B) Security requirement. For purposes of determining the amount of 
the bond or letter of credit required when paragraph (d)(1)(i)(B) or (C) 
of this section applies, the executor of the estate may elect to 
exclude, during the term of the QDOT, up to $600,000 in value 
attributable to real property (and related furnishings) owned directly 
by the QDOT that is used by, or held for the use of the surviving spouse 
as a personal residence and that passes, or is treated as passing, to 
the QDOT under section 2056(d). The election may be made regardless of 
whether the real property is situated within or without the United 
States. The election is made by attaching to the estate tax return on 
which the QDOT election is made a written statement claiming the 
exclusion. If an election is not made on the decedent's estate tax 
return, the election may be made, prospectively, at any time, during the 
term of the QDOT, by attaching to the Form 706-QDT a written statement 
claiming the exclusion. A statement may also be attached to the Form 
706-QDT that cancels a prior election of the personal residence 
exclusion that was made under this paragraph, either on the decedent's 
estate tax return or on a Form 706-QDT.
    (C) Foreign real property limitation. The special rules of this 
paragraph (d)(1)(iv) do not apply for purposes of determining whether 
more than 35 percent of the QDOT assets consist of foreign real property 
under paragraph (d)(1)(ii) of this section.
    (D) Personal residence. For purposes of this paragraph (d)(1)(iv), a 
personal residence is either the principal residence of the surviving 
spouse within the meaning of section 1034 or one other residence of the 
surviving spouse. In order to be used by or held for the use of the 
spouse as a personal residence, the residence must be available at all 
times for use by the surviving spouse. The residence may not be rented 
to another party, even when not occupied by the spouse. A personal 
residence may

[[Page 473]]

include appurtenant structures used by the surviving spouse for 
residential purposes and adjacent land not in excess of that which is 
reasonably appropriate for residential purposes (taking into account the 
residence's size and location).
    (E) Related furnishings. The term related furnishings means 
furniture and commonly included items such as appliances, fixtures, 
decorative items and china, that are not beyond the value associated 
with normal household and decorative use. Rare artwork, valuable 
antiques, and automobiles of any kind or class are not within the 
meaning of this term.
    (F) Required statement. If one or both of the exclusions provided in 
paragraph (d)(1)(iv)(A) or (B) of this section are elected by the 
executor of the estate and the personal residence is later sold or 
ceases to be used, or held for use as a personal residence, the U.S. 
Trustee must file the statement that is required under paragraph (d)(3) 
of this section at the time and in the manner provided in paragraphs 
(d)(3)(ii) and (iii) of this section.
    (G) Cessation of use. Except as provided in this paragraph 
(d)(1)(iv)(G), if the residence ceases to be used by, or held for the 
use of, the spouse as a personal residence of the spouse, or if the 
residence is sold during the term of the QDOT, the exclusions provided 
in paragraphs (d)(1)(iv)(A) and (B) of this section cease to apply. 
However, if the residence is sold, the exclusion continues to apply if, 
within 12 months of the date of sale, the amount of the adjusted sales 
price (as defined in section 1034(b)(1)) is reinvested to purchase a new 
personal residence for the spouse. If less than the amount of the 
adjusted sales price is reinvested, the amount of the exclusion equals 
the amount reinvested in the new residence plus any amount previously 
allocated to a residence that continues to qualify for the exclusion, up 
to a total of $600,000. If the QDOT ceases to qualify for all or any 
portion of the initially claimed exclusions, paragraph (d)(1)(i) of this 
section, if applicable (determined as if the portion of the exclusions 
disallowed had not been initially claimed by the QDOT), must be complied 
with no later than 120 days after the effective date of the cessation. 
In addition, if a residence ceases to be used by, or held for the use of 
the spouse as a personal residence of the spouse or if the personal 
residence is sold during the term of the QDOT, the personal residence 
exclusion may be allocated to another residence that is held in either 
the same QDOT or in another QDOT that is established for the surviving 
spouse, if the other residence qualifies as being used by, or held for 
the use of the spouse as a personal residence. The trustee may allocate 
up to $600,000 to the new personal residence (less the amount previously 
allocated to a residence that continues to qualify for the exclusion) 
even if the entire $600,000 exclusion was not previously utilized with 
respect to the original personal residence(s).
    (v) Anti-abuse rule. Regardless of whether the QDOT designates a 
bank as the U.S. Trustee under paragraph (d)(1)(i)(A) of this section 
(or otherwise complies with paragraph (d)(1)(i)(A) of this section by 
naming a foreign bank with a United States branch as a trustee to serve 
with the U.S. Trustee), complies with paragraph (d)(1)(i)(B) or (C) of 
this section, or is subject to and complies with the foreign real 
property requirements of paragraph (d)(1)(ii) of this section, the trust 
immediately ceases to qualify as a QDOT if the trust utilizes any device 
or arrangement that has, as a principal purpose, the avoidance of 
liability for the estate tax imposed under section 2056A(b)(1), or the 
prevention of the collection of the tax. For example, the trust may 
become subject to this paragraph (d)(1)(v) if the U.S. Trustee that is 
selected is a domestic corporation established with insubstantial 
capitalization by the surviving spouse or members of the spouse's 
family.
    (2) Individual trustees. If the U.S. Trustee is an individual United 
States citizen, the individual must have a tax home (as defined in 
section 911(d)(3)) in the United States.
    (3) Annual reporting requirements--(i) In general. The U.S. Trustee 
must file a written statement described in paragraph (d)(3)(iii) of this 
section, if the QDOT satisfies any one of the following criteria for the 
applicable reporting years--

[[Page 474]]

    (A) The QDOT directly owns any foreign real property on the last day 
of its taxable year (or the last day of the calendar year if it has no 
taxable year), and the QDOT does not satisfy the requirements of 
paragraph (d)(1)(i) (A), (B), or (C) or (d)(4) of this section by 
employing a bank as trustee or providing security; or
    (B) The personal residence previously subject to the exclusion under 
paragraph (d)(1)(iv) of this section is sold, or that personal residence 
ceases to be used, or held for use, as a personal residence, during the 
taxable year (or during the calendar year if the QDOT does not have a 
taxable year); or
    (C) After the application of the look-through rule contained in 
paragraph (d)(1)(ii)(B) of this section, the QDOT is treated as owning 
any foreign real property on the last day of the taxable year (or the 
last day of the calendar year if the QDOT has no taxable year), and the 
QDOT does not satisfy the requirements of paragraph (d)(1) (A), (B), (C) 
or (d)(4) of this section by employing a bank as trustee or providing 
security.
    (ii) Time and manner of filing. The written statement, containing 
the information described in paragraph (d)(3)(iii) of this section, is 
to be filed for the taxable year of the QDOT (calendar year if the QDOT 
does not have a taxable year) for which any of the events or conditions 
requiring the filing of a statement under paragraph (d)(3)(i) of this 
section have occurred or have been satisfied. The written statement is 
to be submitted to the Internal Revenue Service by filing a Form 706-
QDT, with the statement attached, no later than April 15th of the 
calendar year following the calendar year in which or with which the 
taxable year of the QDOT ends (or by April 15th of the following year if 
the QDOT has no taxable year), unless an extension of time is obtained 
under Sec. 20.2056A-11(a). The Form 706-QDT, with attached statement, 
must be filed regardless of whether the Form 706-QDT is otherwise 
required to be filed under the provisions of this chapter. Failure to 
file timely the statement may subject the QDOT to the rules of paragraph 
(d)(1)(v) of this section.
    (iii) Contents of statement. The written statement must contain the 
following information--
    (A) The name, address, and taxpayer identification number, if any, 
of the U.S. Trustee and the QDOT; and
    (B) A list summarizing the assets held by the QDOT, together with 
the fair market value of each listed QDOT asset, determined as of the 
last day of the taxable year (December 31 if the QDOT does not have a 
taxable year) for which the written statement is filed. If the look-
through rule contained in paragraph (d)(1)(ii)(B) of this section 
applies, then the partnership, corporation, trust or other entity must 
be identified and the QDOT's pro rata share of the foreign real property 
and other assets owned by that entity must be listed on the statement as 
if directly owned by the QDOT; and
    (C) If a personal residence previously subject to the exclusion 
under paragraph (d)(1)(iv) of this section is sold during the taxable 
year (or during the calendar year if the QDOT does not have a taxable 
year), the statement must provide the date of sale, the adjusted sales 
price (as defined in section 1034(b)(1)), the extent to which the amount 
of the adjusted sales price has been or will be used to purchase a new 
personal residence and, if not timely reinvested, the steps that will or 
have been taken to comply with paragraph (d)(1)(i) of this section, if 
applicable; and
    (D) If the personal residence ceases to be used, or held for use, as 
a personal residence by the surviving spouse during the taxable year (or 
during the calendar year if the QDOT does not have a taxable year), the 
written statement must describe the steps that will or have been taken 
to comply with paragraph (d)(1)(i) of this section, if applicable.
    (4) Request for alternate arrangement or waiver. If the Commissioner 
provides guidance published in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2) of this chapter) pursuant to which a testator, executor, 
or the U.S. Trustee may adopt an alternate plan or arrangement to assure 
collection of the section 2056A estate tax, and if the alternate plan or 
arrangement is adopted in accordance with the published guidance,

[[Page 475]]

then the QDOT will be treated, subject to paragraph (d)(1)(v) of this 
section, as meeting the requirements of paragraph (d)(1) of this 
section. Until this guidance is published in the Internal Revenue 
Bulletin (see Sec. 601.601(d)(2) of this chapter), taxpayers may submit 
a request for a private letter ruling for the approval of an alternate 
plan or arrangement proposed to be adopted to assure collection of the 
section 2056A estate tax in lieu of the requirements prescribed in this 
paragraph (d)(4).
    (5) Adjustment of dollar threshold and exclusion. The Commissioner 
may increase or decrease the dollar amounts referred to in paragraph 
(d)(1)(i), (ii) or (iv) of this section in accordance with guidance 
published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of 
this chapter).
    (6) Effective date and special rules. (i) This paragraph (d) is 
effective for estates of decedents dying after February 19, 1996.
    (ii) Special rule in the case of incompetency. A revocable trust or 
a trust created under the terms of a will is deemed to meet the 
governing instrument requirements of this paragraph (d) notwithstanding 
that the requirements are not contained in the governing instrument (or 
otherwise incorporated by reference) if the trust instrument (or will) 
was executed on or before November 20, 1995, and--
    (A) The testator or settlor dies after February 19, 1996;
    (B) The testator or settlor is, on November 20, 1995, and at all 
times thereafter, under a legal disability to amend the will or trust 
instrument;
    (C) The will or trust instrument does not provide the executor or 
the U.S. Trustee with a power to amend the instrument in order to meet 
the requirements of section 2056A; and
    (D) The U.S. Trustee provides a written statement with the federal 
estate tax return (Form 706 or 706NA) that the trust is being 
administered (or will be administered) so as to be in actual compliance 
with the requirements of this paragraph (d) and will continue to be 
administered so as to be in actual compliance with this paragraph (d) 
for the duration of the trust. This statement must be binding on all 
successor trustees.
    (iii) Special rule in the case of certain irrevocable trusts. An 
irrevocable trust is deemed to meet the governing instrument 
requirements of this paragraph (d) notwithstanding that the requirements 
are not contained in the governing instrument (or otherwise incorporated 
by reference) if the trust was executed on or before November 20, 1995, 
and:
    (A) The settlor dies after February 19, 1996;
    (B) The trust instrument does not provide the U.S. Trustee with a 
power to amend the trust instrument in order to meet the requirements of 
section 2056A; and
    (C) The U.S. Trustee provides a written statement with the 
decedent's federal estate tax return (Form 706 or 706NA) that the trust 
is being administered in actual compliance with the requirements of this 
paragraph (d) and will continue to be administered so as to be in actual 
compliance with this paragraph (d) for the duration of the trust. This 
statement must be binding on all successor trustees.

[T.D. 8612, 60 FR 43540, Aug. 22, 1995, as amended by T.D. 8686, 61 FR 
60553, Nov. 29, 1996]



Sec. 20.2056A-3  QDOT election.

    (a) General rule. Subject to the time period prescribed in section 
2056A(d), the election to treat a trust as a QDOT must be made on the 
last federal estate tax return filed before the due date (including 
extensions of time to file actually granted) or, if a timely return is 
not filed, on the first federal estate tax return filed after the due 
date. The election, once made, is irrevocable.
    (b) No partial elections. An election to treat a trust as a QDOT may 
not be made with respect to a specific portion of an entire trust that 
would otherwise qualify for the marital deduction but for the 
application of section 2056(d). However, if the trust is actually 
severed in accordance with the applicable requirements of Sec. 
20.2056(b)-7(b)(2)(ii) prior to the due date for the election, a QDOT 
election may be made for any one or more of the severed trusts.
    (c) Protective elections. A protective election may be made to treat 
a trust

[[Page 476]]

as a QDOT only if at the time the federal estate tax return is filed, 
the executor of the decedent's estate reasonably believes that there is 
a bona fide issue that concerns either the residency or citizenship of 
the decedent, the citizenship of the surviving spouse, whether an asset 
is includible in the decedent's gross estate, or the amount or nature of 
the property the surviving spouse is entitled to receive. For example, 
if at the time the federal estate tax return is filed either the estate 
is involved in a bona fide will contest, there is uncertainty regarding 
the inclusion in the gross estate of an asset which, if includible, 
would be eligible for the QDOT election, or there is uncertainty 
regarding the status of the decedent as a resident alien or a 
nonresident alien for estate tax purposes, or a similar uncertainty 
regarding the citizenship status of the surviving spouse, a protective 
QDOT election may be made. The protective election is in addition to, 
and is not in lieu of, the requirements set forth in Sec. 20.2056A-4. 
The protective QDOT election must be made on a written statement signed 
by the executor under penalties of perjury and must be attached to the 
return described in paragraph (a) of this section, and must identify the 
specific assets to which the protective election refers and the specific 
basis for the protective election. However, the protective election may 
otherwise be defined by means of a formula (such as the minimum amount 
necessary to reduce the estate tax to zero). Once made, the protective 
election is irrevocable. For example, if a protective election is made 
because a bona fide question exists as to the includibility of an asset 
in the decedent's gross estate and it is later finally determined that 
the asset is so includible, the protective election becomes effective 
with respect to the asset and cannot thereafter be revoked.
    (d) Manner of election. The QDOT election under paragraph (a) of 
this section is made in the form and manner set forth in the decedent's 
estate tax return, including applicable instructions.

[T.D. 8612, 60 FR 43540, Aug. 22, 1995]



Sec. 20.2056A-4  Procedures for conforming marital trusts and nontrust
marital transfers to the requirements of a qualified domestic trust.

    (a) Marital trusts--(1) In general. If an interest in property 
passes from the decedent to a trust for the benefit of a noncitizen 
surviving spouse and if the trust otherwise qualifies for a marital 
deduction but for the provisions of section 2056(d)(1)(A), the property 
interest is treated as passing to the surviving spouse in a QDOT if the 
trust is reformed, either in accordance with the terms of the decedent's 
will or trust agreement or pursuant to a judicial proceeding, to meet 
the requirements of a QDOT. For this purpose, the requirements of a QDOT 
include all of the applicable requirements set forth in Sec. 20.2056A-
2, and the requirements of Sec. 20.2056A-2T(d). A reformation pursuant 
to the terms of the decedent's will or trust instrument must be 
completed by the time prescribed (including extensions) for filing the 
decedent's estate tax return. For purposes of this paragraph (a), a 
return filed prior to the due date (including extensions) is considered 
filed on the last date that the return is required to be filed 
(including extensions), and a late return filed at any time after the 
due date is considered filed on the date that it is actually filed.
    (2) Judicial reformations. In general, a reformation pursuant to a 
judicial proceeding is permitted under this section if the reformation 
is commenced on or before the due date (determined with regard to 
extensions actually granted) for filing the return of tax imposed by 
chapter 11 of the Internal Revenue Code, regardless of the date that the 
return is actually filed. The reformation (either pursuant to a judicial 
proceeding or otherwise) must result in a trust that is effective under 
local law. The reformed trust may be revocable by the spouse, or 
otherwise be subject to the spouse's general power of appointment, 
provided that no person (including the spouse) has the power to amend 
the trust during the continued existence of the trust such that it would 
no longer qualify as a QDOT. Prior to the time that the judicial 
reformation is completed, the trust must

[[Page 477]]

be treated as a QDOT. Thus, the trustee of the trust is responsible for 
filing the Form 706-QDT, paying any section 2056A estate tax that 
becomes due, and filing the annual statement required under Sec. 
20.2056A-2T(d)(3), if applicable. Failure to comply with these 
requirements may cause the trust to be subject to the anti-abuse rule 
under Sec. 20.2056A-2T(d)(1)(iv). In addition, if the judicial 
reformation is terminated prior to the time that the reformation is 
completed, the estate of the decedent is required to pay the increased 
estate tax imposed on the decedent's estate (plus interest and any 
applicable penalties) that becomes due at the time of such termination 
as a result of the failure of the trust to comply with section 2056(d). 
See section 6511 as to applicable time periods for credit or refund of 
tax.
    (3) Tolling of statutory assessment period. For the tolling of the 
statute of limitations in the case of a judicial reformation, see 
section 2056(d)(5)(B).
    (b) Nontrust marital transfers--(1) In general. Under section 
2056(d)(2)(B), if an interest in property passes outright from a 
decedent to a noncitizen surviving spouse either by testamentary bequest 
or devise, by operation of law, or pursuant to an annuity or other 
similar plan or arrangement, and such property interest otherwise 
qualifies for a marital deduction except that it does not pass in a 
QDOT, solely for purposes of section 2056(d)(2)(A), the property is 
treated as passing to the surviving spouse in a QDOT if the property 
interest is either actually transferred to a QDOT before the estate tax 
return is filed and on or before the last date prescribed by law that 
the QDOT election may be made, or is assigned to a QDOT under an 
enforceable and irrevocable written assignment made on or before the 
date on which the return is filed and on or before the last date 
prescribed by law that the QDOT election may be made. The transfer or 
assignment of property to a QDOT may be made by the surviving spouse, 
the surviving spouse's legal representative (if the surviving spouse is 
incompetent), or the personal representative of the surviving spouse's 
estate (if the surviving spouse has died). The QDOT to which the 
property is transferred may be created by the decedent (during life or 
by will), by the surviving spouse, or by the executor. For purposes of 
section 2056(d)(2)(B), if no property other than the property passing to 
the surviving spouse from the decedent is transferred to the QDOT, the 
transferee QDOT need not be in a form such that the property transferred 
to the QDOT would qualify for a marital deduction under section 2056(a). 
However, if other property is or has been transferred to the QDOT, 100 
percent of the value of the transferee QDOT must qualify for the marital 
deduction under section 2056. For example, if the decedent, a U.S. 
citizen, bequeaths property to a trust that does not satisfy the 
requirements of section 2056(b)(5) or (7), or to a trust that does not 
qualify as an estate trust under Sec. 20.2056(c)-2(b)(1)(i)-(iii), that 
trust cannot be used as a transferee QDOT by the surviving spouse, since 
after that trust is fully funded the portion of the value of the trust 
attributable to property bequeathed to the trust by the decedent will 
not qualify for a marital deduction under section 2056. Similarly, if 
the decedent, a nonresident not a citizen of the United States, 
bequeaths foreign situs assets to a trust created under his will, the 
surviving spouse may not transfer U.S. situs assets passing to the 
spouse outside of the will to that trust under this paragraph. See Sec. 
20.2056A-3(c) with respect to protective elections. See Sec. 20.2056A-
3(a) with respect to the time limitations for making the QDOT election.
    (2) Form of transfer or assignment. A transfer or assignment of 
property to a QDOT must be in writing and otherwise be in accordance 
with all local law requirements for such assignment or transfer. The 
transfer or assignment may be of a specific asset or a group of assets, 
or a fractional share of either, or may be of a pecuniary amount. A 
transfer or assignment of less than an entire interest in an asset or a 
group of assets may be expressed by means of a formula (such as the 
minimum amount necessary to reduce the estate tax to zero). In the case 
of a transfer, a copy of the trust instrument evidencing the transfer 
must be submitted with the decedent's estate tax return. In the

[[Page 478]]

case of an assignment, a copy of the assignment must be submitted with 
the decedent's estate tax return.
    (3) Assets eligible for transfer or assignment. If a transfer or 
assignment is of a specific asset or group of assets, only assets 
included in the decedent's gross estate and passing from the decedent to 
the spouse (or the proceeds from the sale, exchange or conversion of 
such assets) may be transferred or assigned to the QDOT. The noncitizen 
surviving spouse may not transfer or assign to the QDOT property owned 
by the surviving spouse at the time of the decedent's death in lieu of 
property included in the decedent's gross estate that passes to the 
spouse (or in lieu of the proceeds from the sale, exchange or conversion 
of such includible assets). In addition, if only a portion of an asset 
is includible in the decedent's gross estate, the spouse may only 
transfer the portion that is so includible to the transferee trust under 
this paragraph (b)(3).
    (4) Pecuniary assignment--special rules. If the assignment is 
expressed in the form of a pecuniary amount (such as a fixed dollar 
amount or a formula designed to reduce the decedent's estate tax to 
zero), the assignment must specify that--
    (i) Assets actually transferred to the QDOT in satisfaction of the 
assignment have an aggregate fair market value on the date of actual 
transfer to the QDOT amounting to no less than the amount of the 
pecuniary transfer or assignment; or
    (ii) The assets actually transferred to the QDOT be fairly 
representative of appreciation or depreciation in the value of all 
property available for transfer to the QDOT between the valuation date 
and the date of actual transfer to the QDOT, if the assignment is to be 
satisfied by accounting for the assets on the basis of their fair market 
value as of some date before the date of actual transfer to the QDOT.
    (5) Transfer tax treatment of transfer or assignment. Property 
assigned or transferred to a QDOT pursuant to section 2056(d)(2)(B) is 
treated as passing from the decedent to a QDOT solely for purposes of 
section 2056(d)(2)(A). For all other purposes (e.g., income, gift, 
estate, generation-skipping transfer tax, and section 1491 excise tax), 
the surviving spouse is treated as the transferor of the property to the 
QDOT. However, the spouse is not considered the transferor of property 
to a QDOT if the transfer by the spouse constitutes a transfer that 
satisfies the requirements of section 2518(c)(3). For a special 
exception to the valuation rules of section 2702 in the case of a 
transfer by the surviving spouse to a QDOT, see Sec. 25.2702-1(c)(8) of 
this chapter.
    (6) Period for completion of transfer. Property irrevocably assigned 
but not actually transferred to the QDOT before the estate tax return is 
filed must actually be conveyed and transferred to the QDOT under 
applicable local law before the administration of the decedent's estate 
is completed. If there is no administration of the decedent's estate 
(because for example, none of the decedent's assets are subject to 
probate under local law), the conveyance must be made on or before the 
date that is one year after the due date (including extensions) for 
filing the decedent's estate tax return. If an actual transfer to the 
QDOT is not timely made, section 2056(d)(1)(A) applies and the marital 
deduction is not allowed. The executor of the decedent's estate (or 
other authorized legal representative) may request a private letter 
ruling from the Internal Revenue Service requesting an extension of the 
time for completing the conveyance or waiving the actual conveyance 
under specified circumstances under Sec. 301.9100-1(a) of this chapter.
    (7) Retirement accounts and annuities--(i) In general. An assignment 
otherwise in compliance with this paragraph (b) of rights under 
annuities or other similar arrangements that are assignable and thus, 
are not described in paragraph (c) of this section, is treated as a 
transfer of such property to the QDOT regardless of the method of 
payment actually elected under such annuity or plan.
    (ii) Individual retirement annuities. Individual retirement 
annuities described in section 408(b) are not assignable pursuant to 
section 408(b)(1) and thus, do not come within the purview of this 
paragraph (b)(7). See the procedures provided in paragraph (c) of this 
section.

[[Page 479]]

    (iii) Individual retirement accounts. Unless the terms of the 
account provide otherwise, individual retirement accounts described in 
section 408(a) are assignable and subject to the provisions of this 
paragraph (b)(7). However, under paragraph (c) of this section, the 
surviving spouse may treat an individual retirement account as 
nonassignable and, therefore, eligible for the procedures in paragraph 
(c) of this section if the spouse timely complies with the requirements 
in paragraph (c) of this section.
    (iv) Other effects of assignment. The provisions of this paragraph 
(b)(7) apply solely for purposes of qualifying the annuity or account 
under the rules of Sec. 20.2056A-2 and this section. See, for example, 
section 408(d) and 4980A regarding the consequences of an assignment for 
purposes other than this paragraph (b)(7).
    (8) Protective assignment. A protective assignment of property to a 
QDOT may be made only if, at the time the federal estate tax return is 
filed, the executor of the decedent's estate reasonably believes that 
there is a bona fide issue that concerns either the residency or 
citizenship of the decedent, the citizenship of the surviving spouse, 
whether all or a portion of an asset is includible in the decedent's 
gross estate, or the amount or nature of the property the surviving 
spouse is entitled to receive. For example, if at the time the federal 
estate tax return is filed, either the estate is involved in a bona fide 
will contest, there is uncertainty regarding the inclusion in the gross 
estate of an asset which, if includible, would be eligible for the QDOT 
election, or there is uncertainty regarding the status of the decedent 
as a resident alien or a nonresident alien for estate tax purposes, or a 
similar uncertainty regarding the citizenship status of the surviving 
spouse, a protective assignment may be made. The protective assignment 
must be made on a written statement signed by the assignor under 
penalties of perjury on or before the date prescribed under paragraph 
(b)(1) of this section, and must identify the specific assets to which 
the assignment refers and the specific basis for the protective 
assignment. However, the protective assignment may otherwise be defined 
by means of a formula (such as the minimum amount necessary to reduce 
the estate tax to zero). Once made, the protective assignment cannot be 
revoked. For example, if a protective assignment is made because a bona 
fide question exists as to the includibility of an asset in the 
decedent's gross estate and it is later finally determined that the 
asset is so includible, the protective assignment becomes effective with 
respect to the asset and cannot thereafter be revoked. Protective 
assignments are, in all events, subject to paragraph (b)(6) of this 
section. A copy of the protective assignment must be submitted with the 
decedent's estate tax return.
    (c) Nonassignable annuities and other arrangements--(1) Definition 
and general rule. For purposes of this section, a nonassignable annuity 
or other arrangement means a plan, annuity, or other arrangement 
(whether qualified or not qualified under part I of subchapter D of 
chapter 1 of subtitle A of the Internal Revenue Code) that qualifies for 
the marital deduction but for section 2056(d)(1)(A), and whose payments 
are not assignable or transferable to the QDOT under either federal law 
(see, e.g., section 401(a)(13)), state law, foreign law, or the terms of 
the plan or arrangement itself. For purposes of this paragraph (c), a 
surviving spouse's interest as beneficiary of an individual retirement 
annuity described in section 408(b) is a nonassignable annuity or other 
arrangement. See section 408(b)(1). For purposes of this paragraph (c), 
a surviving spouse's interest as beneficiary of an individual retirement 
account described in section 408(a), although assignable under that 
section, is considered to be a nonassignable annuity or other 
arrangement eligible for the procedures contained in this paragraph (c), 
at the option of the surviving spouse, if the requirements of this 
paragraph are otherwise satisfied. See paragraph (b)(7) of this section 
if the spouse elects to treat the account as assignable. In the case of 
a plan, annuity, or other arrangement which is not assignable or 
transferable (or is treated as such), the property passing under the 
plan from the decedent is treated as meeting the

[[Page 480]]

requirements Sec. 20.2056A-2, and the requirements of Sec. 20.2056A-
2T(d) (pertaining, respectively, to general requirements, qualified 
marital interest requirements, statutory requirements, and requirements 
to ensure collection of the tax) if the requirements of either paragraph 
(c)(2) or (3) of this section are satisfied. Thus, the property will be 
treated as passing in the form of a QDOT, notwithstanding that the 
spouse does not irrevocably transfer or assign the annuity or other 
payment to the QDOT as provided in paragraph (b) of this section. The 
Commissioner will prescribe by administrative guidance the extent, if 
any, to which the provisions of this paragraph (c) apply to a rollover 
from a qualified trust to an eligible retirement plan within the meaning 
of section 402(c) or a distribution from an individual retirement 
account or an individual retirement annuity that is paid into an 
individual retirement account or an individual retirement annuity within 
the meaning of section 408(d)(3).
    (2) Agreement to remit section 2056A estate tax on corpus portion of 
each annuity payment. The requirements of this paragraph (c)(2) are 
satisfied if--
    (i) The noncitizen surviving spouse agrees to pay on an annual 
basis, as described in paragraph (c)(6)(i) of this section, the estate 
tax imposed under section 2056A(b)(1) due on the corpus portion, as 
defined in paragraph (c)(4) of this section, of each nonassignable 
annuity or other payment received under the plan or arrangement. 
However, for purposes of this paragraph (c)(2), if the financial 
circumstances of the spouse are such that an amount equal to all or a 
portion of the corpus portion of a nonassignable annuity payment 
received by the spouse would be subject to a hardship exemption (as 
defined in Sec. 20.2056A-5(c)) if paid from a QDOT, then all or a 
corresponding part of the corpus portion will be exempt from the tax 
payment requirement under this paragraph (c)(2);
    (ii) The executor of the decedent's estate files with the estate tax 
return the Information Statement described in paragraph (c)(5) of this 
section;
    (iii) The executor files with the estate tax return the Agreement To 
Pay Section 2056A Estate Tax described in paragraph (c)(6) of this 
section; and
    (iv) The executor makes the election under Sec. 20.2056A-3 with 
respect to the nonassignable annuity or other payment.
    (3) Agreement to roll over corpus portion of annuity payment to 
QDOT. The requirements of this paragraph (c)(3) are satisfied if--
    (i) The noncitizen surviving spouse agrees to roll over and 
transfer, within the time prescribed under paragraph (c)(7)(i) of this 
section, the corpus portion of each annuity payment to a QDOT, whether 
the QDOT is created by the decedent's will, the executor of the 
decedent's estate, or the surviving spouse. However, for purposes of 
this section, if the financial circumstances of the spouse are such that 
an amount equal to all or a portion of the corpus portion of a 
nonassignable annuity payment received by the spouse would be subject to 
a hardship exemption (as defined in Sec. 20.2056A-5(c)) if paid from a 
QDOT, then all or a corresponding part of the corpus portion will be 
exempt from the rollover requirement under this paragraph (c)(3);
    (ii) A QDOT for the benefit of the surviving spouse is established 
prior to the date that the estate tax return is filed and on or prior to 
the last date prescribed by law that the QDOT election may be made;
    (iii) The executor of the decedent's estate files with the estate 
tax return the Information Statement described in paragraph (c)(5) of 
this section;
    (iv) The executor files with the estate tax return the Agreement To 
Roll Over Annuity Payments described in paragraph (c)(7) of this 
section; and
    (v) The executor makes the election under Sec. 20.2056A-3 with 
respect to the nonassignable annuity or other payment. See Sec. 
20.2056A-5(c)(3)(iv)(A), regarding distributions from the QDOT 
reimbursing the spouse for income taxes paid (either by actual payment 
or withholding) by the spouse with respect to amounts transferred to the 
QDOT pursuant to this paragraph (c)(3).
    (4) Determination of corpus portion--(i) Corpus portion. For 
purposes of this paragraph (c), the corpus portion of each nonassignable 
annuity or other

[[Page 481]]

payment is the corpus amount of the annual payment divided by the total 
annual payment.
    (ii) Corpus amount. (A) The corpus amount of the annual payment is 
determined in accordance with the following formula:
[GRAPHIC] [TIFF OMITTED] TR22AU95.008

    (B) The total present value of the annuity or other payment is the 
present value of the nonassignable annuity or other payment as of the 
date of the decedent's death, determined in accordance with the interest 
rates and mortality data prescribed by section 7520. The expected 
annuity term is the number of years that would be required for the 
scheduled payments to exhaust a hypothetical fund equal to the present 
value of the scheduled payments. This is determined by first dividing 
the total present value of the payments by the annual payment. From the 
quotient so obtained, the expected annuity term is derived by 
identifying the term of years that corresponds to the annuity factor 
equal to the quotient. This is determined by using column 1 of Table B, 
for the applicable interest rate, contained in Publication 1457, 
``Actuarial Valuations Version 3A''. A copy of this publication is 
available, at no charge, electronically via the IRS Internet site at 
http://www.irs.gov. If the quotient obtained falls between two terms, 
the longer term is used.
    (5) Information Statement--(i) In general. In order for a 
nonassignable annuity or other payment described in this paragraph (c) 
to qualify under either paragraph (c) (2) or (3) of this section, the 
Information Statement described in paragraph (c)(5)(ii) of this section 
must be filed with the decedent's federal estate tax return. The 
Information Statement must be signed under penalties of perjury by both 
the executor of the decedent's estate and by the surviving spouse of the 
decedent (or by the legal representative of the surviving spouse if the 
surviving spouse is legally incompetent to sign the statement). The 
Statement must contain all of the information prescribed by this 
paragraph (c)(5).
    (ii) Annuity source information--(A) Employment-related annuity. If 
the nonassignable annuity or other payment is employment-related, the 
following information must be provided--
    (1) The name and address of the employer;
    (2) The date of retirement or other separation from employment of 
the decedent;
    (3) The name and address of the pension fund, insurance company, or 
other obligor that is paying the annuity (or similar payment); and
    (4) The identification number, if any, that the obligor has assigned 
to the annuity or other payment.
    (B) Annuity not employment-related. If the nonassignable annuity or 
other payment is not employment-related, the following information must 
be provided--
    (1) The name and address of the person or entity paying the 
nonassignable annuity or other payment;
    (2) The date of acquisition of the nonassignable annuity contract by 
the decedent or by the decedent and the surviving spouse; and
    (3) The identification number, if any, that the obligor has assigned 
to the nonassignable annuity or other payment.
    (iii) The total annuity amount payable each year. The total amount 
payable annually under the nonassignable annuity or other arrangement, 
including a description of whether the annuity is payable monthly, 
quarterly, or at some other interval, and a description of any scheduled 
changes in the annuity payout amount.
    (iv) The duration of the annuity. A description of the term of the 
nonassignable annuity or other payment in

[[Page 482]]

years, if it is determined by a term certain, and the name, address, and 
birthdate of any measuring life if the nonassignable annuity or other 
payment is determined by one or more lives.
    (v) The market interest rate under section 7520. The applicable 
interest rate as determined under section 7520.
    (vi) Determination of corpus portion of each payment (in accordance 
with paragraph (c)(4) of this section). The following items are required 
in order to determine the corpus portion of each payment--
    (A) The present value of the nonassignable annuity or other payment 
as of the decedent's death;
    (B) The expected annuity term;
    (C) The corpus amount of the annual annuity payments (paragraph 
(c)(5)(vi)(A) of this section divided by paragraph (c)(5)(vi)(B) of this 
section); and
    (D) The corpus portion of the annual payments (paragraph 
(c)(5)(vi)(C) of this section divided by the total amount payable 
annually).
    (vii) Recipient QDOT. In the case of an agreement to rollover under 
paragraph (c)(3) of this section, the following must be provided--
    (A) The name and address of the trustee of the QDOT who is the U.S. 
Trustee; and
    (B) The name and taxpayer identification number of the QDOT.
    (viii) Certification statement. The executor of the decedent's 
estate and the surviving spouse of the decedent (or the legal 
representative of the surviving spouse if the surviving spouse is 
legally incompetent to so certify) must each sign a Certification 
Statement as follows:

    Under penalties of perjury, I hereby certify that, to the best of my 
knowledge and belief, the information reported in this Information 
Statement is true, correct and complete.

    (6) Agreement to pay section 2056A estate tax--(i) Payment of 
section 2056A estate tax. The tax payable under paragraph (c)(2) of this 
section is payable on an annual basis, commencing in the calendar year 
following the calendar year of the receipt by the surviving spouse of 
the spouse's first annuity payment. Form 706QDT and the payment are due 
on April 15th of each year following the calendar year in which an 
annuity payment is received except that, in the year of the deceased 
spouse's death, the Form 706-QDT and the payment are not due prior to 
the due date, including extensions, for filing the deceased spouse's 
estate tax return, or if no return is filed, no later than 9 months from 
the date of the deceased spouse's death; and, in the year of the 
surviving spouse's death, the Form 706-QDT must be filed and the payment 
made no later than 9 months from the date of the surviving spouse's 
death. See Sec. 20.2056A-11 for extensions of time for filing Form 706-
QDT and paying the section 2056A estate tax.
    (ii) Agreement. In order for a nonassignable annuity or other 
payment described in this paragraph (c) to qualify under paragraph 
(c)(2) of this section, the executor of the decedent's estate must file 
with the estate tax return the following Agreement To Pay Section 2056A 
Estate Tax, which must be signed by the surviving spouse of the decedent 
(or by the surviving spouse's legal representative if the surviving 
spouse is legally incompetent to sign the agreement):

    I [ name ] hereby agree that I will report all annuity payments 
received under the [name of plan or arrangement] on Form 706-QDT for the 
calendar year and remit, on an annual basis, to the Internal Revenue 
Service the estate tax that is imposed under section 2056A(b)(1) of the 
Internal Revenue Code on the corpus portion of each annuity payment (as 
defined in Sec. 20.2056A-4(c)(4) of the Estate Tax Regulations) 
received under the plan during the calendar year. I also agree that Form 
706-QDT is to be filed no later than April 15th of the year following 
the calendar year in which any annuity payments are received except 
that: in the case of annuity payments received in the year of my 
spouse's death, Form 706-QDT and the payment shall not be due prior to 
the due date, including extensions, for filing my spouse's estate tax 
return or, if no return is filed, no later than 9 months from the date 
of my spouse's death (except if I am granted an extension of time to 
file Form 706-QDT under the provisions of Sec. 20.2056A-11); and in the 
year of my death, the Form 706-QDT must be filed and the payment made no 
later than the date my estate tax return is filed (or if no return is 
filed, no later than 9 months from the date of my death). I further 
agree that if I fail to timely file Form 706-QDT or to timely pay the 
tax imposed on the corpus portion of any annuity payment (determined

[[Page 483]]

after any extensions of time to pay granted to me under the provisions 
of Sec. 20.2056A- 11), I may become immediately liable to pay the 
amount of the tax determined by application of section 2056A(b)(1) on 
the entire remaining present value of the annuity, calculated as of the 
beginning of the year in which the payment was received with respect to 
which I failed to timely pay the tax or failed to timely file the 
return. However, I may make an application for relief under Sec. 
301.9100-1 of the Procedure and Administration Regulations, from the 
consequences of failing to timely file the Form 706-QDT or failing to 
timely pay the tax on the corpus portion. [The following sentence is 
applicable only in cases where the plan or arrangement is established 
and administered by a person or an entity that is located outside of the 
United States.] I agree, at the request of the District Director, [or 
the Assistant Commissioner (International) in the case of a surviving 
spouse of a nonresident noncitizen decedent or a surviving spouse of a 
United States citizen who died domiciled outside the United States] to 
enter into a security agreement to secure my undertakings under this 
agreement.
    (7) Agreement to roll over annuity payments--(i) Roll over of corpus 
portion. Beginning in the calendar year of the receipt by the surviving 
spouse of the spouse's first annuity payment, the corpus portion of each 
annuity payment, as determined under paragraph (c)(4) of this section, 
must, within 60 days of receipt, be transferred to a QDOT. In addition, 
all annuity payments received during the calendar year must be reported 
on Form 706-QDT no later than April 15th of the year following the year 
in which the annuity payments are received, except that in the year of 
the surviving spouse's death, the Form 706-QDT must be filed no later 
than the date the estate tax return is filed (or if no return is filed, 
no later than 9 months from the date of the surviving spouse's death). 
See Sec. 20.2056A-11 for extensions of time for filing Form 706-QDT.
    (ii) Agreement. In order for a nonassignable annuity or other 
payment described in this paragraph (c) to qualify under paragraph 
(c)(3) of this section, the executor of the decedent's estate must file 
with the estate tax return the following Agreement To Roll Over Annuity 
Payments, which must be signed by the surviving spouse of the decedent 
(or by the legal representative of the surviving spouse if the surviving 
spouse is legally incompetent to sign the agreement):

    I [ name ] hereby agree that within 60 days of receipt of each 
annuity payment paid under the [name of plan or arrangement], I will 
transfer an amount equal to ------ percent (the corpus portion 
determined under Sec. 20.2056A-4(c)(4) of the Estate Tax Regulations) 
of each annuity payment to [identify the QDOT]. Further, I will report 
all annuity payments received during the calendar year under the [name 
of plan or arrangement] on Form 706-QDT including a schedule of 
transfers to the [identify the QDOT]. I also agree that Form 706-QDT is 
to be filed no later than April 15th of the year following the year in 
which any annuity payments are received except that: in the case of 
annuity payments received in the year of my spouse's death, Form 706-QDT 
shall not be due prior to the due date, including extensions, for filing 
my spouse's estate tax return, or, if no return is filed, no later than 
9 months from the date of my spouse's death (except if I am granted an 
extension of time to file Form 706-QDT under the provisions of Sec. 
20.2056A-11); and in the year of my death, the Form 706-QDT must be 
filed no later than the date my estate tax return is filed (or if no 
return is filed, no later than 9 months from the date of my death), and 
except if I am granted an extension of time to file Form 706-QDT under 
the provisions of Sec. 20.2056A-11. I further agree that if I fail to 
timely transfer any required amount with respect to any annuity payment, 
or fail to timely file Form 706-QDT reporting the transfers for any 
year, I may become immediately liable to pay the amount of the tax 
determined by application of section 2056A(b)(1) on the entire remaining 
present value of the annuity, calculated as of the beginning of the year 
in which the payment was received with respect to which I failed to make 
the timely transfer or timely file a return. However, I may make an 
application for relief under Sec. 301.9100-1 of the Procedure and 
Administration Regulations, from the consequences of failing to timely 
file Form 706-QDT or failing to timely transfer the corpus portion of 
any annuity payment to the QDOT. [The following sentence is applicable 
only in cases where the plan or arrangement is established and 
administered by a person or an entity that is located outside of the 
United States.] I agree, at the request of the District Director [or the 
Assistant Commissioner (International) in the case of a surviving spouse 
of a nonresident noncitizen decedent or a surviving spouse of a United 
States citizen who died domiciled outside the United States] to enter 
into a security agreement to secure my undertakings under this 
agreement.

    (d) Examples. The provisions of this section are illustrated by the 
following

[[Page 484]]

examples. In each of the following examples the decedent, D, a citizen 
of the United States, died after August 22, 1995, and D's surviving 
spouse, S, is not a United States citizen at the time of D's death.

    Example 1. Transfer and assignment of probate and nonprobate 
property to QDOT. (i) S is the beneficiary of the following probate and 
nonprobate assets included in D's gross estate:

Pecuniary bequest under will...............................     $400,000
Proceeds of life insurance.................................      200,000
D's interest in property owned jointly with S includible in      300,000
 the gross estate under Sec. 2040(a).....................
Devise of real property under will.........................      100,000
                                                            ------------
    Total..................................................   $1,000,000
 

    (ii) Before the estate tax return for D's estate is filed and before 
the date that the QDOT election must be made, S creates a QDOT pursuant 
to which all income is payable to S for life and the remainder is 
distributable to S's children. S retains a power of appointment over the 
disposition of the remainder to ensure that S does not make an immediate 
gift of the remainder of the trust. Also, before the estate tax return 
is filed and before the date that the QDOT election must be made, S 
transfers the life insurance proceeds and the specifically devised real 
property to the QDOT. S decides not to transfer the property that had 
been jointly owned to the QDOT. Because S has not received distribution 
of the pecuniary bequest before D's estate tax return is filed and 
before the date that the QDOT election must be made, S irrevocably 
assigns the interest in the pecuniary bequest to the QDOT. Assume that 
the pecuniary bequest is in fact transferred by S to the QDOT before the 
estate administration is concluded. D's executor makes a QDOT election 
on the estate tax return for the $700,000 in property that S has 
transferred and assigned to the QDOT. A marital deduction of $700,000 is 
allowed to D's estate assuming the estate tax return is filed and the 
QDOT election is made within the time limitation prescribed in Sec. 
20.2056A-3(a). No marital deduction is allowed for the $300,000 interest 
in jointly-owned property not transferred to the QDOT.
    Example 2. Formula assignment. Under the terms of D's will, the 
entire probate estate passes outright to S. Prior to the date D's estate 
tax return is filed and before the date that the QDOT election must be 
made, S establishes a QDOT and S executes an irrevocable assignment in 
which S assigns to the QDOT, ``that portion of the gross estate 
necessary to reduce the estate tax to zero, taking into account all 
available credits and deductions.'' The assignment meets the 
requirements of paragraph (b) of this section, assuming that the QDOT is 
funded by the time that administration of D's estate is completed.
    Example 3. Jointly owned property. At the time of D's death, D and S 
hold real property as joint tenants with right of survivorship. In 
accordance with section 2056(d)(1)(B), section 2040(a), and Sec. 
20.2056A-8(a), 60 percent of the value of the property is included in 
D's gross estate. S establishes a QDOT and, prior to the date the estate 
tax return is filed and before the date that the QDOT election must be 
made, S transfers a 60 percent interest in the real property to the 
QDOT. The transfer satisfies the requirements of paragraph (b) of this 
section.

    Example 4. Computation of corpus portion of annuity payment. (i) At 
the time of D's death on or after May 1, 2009, D is a participant in an 
employees' pension plan described in section 401(a). On D's death, D's 
spouse S, a resident of the United States, becomes entitled to receive a 
survivor's annuity of $72,000 per year, payable monthly, for life. At 
the time of D's death, S is age 60. Assume that under section 7520, the 
appropriate discount rate to be used for valuing annuities in the case 
of this decedent is 6.0 percent. The annuity factor at 6.0 percent for a 
person age 60 is 11.0625 (1.000000 minus .33625, divided by .06). The 
adjustment factor at 6.0 percent in Table K for monthly payments is 
1.0272. Accordingly, the right to receive $72,000 per year on a monthly 
basis is equal to the right to receive $73,958.40 ($72,000 x 1.0272) on 
an annual basis.
    (ii) The corpus portion of each annuity payment received by S is 
determined as follows. The first step is to determine the annuity factor 
for the number of years that would be required to exhaust a hypothetical 
fund that has a present value and a payout corresponding to S 's 
interest in the payments under the plan, determined as follows:
    (A) Present value of S 's annuity: $73,958.40 x 11.0625 = 
$818,164.80.
    (B) Annuity Factor for Expected Annuity Term: $818,164.80/$73,958.40 
= 11.0625.
    (iii) The second step is to determine the number of years that would 
be required for S 's annuity to exhaust a hypothetical fund of 
$818,164.80. The term certain annuity factor of 11.0625 falls between 
the annuity factors for 18 and 19 years in a 6.0 percent term certain 
annuity table (Column 1 of Table B, Publication 1457 Actuarial 
Valuations Version 3A, which may be obtained on the IRS Internet site). 
Accordingly, the expected annuity term is 19 years.
    (iv) The third step is to determine the corpus amount by dividing 
the expected term of 19 years into the present value of the hypothetical 
fund as follows:
    (A) Corpus amount of annual payment: $818,164.80/19 = $43,061.31.
    (B) [Reserved]

[[Page 485]]

    (v) In the fourth step, the corpus portion of each annuity payment 
is determined by dividing the corpus amount of each annual payment by 
the annual annuity payment (adjusted for payments more frequently than 
annually as in (i) of this Example 4) as follows:
    (A) Corpus portion of each annuity payment: $43,061.31/$73,958.40 = 
.58.
    (B) [Reserved]
    (vi) Accordingly, 58 percent of each payment to S is deemed to be a 
distribution of corpus. A marital deduction is allowed for $818,164.80, 
the present value of the annuity as of D's date of death, if either: S 
agrees to roll over the corpus portion of each payment to a QDOT and the 
executor files the Information Statement described in paragraph (c)(5) 
of this section and the Roll Over Agreement described in paragraph 
(c)(7) of this section; or S agrees to pay the tax due on the corpus 
portion of each payment and the executor files the Information Statement 
described in paragraph (c)(5) of this section and the Payment Agreement 
described in paragraph (c)(6) of this section.
    Example 5. Transfer to QDOT subject to gift tax. D's will bequeaths 
$700,000 outright to S. The bequest qualifies for a marital deduction 
under section 2056(a) except that it does not pass in a QDOT. S creates 
an irrevocable trust that meets the requirements for a QDOT and 
transfers the $700,000 to the QDOT. The QDOT instrument provides that S 
is entitled to all the income from the QDOT payable at least annually 
and that, upon the death of S, the property remaining in the QDOT is to 
be distributed to the grandchildren of D and S in equal shares. The 
trust instrument contains all other provisions required to qualify as a 
QDOT. On D's estate tax return, D's executor makes a QDOT election under 
section 2056A(a)(3). Solely for purposes of the marital deduction, the 
property is deemed to pass from D to the QDOT. D's estate is entitled to 
a marital deduction for the $700,000 value of the property passing from 
D to S. S's transfer of property to the QDOT is treated as a gift of the 
remainder interest for gift tax purposes because S's transfer creates a 
vested remainder interest in the grandchildren of D and S. Accordingly, 
as of the date that S transfers the property to the QDOT, a gift tax is 
imposed on the present value of the remainder interest. See Sec. 
25.2702-1(c)(8) of this chapter exempting S's transfer from the special 
valuation rules contained in section 2702. At S's death, S is treated as 
the transferor of the property into the trust for estate tax and 
generation-skipping transfer tax purposes. See, e.g., sections 2036 and 
2652(a)(1). The trust is not eligible for a reverse QTIP election by D's 
estate under section 2652(a)(3) because a QTIP election cannot be made 
for the QDOT. This is so because the marital deduction is allowed under 
section 2056(a) for the outright bequest to the spouse and the spouse is 
then separately treated as the transferor of the property to the QDOT.
    (e) Effective/applicability date. Paragraph (c)(4)(ii)(B) and 
Example 4 in paragraph (d) of this section are applicable with respect 
to decedents dying on or after May 1, 2009.

[T.D. 8612, 60 FR 43541, Aug. 22, 1995, as amended by T.D. 8819, 64 FR 
23229, Apr. 30, 1999; 64 FR 33196, June 22, 1999; T.D. 9448, 74 FR 
21510, May 7, 2009; T.D. 9540, 76 FR 49637, Aug. 10, 2011]



Sec. 20.2056A-5  Imposition of section 2056A estate tax.

    (a) In general. An estate tax is imposed under section 2056A(b)(1) 
on the occurrence of a taxable event, as defined in section 2056A(b)(9). 
The tax is generally equal to the amount of estate tax that would have 
been imposed if the amount involved in the taxable event had been 
included in the decedent's taxable estate and had not been deductible 
under section 2056. See section 2056A(b)(3) and paragraph (c) of this 
section for certain exceptions from taxable events.
    (b) Amounts subject to tax--(1) Distribution of principal during the 
spouse's lifetime. If a taxable event occurs during the noncitizen 
surviving spouse's lifetime, the amount on which the section 2056A 
estate tax is imposed is the amount of money and the fair market value 
of the property that is the subject of the distribution (including 
property distributed from the trust pursuant to the exercise of a power 
of appointment), including any amount withheld from the distribution by 
the U.S. Trustee to pay the tax. If, however, the tax is not withheld by 
the U.S. Trustee but is paid by the U.S. Trustee out of other assets of 
the QDOT, an amount equal to the tax so paid is treated as an additional 
distribution to the spouse in the year that the tax is paid.
    (2) Death of surviving spouse. If a taxable event occurs as a result 
of the death of the surviving spouse, the amount subject to tax is the 
fair market value of the trust assets on the date of the spouse's death 
(or alternate valuation date if applicable). See also section 2032A. Any 
corpus portion amounts, within the meaning of Sec. 20.2056A-4(c)(4)(i), 
remaining in a

[[Page 486]]

QDOT upon the surviving spouse's death, are subject to tax under section 
2056A(b)(1)(B), as well as any residual payments resulting from a 
nonassignable plan or arrangement that, upon the surviving spouse's 
death, are payable to the spouse's estate or to successor beneficiaries.
    (3) Trust ceases to qualify as QDOT. If a taxable event occurs as a 
result of the trust ceasing to qualify as a QDOT (for example, the trust 
ceases to have at least one U.S. Trustee), the amount subject to tax is 
the fair market value of the trust assets on the date of 
disqualification.
    (c) Distributions and dispositions not subject to tax--(1) 
Distributions of principal on account of hardship. Section 
2056A(b)(3)(B) provides an exemption from the section 2056A estate tax 
for distributions to the surviving spouse on account of hardship. A 
distribution of principal is treated as made on account of hardship if 
the distribution is made to the spouse from the QDOT in response to an 
immediate and substantial financial need relating to the spouse's 
health, maintenance, education, or support, or the health, maintenance, 
education, or support of any person that the surviving spouse is legally 
obligated to support. A distribution is not treated as made on account 
of hardship if the amount distributed may be obtained from other sources 
that are reasonably available to the surviving spouse; e.g., the sale by 
the surviving spouse of personally owned, publicly traded stock or the 
cashing in of a certificate of deposit owned by the surviving spouse. 
Assets such as closely held business interests, real estate and tangible 
personalty are not considered sources that are reasonably available to 
the surviving spouse. Although a hardship distribution of principal is 
exempt from the section 2056A estate tax, it must be reported on Form 
706-QDT even if it is the only distribution that occurred during the 
filing period. See Sec. 20.2056A-11 regarding filing requirements for 
Form 706-QDT.
    (2) Distributions of income to the surviving spouse. Section 
2056A(b)(3)(A) provides an exemption from the section 2056A estate tax 
for distributions of income to the surviving spouse. In general, for 
purposes of section 2056A(b)(3)(A), the term income has the same meaning 
as is provided in section 643(b), except that income does not include 
capital gains. In addition, income does not include any other item that 
would be allocated to corpus under applicable local law governing the 
administration of trusts irrespective of any specific trust provision to 
the contrary. However, distributions made to the surviving spouse as the 
income beneficiary in conformance with applicable local law that defines 
the term income as a unitrust amount (or permits a right to income to be 
satisfied by such an amount), or that permits the trustee to adjust 
between principal and income to fulfill the trustee's duty of 
impartiality between income and principal beneficiaries, will be 
considered distributions of trust income if applicable local law 
provides for a reasonable apportionment between the income and remainder 
beneficiaries of the total return of the trust and meets the 
requirements of Sec. 1.643(b)-1 of this chapter. In cases where there 
is no specific statutory or case law regarding the allocation of such 
items under the law governing the administration of the QDOT, the 
allocation under this paragraph (c)(2) will be governed by general 
principles of law (including but not limited to any uniform state acts, 
such as the Uniform Principal and Income Act, or any Restatements of 
applicable law). Further, except as provided in this paragraph (c)(2) or 
in administrative guidance published by the Internal Revenue Service, 
income does not include items constituting income in respect of a 
decedent (IRD) under section 691. However, in cases where a QDOT is 
designated by the decedent as a beneficiary of a pension or profit 
sharing plan described in section 401(a) or an individual retirement 
account or annuity described in section 408, the proceeds of which are 
payable to the QDOT in the form of an annuity, any payments received by 
the QDOT may be allocated between income and corpus using the method 
prescribed under Sec. 20.2056A-4(c) for determining the corpus and 
income portion of an annuity payment.
    (3) Certain miscellaneous distributions and dispositions. Certain 
miscellaneous distributions and dispositions of trust

[[Page 487]]

assets are exempt from the section 2056A estate tax, including but not 
limited to the following--
    (i) Payments for ordinary and necessary expenses of the QDOT 
(including bond premiums and letter of credit fees);
    (ii) Payments to applicable governmental authorities for income tax 
or any other applicable tax imposed on the QDOT (other than a payment of 
the section 2056A estate tax due on the occurrence of a taxable event as 
described in paragraph (b) of this section);
    (iii) Dispositions of trust assets by the trustees (such as sales, 
exchanges, or pledging as collateral) for full and adequate 
consideration in money or money's worth; and
    (iv) Pursuant to section 2056A(b)(15), amounts paid from the QDOT to 
reimburse the surviving spouse for any tax imposed on the spouse under 
Subtitle A of the Internal Revenue Code on any item of income of the 
QDOT to which the surviving spouse is not entitled under the terms of 
the trust. Such distributions include (but are not limited to) amounts 
paid from the QDOT to reimburse the spouse for income taxes paid by the 
spouse (either by actual payment or through withholding) with respect to 
amounts received from a nonassignable annuity or other arrangement that 
are transferred by the spouse to a QDOT pursuant to Sec. 20.2056A- 
4(c)(3); and income taxes paid by the spouse (either by actual payment 
or through withholding) with respect to amounts received in a lump sum 
distribution from a qualified plan if the lump sum distribution is 
assigned by the surviving spouse to a QDOT. For purposes of this 
paragraph (c)(3)(iv), the amount of attributable tax eligible for 
reimbursement is the difference between the actual income tax liability 
of the spouse and the spouse's income tax liability determined as if the 
item had not been included in the spouse's gross income in the 
applicable taxable year.

[T.D. 8612, 60 FR 43546, Aug. 22, 1995, as amended by T.D. 9102, 69 FR 
21, Jan. 2, 2004]



Sec. 20.2056A-6  Amount of tax.

    (a) Definition of tax. Section 2056A(b)(2) provides for the 
computation of the section 2056A estate tax. For purposes of sections 
2056A(b)(2)(A) (i) and (ii), in determining the tax that would have been 
imposed under section 2001 on the estate of the first decedent, the 
rates in effect on the date of the first decedent's death are used. For 
this purpose, the provisions of section 2001(c)(2) (pertaining to 
phaseout of graduated rates and unified credit) apply. In addition, for 
purposes of sections 2056A(b)(2)(A) (i) and (ii), the tax which would 
have been imposed by section 2001 on the estate of the decedent means 
the net tax determined under section 2001 or 2101, as the case may be, 
after allowance of any allowable credits, including the unified credit 
allowable under section 2010, the credit for state death taxes under 
section 2011, the credit for tax on prior transfers under section 2013, 
and the credit for foreign death taxes under section 2014. See paragraph 
(b)(4) of this section regarding the application of the credits under 
sections 2011 and 2014. In the case of a decedent nonresident not a 
citizen of the United States, the applicable credits are determined 
under section 2102. The estate tax (net of any applicable credits) 
imposed under section 2056A(b)(1) constitutes an estate tax for purposes 
of section 691(c)(2)(A).
    (b) Benefits allowed in determining amount of section 2056A estate 
tax--(1) General rule. Section 2056A(b)(10) provides for the allowance 
of certain benefits in computing the section 2056A estate tax. Except as 
provided in this section, the rules of each of the credit, deduction and 
deferral provisions, as provided in the Internal Revenue Code must be 
complied with.
    (2) Treatment as resident. For purposes of section 2056A(b)(10)(A), 
a noncitizen spouse is treated as a resident of the United States for 
purposes of determining whether the QDOT property is includible in the 
spouse's gross estate under chapter 11 of the Internal Revenue Code, and 
for purposes of determining whether any of the credits, deductions or 
deferral provisions are allowable with respect to the QDOT property to 
the estate of the spouse.
    (3) Special rule in the case of trusts described in section 
2056(b)(8). In the case of a QDOT in which the spouse's interest 
qualifies for a marital deduction

[[Page 488]]

under section 2056(b)(8), the provisions of section 2056A(b)(10)(A) 
apply in determining the allowance of a charitable deduction in 
computing the section 2056A estate tax, notwithstanding that the QDOT is 
not includible in the spouse's gross estate.
    (4) Credit for state and foreign death taxes. If the assets of the 
QDOT are included in the surviving spouse's gross estate for federal 
estate tax purposes, or would have been so includible if the spouse had 
been a United States resident, and state or foreign death taxes are paid 
by the spouse's estate with respect to the QDOT, the taxes paid by the 
spouse's estate with respect to the QDOT are creditable, to the extent 
allowable under section 2011 or 2014, as applicable, in computing the 
section 2056A estate tax. In addition, state or foreign death taxes 
previously paid by the decedent/transferor's estate are also creditable 
in computing the section 2056A estate tax to the extent allowable under 
sections 2011 and 2014. Specifically, the tax that would have been 
imposed on the decedent's estate if the taxable estate had been 
increased by the value of the QDOT assets on the spouse's death plus the 
amount involved in prior taxable events (section 2056A(b)(2)(A)(i)), is 
determined after allowance of a credit equal to the lesser of the state 
or foreign death tax previously paid by the decedent's estate, or the 
amount prescribed under section 2011(b) or 2014(b) computed based on a 
taxable estate increased by such amounts. Similarly, the tax that would 
have been imposed on the decedent's estate if the taxable estate had 
been increased only by the amount involved in prior taxable events 
(section 2056A(b)(2)(A)(ii)) is determined after allowance of a credit 
equal to the lesser of the state or foreign death tax previously paid by 
the decedent's estate, or the amount prescribed under section 2011(b) or 
2014(b) computed based on a taxable estate increased by the amount 
involved in such prior taxable events. See paragraph (d), Example 2, of 
this section.
    (5) Alternate valuation and special use valuation--(i) In general. 
In order to claim the benefits of alternate valuation under section 
2032, or special use valuation under section 2032A, for purposes of 
computing the section 2056A estate tax, an election must be made on the 
Form 706-QDT that is filed with respect to the balance remaining in the 
QDOT upon the death of the surviving spouse. In addition, the separate 
requirements for making the section 2032 and/or section 2032A elections 
under those sections and the regulations thereunder must be complied 
with except that, for this purpose, the surviving spouse is treated as a 
resident of the United States regardless of the surviving spouse's 
actual residency status. Solely for purposes of this paragraph (b)(5), 
the citizenship of the first decedent is immaterial.
    (ii) Alternate valuation. For purposes of the alternate valuation 
election under section 2032, the election may not be made unless the 
election decreases both the value of the property remaining in the QDOT 
upon the death of the surviving spouse and the net amount of section 
2056A estate tax due. Once made, the election is irrevocable.
    (iii) Special use valuation. For purposes of section 2032A, the 
Designated Filer (in the case of multiple QDOTs) or the U.S. Trustee may 
elect to value certain farm and closely held business real property at 
its farm or business use value, rather than its fair market value, if 
all of the requirements under section 2032A and the applicable 
regulations are met, except that, for this purpose, the surviving spouse 
is treated as a resident of the United States regardless of the spouse's 
actual residency status. The total value of property valued under 
section 2032A in the QDOT cannot be decreased from fair market value by 
more than $750,000.
    (c) Miscellaneous rules. See sections 2056A(b)(2)(B)(i) and 
2056A(b)(2)(C) for special rules regarding the appropriate rate of tax. 
See section 2056A(b)(2)(B)(ii) for provisions regarding a credit or 
refund with respect to the section 2056A estate tax.
    (d) Examples. The rules of this section are illustrated by the 
following examples.
    Example 1. (i) D, a United States citizen, dies in 1995 a resident 
of State X, with a gross estate of $1,200,000. Under D's will, a 
pecuniary bequest of $700,000 passes to a QDOT for the benefit of D's 
spouse S, who is a resident but not a citizen of the United States. D's 
estate tax is computed as follows:

[[Page 489]]



Gross estate..........................      $1,200,000   ...............
Marital Deduction.....................        (700,000)  ...............
                                       -----------------
    Taxable Estate....................        $500,000   ...............
Gross Tax.............................  ...............        $155,800
Less: Unified Credit..................  ...............        (155,800)
                                                        ----------------
    Net Tax...........................  ...............               0
 

    (ii) S dies in 1997 at which time S is still a resident of the 
United States and the value of the assets of the QDOT is $700,000. 
Assuming there were no taxable events during S's lifetime with respect 
to the QDOT, the estate tax imposed under section 2056A(b)(1)(B) is 
$235,000, computed as follows:

D's actual taxable estate.................      $500,000  ..............
QDOT property.............................       700,000  ..............
                                           --------------
    Total.................................    $1,200,000  ..............
Gross Tax.................................  ............       $427,800
Less: Unified Credit......................  ............       (192,800)
                                                         ---------------
    Net Tax...............................  ............  Sec. 235,000
Less: Tax that would have been imposed on   ............              0
 D's actual taxable estate of $500,000....
                                                         ---------------
Section 2056A Estate Tax..................  ............       $235,000
 

    Example 2. (i) The facts are the same as in Example 1, except that 
D's gross estate was $2,000,000 and D's estate paid $70,000 in state 
death taxes to State X. D's estate tax is computed as follows:

Gross Estate..................     $2,000,000   ........  ..............
Marital Deduction.............       (700,000)  ........  ..............
                               ----------------
    Taxable Estate............     $1,300,000   ........  ..............
Gross Tax.....................  ..............  ........       $469,800
Less: Unified Credit..........  ..............   192,800  ..............
State Death Tax Credit          ..............    51,600       (244,400)
 Limitation (lesser of $51,600
 or $70,000 tax paid).........
                               ---------------------------
    Estate Tax................  ..............  ........       $225,400
 

    (ii) S dies in 1997 at which time S is still a resident of the 
United States and the value of the assets of the QDOT is $800,000. S's 
estate pays $40,000 in State X death taxes with respect to the inclusion 
of the QDOT in S's gross estate for state death tax purposes. Assuming 
there were no taxable events during S's lifetime with respect to the 
QDOT, the estate tax imposed under section 2056A(b)(1)(B) is $304,800 
computed as follows:

D's Actual Taxable Estate.................    $1,300,000  ..............
QDOT Property.............................       800,000  ..............
                                           --------------
    Total.................................    $2,100,000  ..............
Gross Tax.................................  ............       $829,800
Less: Unified Credit......................  ............       (192,800)
                                                         ---------------
    Pre-2011 section 2056A estate tax.....  ............       $637,000
(A) State Death Tax Credit Computation:
    (1) State death tax paid by S's estate  ............  ..............
     with respect to the QDOT [$40,000]
     plus state death tax previously paid
     by D's estate [$70,000] = $110,000...
    (2) Credit limit under section 2011(b)  ............  ..............
     (based on D's adjusted taxable estate
     of $2,040,000 under sections
     2056A(b)(2)(A) and 2011(b)) =
     $106,800.............................
(B) State death tax credit allowable        ............       (106,800)
 against section 2056A estate tax (lesser
 of paragraph (ii)(A)(1) or (2) of this
 Example 2
                                                         ---------------
        Net Tax...........................  ............       $530,200
Less: Tax that would have been imposed on   ............        225,400
 D's taxable estate of $1,300,000.........
                                                         ---------------
    Section 2056A Estate Tax..............  ............       $304,800
 


[T.D. 8612, 60 FR 43547, Aug. 22, 1995]



Sec. 20.2056A-7  Allowance of prior transfer credit under section 2013.

    (a) Property subject to QDOT election. Section 2056(d)(3) provides 
special rules for computing the section 2013 credit allowed with respect 
to property subject to a QDOT election. In computing the credit under 
section 2013, the amount of the credit is determined under section 2013 
and the regulations thereunder, except that--
    (1) The first limitation as described in section 2013(b) and Sec. 
20.2013-2 is the amount of the estate tax imposed under section 
2056A(b)(1)(A), with respect to distributions during the spouse's life, 
and under section 2056A(b)(1)(B), with respect to the value

[[Page 490]]

of the QDOT assets on the spouse's death;
    (2) In computing the second limitation as described in section 
2013(c) and Sec. 20.2013-3, the value of the property transferred to 
the decedent (as defined in section 2013(d) and Sec. 20.2013-4) is 
deemed to be the value of the QDOT assets on the date of death of the 
surviving spouse. The value as so determined is not reduced by the 
section 2056A estate tax imposed at the time of the spouse's death; and
    (3) The amount of the credit is determined without regard to the 
percentage limitations contained in section 2013(a).
    (b) Property not subject to QDOT election. If property includible in 
a decedent's gross estate passes to a noncitizen surviving spouse (the 
transferee) and no deduction is allowed to the decedent's estate for 
that interest in property under section 2056(a) solely because the 
requirements of section 2056(d)(2) are not satisfied, and the transferee 
spouse dies with an estate that is subject to tax under section 2001 or 
2101, as the case may be, any credit for tax on prior transfers 
allowable to the estate of the transferee spouse under section 2013 with 
respect to such interest in property is determined in accordance with 
the rules of section 2013 and the regulations thereunder, except that 
the amount of the credit is determined without regard to the percentage 
limitations contained in section 2013(a).
    (c) Example. The application of this section may be illustrated by 
the following example:

    Example. The facts are the same as in Sec. 20.2056A-6, Example 
2(ii). D, a United States citizen, dies in 1994, a resident of State X, 
with a gross estate of $2,000,000. Under D's will, a pecuniary bequest 
of $700,000 passes to a QDOT for the benefit of D's spouse S, who is a 
resident but not a citizen of the United States. S dies in 1997 at which 
time S is still a resident of the United States and the value of the 
assets of the QDOT is $800,000. There were no taxable events during S's 
lifetime. An estate tax of $304,800 is imposed under section 
2056A(b)(1)(B). S's taxable estate, including the value of the QDOT 
($800,000), is $1,500,000.
    (i) Under paragraph (a)(1) of this section, the first limitation for 
purposes of section 2013(b) is $304,800, the amount of the section 2056A 
estate tax.
    (ii) Under paragraph (a)(2) of this section, the second limitation 
for purposes of section 2013(c) is computed as follows:
    (A) S's net estate tax payable under Sec. 20.2013-3(a)(1), as 
modified under paragraph (a)(2) of this section, is computed as follows:

Taxable estate................................  ...........   $1,500,000
Gross estate tax..............................  ...........      555,800
Less: Unified credit..........................     $192,800  ...........
Credit for state death taxes..................       64,400      257,200
                                               -------------------------
    Pre-2013 net estate tax payable...........  ...........     $298,600
 

    (B) S's net estate tax payable under Sec. 20.2013-3(a)(2), as 
modified under paragraph (a)(2) of this section, is computed as follows:

Taxable estate................................  ...........     $700,000
Gross estate tax..............................  ...........      229,800
Less: Unified credit..........................     $192,800  ...........
Credit for state death taxes..................       18,000      210,800
                                               -------------------------
    Net tax payable...........................  ...........      $19,000
(C) Second Limitation:
    Paragraph (ii)(A) of this Example.........     $298,600  ...........
    Less: Paragraph (ii)(B) of this Example...       19,000
                                               --------------
                                                ...........     $279,600
 

    (iii) Credit for tax on prior transfers = $279,600 (lesser of 
paragraphs (i) or (ii) of this Example.

[T.D. 8612, 60 FR 43549, Aug. 22, 1995]



Sec. 20.2056A-8  Special rules for joint property.

    (a) Inclusion in gross estate--(1) General rule. If property is held 
by the decedent and the surviving spouse of the decedent as joint 
tenants with right of survivorship, or as tenants by the entirety, and 
the surviving spouse is not a United States citizen (or treated as a 
United States citizen) at the time of the decedent's death, the property 
is subject to inclusion in the decedent's gross estate in accordance 
with the rules of section 2040(a) (general rule for includibility of 
joint interests), and section 2040(b) (special rule for includibility of 
certain joint interests of husbands and wives) does not apply. 
Accordingly, the rules contained in section 2040(a) and Sec. 20.2040-1 
govern the extent to which such joint interests are includible in the 
gross estate of a decedent who was a citizen or resident of the United 
States. Under Sec. 20.2040-1(a)(2), the entire value of jointly held 
property is included in the decedent's gross estate unless the executor 
submits facts sufficient to show that property was not entirely acquired 
with consideration furnished by

[[Page 491]]

the decedent, or was acquired by the decedent and the other joint owner 
by gift, bequest, devise or inheritance. If the decedent is a 
nonresident not a citizen of the United States, the rules of this 
paragraph (a)(1) apply pursuant to sections 2103, 2031, 2040(a), and 
2056(d)(1)(B).
    (2) Consideration furnished by surviving spouse. For purposes of 
applying section 2040(a), in determining the amount of consideration 
furnished by the surviving spouse, any consideration furnished by the 
decedent with respect to the property before July 14, 1988, is treated 
as consideration furnished by the surviving spouse to the extent that 
the consideration was treated as a gift to the spouse under section 
2511, or to the extent that the decedent elected to treat the transfer 
as a gift to the spouse under section 2515 (to the extent applicable). 
For purposes of determining whether the consideration was a gift by the 
decedent under section 2511, it is presumed that the decedent was a 
citizen of the United States at the time the consideration was so 
furnished to the spouse. The special rule of this paragraph (a)(2) is 
applicable only if the donor spouse predeceases the donee spouse and not 
if the donee spouse predeceases the donor spouse. In cases where the 
donee spouse predeceases the donor spouse, any portion of the 
consideration treated as a gift to the donee spouse/decedent on the 
creation of the tenancy (or subsequently thereafter), regardless of the 
date the tenancy was created, is not treated as consideration furnished 
by the donee spouse/decedent for purposes of section 2040(a).
    (3) Amount allowed to be transferred to QDOT. If, as a result of the 
application of the rules described above, only a portion of the value of 
a jointly-held property interest is includible in a decedent's gross 
estate, only that portion that is so includible may be transferred to a 
QDOT under section 2056(d)(2). See Sec. 20.2056A-4(b)(1) and (d), 
Example 3.
    (b) Surviving spouse becomes citizen. Paragraph (a) of this section 
does not apply if the surviving spouse meets the requirements of section 
2056(d)(4). For the definition of resident in applying section 
2056(d)(4), see Sec. 20.0-1(b).
    (c) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. In 1987, D, a United States citizen, purchases real 
property and takes title in the names of D and S, D's spouse (a 
noncitizen, but a United States resident), as joint tenants with right 
of survivorship. In accordance with Sec. 25.2511-1(h)(5) of this 
chapter, one-half of the value of the property is a gift to S. D dies in 
1995. Because S is not a United States citizen, the provisions of 
section 2040(a) are determinative of the extent to which the real 
property is includible in D's gross estate. Because the joint tenancy 
was established before July 14, 1988, and under the applicable 
provisions of the Internal Revenue Code and regulations the transfer was 
treated as a gift of one-half of the property, one-half of the value of 
the property is deemed attributable to consideration furnished by S for 
purposes of section 2040(a). Accordingly, only one-half of the value of 
the property is includible in D's gross estate under section 2040(a).
    Example 2. The facts are the same as in Example 1, except that S 
dies in 1995 survived by D who is not a citizen of the United States. 
For purposes of applying section 2040(a), D's gift to S on the creation 
of the tenancy is not treated as consideration furnished by S toward the 
acquisition of the property. Accordingly, since S made no other 
contributions with respect to the property, no portion of the property 
is includible in S's gross estate.
    Example 3. The facts are the same as in Example 1, except that D and 
S purchase real property in 1990 making the down payment with funds from 
a joint bank account. All subsequent mortgage payments and improvements 
are paid from the joint bank account. The only funds deposited in the 
joint bank account are the earnings of D and S. It is established that D 
earned approximately 60% of the funds and S earned approximately 40% of 
the funds. D dies in 1995. The establishment of S's contribution to the 
joint bank account is sufficient to show that S contributed 40% of the 
consideration for the property. Thus, under paragraph Sec. 20.2040-
1(a)(2), 60% of the value of the property is includible in D's gross 
estate.

[T.D. 8612, 60 FR 43549, Aug. 22, 1995]



Sec. 20.2056A-9  Designated Filer.

    Section 2056A(b)(2)(C) provides special rules where more than one 
QDOT is established with respect to a decedent. The designation of a 
person responsible for filing a return under section 2056A(b)(2)(C)(i) 
(the Designated Filer) must be made on the decedent's federal estate tax 
return, or on the first Form 706-QDT that is due and is

[[Page 492]]

filed by its prescribed date, including extensions. The Designated Filer 
must be a U.S. Trustee. If the U.S. Trustee is an individual, that 
individual must have a tax home (as defined in section 911(d)(3)) in the 
United States. At least sixty days before the due date for filing the 
tax returns for all of the QDOTs, the U.S. Trustee(s) of each of the 
QDOTs must provide to the Designated Filer all of the necessary 
information relating to distributions from their respective QDOTs. The 
section 2056A estate tax due from each QDOT is allocated on a pro rata 
basis (based on the ratio of the amount of each respective distribution 
constituting a taxable event to the amount of all such distributions), 
unless a different allocation is required under the terms of the 
governing instrument or under local law. Unless the decedent has 
provided for a successor Designated Filer, if the Designated Filer 
ceases to qualify as a U.S. Trustee, or otherwise becomes unable to 
serve as the Designated Filer, the remaining trustees of each QDOT must 
select a qualifying successor Designated Filer (who is also a U.S. 
Trustee) prior to the due date for the filing of Form 706-QDT (including 
extensions). The selection is to be indicated on the Form 706-QDT. 
Failure to select a successor Designated Filer will result in the 
application of section 2056A(b)(2)(C).

[T.D. 8612, 60 FR 43550, Aug. 22, 1995]



Sec. 20.2056A-10  Surviving spouse becomes citizen after QDOT 
established.

    (a) Section 2056A estate tax no longer imposed under certain 
circumstances. Section 2056A(b)(12) provides that a QDOT is no longer 
subject to the imposition of the section 2056A estate tax if the 
surviving spouse becomes a citizen of the United States and the 
following conditions are satisfied--
    (1) The spouse either was a United States resident (for the 
definition of resident for this purpose, see Sec. 20.2056A-1(b)) at all 
times after the death of the decedent and before becoming a United 
States citizen, or no taxable distributions are made from the QDOT 
before the spouse becomes a United States citizen (regardless of the 
residency status of the spouse); and
    (2) The U.S. Trustee(s) of the QDOT notifies the Internal Revenue 
Service and certifies in writing that the surviving spouse has become a 
United States citizen. Notice is to be made by filing a final Form 706-
QDT on or before April 15th of the calendar year following the year in 
which the surviving spouse becomes a United States citizen, unless an 
extension of time for filing is granted under section 6081.
    (b) Special election by spouse. If the surviving spouse becomes a 
United States citizen and the spouse is not a United States resident at 
all times after the death of the decedent and before becoming a United 
States citizen, and a tax was previously imposed under section 
2056A(b)(1)(A) with respect to any distribution from the QDOT before the 
surviving spouse becomes a United States citizen, the estate tax imposed 
under section 2056A(b)(1) does not apply to distributions after the 
spouse becomes a citizen if--
    (1) The spouse elects to treat any taxable distribution from the 
QDOT prior to the spouse's election as a taxable gift made by the spouse 
for purposes of section 2001(b)(1)(B) (referring to adjusted taxable 
gifts), and for purposes of determining the amount of the tax imposed by 
section 2501 on actual taxable gifts made by the spouse during the year 
in which the spouse becomes a citizen or in any subsequent year;
    (2) The spouse elects to treat any previous reduction in the section 
2056A estate tax by reason of the decedent's unified credit (under 
either section 2010 or section 2102(c)) as a reduction in the spouse's 
unified credit under section 2505 for purposes of determining the amount 
of the credit allowable with respect to taxable gifts made by the 
surviving spouse during the taxable year in which the spouse becomes a 
citizen, or in any subsequent year; and
    (3) The elections referred to in this paragraph (b) are made by 
timely filing a Form 706-QDT on or before April 15th of the year 
following the year in which the surviving spouse becomes a citizen 
(unless an extension of time for filing

[[Page 493]]

is granted under section 6081) and attaching notification of the 
election to the return.

[T.D. 8612, 60 FR 43550, Aug. 22, 1995]



Sec. 20.2056A-11  Filing requirements and payment of the section 
2056A estate tax.

    (a) Distributions during surviving spouse's life. Section 
2056A(b)(5)(A) provides the due date for payment of the section 2056A 
estate tax imposed on distributions during the spouse's lifetime. An 
extension of not more than 6 months may be obtained for the filing of 
Form 706-QDT under section 6081(a) if the conditions specified therein 
are satisfied. See also Sec. 20.2056A- 5(c)(1) regarding the 
requirements for filing a Form 706-QDT in the case of a distribution to 
the surviving spouse on account of hardship, and Sec. 20.2056A-2T(d)(3) 
regarding the requirements for filing Form 706-QDT in the case of the 
required annual statement.
    (b) Tax at death of surviving spouse. Section 2056A(b)(5)(B) 
provides the due date for payment of the section 2056A estate tax 
imposed on the death of the spouse under section 2056A(b)(1)(B). An 
extension of not more than 6 months may be obtained for the filing of 
the Form 706-QDT under section 6081(a), if the conditions specified 
therein are satisfied. The obtaining of an extension of time to file 
under section 6081(a) does not extend the time to pay the section 2056A 
estate tax as prescribed under section 2056A(b)(5)(B).
    (c) Extension of time for paying section 2056A estate tax--(1) 
Extension of time for paying tax under section 6161(a)(2). Pursuant to 
sections 2056A(b)(10)(C) and 6161(a)(2), upon a showing of reasonable 
cause, an extension of time for a reasonable period beyond the due date 
may be granted to pay any part of the estate tax that is imposed upon 
the surviving spouse's death under section 2056A(b)(1)(B) and shown on 
the final Form 706-QDT, or any part of any installments of such tax 
payable under section 6166 (including any part of a deficiency prorated 
to any installment under such section). The extension may not exceed 10 
years from the date prescribed for payment of the tax (or in the case of 
an installment or part of a deficiency prorated to an installment, if 
later, not beyond the date that is 12 months after the due date for the 
last installment). Such extension may be granted by the district 
director or the director of the service center where the Form 706-QDT is 
filed.
    (2) Extension of time for paying tax under section 6161(a)(1). An 
extension of time beyond the due date to pay any part of the estate tax 
imposed on lifetime distributions under section 2056A(b)(1)(A), or 
imposed at the death of the surviving spouse under section 
2056A(b)(1)(B), may be granted for a reasonable period of time, not to 
exceed 6 months (12 months in the case of the estate tax imposed under 
section 2056A(b)(1)(B) at the surviving spouse's death), by the district 
director or the director of the service center where the Form 706-QDT is 
filed.
    (d) Liability for tax. Under section 2056A(b)(6), each trustee (and 
not solely the U.S. Trustee(s)) of a QDOT is personally liable for the 
amount of the estate tax imposed in the case of any taxable event under 
section 2056A(b)(1). In the case of multiple QDOTs with respect to the 
same decedent, each trustee of a QDOT is personally liable for the 
amount of the section 2056A estate tax imposed on any taxable event with 
respect to that trustee's QDOT, but is not personally liable for tax 
imposed with respect to taxable events involving QDOTs of which that 
person is not a trustee. However, the assets of any QDOT are subject to 
collection by the Internal Revenue Service for any tax resulting from a 
taxable event with respect to any other QDOT established with respect to 
the same decedent. The trustee may also be personally liable as a 
withholding agent under section 1461 or other applicable provisions of 
the Internal Revenue Code.

[T.D. 8612, 60 FR 43551, Aug. 22, 1995]



Sec. 20.2056A-12  Increased basis for section 2056A estate tax paid 
with respect to distribution from a QDOT.

    Under section 2056A(b)(13), in the case of any distribution from a 
QDOT on which an estate tax is imposed under section 2056A(b)(1)(A), the 
distribution is treated as a transfer by gift for purposes of section 
1015, and any estate tax paid under section 2056A(b)(1)(A) is treated as 
a gift tax.

[[Page 494]]

See Sec. 1.1015-5(c)(4) and (5) of this chapter for rules for 
determining the amount by which the basis of the distributed property is 
increased.

[T.D. 8612, 60 FR 43551, Aug. 22, 1995]



Sec. 20.2056A-13  Effective dates.

    Except as provided in this section, the provisions of Sec. Sec. 
20.2056A-1 through 20.2056A-12 are applicable with respect to estates of 
decedents dying after August 22, 1995. The rule in the fourth sentence 
of Sec. 20.2056A-5(c)(2) regarding unitrusts and distributions of 
income to the surviving spouse in conformance with applicable local law 
is applicable to trusts for taxable years ending after January 2, 2004.

[T.D. 9102, 69 FR 21, Jan. 2, 2004]

                  Estates of Nonresidents Not Citizens



Sec. 20.2101-1  Estates of nonresidents not citizens; tax imposed.

    (a) Imposition of tax. Section 2101 imposes a tax on the transfer of 
the taxable estate of a nonresident who is not a citizen of the United 
States at the time of death. In the case of estates of decedents dying 
after November 10, 1988, the tax is computed at the same rates as the 
tax that is imposed on the transfer of the taxable estate of a citizen 
or resident of the United States in accordance with the provisions of 
sections 2101(b) and (c). For the meaning of the terms resident, 
nonresident, and United States, as applied to a decedent for purposes of 
the estate tax, see Sec. 20.0-1(b)(1) and (2). For the liability of the 
executor for the payment of the tax, see section 2002. For special rules 
as to the phaseout of the graduated rates and unified credit, see 
sections 2001(c)(2) and 2101(b).
    (b) Special rates in the case of certain decedents. In the case of 
an estate of a nonresident who was not a citizen of the United States 
and who died after December 31, 1976, and on or before November 10, 
1988, the tax on the nonresident's taxable estate is computed using the 
formula provided under section 2101(b), except that the rate schedule in 
paragraph (c) of this section is to be used in lieu of the rate schedule 
in section 2001(c).
    (c) Rate schedule for decedents dying after December 31, 1976 and on 
or before November 10, 1988.

------------------------------------------------------------------------
 If the amount for which the tentative
         tax to be computed is:               The tentative tax is:
------------------------------------------------------------------------
    Not over $100,000..................  6% of such amount.
    Over $100,000 but not over $500,000  $6,000, plus 12% of excess over
                                          $100,000.
    Over $500,000 but not over           $54,000, plus 18% of excess
     $1,000,000.                          over $500,000.
    Over $1,000,000 but not over         $144,000, plus 24% of excess
     $2,000,000.                          over $1,000,000.
    Over $2,000,000....................  $384,000, plus 30% of excess
                                          over $2,000,000.
------------------------------------------------------------------------


[T.D. 8612, 60 FR 43551, Aug. 22, 1995]



Sec. 20.2102-1  Estates of nonresidents not citizens; credits against 
tax.

    (a) In general. In arriving at the net estate tax payable with 
respect to the transfer of an estate of a nonresident who was not a 
citizen of the United States at the time of his death, the following 
credits are subtracted from the tax imposed by section 2101:
    (1) The State death tax credit under section 2011, to the extent 
permitted by section 2102(b) and paragraph (b) of this section;
    (2) The gift tax credit under section 2012; and
    (3) The credit under section 2013 for tax on prior transfers.

Except as provided in section 2102(b) and paragraph (b) of this section 
(relating to a special limitation on the amount of the credit for State 
death taxes), the amount of each of these credits is determined in the 
same manner as that prescribed for its determination in the case of 
estates of citizens or residents of the United States. See Sec. Sec. 
20.2011-1 through 20.2013-6. Subject to the additional special 
limitation contained in section 2102(b) in the case of section 2015, the 
provisions of sections 2015 and 2016, relating respectively to the 
credit for death taxes on remainders and the recovery of taxes claimed 
as a credit, are applicable with

[[Page 495]]

respect to the credit for State death taxes in the case of the estates 
of nonresidents not citizens. However, no credit is allowed under 
section 2014 for foreign death taxes.
    (b) Special limitation--(1) In general. In the case of estates of 
decedents dying on or after November 14, 1966, other than estates the 
estate tax treatment of which is subject to a Presidential proclamation 
made pursuant to section 2108(a), the maximum credit allowable under 
section 2011 for State death taxes against the tax imposed by section 
2101 on the transfer of estates of nonresidents not citizens of the 
United States is an amount which bears the same ratio to the maximum 
credit computed as provided in section 2011(b) (and without regard to 
this special limitation) as the value of the property (determined in the 
same manner as that prescribed in paragraph (b) of Sec. 20.2031-1 for 
the estates of citizens or residents of the United States) in respect of 
which a State death tax was actually paid and which is included in the 
gross estate under section 2103 or, if applicable, section 2107(b) bears 
to the value (as so determined) of the total gross estate under section 
2103 or 2107(b). For purposes of this special limitation, the term 
``State death taxes'' means the taxes described in section 2011(a) and 
paragraph (a) of Sec. 20.2011-1.
    (2) Illustrations. The application of this paragraph may be 
illustrated by the following examples:

    Example (1). A, a nonresident not a citizen of the United States, 
died on February 15, 1967, owning real property in State Z valued at 
$50,000 and stock in various domestic corporations valued at $100,000 
and not subject to death taxes in any State. State Z's inheritance tax 
actually paid with respect to the real property in State Z is $2,000. 
A's taxable estate for Federal estate tax purposes is $110,000, in 
respect of which the maximum credit under section 2011 would be $720 in 
the absence of the special limitation contained in section 2102(b). 
However, under section 2102(b) and this paragraph the amount of the 
maximum credit allowable in respect to A's estate for State death taxes 
is limited to the amount which bears the same ratio to $720 (the maximum 
credit computed as provided in section 2011(b)) as $50,000 (the value of 
the property in respect of which a State death tax was actually paid and 
which is included in A's gross estate under section 2103) bears to 
$150,000 (the value of A's total gross estate under section 2103). 
Accordingly, the maximum credit allowable under section 2102 and this 
section for all State death taxes actually paid is $240 ($720x$50,000/
$150,000).
    Example (2). B, a nonresident not a citizen of the United States, 
died on January 15, 1967, owning real property in State X valued at 
$100,000, real property in State Y valued at $200,000, and stock in 
various domestic corporations valued at $300,000 and not subject to 
death taxes in any State. States X and Y both imposed inheritance taxes. 
State X has, in addition to its inheritance tax, an estate tax equal to 
the amount by which the maximum State death tax credit allowable to an 
estate against its Federal estate tax exceeds the amount of the 
inheritance tax imposed by State X plus the amount of death taxes paid 
to other States. State Y has no estate tax. The amount of the 
inheritance tax actually paid to State X with respect to the real 
property situated in State X is $4,000; the amount of the inheritance 
tax actually paid to State Y with respect to the real property situated 
in State Y is $9,000. B's taxable estate for Federal estate tax purposes 
is $550,000, in respect of which the maximum credit under section 2011 
would be $14,400 in the absence of the special limitation contained in 
section 2102(b). However, under section 2102(b) and this paragraph the 
amount of the maximum credit allowable in respect of B's estate for 
State death taxes is limited to the amount which bears the same ratio to 
$14,400 (the maximum credit computed as provided in section 2011(b)) as 
$300,000 (the value of the property in respect of which a State death 
tax was actually paid and which is included in B's gross estate under 
section 2103) bears to $600,000 (the value of B's total gross estate 
under section 2103). Accordingly, the maximum credit allowable under 
section 2102 and this section for all State death taxes actually paid is 
$7,200 ($14,400x$300,000/$600,000), and the estate tax of State X is not 
applicable to B's estate.

    (c) Unified credit--(1) In general. Subject to paragraph (c)(2) of 
this section, in the case of estates of decedents dying after November 
10, 1988, a unified credit of $13,000 is allowed against the tax imposed 
by section 2101 subject to the limitations of section 2102(c).
    (2) When treaty is applicable. To the extent required under any 
treaty obligation of the United States, the estate of a nonresident not 
a citizen of the United States is allowed the unified credit permitted 
to a United States citizen or resident of $192,800, multiplied by the 
proportion that the total gross estate of the decedent situated in the

[[Page 496]]

United States bears to the decedent's total gross estate wherever 
situated.
    (3) Certain residents of possessions. In the case of a decedent who 
is considered to be a nonresident not a citizen of the United States 
under section 2209, there is allowed a unified credit equal to the 
greater of $13,000, or $46,800 multiplied by the proportion that the 
decedent's gross estate situated in the United States bears to the total 
gross estate of the decedent wherever situated.

[T.D. 7296, 38 FR 34194, Dec. 12, 1973, as amended at T.D. 8612, 60 FR 
43552, Aug. 22, 1995]



Sec. 20.2103-1  Estates of nonresidents not citizens; ``entire gross 
estate''.

    The ``entire gross estate'' wherever situated of a nonresident who 
was not a citizen of the United States at the time of his death is made 
up in the same way as the ``gross estate'' of a citizen or resident of 
the United States. See Sec. Sec. 20.2031-1 through 20.2044-1. See 
paragraphs (a) and (c) of Sec. 20.2031-1 for the circumstances under 
which real property situated outside the United States is excluded from 
the gross estate of a citizen or resident of the United States. However, 
except as provided in section 2107(b) with respect to the estates of 
certain expatriates, in the case of a nonresident not a citizen, only 
that part of the entire gross estate which on the date of the decedent's 
death is situated in the United States is included in his taxable 
estate. In fact, property situated outside the United States need not be 
disclosed on the return unless section 2107 is applicable, certain 
deductions are claimed, or information is specifically requested. See 
Sec. Sec. 20.2106-1, 20.2106-2, and 20.2107-1. For a description of 
property considered to be situated in the United States, see Sec. 
20.2104-1. For a description of property considered to be situated 
outside the United States, see Sec. 20.2105-1.

[T.D. 7296, 38 FR 34195, Dec. 12, 1973]



Sec. 20.2104-1  Estates of nonresidents not citizens; property within
the United States.

    (a) In general. Property of a nonresident who was not a citizen of 
the United States at the time of his death is considered to be situated 
in the United States if it is--
    (1) Real property located in the United States.
    (2) Tangible personal property located in the United States, except 
certain works of art on loan for exhibition (see paragraph (b) of Sec. 
20.2105-1).
    (3) In the case of an estate of a decedent dying before November 14, 
1966, written evidence of intangible personal property which is treated 
as being the property itself, such as a bond for the payment of money, 
if it is physically located in the United States; except that this 
subparagraph shall not apply to obligations of the United States (but 
not its instrumentalities) issued before March 1, 1941, if the decedent 
was not engaged in business in the United States at the time of his 
death. See section 2106(c).
    (4) Except as specifically provided otherwise in this section or in 
Sec. 20.2105-1 (which specific exceptions, in the case of estates of 
decedents dying on or after November 14, 1966, cause this subparagraph 
to have relatively limited applicability), intangible personal property 
the written evidence of which is not treated as being the property 
itself, if it is issued by or enforceable against a resident of the 
United States or a domestic corporation or governmental unit.
    (5) Shares of stock issued by a domestic corporation, irrespective 
of the location of the certificates (see, however, paragraph (i) of 
Sec. 20.2105-1 for a special rule with respect to certain withdrawable 
accounts in savings and loan or similar associations).
    (6) In the case of an estate of a decedent dying before November 14, 
1966, moneys deposited in the United States by or for the decedent with 
any person carrying on the banking business, if the decedent was engaged 
in business in the United States at the time of his death.
    (7) In the case of an estate of a decedent dying on or after 
November 14, 1966, except as specifically provided otherwise in 
paragraph (d), (i), (j), (l), or (m) of Sec. 20.2105-1, any debt 
obligation, including a bank deposit, the primary obligor of which is--
    (i) A United States person (as defined in section 7701(a)(30)), or

[[Page 497]]

    (ii) The United States, a State or any political subdivision 
thereof, the District of Columbia, or any agency or instrumentality of 
any such government.

This paragraph applies irrespective of whether the written evidence of 
the debt obligation is treated as being the property itself or whether 
the decedent was engaged in business in the United States at the time of 
his death. For purposes of this subparagraph and paragraphs (k), (l), 
and (m) of Sec. 20.2105-1, a debt obligation on which there are two or 
more primary obligors shall be apportioned among such obligors, taking 
into account to the extent appropriate under all the facts and 
circumstances any choate or inchoate rights of contribution existing 
among such obligors with respect to the indebtedness. The term ``agency 
or instrumentality,'' as used in paragraph (a)(7)(ii) of this section 
does not include a possession of the United States or an agency or 
instrumentality of a possession. Currency is not a debt obligation for 
purposes of this subparagraph.
    (8) In the case of an estate of a decedent dying on or after January 
1, 1970, except as specifically provided otherwise in paragraph (i) or 
(l) of Sec. 20.2105-1, deposits with a branch in the United States of a 
foreign corporation, if the branch is engaged in the commercial banking 
business, whether or not the decedent was engaged in business in the 
United States at the time of his death.
    (b) Transfers. Property of which the decedent has made a transfer 
taxable under sections 2035 through 2038 is deemed to be situated in the 
United States if it is determined, under the provisions of paragraph (a) 
of this section, to be so situated either at the time of the transfer or 
at the time of the decedent's death. See Sec. Sec. 20.2035-1 through 
20.2038-1.
    (c) Death tax convention. It should be noted that the situs rules 
described in this section may be modified for various purposes under the 
provisions of an applicable death tax convention with a foreign country.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7296, 38 FR 34195, Dec. 12, 1973; T.D. 7321, 39 FR 
29597, Aug. 16, 1974]



Sec. 20.2105-1  Estates of nonresidents not citizens; property without
the United States.

    Property of a nonresident who was not a citizen of the United States 
at the time of his death is considered to be situated outside the United 
States if it is--
    (a)(1) Real property located outside the United States, except to 
the extent excludable from the entire gross estate wherever situated 
under Sec. 20.2103-1.
    (2) Tangible personal property located outside the United States.
    (b) Works of art owned by the decedent if they were--
    (1) Imported into the United States solely for exhibition purposes,
    (2) Loaned for those purposes to a public gallery or museum, no part 
of the net earnings of which inures to the benefit of any private 
shareholder or individual, and
    (3) At the time of the death of the owner, on exhibition, or en 
route to or from exhibition, in such a public gallery or museum.
    (c) In the case of an estate of a decedent dying before November 14, 
1966, written evidence of intangible personal property which is treated 
as being the property itself, such as a bond for the payment of money, 
if it is not physically located in the United States.
    (d) Obligations of the United States issued before March 1, 1941, 
even though physically located in the United States, if the decedent was 
not engaged in business in the United States at the time of his death.
    (e) Except as specifically provided otherwise in this section or in 
Sec. 20.2104-1, intangible personal property the written evidence of 
which is not treated as being the property itself, if it is not issued 
by or enforceable against a resident of the United States or a domestic 
corporation or governmental unit.
    (f) Shares of stock issued by a corporation which is not a domestic 
corporation, regardless of the location of the certificates.
    (g) Amounts receivable as insurance on the decedent's life.
    (h) In the case of an estate of a decedent dying before November 14, 
1966, moneys deposited in the United States by or for the decedent with 
any person

[[Page 498]]

carrying on the banking business, if the decedent was not engaged in 
business in the United States at the time of his death.
    (i) In the case of an estate of a decedent dying on or after 
November 14, 1966, and before January 1, 1976, any amount deposited in 
the United States which is described in section 861(c) (relating to 
certain bank deposits, withdrawable accounts, and amounts held by an 
insurance company under an agreement to pay interest), if any interest 
thereon, were such interest received by the decedent at the time of his 
death, would be treated under section 862(a)(1) as income from sources 
without the United States by reason of section 861(a)(1)(A) (relating to 
interest on amounts described in section 861(c) which is not effectively 
connected with the conduct of a trade or business within the United 
States) and the regulations thereunder. If such interest would be 
treated by reason of those provisions as income from sources without the 
United States only in part, the amount described in section 861(c) shall 
be considered situated outside the United States in the same proportion 
as the part of the interest which would be treated as income from 
sources without the United States bears to the total amount of the 
interest. This paragraph applies whether or not the decedent was engaged 
in business in the United States at the time of his death, and, except 
with respect to amounts described in section 861(c)(3) (relating to 
amounts held by an insurance company under an agreement to pay 
interest), whether or not the deposit or other amount is in fact 
interest bearing.
    (j) In the case of an estate of a decedent dying on or after 
November 14, 1966, deposits with a branch outside of the United States 
of a domestic corporation or domestic partnership, if the branch is 
engaged in the commercial banking business. This paragraph applies 
whether or not the decedent was engaged in business in the United States 
at the time of his death, and whether or not the deposits, upon 
withdrawal, are payable in currency of the United States.
    (k) In the case of an estate of a decedent dying on or after 
November 14, 1966, except as specifically provided otherwise in 
paragraph (a)(8) of Sec. 20.2104-1 with respect to estates of decedents 
dying on or after January 1, 1970, any debt obligation, including a bank 
deposit, the primary obligor of which is neither--
    (1) A United States person (as defined in section 7701(a)(30)), nor
    (2) The United States, a State or any political subdivision thereof, 
the District of Columbia, or any agency or instrumentality of any such 
government.

This paragraph applies irrespective of whether the written evidence of 
the debt obligation is treated as being the property itself or whether 
the decedent was engaged in business in the United States at the time of 
his death. See paragraph (a)(7) of Sec. 20.2104-1 for the treatment of 
a debt obligation on which there are two or more primary obligors. The 
term ``agency or instrumentality,'' as used in subparagraph (2) of this 
paragraph, does not include a possession of the United States or an 
agency or instrumentality of a possession. Currency is not a debt 
obligation for purposes of this paragraph.
    (l) In the case of an estate of a decedent dying on or after 
November 14, 1966, any debt obligation to the extent that the primary 
obligor on the debt obligation is a domestic corporation, if any 
interest thereon, were the interest received from such obligor by the 
decedent at the time of his death, would be treated under section 
862(a)(1) as income from sources without the United States by reason of 
section 861(a)(1)(B) (relating to interest received from a domestic 
corporation less than 20 percent of whose gross income for a 3-year 
period was derived from sources within the United States) and the 
regulations thereunder. For such purposes the 3-year period referred to 
in section 861(a)(1)(B) is the period of 3 years ending with the close 
of the domestic corporation's last taxable year terminating before the 
decedent's death. This paragraph applies whether or not (1) the 
obligation is in fact interest bearing, (2) the written evidence of the 
debt obligation is treated as being the property itself, or (3) the 
decedent was engaged in business in the United States at the time of his 
death. See paragraph (a)(7) of Sec. 20.2104-1 for the

[[Page 499]]

treatment of a debt obligation on which there are two or more primary 
obligors.
    (m)(1) In the case of an estate of a decedent dying after December 
31, 1972, except as otherwise provided in paragraph (m)(2) of this 
section any debt obligation to the extent that the primary obligor on 
the debt obligation is a domestic corporation or domestic partnership, 
if any interest thereon, were the interest received from such obligor by 
the decedent at the time of his death, would be treated under section 
862(a)(1) as income from sources without the United States by reason of 
section 861(a)(1)(G) (relating to interest received on certain debt 
obligations with respect to which elections have been made under section 
4912(c)) and the regulations thereunder. This paragraph applies whether 
or not (i) the obligation is in fact interest bearing, (ii) the written 
evidence of the debt obligation is treated as being the property itself, 
or (iii) the decedent was engaged in business in the United States at 
the time of his death. See paragraph (a)(7) of Sec. 20.2104-1 for the 
treatment of a debt obligation on which there are two or more primary 
obligors.
    (2) In the case of an estate of a decedent dying before January 1, 
1974, this paragraph does not apply to any debt obligation of a foreign 
corporation assumed by a domestic corporation which is treated under 
section 4912(c)(2) as issued by such domestic corporation during 1973.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6684, 28 FR 
11410, Oct. 24, 1963; T.D. 7296, 38 FR 34196, Dec. 12, 1973; T.D. 7321, 
39 FR 29597, Aug. 16, 1974]



Sec. 20.2106-1  Estates of nonresidents not citizens; taxable estate;
deductions in general.

    (a) The taxable estate of a nonresident who was not a citizen of the 
United States at the time of his death is determined by adding the value 
of that part of his gross estate which, at the time of his death, is 
situated in the United States and, in the case of an estate to which 
section 2107 (relating to expatriation to avoid tax) applies, any 
amounts includible in his gross estate under section 2107(b), and then 
subtracting from the sum thereof the total amount of the following 
deductions:
    (1) The deductions allowed in the case of estates of decedents who 
were citizens or residents of the United States under sections 2053 and 
2054 (see Sec. Sec. 20.2053-1 through 20.2053-9 and Sec. 20.2054-1) 
for expenses, indebtedness and taxes, and for losses, to the extent 
provided in Sec. 20.2106-2.
    (2) A deduction computed in the same manner as the one allowed under 
section 2055 (see Sec. Sec. 20.2055-1 through 20.2055-5) for 
charitable, etc., transfers, except--
    (i) That the deduction is allowed only for transfers to corporations 
and associations created or organized in the United States, and to 
trustees for use within the United States, and
    (ii) That the provisions contained in paragraph (c)(2) of Sec. 
20.2055-2 relating to termination of a power to consume are not 
applicable.
    (3) Subject to the special rules set forth at Sec. 20.2056A-1(c), 
the amount which would be deductible with respect to property situated 
in the United States at the time of the decedent's death under the 
principles of section 2056. Thus, if the surviving spouse of the 
decedent is a citizen of the United States at the time of the decedent's 
death, a marital deduction is allowed with respect to the estate of the 
decedent if all other applicable requirements of section 2056 are 
satisfied. If the surviving spouse of the decedent is not a citizen of 
the United States at the time of the decedent's death, the provisions of 
section 2056, including specifically the provisions of section 2056(d) 
and (unless section 2056(d)(4) applies) the provisions of section 2056A 
(QDOTs) must be satisfied.
    (b) Section 2106(b) provides that no deduction is allowed under 
paragraph (a) (1) or (2) of this section unless the executor discloses 
in the estate tax return the value of that part of the gross estate not 
situated in the United States. See Sec. 20.2105-1. Such part must be 
valued as of the date of the decedent's death, or if the alternate 
valuation method under section 2032 is

[[Page 500]]

elected, as of the applicable valuation date.

[T.D. 6296, 23 FR 5429, June 24, 1958, as amended by T.D. 6526, 26 FR 
417, Jan. 19, 1961; T.D. 7296, 38 FR 34197, Dec. 12, 1973; T.D. 7318, 39 
FR 25457, July 11, 1974; T.D. 8612, 60 FR 43552, Aug. 22, 1995]



Sec. 20.2106-2  Estates of nonresidents not citizens; deductions for 
expenses, losses, etc.

    (a) In computing the taxable estate of a nonresident who was not a 
citizen of the United States at the time of his death, deductions are 
allowed under sections 2053 and 2054 for expenses, indebtedness and 
taxes, and for losses, to the following extent:
    (1) A pledge or subscription is deductible if it is an enforceable 
claim against the estate and if it would constitute an allowable 
deduction under paragraph (a)(2) of Sec. 20.2106-1, relating to 
charitable, etc., transfers, if it had been a bequest.
    (2) That proportion of other deductions under sections 2053 and 2054 
is allowed which the value of that part of the decedent's gross estate 
situated in the United States at the time of his death bears to the 
value of the decedent's entire gross estate wherever situated. It is 
immaterial whether the amounts to be deducted were incurred or expended 
within or without the United States. For purposes of this subparagraph, 
an amount which is includible in the decedent's gross estate under 
section 2107(b) with respect to stock in a foreign corporation shall be 
included in the value of the decedent's gross estate situated in the 
United States.

No deduction is allowed under this paragraph unless the value of the 
decedent's entire gross estate is disclosed in the estate tax return. 
See paragraph (b) of Sec. 20.2106-1.
    (b) In order that the Internal Revenue Service may properly pass 
upon the items claimed as deductions, the executor should submit a 
certified copy of the schedule of liabilities, claims against the 
estate, and expenses of administration filed under any applicable 
foreign death duty act. If no such schedule was filed, the executor 
should submit a certified copy of the schedule of these liabilities, 
claims and expenses filed with the foreign court in which administration 
was had. If the items of deduction allowable under section 2106(a)(1) 
were not included in either such schedule, or if no such schedules were 
filed, then there should be submitted a written statement of the foreign 
executor containing a declaration that it is made under the penalties of 
perjury setting forth the facts relied upon as entitling the estate to 
the benefit of the particular deduction or deductions.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7296, 38 FR 34197, Dec. 12, 1973; T.D. 8612, 60 FR 
43552, Aug. 22, 1995]



Sec. 20.2107-1  Expatriation to avoid tax.

    (a) Rate of tax. The tax imposed by section 2107(a) on the transfer 
of the taxable estates of certain nonresident expatriate decedents who 
were formerly citizens of the United States is computed in accordance 
with the table contained in section 2001, relating to the rate of the 
tax imposed on the transfer of the taxable estates of decedents who were 
citizens or residents of the United States. Except for any amounts 
included in the gross estate solely by reason of section 2107(b) and 
paragraph (b)(1) (ii) and (iii) of this section, the value of the 
taxable estate to be used in this computation is determined as provided 
in section 2106 and Sec. 20.2106-1. The decedents to which section 
2107(a) and this section apply are described in paragraph (d) of this 
section.
    (b) Gross estate--(1) Determination of value--(i) General rule. 
Except as provided in subdivision (ii) of this subparagraph with respect 
to stock in certain foreign corporations, for purposes of the tax 
imposed by section 2107(a) the value of the gross estate of every estate 
the transfer of which is subject to the tax imposed by that section is 
determined as provided in section 2103 and Sec. 20.2103-1.
    (ii) Amount includible with respect to stock in certain foreign 
corporations. If at the time of his death a nonresident expatriate 
decedent the transfer of whose estate is subject to the tax imposed by 
section 2107(a)--

[[Page 501]]

    (a) Owned (within the meaning of section 958(a) and the regulations 
thereunder) 10 percent or more of the total combined voting power of all 
classes of stock entitled to vote in a foreign corporation, and
    (b) Owned (within the meaning of section 958(a) and the regulations 
thereunder), or is considered to have owned (by applying the ownership 
rules of section 958(b) and the regulations thereunder), more than 50 
percent of the total combined voting power of all classes of stock 
entitled to vote in such foreign corporation,


then section 2107(b) requires the inclusion in the decedent's gross 
estate, in addition to amounts otherwise includible therein under 
subdivision (i) of this subparagraph, of an amount equal to that 
proportion of the fair market value (determined at the time of the 
decedent's death or, if so elected by the executor of the decedent's 
estate, on the alternate valuation date as provided in section 2032) of 
the stock in such foreign corporation owned (within the meaning of 
section 958(a) and the regulations thereunder) by the decedent at the 
time of his death, which the fair market value of any assets owned by 
such foreign corporation and situated in the United States, at the time 
of his death, bears to the total fair market value of all assets owned 
by such foreign corporation at the time of his death.
    (iii) Rules of application. (a) In determining the proportion of the 
fair market value of the stock which is includible in the gross estate 
under subdivision (ii) of this subparagraph, the fair market value of 
the foreign corporation's assets situated in the United States and of 
its total assets shall be determined without reduction for any 
outstanding liabilities of the corporation.
    (b) For purposes of subdivision (ii) of this subparagraph, the 
foreign corporation's assets which are situated in the United States 
shall be all its property which, by applying the provisions of sections 
2104, 2105, and Sec. Sec. 20.2104-1 and 20.2105-1, would be considered 
to be situated in the United States if such property were property of a 
nonresident who was not a citizen of the United States.
    (c) For purposes of subdivision (ii)(a) of this subparagraph, a 
decedent is treated as owning stock in a foreign corporation at the time 
of his death to the extent he owned (within the meaning of section 
958(a) and the regulations thereunder) the stock at the time he made a 
transfer of the stock in a transfer described in sections 2035 to 2038, 
inclusive (relating respectively to transfers made in contemplation of 
death, transfers with a retained life estate, transfers taking effect at 
death, and revocable transfers). For purposes of subdivision (ii)(b) of 
this subparagraph, a decedent is treated as owning stock in a foreign 
corporation at the time of his death to the extent he owned (within the 
meaning of section 958(a) and the regulations thereunder), or is 
considered to have owned (by applying the ownership rules of section 
958(b) and the regulations thereunder), the stock at the time he made a 
transfer of the stock in a transfer described in sections 2035 to 2038, 
inclusive. In applying the proportion rule of section 2107(b) and 
subdivision (ii) of this subparagraph where a decedent is treated as 
owning stock in a foreign corporation at the time of his death by reason 
of having transferred his interest in such stock in a transfer described 
in sections 2035 to 2038, inclusive, the proportionate value of the 
interest includible in his gross estate is based upon the value as of 
the applicable valuation date described in section 2031 or 2032 of the 
amount, determined as of the date of transfer, of his interest in the 
stock. See example (2) in subparagraph (2) of this paragraph.
    (d) For purposes of applying subdivision (ii)(b) of this 
subparagraph, the same shares of stock may not be counted more than 
once. See example (2) in subparagraph (2) of this paragraph.
    (e) The principles applied in paragraph (b) of Sec. 1.957-1 of this 
chapter (Income Tax Regulations) for determining what constitutes total 
combined voting power of all classes of stock entitled to vote in a 
foreign corporation for purposes of section 957(a) shall be applied in 
determining what constitutes total combined voting power of all classes 
of stock entitled to vote in a foreign corporation for purposes of 
section 2107(b)

[[Page 502]]

and subdivision (ii) of this subparagraph. In applying such principles 
under this paragraph changes in language shall be made, where necessary, 
in order to treat the nonresident expatriate decedent, rather than U.S. 
shareholders, as owning such total combined voting power.
    (2) Illustrations. The application of this paragraph may be 
illustrated by the following examples:

    Example (1). (a) At the time of his death, H, a nonresident 
expatriate decedent the transfer of whose estate is subject to the tax 
imposed by section 2107(a), owned a 60-percent interest in M Company, a 
foreign partnership, which in turn owned stock issued by N Corporation, 
a foreign corporation. The stock in N Corporation held by M Company, 
which constituted 50 percent of the total combined voting power of all 
classes of stock entitled to vote in N Corporation, was valued at 
$50,000 at the time of H's death. In addition, W, H's wife, also a 
nonresident not a citizen of the United States, owned at the time of H's 
death stock in N Corporation constituting 25 percent of the total 
combined voting power of all classes of stock entitled to vote in that 
corporation. The fair market value of the assets of N Corporation which, 
at the time of H's death, were situated in the United States constituted 
40 percent of the fair market value of all assets of that corporation. 
It is assumed for purposes of this example that the executor of H's 
estate has not elected to value the estate on the alternate valuation 
date provided in section 2032.
    (b) The test contained in subparagraph (1)(ii)(a) of this paragraph 
is met since at the time of his death H indirectly owned (within the 
meaning of section 958(a) and the regulations thereunder) 30 percent (60 
percent of 50 percent) of the total combined voting power of all classes 
of stock entitled to vote in N Corporation; and the test contained in 
subparagraph (1)(ii)(b) of this paragraph is met since at such time H 
owned or is considered to have owned (within the meaning of section 958 
(a) and (b) and the regulations thereunder) 55 percent of the total 
combined voting power of all classes of stock entitled to vote in N 
Corporation (having constructive ownership of his wife's 25 percent, in 
addition to his own indirect ownership of 30 percent, of the total 
combined voting power). Accordingly, $12,000 is included in H's gross 
estate by reason of section 2107(b) and this paragraph. This $12,000 is 
the amount which is equal to 40 percent (the percentage of the fair 
market value of N Corporation's asset which were situated within the 
United States at H's death) of $30,000 (the fair market value of the 
stock then owned by H within the meaning of section 958(a) and the 
regulations thereunder, i.e., H's 60-percent interest in the $50,000 
fair market value of stock held by M Company).
    Example (2). (a) Assume the same facts as those given in example (1) 
except that H made a transfer to W in contemplation of his death (within 
the meaning of section 2035) of his 60-percent interest in M Company, 
that on the date of the transfer M Company held stock in N Corporation 
constituting 80 percent of the total combined voting power of all 
classes of stock entitled to vote in that corporation (rather than the 
50 percent of total combined voting power held by M Company on the date 
of H's death), and that the 80 percent of total combined voting power 
owned by M Company on the date of the transfer is valued at $70,000 on 
that date and at $85,000 at the time of H's death. It is assumed for 
purposes of this example that the 60-percent interest in M Company was 
held by W at the time of H's death.
    (b) The test contained in subparagraph (1)(ii)(a) of this paragraph 
is met since, under subparagraph (1)(iii)(c) of this paragraph, H is 
treated as owning (within the meaning of section 958(a) and the 
regulations thereunder), at the time of his death, the 48 percent (60 
percent of 80 percent) of the total combined voting power of all classes 
of stock entitled to vote in N Corporation represented by his 
transferred interest in M Company; and the test contained in 
subparagraph (1)(ii)(b) of this paragraph is met since, under that 
subparagraph and subparagraph (1)(iii)(c) of this paragraph, H is 
treated as owning (within the meaning of section 958 (a) or (b)), at the 
time of his death, 73 percent (48 percent plus 25 percent) of the total 
combined voting power of all classes of stock entitled to vote in N 
Corporation. Accordingly, $20,400 is included in H's gross estate by 
reason of section 2107(b) and this paragraph. This $20,400 is the amount 
which is equal to 40 percent (the percentage of the fair market value of 
N Corporation's assets which were situated within the United States at 
H's death) of $51,000 (the fair market value at the time of H's death of 
the transferred interest which under subparagraph (1)(iii)(c) of this 
paragraph H is considered to own within the meaning of section 958(a) 
and the regulations thereunder at that time, i.e., the 60-percent 
interest in the $85,000 fair market value at that time of the 80-percent 
total combined voting power held by M Company on the date of transfer).
    (c) The fact that the stock in N Corporation owned by M Company is 
considered under subparagraph (1)(ii)(b) of this paragraph to be owned 
by H for two independent reasons (i.e., under section 958(a) and the 
regulations thereunder, because H transferred his 60-percent interest in 
M Company to W in contemplation of death, and under section 958(b) and 
the regulations thereunder, because H is considered to own the stock in 
N Corporation indirectly owned by his wife, W,

[[Page 503]]

by reason of her ownership of such transferred interest) does not cause 
the shares of stock represented by the transferred interest in M Company 
to be counted twice in determining whether the test contained in that 
subparagraph is met. See subparagraph (1)(iii)(d) of this paragraph.
    Example (3). (a) At the time of his death, H, a nonresident 
expatriate decedent the transfer of whose estate is subject to the tax 
imposed by section 2107(a), owned a 40-percent beneficial interest in a 
domestic trust; at that time he also directly owned stock in P 
Corporation, a foreign corporation, constituting 15 percent of the total 
combined voting power of all classes of stock entitled to vote in that 
corporation. The trust owned stock in P Corporation constituting 51 
percent of the total combined voting power of all classes of stock 
entitled to vote in that corporation. The stock in P Corporation owned 
directly by H was valued at $20,000 on the alternate valuation date 
determined pursuant to an election under section 2032. The fair market 
value of the assets of P Corporation which, at the time of H's death, 
were situated in the United States constituted 20 percent of the fair 
market value of all assets of that corporation.
    (b) By reason of section 958(b)(2) and the regulations thereunder, 
the trust is considered to own all the stock entitled to vote in P 
Corporation since it owns more than 50 percent of the total combined 
voting power of all classes of stock entitled to vote in that 
corporation. The test contained in subparagraph (1)(ii)(a) of this 
paragraph is met since at the time of his death H owned (within the 
meaning of section 958(a) and the regulations thereunder) 15 percent of 
the total combined voting power of all classes of stock entitled to vote 
in P Corporation; the stock in P Corporation owned by the trust is not 
considered to have been owned by H under section 958(a)(2) since the 
trust is not a foreign trust. In addition, the test contained in 
subparagraph (1)(ii)(b) of this paragraph is met since at the time of 
his death H owned or is considered to have owned (within the meaning of 
section 958 (a) and (b) and the regulations thereunder) 55 percent of 
the total combined voting power of all classes of stock entitled to vote 
in that corporation (his 15 percent directly owned plus his 40 percent 
(40 percent of 100 percent) considered to be owned). Accordingly, $4,000 
is included in H's gross estate by reason of section 2107(b) and this 
paragraph. This $4,000 is the amount which is equal to 20 percent (the 
percentage of the fair market value of P Corporation's assets which were 
situated within the United States at H's death) of $20,000 (the fair 
market value of the stock then owned by H within the meaning of section 
958(a) and the regulations thereunder). In addition, the value of H's 
interest in the domestic trust is included in his gross estate under 
section 2103 to the extent it constitutes property having a situs in the 
United States.

    (c) Credits. Credits against the tax imposed by section 2107(a) are 
allowed for any amounts determined in accordance with section 2102 and 
Sec. 20.2102-1 (relating to credits against the estate tax for State 
death taxes, gift tax, and tax on prior transfers). In computing the 
special limitation on the credit for State death taxes contained in 
section 2102(b) and paragraph (b) of Sec. 20.2102-1, amounts included 
in the gross estate under section 2107(b) and paragraph (b)(1) of this 
section are to be taken into account.
    (d) Decedents to whom the tax imposed by section 2107(a) applies--
(1) General rule. The tax imposed by section 2107(a) applies to the 
transfer of the taxable estate of every decedent nonresident not a 
citizen of the United States dying on or after November 14, 1966, who 
lost his U.S. citizenship after March 8, 1965, and within the 10-year 
period ending with the date of his death, except in the case of the 
estate of a decedent whose loss of U.S. citizenship either--
    (i) Resulted from the application of section 301(b), 350, or 355 of 
the Immigration and Nationality Act, as amended (8 U.S.C. 1401(b), 1482, 
or 1487); or
    (ii) Did not have for one of its principal purposes (but not 
necessarily its only principal purpose) the avoidance of Federal income, 
estate, or gift tax.

Section 301(b) of the Immigration and Nationality Act provides generally 
that a U.S. citizen, who is born outside the United States of parents 
one of whom is an alien and the other is a U.S. citizen who was 
physically present in the United States for a specified period, shall 
lose his U.S. citizenship if, within a specified period preceding the 
age of 28 years, he fails to be continuously physically present in the 
United States for at least 5 years. Section 350 of that Act provides 
that under certain circumstances a person, who at birth acquired the 
nationality of the United States and of a foreign country and who has 
voluntarily sought or claimed benefits of the nationality of any foreign 
country, shall lose his U.S. nationality if, after attaining the age of 
22 years, he has a continuous residence for 3 years in the foreign 
country of which he is a national by birth. Section

[[Page 504]]

355 of that Act provides that a person having U.S. nationality, who is 
under 21 years of age and whose residence is in a foreign country with 
or under the legal custody of a parent who loses his U.S. nationality 
under specified circumstances, shall lose his U.S. nationality if he has 
or acquires the nationality of that foreign country and attains the age 
of 25 years without having established his residence in the United 
States. Section 2107 and this section do not apply to the transfer of 
any estate the estate tax treatment of which is subject to a 
Presidential proclamation made pursuant to section 2108(a) (relating to 
the application of pre-1967 estate tax provisions in the case of a 
foreign country which imposes a more burdensome tax than the United 
States).
    (2) Burden of proof--(i) General rule. In determining for purposes 
of subparagraph (1)(ii) of this paragraph whether a principal purpose 
for the loss of U.S. citizenship by a decedent was the avoidance of 
Federal income, estate, or gift tax, the Commissioner must first 
establish that it is reasonable to believe that the decedent's loss of 
U.S. citizenship would, but for section 2107 and this section, result in 
a substantial reduction in the sum of (a) the Federal estate tax and (b) 
all estate, inheritance, legacy, and succession taxes imposed by foreign 
countries and political subdivisions thereof, in respect of the transfer 
of the decedent's estate. Once the Commissioner has so established, the 
burden of proving that the loss of citizenship by the decedent did not 
have for one of its principal purposes the avoidance of Federal income, 
estate, or gift tax shall be on the executor of the decedent's estate.
    (ii) Tentative determination of substantial reduction in Federal and 
foreign death taxes. In the absence of complete factual information, the 
Commissioner may make a tentative determination, based on the 
information available, that the decedent's loss of U.S. citizenship 
would, but for section 2107 and this section, result in a substantial 
reduction in the sum of the Federal and foreign death taxes described in 
subdivision (i) (a) and (b) of this subparagraph. This tentative 
determination may be based upon the fact that the laws of the foreign 
country of which the decedent became a citizen and the laws of the 
foreign country of which the decedent was a resident at the time of his 
death, including the laws of any political subdivisions of those foreign 
countries, would ordinarily result, in the case of an estate of a 
nonexpatriate decedent having the same citizenship and residence as the 
decedent, in liability for total death taxes under such laws 
substantially lower than the amount of the Federal estate tax which 
would be imposed on the transfer of a comparable estate of a citizen of 
the United States. In the absence of a preponderance of evidence to the 
contrary, this tentative determination shall be sufficient to establish 
that it is reasonable to believe that the decedent's loss of U.S. 
citizenship would, but for section 2107 and this section, result in a 
substantial reduction in the sum of the Federal and foreign death taxes 
described in subdivision (i) (a) and (b) of this subparagraph.

[T.D. 7296, 38 FR 34197, Dec. 12, 1973]

                              Miscellaneous



Sec. 20.2201-1  Members of the Armed Forces dying during an induction
period.

    (a) The additional estate tax as defined in section 2011(d) does not 
apply to the transfer of the taxable estate of a citizen or resident of 
the United States dying during an induction period as defined in section 
112(c)(5) (see paragraph (b) of this section) and while in active 
service as a member of the Armed Forces of the United States, if the 
decedent--
    (1) Was killed in action while serving in a combat zone, as 
determined under section 112(c) (2) and (3) (see paragraph (c) of this 
section), or
    (2) Died as a result of wounds, disease, or injury suffered while 
serving in such a combat zone and while in line of duty, by reason of a 
hazard to which he was subject as an incident of such service.
    (b) Section 112(c)(5) defines the term ``induction period'' as 
meaning any period during which individuals are liable for induction, 
for reasons other than

[[Page 505]]

prior deferment, for training and service in the Armed Forces of the 
United States.
    (c) Section 112(c) (2) and (3) provides that service is performed in 
a combat zone only--
    (1) If it is performed in an area which the President of the United 
States has designated by Executive order for purposes of section 112(c) 
as an area in which the Armed Forces of the United States are, or have, 
engaged in combat, and
    (2) If it is performed on or after the date designated by the 
President by Executive order as the date of the commencing of combatant 
activities in such zone and on or before the date designated by the 
President by Executive order as the date of termination of combatant 
activities in such zone.
    (d) If the official record of the branch of the Armed Forces of 
which the decedent was a member at the time of his death states that the 
decedent was killed in action while serving in a combat zone, or that 
death resulted from wounds or injuries received or disease contracted 
while in line of duty in a combat zone, this fact shall, in the absence 
of evidence establishing to the contrary, be presumed to be established 
for the purposes of the exemption. Moreover, wounds, injuries or disease 
suffered while in line of duty will be considered to have been caused by 
a hazard to which the decedent was subjected as an incident of service 
as a member of the Armed Forces, unless the hazard which caused the 
wounds, injuries, or disease was clearly unrelated to such service.
    (e) A person was in active service as a member of the Armed Forces 
of the United States if he was at the time of his death actually serving 
in such forces. A member of the Armed Forces in active service in a 
combat zone who thereafter becomes a prisoner of war or missing in 
action, and occupies such status at death or when the wounds, disease, 
or injury resulting in death were incurred, is considered for purposes 
of this section as serving in a combat zone.
    (f) The exemption from tax granted by section 2201 does not apply to 
the basic estate tax as defined in section 2011(d).



Sec. 20.2202-1  Missionaries in foreign service.

    Section 2202 provides that a duly commissioned missionary, dying 
while in foreign missionary service under a board of foreign missions of 
a religious denomination in the United States, is presumed to have 
retained a United States residence (see paragraph (b)(1) of Sec. 20.0-
1) held at the time of his commission and departure for foreign service, 
in the absence of relevant facts other than his intention to remain 
permanently in such foreign service.



Sec. 20.2203-1  Definition of executor.

    The term executor means the executor or administrator of the 
decedent's estate. However, if there is no executor or administrator 
appointed, qualified and acting within the United States, the term means 
any person in actual or constructive possession of any property of the 
decedent. The term ``person in actual or constructive possession of any 
property of the decedent'' includes, among others, the decedent's agents 
and representatives; safe-deposit companies, warehouse companies, and 
other custodians of property in this country; brokers holding, as 
collateral, securities belonging to the decedent; and debtors of the 
decedent in this country.



Sec. 20.2204-1  Discharge of executor from personal liability.

    (a) General rule. The executor of a decedent's estate may make 
written application to the applicable internal revenue officer with whom 
the estate tax return is required to be filed, as provided in Sec. 
20.6091-1, for a determination of the Federal estate tax and for a 
discharge of personal liability therefrom. Within 9 months after receipt 
of the application, or if the application is made before the return is 
filed then within 9 months after the return is filed, the executor will 
be notified of the amount of the tax and, upon payment thereof, he will 
be discharged from personal liability for any deficiency in the tax 
thereafter found to be due. If no such notification is received, the 
executor is discharged at the end of such 9 month period from personal 
liability for any deficiency thereafter found to be due. The discharge 
of the

[[Page 506]]

executor from personal liability under this section applies only to him 
in his personal capacity and to his personal assets. The discharge is 
not applicable to his liability as executor to the extent of the assets 
of the estate in his possession or control. Further, the discharge is 
not to operate as a release of any part of the gross estate from the 
lien for estate tax for any deficiency that may thereafter be determined 
to be due.
    (b) Special rule in the case of extension of time for payment of 
tax. In addition to the provisions of paragraph (a) of this section, an 
executor of the estate of a decedent dying after December 31, 1970, may 
make written application to be discharged from personal liability for 
the amount of Federal estate tax for which the time for payment has been 
extended under section 6161, 6163, or 6166. In such a case, the executor 
will be notified of the amount of bond, if any, to be furnished within 9 
months after receipt of the application, or, if the application is made 
before the return is filed, within 9 months after the return is filed. 
The amount of any bond required under the provisions of this paragraph 
shall not exceed the amount of tax the payment of which has been 
extended. Upon furnishing the bond in the form required under Sec. 
301.7101-1 of this chapter (Regulations on Procedure and 
Administration), or upon receipt of the notification that no bond is 
required, the executor will be discharged from personal liability for 
the tax the payment of which has been extended. If no notification is 
received, the executor is discharged at the end of such 9 month period 
from personal liability for the tax the payment of which has been 
extended.

[T.D. 7238, 37 FR 28720, Dec. 29, 1972, as amended by T.D. 7941, 49 FR 
4468, Feb. 7, 1984]



Sec. 20.2204-2  Discharge of fiduciary other than executor from personal
liability.

    (a) A fiduciary (not including a fiduciary of the estate of a 
nonresident decedent, other than the executor, who as a fiduciary holds, 
or has held at any time since the decedent's death, property transferred 
to the fiduciary from a decedent dying after December 31, 1970, or his 
estate, may make written application to the applicable internal revenue 
officer with whom the estate tax return is required to be filed, as 
provided in Sec. 20.6091-1, for a determination of the Federal estate 
tax liability with respect to such property and for a discharge of 
personal liability therefrom. The application must be accompanied by a 
copy of the instrument, if any, under which the fiduciary is acting, a 
description of all the property transferred to the fiduciary from the 
decedent or his estate, and any other information that would be relevant 
to a determination of the fiduciary's tax liability.
    (b) Upon the discharge of the executor from personal liability under 
Sec. 20.2204-1, or, if later, within 6 months after the receipt of the 
application filed by a fiduciary pursuant to the provisions of paragraph 
(a) of this section, such fiduciary will be notified either (1) of the 
amount of tax for which it has been determined the fiduciary is liable, 
or (2) that it has been determined that the fiduciary is not liable for 
any such tax. The fiduciary will also be notified of the amount of bond, 
if any, to be furnished for any Federal estate tax for which the time 
for payment has been extended under section 6161, 6163, or 6166. The 
amount of any bond required under the provisions of this paragraph shall 
not exceed the amount of tax the payment of which has been so extended. 
Upon payment of the amount for which it has been determined the 
fiduciary is liable, and upon furnishing any bond required under this 
paragraph in the form specified under Sec. 301.7101-1 of this chapter 
(Regulations on Procedure and Administration), or upon receipt by the 
fiduciary of notification of a determination that he is not liable for 
such tax or that a bond is not required, the fiduciary will be 
discharged from personal liability for any deficiency in the tax 
thereafter found to be due. If no such notification is received, the 
fiduciary is discharged at the end of such 6 months (or upon discharge 
of the executor, if later) from personal liability for any deficiency 
thereafter found to be due. The discharge of the fiduciary from personal 
liability under this section applies only to him in his personal 
capacity and to his personal assets. The discharge is

[[Page 507]]

not applicable to his liability as a fiduciary (such as a trustee) to 
the extent of the assets of the estate in his possession or control. 
Further, the discharge is not to operate as a release of any part of the 
gross estate from the lien for estate tax for any deficiency that may 
thereafter be determined to be due.

[T.D. 7238, 37 FR 28720, Dec. 29, 1972]



Sec. 20.2204-3  Special rules for estates of decedents dying after
December 31, 1976; special lien under section 6324A.

    For purposes of Sec. Sec. 20.2204-1(b) and 20.2204-2(b), in the 
case of a decedent dying after December 31, 1976, if the executor elects 
a special lien in favor of the United States under section 6324A, 
relating to special lien for estate taxes deferred under sections 6166 
or 6166A (as in effect prior to its repeal by the Economic Recovery Tax 
Act of 1981), such lien shall be treated as the furnishing of a bond 
with respect to the amount for which the time for payment has been 
extended under section 6166. If an election has been made under section 
6324A, the executor may not thereafter substitute a bond pursuant to 
section 2204 in lieu of that lien. If a bond has been supplied under 
section 2204, however,the executor may, by filing a proper notice of 
election and agreement, substitute a lien under section 6324A for any 
part or all of such bond. See Sec. Sec. 20.6324A-1 and 301.6324A-1 for 
rules relating to a special lien under section 6324A.

[T.D. 7941, 49 FR 4468, Feb. 7, 1984]



Sec. 20.2205-1  Reimbursement out of estate.

    If any portion of the tax is paid by or collected out of that part 
of the estate passing to, or in the possession of, any person other than 
the duly qualified executor or administrator, that person may be 
entitled to reimbursement, either out of the undistributed estate or by 
contribution from other beneficiaries whose shares or interests in the 
estate would have been reduced had the tax been paid before distribution 
of the estate, or whose shares or interests are subject either to an 
equal or prior liability for the payment of taxes, debts, or other 
charges against the estate. For specific provisions giving the executor 
the right to reimbursement from life insurance beneficiaries and from 
recipients of property over which the decedent had a power of 
appointment, see sections 2206 and 2207. These provisions, however, are 
not designed to curtail the right of the district director to collect 
the tax from any person, or out of any property, liable for its payment. 
The district director cannot be required to apportion the tax among the 
persons liable nor to enforce any right of reimbursement or 
contribution.



Sec. 20.2206-1  Liability of life insurance beneficiaries.

    With respect to the right of the district director to collect the 
tax without regard to the provisions of section 2206, see Sec. 20.2205-
1.



Sec. 20.2207-1  Liability of recipient of property over which decedent
had power of appointment.

    With respect to the right of the district director to collect the 
tax without regard to the provisions of section 2207, see Sec. 20.2205-
1.



Sec. 20.2207A-1  Right of recovery of estate taxes in the case of 
certain marital deduction property.

    (a) In general--(1) Right of recovery from person receiving the 
property. If the gross estate includes the value of property that is 
includible by reason of section 2044 (relating to certain property in 
which the decedent had a qualifying income interest for life under 
sections 2056(b)(7) or 2523(f)), the estate of the surviving spouse is 
entitled to recover from the person receiving the property (as defined 
in paragraph (d) of this section) the amount of Federal estate tax 
attributable to that property. The right of recovery arises when the 
Federal estate tax with respect to the property includible in the gross 
estate by reason of section 2044 is paid by the estate. There is no 
right of recovery from any person for the property received by that 
person for which a deduction was allowed from the gross estate if no tax 
is attributable to that property.
    (2) Failure to exercise right of recovery. Failure of an estate to 
exercise a right

[[Page 508]]

of recovery under this section upon a transfer subject to section 2044 
is treated as a transfer for Federal gift tax purposes of the 
unrecovered amounts from the persons who would benefit from the recovery 
to the persons from whom the recovery could have been obtained. See 
Sec. 25.2511-1 of this chapter. The transfer is considered made when 
the right of recovery is no longer enforceable under applicable law. A 
delay in the exercise of the right of recovery without payment of 
sufficient interest is a below-market loan. Section 1.7872-5T of the 
Temporary Income Tax regulations describes factors that are used to 
determine, based on the facts and circumstances of a particular case, 
whether a loan otherwise subject to imputation under section 7872 
(relating to the treatment of below-market loans) is exempted from its 
provisions.
    (3) Waiver of right of recovery. The provisions of Sec. 20.2207A-
1(a)(2) do not apply to the extent that the surviving spouse's will 
provides that a recovery shall not be made or to the extent that the 
beneficiaries cannot otherwise compel recovery. Thus, e.g., if the 
surviving spouse gives the executor of the estate discretion to waive 
the right of recovery and the executor waives the right, no gift occurs 
under Sec. 25.2511-1 of this chapter if the persons who would benefit 
from the recovery cannot compel the executor to exercise the right of 
recovery.
    (b) Amount of estate tax attributable to property includible under 
section 2044. The amount of Federal estate tax attributable to property 
includible in the gross estate under section 2044 is the amount by which 
the total Federal estate tax (including penalties and interest 
attributable to the tax) under chapter 11 of the Internal Revenue Code 
that has been paid, exceeds the total Federal estate tax (including 
penalties and interest attributable to the tax) under chapter 11 of the 
Internal Revenue Code that would have been paid if the value of the 
property includible in the gross estate by reason of section 2044 had 
not been so included.
    (c) Amount of estate tax attributable to a particular property. An 
estate's right of recovery with respect to a particular property is an 
amount equal to the amount determined in paragraph (b) of this section 
multiplied by a fraction. The numerator of the fraction is the value for 
Federal estate tax purposes of the particular property included in the 
gross estate by reason of section 2044, less any deduction allowed with 
respect to the property. The denominator of the fraction is the total 
value of all properties included in the gross estate by reason of 
section 2044, less any deductions allowed with respect to those 
properties.
    (d) Person receiving the property. If the property is in a trust at 
the time of the decedent's death, the person receiving the property is 
the trustee and any person who has received a distribution of the 
property prior to the expiration of the right of recovery if the 
property does not remain in trust. This paragraph (d) does not affect 
the right, if any, under local law, of any person with an interest in 
property to reimbursement or contribution from another person with an 
interest in the property.
    (e) Example. The following example illustrates the application of 
paragraphs (a) through (d) of this section.

    Example. D died in 1994. D's will created a trust funded with 
certain income producing assets included in D's gross estate at 
$1,000,000. The trust provides that all the income is payable to D's 
wife, S, for life, remainder to be divided equally among their four 
children. In computing D's taxable estate, D's executor deducted, 
pursuant to section 2056(b)(7), $1,000,000. Assume that S received no 
other property from D and that S died in 1996. Assume further that S 
made no section 2519 disposition of the property, that the property was 
included in S's gross estate at a value of $1,080,000, and that S's will 
contained no provision regarding section 2207A(a). The tax attributable 
to the property is equal to the amount by which the total Federal estate 
tax (including penalties and interest) paid by S's estate exceeds the 
Federal estate tax (including penalties and interest) that would have 
been paid if S's gross estate had been reduced by $1,080,000. That 
amount of tax may be recovered by S's estate from the trust. If, at the 
time S's estate seeks reimbursement, the trust has been distributed to 
the four children, S's estate is also entitled to recover the tax from 
the children.

[T.D. 8522, 59 FR 9654, Mar. 1, 1994, as amended by T.D. 9077, 68 FR 
42594, July 18, 2003]

[[Page 509]]



Sec. 20.2207A-2  Effective date.

    The provisions of Sec. 20.2207A-1 are effective with respect to 
estates of decedents dying after March 1, 1994. With respect to estates 
of decedent dying on or before such date, the executor of the decedent's 
estate may rely on any reasonable interpretation of the statutory 
provisions. For these purposes, the provisions of Sec. 20.2207A-1 (as 
well as project LR-211-76, 1984-1 C.B., page 598, see Sec. 
601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable 
interpretation of the statutory provisions.

[T.D. 8522, 59 FR 9655, Mar. 1, 1994]



Sec. 20.2208-1  Certain residents of possessions considered citizens 
of the United States.

    As used in this part, the term ``citizen of the United States'' is 
considered to include a decedent dying after September 2, 1958, who, at 
the time of his death, was domiciled in a possession of the United 
States and was a United States citizen, and who did not acquire his 
United States citizenship solely by reason of his being a citizen of 
such possession or by reason of his birth or residence within such 
possession. The estate of such a decedent is, therefore, subject to the 
tax imposed by section 2001. See paragraph (a)(2) of Sec. 20.0-1 and 
Sec. 20.2209-1 for further information relating to the application of 
the Federal estate tax to the estates of decedents who were residents of 
possessions of the United States. The application of this section may be 
illustrated by the following example and the examples set forth in Sec. 
20.2209-1:

    Example. A, a citizen of the United States by reason of his birth in 
the United States at San Francisco, established residence in Puerto Rico 
and acquired a Puerto Rican citizenship. A died on September 4, 1958, 
while a citizen and domiciliary of Puerto Rico. A's estate is, by reason 
of the provisions of section 2208, subject to the tax imposed by section 
2001 inasmuch as his United States citizenship is based on birth in the 
United States and is not based solely on being a citizen of a possession 
or solely on birth or residence in a possession.

[T.D. 6526, 26 FR 417, Jan. 19, 1961]



Sec. 20.2209-1  Certain residents of possessions considered 
nonresidents not citizens of the United States.

    As used in this part, the term ``nonresident not a citizen of the 
United States'' is considered to include a decedent dying after 
September 14, 1960, who, at the time of his death, was domiciled in a 
possession of the United States and was a United States citizen, and who 
acquired his United States citizenship solely by reason of his being a 
citizen of such possession or by reason of his birth or residence within 
such possession. The estate of such a decedent is, therefore, subject to 
the tax imposed by section 2101 which is the tax applicable in the case 
of a ``nonresident not a citizen of the United States.'' See paragraph 
(a)(2) of Sec. 20.0-1 and Sec. 20.2208-1 for further information 
relating to the application of the Federal estate tax to the estates of 
decedents who were residents of possessions of the United States. The 
application of this section may be illustrated by the following examples 
and the example set forth in Sec. 20.2208-1. In each of the following 
examples the decedent is deemed a ``nonresident not a citizen of the 
United States'' and his estate is subject to the tax imposed by section 
2101 since the decedent died after September 14, 1960, but would not 
have been so deemed and subject to such tax if the decedent had died on 
or before September 14, 1960.

    Example (1). C, who acquired his United States citizenship under 
section 5 of the Act of March 2, 1917 (39 Stat. 953), by reason of being 
a citizen of Puerto Rico, died in Puerto Rico on October 1, 1960, while 
domiciled therein. C is considered to have acquired his United States 
citizenship solely by reason of his being a citizen of Puerto Rico.
    Example (2). E, whose parents were United States citizens by reason 
of their birth in Boston, was born in the Virgin Islands on March 1, 
1927. On September 30, 1960, he died in the Virgin Islands while 
domiciled therein. E is considered to have acquired his United States 
citizenship solely by reason of his birth in the Virgin Islands (section 
306 of the Immigration and Nationality Act (66 Stat. 237, 8 U.S.C. 
1406)).
    Example (3). N, who acquired United States citizenship by reason of 
being a native of the Virgin Islands and a resident thereof on June 28, 
1932 (section 306 of the Immigration and Nationality Act (66 Stat. 237, 
8 U.S.C. 1406)), died on October 1, 1960, while domiciled in

[[Page 510]]

the Virgin Islands. N is considered to have acquired his United States 
citizenship solely by reason of his birth or residence in the Virgin 
Islands.
    Example (4). P, a former Danish citizen, who on January 17, 1917, 
resided in the Virgin Islands, made the declaration to preserve his 
Danish citizenship required by Article 6 of the treaty entered into on 
August 4, 1916, between the United States and Denmark. Subsequently P 
acquired United States citizenship when he renounced such declaration 
before a court of record (section 306 of the Immigration and Nationality 
Act (66 Stat. 237, 8 U.S.C. 1406)). P died on October 1, 1960, while 
domiciled in the Virgin Islands. P is considered to have acquired his 
United States citizenship solely by reason of his birth or residence in 
the Virgin Islands.
    Example (5). R, a former French citizen, acquired his United States 
citizenship through naturalization proceedings in a court located in the 
Virgin Islands after having qualified for citizenship by residing in the 
Virgin Islands for 5 years. R died on October 1, 1960, while domiciled 
in the Virgin Islands. R is considered to have acquired his United 
States citizenship solely by reason of his birth or residence within the 
Virgin Islands.

[T.D. 6526, 26 FR 418, Jan. 19, 1961]

                      Procedure and Administration



Sec. 20.6001-1  Persons required to keep records and render statements.

    (a) It is the duty of the executor to keep such complete and 
detailed records of the affairs of the estate for which he acts as will 
enable the district director to determine accurately the amount of the 
estate tax liability. All documents and vouchers used in preparing the 
estate tax return (Sec. 20.6018-1) shall be retained by the executor so 
as to be available for inspection whenever required.
    (b) In addition to filing an estate tax return (see Sec. 20.6018-1) 
and, if applicable, a preliminary notice (see Sec. 20.6036-1), the 
executor shall furnish such supplemental data as may be necessary to 
establish the correct estate tax. It is therefore the duty of the 
executor (1) to furnish, upon request, copies of any documents in his 
possession (or on file in any court having jurisdiction over the estate) 
relating to the estate, appraisal lists of any items included in the 
gross estate, copies of balance sheets or other financial statements 
obtainable by him relating to the value of stock, and any other 
information obtainable by him that may be found necessary in the 
determination of the tax, and (2) to render any written statement, 
containing a declaration that it is made under penalties of perjury, of 
facts within his knowledge which the district director may require for 
the purpose of determining whether a tax liability exists and, if so, 
the extent thereof. Failure to comply with such a request will render 
the executor liable to penalties (see section 7269), and proceedings may 
be instituted in the proper court of the United States to secure 
compliance therewith (see section 7604).
    (c) Persons having possession or control of any records or documents 
containing or supposed to contain any information concerning the estate, 
or having knowledge of or information about any fact or facts which have 
a material bearing upon the liability, or the extent of liability, of 
the estate for the estate tax, shall, upon request of the district 
director, make disclosure thereof. Failure on the part of any person to 
comply with such request will render him liable to penalties (section 
7269), and compliance with the request may be enforced in the proper 
court of the United States (section 7604).
    (d) Upon notification from the Internal Revenue Service, a 
corporation (organized or created in the United States) or its transfer 
agent is required to furnish the following information pertaining to 
stocks or bonds registered in the name of a nonresident decedent 
(regardless of citizenship): (1) The name of the decedent as registered; 
(2) the date of the decedent's death; (3) the decedent's residence and 
his place of death; (4) the names and addresses of executors, attorneys, 
or other representatives of the estate, within and without the United 
States; and (5) a description of the securities, the number of shares or 
bonds and the par values thereof.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7238, 37 FR 
28720, Dec. 29, 1972]



Sec. 20.6011-1  General requirement of return, statement, or list.

    (a) General rule. Every person made liable for any tax imposed by 
subtitle B of the Code shall make such returns or

[[Page 511]]

statements as are required by the regulations in this part. The return 
or statement shall include therein the information required by the 
applicable regulations or forms.
    (b) Use of prescribed forms. Copies of the forms prescribed by 
Sec. Sec. 20.6018-1 and 20.6036-1 may be obtained from district 
directors. The fact that an executor has not been furnished with copies 
of these forms will not excuse him from making a return or, if 
applicable, from filing a preliminary notice. Application for a form 
shall be made to the district director in ample time for the executor to 
have the form prepared, verified, and filed with the appropriate 
internal revenue office on or before the date prescribed for the filing 
thereof (see Sec. Sec. 20.6071-1 and 20.6075-1). The executor shall 
carefully prepare the return and, if applicable, the preliminary notice 
so as to set forth fully and clearly the data called for therein. A 
return or, if applicable, a preliminary notice which has not been so 
prepared will not be accepted as meeting the requirements of Sec. Sec. 
20.6018-1 through 20.6018-4, and Sec. 20.6036-1.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7238, 37 FR 
28720, Dec. 29, 1972]



Sec. 20.6011-4  Requirement of statement disclosing participation in 
certain transactions by taxpayers.

    (a) In general. If a transaction is identified as a listed 
transaction or a transaction of interest as defined in Sec. 1.6011-4 of 
this chapter by the Commissioner in published guidance (see Sec. 
601.601(d)(2)(ii)(b) of this chapter), and the listed transaction or 
transaction of interest involves an estate tax under chapter 11 of 
subtitle B of the Internal Revenue Code, the transaction must be 
disclosed in the manner stated in such published guidance.
    (b) Effective/applicability date. This section applies to listed 
transactions entered into on or after January 1, 2003. This section 
applies to transactions of interest entered into on or after November 2, 
2006.

[T.D. 9350, 72 FR 43153, Aug. 3, 2007]



Sec. 20.6018-1  Returns.

    (a) Estates of citizens or residents. A return must be filed on Form 
706 for the estate of every citizen or resident of the United States 
whose gross estate exceeded $60,000 in value on the date of his death. 
The value of the gross estate at the date of death governs with respect 
to the filing of the return regardless of whether the value of the gross 
estate is, at the executor's election, finally determined as of a date 
subsequent to the date of death pursuant to the provisions of section 
2032. Duplicate copies of the return are not required to be filed. For 
the contents of the return, see Sec. 20.6018-3.
    (b) Estates of nonresidents not citizens--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, a return must be filed 
on Form 706 or Form 706NA for the estate of every nonresident not a 
citizen of the United States if the value of that part of the gross 
estate situated in the United States on the date of his death exceeded 
$30,000 in the case of a decedent dying on or after November 14, 1966, 
or $2,000 in the case of a decedent dying before November 14, 1966. 
Under certain conditions the return may be made only on Form 706. See 
the instructions on Form 706NA for circumstances under which that form 
may not be used. Duplicate copies of the return are not required to be 
filed. For the contents of the return, see Sec. 20.6018-3. For the 
determination of the gross estate situated in the United States, see 
Sec. Sec. 20.2103-1 and 20.2104-1.
    (2) Certain estates of decedents dying on or after November 14, 
1966. In the case of an estate of a nonresident not a citizen of the 
United States dying on or after November 14, 1966--
    (i) Transfers subject to the tax imposed by section 2107(a). If the 
transfer of the estate is subject to the tax imposed by section 2107(a) 
(relating to expatriation to avoid tax), any amounts includible in the 
decedent's gross estate under section 2107(b) are to be added to the 
value on the date of his death of that part of his gross estate situated 
in the United States, for purposes of determining under subparagraph (1) 
of this paragraph whether his gross estate exceeded $30,000 on the date 
of his death.
    (ii) Transfers subject to a Presidential proclamation. If the 
transfer of the estate is subject to tax pursuant to a Presidential 
proclamation made under

[[Page 512]]

section 2108(a) (relating to Presidential proclamations of the 
application of pre-1967 estate tax provisions), the return must be filed 
on Form 706 or Form 706NA if the value on the date of the decedent's 
death of that part of his gross estate situated in the United States 
exceeded $2,000.
    (c) Place for filing. See Sec. 20.6091-1 for the place where the 
return shall be filed.
    (d) Time for filing. See Sec. 20.6075-1 for the time for filing the 
return.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7296, 38 FR 34200, Dec. 12, 1973]



Sec. 20.6018-2  Returns; person required to file return.

    It is required that the duly qualified executor or administrator 
shall file the return. If there is more than one executor or 
administrator, the return must be made jointly by all. If there is no 
executor or administrator appointed, qualified and acting within the 
United States, every person in actual or constructive possession of any 
property of the decedent situated in the United States is constituted an 
executor for purposes of the tax (see Sec. 20.2203-1), and is required 
to make and file a return. If in any case the executor is unable to make 
a complete return as to any part of the gross estate, he is required to 
give all the information he has as to such property, including a full 
description, and the name of every person holding a legal or beneficial 
interest in the property. If the executor is unable to make a return as 
to any property, every person holding a legal or beneficial interest 
therein shall, upon notice from the district director, make a return as 
to that part of the gross estate. For delinquency penalty for failure to 
file return, see section 6651 and Sec. 301.6651-1 of this chapter 
(Regulations on Procedure and Administration). For criminal penalties 
for failure to file a return and filing a false or fraudulent return, 
see sections 7203, 7206, 7207, and 7269.



Sec. 20.6018-3  Returns; contents of returns.

    (a) Citizens or residents. The return of an estate of a decedent who 
was a citizen or resident of the United States at the time of his death 
must contain an itemized inventory by schedule of the property 
constituting the gross estate and lists of the deductions under the 
proper schedules. The return shall set forth (1) the value of the gross 
estate (see Sec. Sec. 20.2031-1 through 20.2044-1), (2) the deduction 
claimed (see Sec. Sec. 20.2052-1 through 20.2056(e)-3), (3) the taxable 
estate (see Sec. 20.2051-1), and (4) the gross estate tax, reduced by 
any credits (see Sec. Sec. 20.2011-1 through 20.2014-6) against the 
tax. In listing upon the return the property constituting the gross 
estate (other than household and personal effects for which see Sec. 
20.2031-6), the description of it shall be such that the property may be 
readily identified for the purpose of verifying the value placed on it 
by the executor.
    (b) Nonresidents not citizens. The return of an estate of a decedent 
who was not a citizen or resident of the United States at the time of 
his death must contain the following information:
    (1) An itemized list of that part of the gross estate situated in 
the United States (see Sec. Sec. 20.2103-1 and 20.2104-1);
    (2) In the case of an estate the transfer of which is subject to the 
tax imposed by section 2107(a) (relating to expatriation to avoid tax), 
a list of any amounts with respect to stock in a foreign corporation 
which are includible in the gross estate under section 2107(b), together 
with an explanation of how the amounts were determined;
    (3) An itemized list of any deductions claimed (see Sec. Sec. 
20.2106-1 and 20.2106-2);
    (4) The amount of the taxable estate (see Sec. 20.2106-1); and
    (5) The gross estate tax, reduced by any credits against the tax 
(see Sec. 20.2102-1).

For the disallowance of certain deductions if the return does not 
disclose that part of the gross estate not situated in the United 
States, see Sec. Sec. 20.2106-1 and 20.2106-2.
    (c) Provisions applicable to returns described in paragraphs (a) and 
(b) of this section. (1) A legal description shall be given of each 
parcel of real estate, and, if located in a city, the name of the street 
and number, its area, and, if improved, a short statement of the 
character of the improvements.
    (2) A description of bonds shall include the number held, principal

[[Page 513]]

amount, name of obligor, date of maturity, rate of interest, date or 
dates on which interest is payable, series number if there is more than 
one issue, and the principal exchange upon which listed, or the 
principal business office of the obligor, if unlisted. A description of 
stocks shall include number of shares, whether common or preferred, and, 
if preferred, what issue, par value, quotation at which returned, exact 
name of corporation, and, if the stock is unlisted, the location of the 
principal business office and State in which incorporated and the date 
of incorporation, or if the stock is listed, the principal exchange upon 
which sold. A description of notes shall include name of maker, date on 
which given, date of maturity, amount of principal, amount of principal 
unpaid, rate of interest and whether simple or compound, date to which 
interest has been paid and amount of unpaid interest. A description of 
the seller's interest in land contracts shall include name of buyer, 
date of contract, description of property, sale price, initial payment, 
amounts of installment payments, unpaid balance of principal and accrued 
interest, interest rate and date prior to decedent's death to which 
interest had been paid.
    (3) A description of bank accounts shall disclose the name and 
address of depository, amount on deposit, whether a checking, savings, 
or a time-deposit account, rate of interest, if any payable, amount of 
interest accrued and payable, and serial number. A description of life 
insurance shall give the name of the insurer, number of policy, name of 
the beneficiary, and the amount of the proceeds.
    (4) In describing an annuity, the name and address of the grantor of 
the annuity shall be given, or, if the annuity is payable out of a trust 
or other funds, such a description as will fully identify it. If the 
annuity is payable for a term of years, the duration of the term and the 
date on which it began shall be given, and if payable for the life of a 
person other than the decedent, the date of birth of such person shall 
be stated. If the executor has not included in the gross estate the full 
value of an annuity or other payment described in section 2039, he shall 
nevertheless fully describe the annuity and state its total purchase 
price and the amount of the contribution made by each person (including 
the decedent's employer) toward the purchase price. If the executor 
believes that any part of the annuity or other payment is excludable 
from the gross estate under the provisions of section 2039, or for any 
other reason, he shall state in the return the reason for his belief.
    (5) Judgments should be described by giving the title of the cause 
and the name of the court in which rendered, date of judgment, name and 
address of the judgment debtor, amount of judgment, and rate of interest 
to which subject, and by stating whether any payments have been made 
thereon, and, if so, when and in what amounts.
    (6) If, pursuant to section 2032, the executor elects to have the 
estate valued at a date or dates subsequent to the time of the 
decedent's death, there must be set forth on the return: (i) An itemized 
description of all property included in the gross estate on the date of 
the decedent's death, together with the value of each item as of that 
date; (ii) an itemized disclosure of all distributions, sales, 
exchanges, and other dispositions of any property during the 6 month (1 
year, if the decedent died on or before December 31, 1970) period after 
the date of the decedent's death, together with the dates thereof; and 
(iii) the value of each item of property in accordance with the 
provisions of section 2032 (see Sec. 20.2032-1). Interest and rents 
accrued at the date of the decedent's death and dividends declared to 
stockholders of record on or before the date of the decedent's death and 
not collected at that date are to be shown separately. (See also 
paragraph (e) of Sec. 20.6018-4 with respect to documents required to 
be filed with the return.)
    (7) All transfers made by the decedent within 3 years before the 
date of his death of a value of $1,000 or more and all transfers (other 
than outright transfers not in trust) made by the decedent at any time 
during his life of a value of $5,000 or more, except bona fide sales for 
an adequate and full consideration in money or money's worth, must be 
disclosed in the return, whether or not the executor regards the

[[Page 514]]

transfers as subject to the tax. If the executor believes that such a 
transfer is not subject to the tax, a brief statement of the pertinent 
facts shall be made.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 7238, 37 FR 
28721, Dec. 29, 1972; T.D. 7296, 38 FR 34200, Dec. 12, 1973]



Sec. 20.6018-4  Returns; documents to accompany the return.

    (a) A certified copy of the will, if the decedent died testate, must 
be submitted with the return, together with copies of such other 
documents as are required in Form 706 and in the applicable sections of 
these regulations. There may also be filed copies of any documents which 
the executor may desire to submit in explanation of the return.
    (b) In the case of an estate of a nonresident citizen, the executor 
shall also file the following documents with the return:
    (1) A copy of any inventory of property and schedule of liabilities, 
claims against the estate and expenses of administration filed with the 
foreign court of probate jurisdiction, certified by a proper official of 
the court; and
    (2) A copy of any return filed under any applicable foreign 
inheritance, estate, legacy, or succession tax act, certified by a 
proper official of the foreign tax department.
    (c) In the case of an estate of a nonresident not a citizen of the 
United States, the executor must also file with the return, but only if 
deductions are claimed or the transfer of the estate is subject to the 
tax imposed by section 2107(a) (relating to expatriation to avoid tax), 
a copy of the inventory of property filed under the foreign death duty 
act; or, if no such inventory was filed, a certified copy of the 
inventory filed with the foreign court of probate jurisdiction.
    (d) For every policy of life insurance listed on the return, the 
executor must procure a statement, on Form 712, by the company issuing 
the policy and file it with the return.
    (e) If, pursuant to section 2032, the executor elects to have the 
estate valued at a date or dates subsequent to the time of the 
decedent's death, the executor shall file with the return evidence in 
support of any statements made by him in the return as to distributions, 
sales, exchanges, or other dispositions of property during the 6 month 
(1 year, if the decedent died on or before December 31, 1970) period 
which followed the decedent's death. If the court having jurisdiction 
over the estate makes an order or decree of distribution during that 
period, a certified copy thereof must be submitted as part of the 
evidence. The district director, or the director of a service center, 
may require the submission of such additional evidence as is deemed 
necessary.
    (f) In any case where a transfer, by trust or otherwise, was made by 
a written instrument, a copy thereof shall be filed with the return if 
(1) the property is included in the gross estate, or (2) the executor 
pursuant to the provisions of paragraph (c)(7) of Sec. 20.6018-3 has 
made a disclosure of the transfer on the return but has not included its 
value in the gross estate in the belief that it is not so includible. If 
the written instrument is of public record, the copy shall be certified, 
or if it is not of record, the copy shall be verified. If the decedent 
was a nonresident, not a citizen at the time of his death, the copy may 
be either certified or verified.
    (g) If the executor contends that the value of property transferred 
by the decedent within a period of three years ending with the date of 
the decedent's death should not be included in the gross estate because 
he considers that the transfer was not made in contemplation of death, 
he shall file with the return (1) a copy of the death certificate, and 
(2) a statement, continuing a declaration that it is made under the 
penalties of perjury, of all the material facts and circumstances, 
including those directly or indirectly indicating the decedent's motive 
in making the transfer and his mental and physical condition at that 
time. However, this data need not be furnished with respect to transfers 
of less than $1,000 in value unless requested by the district director.

[T.D. 6996, 23 FR 4529, June 24, 1958, as amended by T.D. 7238, 37 FR 
28721, Dec. 29, 1972; T.D. 7296, 38 FR 34200, Dec. 12, 1973]

[[Page 515]]



Sec. 20.6036-1  Notice of qualification as executor of estate of 
decedent dying before 1971.

    (a) Preliminary notice for estates of decedents dying before January 
1, 1971. (1) A preliminary notice must be filed on Form 704 for the 
estate of every citizen or resident of the United States whose gross 
estate exceeded $60,000 in value on the date of his death.
    (2) In the case of a nonresident not a citizen of the United States 
dying on or after November 14, 1966--
    (i) Subject to the provisions of subdivisions (ii) and (iii) of this 
subparagraph, a preliminary notice must be filed on Form 705 if that 
part of the decedent's gross estate situated in the United States 
exceeded $30,000 in value on the date of his death (see Sec. Sec. 
20.2103-1 and 20.2104-1).
    (ii) If the transfer of the estate is subject to the tax imposed by 
section 2107(a) (relating to expatriation to avoid tax), any amounts 
includible in the decedent's gross estate under section 2107(b) are to 
be added to the value on the date of his death of that part of his gross 
estate situated in the United States, for purposes of determining under 
subdivision (i) of this subparagraph whether his gross estate exceeded 
$30,000 in value on the date of his death.
    (iii) If the transfer of the estate is subject to tax pursuant to a 
Presidential proclamation made under section 2108(a) (relating to 
Presidential proclamations of the application of pre-1967 estate tax 
provisions), a preliminary notice must be filed on Form 705 if the value 
on the date of the decedent's death of that part of his gross estate 
situated in the United States exceeded $2,000.
    (3) A preliminary notice must be filed on Form 705 for the estate of 
every nonresident not a citizen of the United States dying before 
November 14, 1966, if the value on the date of his death of that part of 
his gross estate situated in the United States exceeded $2,000.
    (4) The value of the gross estate on the date of death governs with 
respect to the requirement for filing the preliminary notice 
irrespective of whether the value of the gross estate is, at the 
executor's election, finally determined pursuant to the provisions of 
section 2032 as of a date subsequent to the date of death. If there is 
doubt as to whether the gross estate exceeds $60,000, $30,000, or 
$2,000, as the case may be, the notice shall be filed as a matter of 
precaution in order to avoid the possibility of penalties attaching.
    (5) The primary purpose of the preliminary notice is to advise the 
Internal Revenue Service of the existence of taxable estates, and filing 
shall not be delayed beyond the period provided for in Sec. 20.6071-1 
merely because of uncertainty as to the exact value of the assets. The 
estimate of the gross estate called for by the notice shall be the best 
approximation of value which can be made within the time allowed. 
Duplicate copies of the preliminary notice are not required to be filed.
    (6) For criminal penalties for failure to file a notice and filing a 
false or fraudulent notice, see sections 7203, 7207, and 7269. See Sec. 
20.6091-1 for the place for filing the notice. See Sec. 20.6071-1 for 
the time for filing the notice.
    (b) Persons required to file. In the case of an estate of a citizen 
or resident of the United States described in paragraph (a) of this 
section, the preliminary notice must be filed by the duly qualified 
executor or administrator, or if none qualifies within two months after 
the decedent's death, by every person in actual or constructive 
possession of any property of the decedent at or after the time of the 
decedent's death. The signature of one executor or administrator on the 
preliminary notice is sufficient. In the case of a nonresident not a 
citizen, the notice must be filed by every duly qualified executor or 
administrator within the United States, or if none qualifies within two 
months after the decedent's death, by every person in actual or 
constructive possession of any property of the decedent at or after the 
time of the decedent's death.

[T.D. 7238, 37 FR 28721, Dec. 29, 1972, as amended by T.D. 7296, 38 FR 
34200, Dec. 12, 1973]



Sec. 20.6036-2  Notice of qualification as executor of estate of 
decedent dying after 1970.

    In the case of the estate of a decedent dying after December 31, 
1970, no special notice of qualification as executor

[[Page 516]]

of an estate is required to be filed. The requirement of section 6036 
for notification of qualification as executor of an estate shall be 
satisfied by the filing of the estate tax return required by section 
6018 and the regulations thereunder.

[T.D. 7238, 37 FR 28721, Dec. 29, 1972]



Sec. 20.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs one or more tax return 
preparers to prepare a return or claim for refund of estate tax under 
chapter 11 of subtitle B of the Internal Revenue Code, other than for 
the person, at any time during a return period, shall satisfy the 
recordkeeping and inspection requirements in the manner stated in Sec. 
1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78450, Dec. 22, 2008]



Sec. 20.6061-1  Signing of returns and other documents.

    Any return, statement, or other document required to be made under 
any provision of Chapter 11 or Subtitle F of the Code or regulations 
prescribed thereunder with respect to any tax imposed by Chapter 11 of 
the Code shall be signed by the executor, administrator or other person 
required or duly authorized to sign in accordance with the regulations, 
forms or instructions prescribed with respect to such return, statement, 
or other document. See section 2203 for definition of executor, 
administrator, etc. The person required or duly authorized to make the 
return may incur liability for the penalties provided for erroneous, 
false, or fraudulent returns. For criminal penalties see sections 7201, 
7203, 7206, 7207, and 7269.

[T.D. 6600, 27 FR 4986, May 29, 1962]



Sec. 20.6065-1  Verification of returns.

    (a) Penalties of perjury. If a return, statement, or other document 
made under the provisions of Chapter 11 or Subtitle F of the Code or the 
regulations thereunder with respect to any tax imposed by Chapter 11 of 
the Code, or the form and instructions issued with respect to such 
return, statement, or other document, requires that it shall contain or 
be verified by a written declaration that it is made under the penalties 
of perjury, it must be so verified by the person or persons required to 
sign such return, statement or other document. In addition, any other 
statement or document submitted under any provision of Chapter 11 or 
Subtitle F of the Code or regulations thereunder with respect to any tax 
imposed by Chapter 11 of the Code may be required to contain or be 
verified by a written declaration that it is made under the penalties of 
perjury.
    (b) Oath. Any return, statement, or other document required to be 
submitted under Chapter 11 or Subtitle F of the Code or regulations 
prescribed thereunder with respect to any tax imposed by Chapter 11 of 
the Code may be required to be verified by an oath.

[T.D. 6600, 27 FR 4986, May 29, 1962]



Sec. 20.6071-1  Time for filing preliminary notice required by 
Sec. 20.6036-1.

    In the case of the estate of a decedent dying before January 1, 
1971, if a duly qualified executor or administrator of the estate of 
such a decedent who was a resident or a citizen of the United States 
qualifies within 2 months after a decedent's death, or if a duly 
qualified executor or administrator of the estate of such a decedent who 
was a nonresident not a citizen qualifies within the United States 
within 2 months after the decedent's death, the preliminary notice 
required by Sec. 20.6036-1 must be filed within 2 months after his 
qualification. If no such executor or administrator qualifies within 
that period, the preliminary notice must be filed within 2 months of the 
decedent's death.

[T.D. 7238, 37 FR 28721, Dec. 29, 1972]



Sec. 20.6075-1  Returns; time for filing estate tax return.

    The estate tax return required by section 6018 must be filed on or 
before the due date. The due date is the date on or before which the 
return is required to be filed in accordance with the provisions of 
section 6075(a) or the

[[Page 517]]

last day of the period covered by an extension of time as provided in 
Sec. 20.6081-1. The due date, for a decedent dying after December 31, 
1970, is, unless an extension of time for filing has been obtained, the 
day of the ninth calendar month after the decedent's death numerically 
corresponding to the day of the calendar month on which death occurred. 
However, if there is no numerically corresponding day in the ninth 
month, the last day of the ninth month is the due date. For example, if 
the decedent dies on July 31, 2000, the estate tax return and tax 
payment must be made on or before April 30, 2001. When the due date 
falls on Saturday, Sunday, or a legal holiday, the due date for filing 
the return is the next succeeding day that is not Saturday, Sunday, or a 
legal holiday. For the definition of a legal holiday, see section 7503 
and Sec. 301.7503-1 of this chapter. As to additions to the tax in the 
case of failure to file the return or pay the tax within the prescribed 
time, see section 6651 and Sec. 301.6651-1 of this chapter. For rules 
with respect to the right to elect to have the property valued as of a 
date or dates subsequent to the decedent's death, see section 2032 and 
Sec. 20.2032-1, and section 7502 and Sec. 301.7502-1 of this chapter. 
This section applies to estates of decedents dying after August 16, 
1954.

[T.D. 8957, 66 FR 38546, July 25, 2001]



Sec. 20.6081-1  Extension of time for filing the return.

    (a) Procedures for requesting an extension of time for filing the 
return. A request for an extension of time to file the return required 
by section 6018 must be made by filing Form 4768, ``Application for 
Extension of Time To File a Return and/or Pay U.S. Estate (and 
Generation-Skipping Transfer) Taxes.'' Form 4768 must be filed with the 
Internal Revenue Service office designated in the application's 
instructions (except as provided in Sec. 301.6091-1(b) of this chapter 
for hand-carried documents). Form 4768 must include an estimate of the 
amounts of estate and generation-skipping transfer tax liabilities with 
respect to the estate.
    (b) Automatic extension. An estate will be allowed an automatic 6-
month extension of time beyond the date prescribed in section 6075(a) to 
file Form 706, ``United States Estate (and Generation-Skipping Transfer) 
Tax Return,'' if Form 4768 is filed on or before the due date for filing 
Form 706 and in accordance with the procedures under paragraph (a) of 
this section.
    (c) Extension for good cause shown. In its discretion, the Internal 
Revenue Service may, upon the showing of good and sufficient cause, 
grant an extension of time to file the return required by section 6018 
in certain situations. Such an extension may be granted to an estate 
that did not request an automatic extension of time to file Form 706 
prior to the due date under paragraph (b) of this section, to an estate 
or person that is required to file forms other than Form 706, or to an 
executor who is abroad and is requesting an additional extension of time 
to file Form 706 beyond the 6-month automatic extension. Unless the 
executor is abroad, the extension of time may not be for more than 6 
months beyond the filing date prescribed in section 6075(a). To obtain 
such an extension, Form 4768 must be filed in accordance with the 
procedures under paragraph (a) of this section and must contain a 
detailed explanation of why it is impossible or impractical to file a 
reasonably complete return by the due date. Form 4768 should be filed 
sufficiently early to permit the Internal Revenue Service time to 
consider the matter and reply before what otherwise would be the due 
date of the return. Failure to file Form 4768 before that due date may 
indicate negligence and constitute sufficient cause for denial of the 
extension. If an estate did not request an automatic extension of time 
to file Form 706 under paragraph (b) of this section, Form 4768 must 
also contain an explanation showing good cause for not requesting the 
automatic extension.
    (d) Filing the return. A return as complete as possible must be 
filed before the expiration of the extension period. The return thus 
filed will be the return required by section 6018(a), and any tax shown 
on the return will be the amount determined by the executor as the tax 
referred to in section 6161(a)(2), or the amount shown as the tax by the 
taxpayer upon the taxpayer's return referred to in section 
6211(a)(1)(A). The

[[Page 518]]

return cannot be amended after the expiration of the extension period 
although supplemental information may subsequently be filed that may 
result in a finally determined tax different from the amount shown as 
the tax on the return.
    (e) Payment of the tax. An extension of time for filing a return 
does not operate to extend the time for payment of the tax. See Sec. 
20.6151-1 for the time for payment of the tax, and Sec. Sec. 20.6161-1 
and 20.6163-1 for extensions of time for payment of the tax. If an 
extension of time to file a return is obtained, but no extension of time 
for payment of the tax is granted, interest will be due on the tax not 
paid by the due date and the estate will be subject to all applicable 
late payment penalties.
    (f) Effective date. This section applies to estates of decedents 
dying after August 16, 1954, except for paragraph (b) of this section 
which applies to estate tax returns due after July 25, 2001.

[T.D. 8957, 66 FR 38546, July 25, 2001]



Sec. 20.6091-1  Place for filing returns or other documents.

    (a) General rule. If the decedent was domiciled in the United States 
at the time of his death, the preliminary notice required by Sec. 
20.6036-1 in the case of the estate of a decedent dying before January 
1, 1971, and the estate tax return required by Sec. 20.6018-1 shall be 
filed with:
    (1) The service center serving the location in which the decedent 
was domiciled at the time of his death, if the instructions applicable 
to the estate tax return provide that the return shall be filed with a 
service center, or
    (2) Any person assigned the responsibility to receive returns in the 
local Internal Revenue Service office serving the location in which the 
decedent was domiciled at the time of his death, if paragraph (a)(1) of 
this section does not apply.

Paragraph (a)(1) of this section does not apply if the return is made by 
hand-carrying or if the instructions applicable to the preliminary 
notice or to the return do not provide that it shall be filed with a 
service center.
    (b) Non-U.S. domiciliaries. If the decedent was not domiciled in the 
United States at the time of his death, the preliminary notice required 
by Sec. 20.6036-1 in the case of the estate of a decedent dying before 
January 1, 1971, and the estate tax return required by Sec. 20.6018-1 
shall be filed with the Internal Revenue Service Center, Philadelphia, 
Pa. or as designated on the return form or in the instructions issued 
with respect to such form. This paragraph applies whether or not the 
decedent was a citizen of the United States and whether or not the 
return is made by hand-carrying.

[T.D. 7238, 37 FR 28722, Dec. 29, 1972, as amended by T.D. 7302, 39 FR 
796, Jan. 3, 1974; T.D. 7495, 42 FR 33726, July 1, 1977; T.D. 9156, 69 
FR 55745, Sept. 16, 2004]



Sec. 20.6091-2  Exceptional cases.

    Notwithstanding the provisions of Sec. 20.6091-1 the Commissioner 
may permit the filing of the preliminary notice required by Sec. 
20.6036-1 and the estate tax return required by Sec. 20.6018-1 in any 
local Internal Revenue Service office.

[T.D. 6600, 27 FR 4986, May 29, 1962, as amended by T.D. 9156, 69 FR 
55745, Sept. 16, 2004]



Sec. 20.6107-1  Tax return preparer must furnish copy of return to
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of any 
return or claim for refund of estate tax under chapter 11 of subtitle B 
of the Internal Revenue Code shall furnish a completed copy of the 
return or claim for refund to the taxpayer and retain a completed copy 
or record in the manner stated in Sec. 1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78450, Dec. 22, 2008]



Sec. 20.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each estate tax return or claim for refund prepared 
by one or more signing tax return preparers must include the identifying 
number of the preparer required by Sec. 1.6695-1(b) of this chapter to 
sign the return or claim for refund in the manner stated in Sec. 
1.6109-2 of this chapter.

[[Page 519]]

    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after December 31, 
2008.

[T.D. 9436, 73 FR 78450, Dec. 22, 2008]



Sec. 20.6151-1  Time and place for paying tax shown on the return.

    (a) General rule. The tax shown on the estate tax return is to be 
paid at the time and place fixed for filing the return (determined 
without regard to any extension of time for filing the return). For 
provisions relating to the time and place for filing the return, see 
Sec. Sec. 20.6075-1 and 20.6091-1. For the duty of the executor to pay 
the tax, see Sec. 20.2002-1.
    (b) Extension of time for paying--(1) In general. For general 
provisions relating to extension of time for paying the tax, see Sec. 
20.6161-1.
    (2) Reversionary or remainder interests. For provisions relating to 
extension of time for payment of estate tax on the value of a 
reversionary or remainder interest in property, see Sec. 20.6163-1.
    (3) Interest in a closely held business. For provisions relating to 
payment in installments of the estate tax attributable to inclusion in 
the gross estate of an interest in a closely held business, see 
Sec. Sec. 20.6166-1 through 20.6166-4.
    (c) Payment with obligations of the United States. Treasury bonds of 
certain issues which were owned by the decedent at the time of his death 
or which were treated as part of his gross estate under the rules 
contained in Sec. 306.28 of Treasury Department Circular No. 300, 
Revised (31 CFR part 306), may be redeemed at par plus accrued interest 
for the purpose of payment of the estate tax, as provided in said 
section. Whether bonds of particular issues may be redeemed for this 
purpose will depend on the terms of the offering circulars cited on the 
face of the bonds. A current list of eligible issues may be obtained 
from any Federal reserve bank or branch, or from the Bureau of Public 
Debt, Washington, DC. See section 6312 and Sec. Sec. 301.6312-1 and 
301.6312-2 of this chapter (Regulations on Procedure and Administration) 
for provisions relating to the payment of taxes with United States 
Treasury obligations.
    (d) Receipt for payment. For provisions relating to duplicate 
receipts for payment of the tax, see Sec. 20.6314-1.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6522, 25 FR 
13885, Dec. 29, 1960]



Sec. 20.6161-1  Extension of time for paying tax shown on the return.

    (a) Basis for granting an extension of time--(1) Reasonable cause. 
With respect to the estate of a decedent dying after December 31, 1970, 
an extension of time beyond the due date to pay any part of the tax 
shown on the estate tax return may be granted for a reasonable period of 
time, not to exceed 12 months, by the district director or the director 
of a service center, at the request of the executor, if an examination 
of all the facts and circumstances discloses that such request is based 
upon reasonable cause. (See paragraph (b) of this section for rules 
relating to application for extension.) The following examples 
illustrate cases involving reasonable cause for granting an extension of 
time pursuant to this paragraph:

    Example (1). An estate includes sufficient liquid assets to pay the 
estate tax when otherwise due. The liquid assets, however, are located 
in several jurisdictions and are not immediately subject to the control 
of the executor. Consequently, such assets cannot readily be marshaled 
by the executor, even with the exercise of due diligence.
    Example (2). An estate is comprised in substantial part of assets 
consisting of rights to receive payments in the future (i.e., annuities, 
copyright royalties, contingent fees, or accounts receivable). These 
assets provide insufficient present cash with which to pay the estate 
tax when otherwise due and the estate cannot borrow against these assets 
except upon terms which would inflict loss upon the estate.
    Example (3). An estate includes a claim to substantial assets which 
cannot be collected without litigation. Consequently, the size of the 
gross estate is unascertainable as of the time the tax is otherwise due.
    Example (4). An estate does not have sufficient funds (without 
borrowing at a rate of interest higher than that generally available) 
with which to pay the entire estate tax when otherwise due, to provide a 
reasonable allowance during the remaining period of administration of 
the estate for the decedent's widow and dependent children, and to 
satisfy claims against the estate that are due and payable. Furthermore, 
the executor has made a reasonable effort to convert assets in

[[Page 520]]

his possession (other than an interest in a closely held business to 
which section 6166 applies) into cash.

    (2) Undue hardship--(i) General rule. In any case where the district 
director finds that payment on the due date of any part of the tax shown 
on the return, or payment of any part of an installment under section 
6166 (including any part of a deficiency prorated to an installment the 
date for payment of which had not arrived) on the date fixed for payment 
thereof, would impose undue hardship upon the estate, he may extend the 
time for payment for a period or periods not to exceed one year for any 
one period and for all periods not to exceed 10 years from the date 
prescribed in section 6151(a) for payment of the tax. See paragraph (a) 
of Sec. 20.6151-1. In addition, if the district director finds that 
payment upon notice and demand of any part of a deficiency prorated 
under the provisions of section 6166 to installments the date for 
payment of which had arrived would impose undue hardship upon the 
estate, he may extend the time for payment for a similar period or 
periods.
    (ii) Definition of ``undue hardship''. The extension provided under 
this subparagraph on the basis of undue hardship to the estate will not 
be granted upon a general statement of hardship or merely upon a showing 
of reasonable cause. The term ``undue hardship'' means more than an 
inconvenience to the estate. A sale of property at a price equal to its 
current fair market value, where a market exists, is not ordinarily 
considered as resulting in an undue hardship to the estate. The 
following examples illustrate cases in which an extension of time will 
be granted based on undue hardship pursuant to this paragraph:

    Example (1). A farm (or other closely held business) comprises a 
significant portion of an estate, but the percentage requirements of 
section 6166(a) (relating to an extension where the estate includes a 
closely held business) are not satisfied and, therefore, that section 
does not apply. Sufficient funds for the payment of the estate tax when 
otherwise due are not readily available. The farm (or closely held 
business) could be sold to unrelated persons at a price equal to its 
fair market value, but the executor seeks an extension of time to 
facilitate the raising of funds from other sources for the payment of 
the estate tax.
    Example (2). The assets in the gross estate which must be liquidated 
to pay the estate tax can only be sold at a sacrifice price or in a 
depressed market if the tax is to be paid when otherwise due.

    (b) Application for extension. An application containing a request 
for an extension of time for paying the tax shown on the return shall be 
in writing, shall state the period of the extension requested, and shall 
include a declaration that it is made under penalties of perjury. If the 
application is based upon reasonable cause (see paragraph (a)(1) of this 
section), a statement of such reasonable cause shall be included in the 
application. If the application is based upon undue hardship to the 
estate (see paragraph (a)(2) of this section), the application shall 
include a statement explaining in detail the undue hardship to the 
estate that would result if the requested extension were refused. At the 
option of the executor, an application for an extension of time based 
upon undue hardship may contain an alternative request for an extension 
based upon reasonable cause if the application for an extension based 
upon undue hardship is denied. However, an application for an extension 
of time based solely upon reasonable cause will be treated as such even 
though an examination of all the facts and circumstances discloses that 
an application for an extension of time based upon undue hardship might 
have been granted had such an application therefor been made. If the 
application is based solely on reasonable cause, it shall be filed with 
the internal revenue officer with whom the estate tax return is required 
to be filed under the provisions of Sec. 20.6091-1(a). If the 
application is based on undue hardship (including an application in 
which the executor makes an alternative request for an extension based 
on reasonable cause), it shall be filed with the appropriate district 
director referred to in paragraph (a)(2) of Sec. 20.6091-1 whether or 
not the return is to be filed with, or the tax is to be paid to, such 
district director. An application, for an extension of time, relating to 
the estate of a decedent who was not domiciled in the United States at 
the time of death, shall be filed with the Director of

[[Page 521]]

International Operations, Internal Revenue Service, Washington, DC. 
20225. When received, the application will be examined, and, if 
possible, within 30 days will be denied, granted, or tentatively granted 
subject to certain conditions of which the executor will be notified. An 
application for an extension of time for payment of the tax, or of an 
installment under section 6166 (including any part of a deficiency 
prorated to an installment the date for payment of which had not 
arrived), will not be considered unless the extension is applied for on 
or before the date fixed for payment of the tax or installment. 
Similarly, an application for such an extension of time for payment of 
any part of a deficiency prorated under the provisions of section 6166 
to installments the date for payment of which had arrived, will not be 
considered unless the extension is applied for on or before the date 
prescribed for payment of the deficiency as shown by the notice and 
demand from the district director. If the executor desires to obtain an 
additional extension of time for payment of any part of the tax shown on 
the return, or any part of an installment under section 6166 (including 
any part of a deficiency prorated to installment), it must be applied 
for on or before the date of the expiration of the previous extension. 
The granting of the extension of time for paying the tax is 
discretionary with the appropriate internal revenue officer and his 
authority will be exercised under such conditions as he may deem 
advisable. However, if a request for an extension of time for payment of 
estate tax under this section is denied by a district director or a 
director of a service center, a written appeal may be made, by 
registered or certified mail or hand delivery, to the regional 
commissioner with authority over such district director or service 
center director within 10 days after the denial is mailed to the 
executor. The provisions of sections 7502 (relating to timely mailing 
treated as timely filing) and 7503 (relating to time for performance of 
acts where the last day falls on Saturday, Sunday, or a legal holiday) 
apply in the case of appeals filed under this paragraph. When received, 
the appeal will be examined, and if possible, within 30 days will be 
denied, granted, or tentatively granted subject to certain conditions of 
which the executor will be notified. If, in the mistaken belief that an 
estate satisfies the requirements of section 6166, the executor, within 
the time prescribed in paragraph (e) of Sec. 20.6166-1, files a 
notification of election to pay estate tax in installments, the 
notification of election to pay tax in installments will be treated as a 
timely filed application for an extension, under section 6161, of time 
for payment of the tax if the executor so requests, in writing, within a 
reasonable time after being notified by the district director that the 
estate does not satisfy the requirements of section 6166. A request that 
the election under section 6166 be treated as a timely filed application 
for an extension under section 6161 must contain, or be supported by the 
same information required by this paragraph with respect to an 
application for such an extension.
    (c) Special rules--(1) Payment pursuant to extension. The amount of 
the tax for which an extension is granted, with the additions thereto, 
shall be paid on or before the expiration of the period of extension 
without the necessity of notice and demand from the district director.
    (2) Interest. The granting of an extension of the time for payment 
of the tax will not relieve the estate from liability for the payment of 
interest thereon during the period of the extension. See section 6601.
    (3) Duty to file timely return. The granting of an extension of time 
for paying the tax will not relieve the executor from the duty of filing 
the return on or before the date provided for in Sec. 20.6075-1.
    (4) Credit for taxes. An extension of time to pay the tax may extend 
the period within which State and foreign death taxes allowed as a 
credit under sections 2011 and 2014 are required to be paid and the 
credit therefor claimed. See paragraph (c) of Sec. 20.2011-1 and Sec. 
20.2014-6.
    (d) Cross references. For provisions requiring the furnishing of 
security for the payment of the tax for which an extension is granted, 
see paragraph (a) of Sec. 20.6165-1. For provisions relating to 
extensions of time for payment of tax

[[Page 522]]

on the value of a reversionary or remainder interest in property, see 
Sec. 20.6163-1.

[T.D. 7238, 37 FR 28722, Dec. 29, 1972, as amended by T.D. 7384, 40 FR 
49323, Oct. 22, 1975]



Sec. 20.6161-2  Extension of time for paying deficiency in tax.

    (a) In any case in which the district director finds that payment, 
on the date prescribed therefor, of any part of a deficiency would 
impose undue hardship upon the estate, he may extend the time for 
payment for a period or periods not to exceed one year for any one 
period and for all periods not to exceed four years from the date 
prescribed for payment thereof. However, see Sec. 20.6161-1 for 
extensions of time for payment of the part of a deficiency which is 
prorated to installments under the provisions of section 6166.
    (b) The extension will not be granted upon a general statement of 
hardship. The term ``undue hardship'' means more than an inconvenience 
to the estate. It must appear that a substantial financial loss, for 
example, due to the sale of property at a sacrifice price, will result 
to the estate from making payment of the deficiency at the date 
prescribed therefor. If a market exists, a sale of property at the 
current market price is not ordinarily considered as resulting in an 
undue hardship. No extension will be granted if the deficiency is due to 
negligence or intentional disregard of rules and regulations or to fraud 
with intent to evade the tax.
    (c) An application for such an extension must be in writing and must 
contain, or be supported by, information in a written statement 
declaring that it is made under penalties of perjury showing the undue 
hardship that would result to the estate if the extension were refused. 
The application, with the supporting information, must be filed with the 
district director. When received, it will be examined, and, if possible, 
within thirty days will be denied, granted, or tentatively granted 
subject to certain conditions of which the executor will be notified. 
The district director will not consider an application for such an 
extension unless it is applied for on or before the date prescribed for 
payment of the deficiency, as shown by the notice and demand from the 
district director. If the executor desires to obtain an additional 
extension, it must be applied for on or before the date of the 
expiration of the previous extension. The granting of the extension of 
time for paying the deficiency is discretionary with the district 
director.
    (d) The amount of the deficiency for which an extension is granted, 
with the additions thereto, shall be paid on or before the expiration of 
the period of extension without the necessity of notice and demand from 
the district director.
    (e) The granting of an extension of time for paying the deficiency 
will not operate to prevent the running of interest. See section 6601. 
An extension of time to pay the deficiency may extend the period within 
which State and foreign death taxes allowed as a credit under sections 
2011 and 2014 are required to be paid and the credit therefor claimed. 
See paragraph (c) of Sec. 20.2011-1 and Sec. 20.2014-6.
    (f) For provisions requiring the furnishing of security for the 
payment of the deficiency for which an extension is granted, see Sec. 
20.6165-1.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6522, 25 FR 
13885, Dec. 29, 1960]



Sec. 20.6163-1  Extension of time for payment of estate tax on value 
of reversionary or remainder interest in property.

    (a)(1) In case there is included in the gross estate a reversionary 
or remainder interest in property, the payment of the part of the tax 
attributable to that interest may, at the election of the executor, be 
postponed until six months after the termination of the precedent 
interest or interests in the property. The provisions of this section 
are limited to cases in which the reversionary or remainder interest is 
included in the decedent's gross estate as such and do not extend to 
cases in which the decedent creates future interests by his own 
testamentary act.
    (2) If the district director finds that the payment of the tax at 
the expiration of the period of postponement described in subparagraph 
(1) of this

[[Page 523]]

paragraph would result in undue hardship to the estate, he may--
    (i) After September 2, 1958, and before February 27, 1964, extend 
the time for payment for a reasonable period or periods not to exceed in 
all 2 years from the expiration of the period of postponement, but only 
if the precedent interest or interests in the property terminated after 
March 2, 1958, or
    (ii) After February 26, 1964, extend the time for payment for a 
reasonable period or periods not to exceed in all 3 years from the 
expiration of the period of postponement, but only if the time for 
payment of the tax, including any extensions thereof, did not expire 
before February 26, 1964.

See paragraph (a)(2)(ii) of Sec. 20.6161-1 for the meaning of the term 
``undue hardship''. An example of undue hardship is a case where, by 
reason of the time required to settle the complex issues involved in a 
trust, the decedent's heirs or beneficiaries cannot reasonably expect to 
receive the decedent's remainder interest in the trust before the 
expiration of the period of postponement. The extension will be granted 
only in the manner provided in paragraph (b) of Sec. 20.6161-1, and the 
amount of the tax for which the extension is granted, with the additions 
thereto, shall be paid on or before the expiration of the period of 
extension without the necessity of notice and demand from the district 
director.
    (b) Notice of the exercise of the election to postpone the payment 
of the tax attributable to a reversionary or remainder interest should 
be filed with the district director before the date prescribed for 
payment of the tax. The notice of election may be made in the form of a 
letter addressed to the district director. There shall be filed with the 
notice of election a certified copy of the will or other instrument 
under which the reversionary or remainder interest, was created, or a 
copy verified by the executor if the instrument is not filed of record. 
The district director may require the submission of such additional 
proof as he deems necessary to disclose the complete facts. If the 
duration of the precedent interest is dependent upon the life of any 
person, the notice of election must show the date of birth of that 
person.
    (c) If the decedent's gross estate consists of both a reversionary 
or remainder interest in property and other property, the tax 
attributable to the reversionary or remainder interest, within the 
meaning of this section, is an amount which bears the same ratio to the 
total tax as the value of the reversionary or remainder interest 
(reduced as provided in the following sentence) bears to the entire 
gross estate (reduced as provided in the last sentence of this 
paragraph). In applying this ratio, the value of the reversionary or 
remainder interest is reduced by (1) the amount of claims, mortgages, 
and indebtedness which is a lien upon such interest; (2) losses in 
respect of such interest during the settlement of the estate which are 
deductible under the provisions of section 2054 or section 2106(a)(1); 
(3) any amount deductible in respect of such interest under section 2055 
or 2106(a)(2) for charitable, etc., transfers; and (4) the portion of 
the marital deduction allowed under the provisions of section 2056 on 
account of bequests, etc., of such interests to the decedent's surviving 
spouse. Likewise, in applying the ratio, the value of the gross estate 
is reduced by such deductions having similar relationship to the items 
comprising the gross estate.
    (d) For provisions requiring the payment of interest during the 
period of the extension occurring before July 1, 1975, see section 
6601(b) prior to its amendment by section 7(d)(1) of the Act of Jan. 3, 
1975 (Pub. L. 93-625, 88 Stat. 2115). For provisions requiring the 
furnishing of security for the payment of the tax for which the 
extension is granted, see paragraph (b) of Sec. 20.6165-1. For 
provisions concerning the time within which credit for State and foreign 
death taxes on such a reversionary or remainder interest may be taken, 
see section 2015 and the regulations thereunder.

[T.D. 6296, 23 FR 4529, June 24, 1958, as amended by T.D. 6716, 29 FR 
3757, Mar. 26, 1964; T.D. 7238, 37 FR 28724, Dec. 29, 1972; T.D. 7384, 
40 FR 49323, Oct. 22, 1975]



Sec. 20.6165-1  Bonds where time to pay tax or deficiency has been 
extended.

    (a) Extensions under sections 6161 and 6163(b) of time to pay tax or 
deficiency. If

[[Page 524]]

an extension of time for payment of tax or deficiency is granted under 
section 6161 or 6163(b), the district director may, if he deems it 
necessary, require the executor to furnish a bond for the payment of the 
amount in respect of which the extension is granted in accordance with 
the terms of the extension. However, such bond shall not exceed double 
the amount with respect to which the extension is granted. For other 
provisions relating to bonds required where extensions of time to pay 
estate taxes or deficiencies are granted under sections 6161 and 
6163(b), see the regulations under section 7101 contained in part 301 of 
this chapter (Regulations on Procedure and Administration).
    (b) Extensions under section 6163 of time to pay estate tax 
attributable to reversionary or remainder interests. As a prerequisite 
to the postponement of the payment of the tax attributable to a 
reversionary or remainder interest as provided in Sec. 20.6163-1, a 
bond equal to double the amount of the tax and interest for the 
estimated duration of the precedent interest must be furnished 
conditioned upon the payment of the tax and interest accrued thereon 
within six months after the termination of the precedent interest. If 
after the acceptance of a bond it is determined that the amount of the 
tax attributable to the reversionary or remainder interest was 
understated in the bond, a new bond or a supplemental bond may be 
required, or the tax, to the extent of the understatement, may be 
collected. The bond must be conditioned upon the principal or surety 
promptly notifying the district director when the precedent interest 
terminates and upon the principal or surety notifying the district 
director during the month of September of each year as to the 
continuance of the precedent interest, if the duration of the precedent 
interest is dependent upon the life or lives of any person or persons, 
or is otherwise indefinite. For other provisions relating to bonds where 
an extension of time has been granted for paying the tax, see the 
regulations under section 7101 contained in part 301 of this chapter 
(Regulations on Procedure and Administration).

[T.D. 6526, 26 FR 418, Jan. 19, 1961, as amended by T.D. 6600, 27 FR 
4986, May 29, 1962]



Sec. 20.6166-1  Election of alternate extension of time for payment
of estate tax where estate consists largely of interest in closely 

held business.

    (a) In general. Section 6166 allows an executor to elect to extend 
payment of part or all of the portion of the estate tax which is 
attributable to a closely held business interest (as defined in section 
6166(b)(1)). If it is made at the time the estate tax return is filed, 
the election is applicable both to the tax originally determined to be 
due and to certain deficiencies. If no election is made when the estate 
tax return is filed, up to the full amount of certain later deficiencies 
(but not any tax originally determined to be due) may be paid in 
installments.
    (b) Time and manner of election. The election provided under section 
6166(a) is made by attaching to a timely filed estate tax return a 
notice of election containing the following information:
    (1) The decedent's name and taxpayer identification number as they 
appear on the estate tax return;
    (2) The amount of tax which is to be paid in installments;
    (3) The date selected for payment of the first installment;
    (4) The number of annual installments, including the first 
installment, in which the tax is to be paid;
    (5) The properties shown on the estate tax return which constitute 
the closely held business interest (identified by schedule and item 
number); and
    (6) The facts which formed the basis for the executor's conclusion 
that the estate qualifies for payment of the estate tax in installments.

In the absence of a statement in the notice of election as to the amount 
of tax to be paid in installments, the date selected for payment of the 
first installment, or the number of installments, the election is 
presumed to be for the maximum amount so payable and for payment thereof 
in 10 equal installments, the first of which is due on the date which is 
5 years after the date prescribed in section 6151(a) for payment of 
estate tax.

[[Page 525]]

    (c) Treatment of certain deficiencies--(1) No election before 
assessment of deficiency. Where a deficiency is assessed and no 
election, including a protective election, has been made under section 
6166(a) to pay any tax in installments, the executor may elect under 
section 6166(h) to pay the portion of the deficiency attributable to the 
closely held business interest in installments. However, this is true 
only if the estate qualifies under section 6166 based upon values as 
finally determined (or agreed to following examination of a return). 
Such an election is exercised by filing a notice of election with the 
Internal Revenue Service office where the estate tax return was filed. 
The notice of election must be filed within 60 days after issuance of 
notice and demand for payment of the deficiency, and it must contain the 
same information as is required under paragraph (b) of this section. The 
notice of election is to be accompanied by payment of the amount of tax 
and interest, the date for payment of which has arrived as determined 
under paragraphs (e) and (f) of this section, plus any amount of unpaid 
tax and interest which is not attributable to the closely held business 
interest and which is not eligible for further extension (or currently 
extended) under another section (other than section 6166A).
    (2) Election made with estate tax return. If the executor makes an 
election under section 6166(a) (other than a protective election) at the 
time the estate tax return is filed and a deficiency is later assessed, 
the portion of the deficiency which is attributable to the closely held 
business interest (but not any accrued interest thereon) will be 
prorated to the installments payable pursuant to the original section 
6166(a) election. Any part of the deficiency prorated to an installment, 
the date for payment of which has arrived, is due upon notice and 
demand. Interest for any such period, including the deferral period, is 
payable upon notice and demand.
    (3) Portion of deficiency attributable to closely held business 
interest. Only that portion of any deficiency which is attributable to a 
closely held business interest may be paid in installments under section 
6166. The amount of any deficiency which is so attributable is the 
difference between the amount of tax which the executor has previously 
elected to pay in installments under section 6166 and the maximum amount 
of tax which the executor could have elected to pay in installments on 
the basis of a return which reflects the adjustments that resulted in 
the deficiency.
    (d) Protective election. A protective election may be made to defer 
payment of any portion of tax remaining unpaid at the time values are 
finally determined (or agreed to following examination of a return) and 
any deficiencies attributable to the closely held business interest 
(within the meaning of paragraph (c)(3) of this section). Extension of 
tax payments pursuant to this election is contingent upon final values 
meeting the requirements of section 6166. A protective election does 
not, however, extend the time for payment of any amount of tax. Rules 
for such extensions are contained in sections 6161, 6163, and 6166A. A 
protective election is made by filing a notice of election with a timely 
filed estate tax return stating that the election is being made. Within 
60 days after values are finally determined (or agreed to following 
examination of a return), a final notice of election which sets forth 
the information required under paragraph (b) of this section must be 
filed with the Internal Revenue Service office where the original estate 
tax return was filed. That notice of final election is to be accompanied 
by payment of any amount of previously unpaid tax and interest, the date 
for payment of which has arrived as determined under paragraphs (e) and 
(f) of this section, plus any amount of unpaid tax and interest which is 
not attributable to the closely held business interest and which is not 
eligible for further extension (or currently extended) under another 
section (other than section 6166A).
    (e) Special rules--(1) Effect of deficiencies and protective 
elections upon payment. Upon election to extend the time for payment of 
a deficiency or upon final determination of values following a 
protective election, the executor must prorate the tax or deficiency

[[Page 526]]

attributable to the closely held business interest among all 
installments. All amounts attributed to installments which would have 
been due had the election been made at the time the tax was due to be 
paid under section 6151(a) and all accrued interest must be paid at the 
time the election is made.
    (2) Determination of date for payment of first installment. The 
executor may defer payment of tax (but not interest) for any period up 
to 5 years from the date determined under section 6151(a) for payment of 
the estate tax. The date chosen for payment of the first installment of 
tax is not required to be on an annual anniversary of the original due 
date of the tax; however, it must be the date within any month which 
corresponds to the day of the month determined under section 6151(a).
    (f) Rule for computing interest. Section 6601(j) provides a special 
4 percent interest rate for the amount of tax (including deficiencies) 
which is to be paid in installments under section 6166. This special 
interest rate applies only to that amount of tax which is to be paid in 
installments and which does not exceed the limitation of section 
6601(j)(2). Where payment of a greater amount of tax than is subject to 
section 6601(j)(2) is extended under section 6166, each installment is 
deemed to be comprised of both tax subject to the 4 percent interest 
rate and tax subject to the rate otherwise prescribed by section 6621. 
The percentage of any installment subject to the special 4 percent rate 
is equal to the percentage of the total tax payable in installments 
which is subject to the 4 percent rate. Where an election is made under 
the provisions of paragraphs (b) or (c) (1) of this section, the 4 
percent rate applies from the date on which the estate tax was 
originally due to be paid. If only a protective election is made, 
section 6601(j) applies to the amount which is to be paid in 
installments, limited to the amount of any deficiency, from the due date 
for payment of estate tax. After the date upon which the section 6166 
election is made final, section 6601(j) applies to the entire amount to 
be paid in installments.
    (g) Relation of sections 6166 and 6166A. No election may be made 
under section 6166 if an election under section 6166A applies with 
respect to an estate. For example, no election can be made under section 
6166(h) where an executor has made an election under section 6166A. If 
an election is timely made under either section 6166 or section 6166A, 
however, a protective election can be made under the other section at 
the same time. If the executor then files a timely notice of final 
election under the section protectively elected and pays any amounts 
determined to be due currently following final determination of (or 
agreement as to) estate tax values, the original election under the 
other provision will be deemed never to have applied to the estate.
    (h) Special rule for estates for which elections under section 6166 
are made on or before August 30, 1980. An election to extend payment of 
estate tax under section 6166 that is made on or before August 30, 1980, 
may be revoked. To revoke an election, the executor must file a notice 
of revocation with the Internal Revenue Service office where the 
original estate tax return was filed on or before January 31, 1981 (or 
if earlier, the date on which the period of limitation on assessment 
expires). This notice of revocation must contain the decedent's name, 
date of death, and taxpayer identification number, and is to be 
accompanied by remittance of any additional amount of estate tax and 
interest determined to be due.
    (i) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). (i) Based upon values shown on decedent A's timely 
filed estate tax return, 60 percent of the value of A's adjusted gross 
estate consisted of a farm which was a closely held business within the 
meaning of section 6166. A's executor, B, made a protective election 
under section 6166 when he filed A's estate tax return. B also applied 
for an extension of time under section 6161 to pay $15,000 of the 
$30,000 of estate tax shown due on the return. The requested extension 
was granted and was renewed at the end of 1 year. Eighteen months after 
the return was filed and after examination of A's estate tax return, the 
value of the farm was found to constitute 67 percent of the adjusted 
gross estate. B entered into an agreement consenting to the values as 
established on examination and to a deficiency of $5,000. B then filed a 
final notice of election under section 6166, choosing a 5-year deferral 
followed by 10 annual installment payments and thereby

[[Page 527]]

terminated his extension under section 6161 because that amount of tax 
was then included under the section 6166 election. B could have extended 
payment of 67 percent of the total estate tax, or $23,450. $23,450 is 
eligible for installment payments under section 6166 and the section 
section 6166 election is considered to be for that amount. B is 
considered to have prepaid $3,450 of tax since only $20,000 of tax 
remained unpaid. The $3,450 is attributed to the first installment of 
$2,345 and to $1,105 of the second installment which would have been 
payable under the section 6166 election.
    (ii) Had B been granted an extension of time under section 6161 to 
pay $20,000 of tax, $25,000 would remain upaid when the final section 
6166 election is made. Payment of the full $23,450 (67 percent) of tax 
which is attributable to the closely held business interest is included 
under the section 6166 election. The balance of unpaid tax ($1,550) is 
due upon expiration of the estate's section 6161 extension.
    (iii) Assume the facts under example (1) (i). B must pay all unpaid 
accrued interest with his notice of final election. Since only 18 months 
have passed, no installments of tax are due. Interest on the $5,000 
deficiency is computed at 4 percent per annum for the entire 18 months, 
and interest for 12 months of that period is currently due to be paid. 
Interest for the remaining 6 months is due at the next succeeding date 
for payment of interest. Interest on the $15,000 of tax extended under 
section 6161 is computed at the rate determined under section 6621 until 
the date of the final section 6166 election and is due upon termination 
of the section 6161 extension. After that date, the interest on the 
$15,000 will also accrue at 4 percent per annum.
    Example (2). Assume the facts as in example (1), except B initially 
made an election under section 6166A and made no protective election 
under section 6166. Following final determination of values, B is not 
permitted to make any election under section 6166; however, had B 
protectively elected section 6166 at the time he made the section 6166A 
election, he could have terminated the section 6166A election and 
finally elected under section 6166. In such a case, the full $23,450 of 
tax attributable to the farm would have been eligible for extension 
under section 6166. The 4 percent interest rate would apply to the 
$5,000 deficiency from the original due date of the tax, and, as with 
the extension under section 6161, it would apply to the amounts extended 
under section 6166A only from the date on which the election under 
section 6166 was finalized.
    Example (3). C died in 1977. His estate owes Federal estate taxes of 
$750,000, $500,000 of which is attributable to a closely held business 
interest. Payment of the $500,000 was extended under section 6166. A 5-
year deferral followed by 10 annual installment payments was chosen by 
C's executor. Under paragraph (f) of this section, only 63.16 percent of 
each installment will be subject to the special 4 percent interest rate 
and the remainder will be subject to the rate determined under section 
6621. The same rule applies in computing interest for the 5 years during 
which payment of tax is deferred. (This is so because the 4 percent 
interest rate applies only to a maximum of $345,800 of tax less the 
$30,000 of credit allowable under section 2010(a) rather than to the 
entire $500,000 extended amount).

[T.D. 7710, 45 FR 50745, July 31, 1980]



Sec. 20.6166A-1  Extension of time for payment of estate tax where
estate consists largely of interest in closely held business.

    (a) In general. Section 6166 provides that where the value of an 
interest in a closely held business, which is included in the gross 
estate of a decedent who was a citizen or resident of the United States 
at the time of his death, exceeds either (1) 35 percent of the value of 
the gross estate, or (2) 50 percent of the taxable estate, the executor 
may elect to pay part or all of the Federal estate tax in installments. 
The election to pay the tax in installments applies to deficiencies in 
tax as well as to the tax shown on the return, unless the deficiency is 
due to negligence, to intentional disregard of rules and regulations, or 
to fraud with intent to evade tax. Except as otherwise provided in 
section 6166(i) and Sec. 20.6166-4, the provisions of section 6166 and 
this section apply only if the due date of the return is after September 
2, 1958. See Sec. 20.6166-4 for special rules applicable where the 
decedent died after August 16, 1954, and the due date of the return was 
on or before September 2, 1958. See also Sec. 20.6075-1 for the due 
date of the return, and Sec. 20.6166-2 for definition of the term 
``interest in a closely held business.'' Since the election must be made 
on or before the due date of the return, the provisions of section 6166 
will not apply to a deficiency in a case where, for whatever reason, no 
election was made to pay in installments the tax shown on the return. 
However, see paragraph (e)(3) of this section concerning a protective 
election. The general administrative provisions of Subtitle F of the 
Code are applicable in

[[Page 528]]

connection with an election by the executor to pay the estate tax in 
installments in the same manner in which they are applied in a case 
where an extension of time under section 6161 is granted for payment of 
the tax. See paragraph (a) of Sec. 20.6165-1 for provisions requiring 
the furnishing of security for the payment of the tax in cases where an 
extension is granted under section 6161.
    (b) Limitation on amount of tax payable in installments. The amount 
of estate tax which the executor may elect to pay in installments is 
limited to an amount A, which bears the same ratio to B (the gross 
Federal estate tax, reduced by the credits authorized by sections 2011 
through 2014 and any death tax convention) as C (the value of the 
interest in a closely held business which is included in the gross 
estate) bears to D (the value of the gross estate). Stated 
algebraically, the limitation (A) equals:
Value of interest in a closely held business which is included in the 
gross estate (C) / Value of gross estate (D) x Gross Federal estate tax 
reduced by the credits authorized by sections 2011 through 2014 and any 
death tax convention (B).

The executor may elect to pay in installments an amount less than the 
amount computed under the limitation in this paragraph. For example, if 
the total estate tax payable is $100,000 and the amount computed under 
the limitation in this paragraph is $60,000, the executor may elect to 
pay in installments some lesser sum such as $30,000, in which event the 
executor must pay $73,000 to the district director on or before the date 
prescribed by section 6151(a) for payment of the tax. Of such payment, 
$70,000 represents tax which the executor either could not elect to pay 
in installments or did not choose to so elect, and $3,000 represents a 
payment of the first installment of the tax which the executor elected 
to pay in installments.
    (c) Number of installments and dates for payment. The executor may 
elect to pay part or all of the tax (determined after application of the 
limitation contained in paragraph (b) of this section) in two or more, 
but not exceeding 10, equal annual installments. The first installment 
shall be paid on or before the date prescribed by section 6151(a) for 
payment of the tax (see paragraph (a) of Sec. 20.6151-1), and each 
succeeding installment shall be paid on or before the date which is one 
year after the date prescribed for the payment of the preceding 
installment. See Sec. 20.6166-3 for the circumstances under which the 
privilege of paying the tax in installments will terminate.
    (d) Deficiencies. The amount of a deficiency which may be paid in 
installments shall not exceed the difference between the amount of tax 
which the executor elected to pay in installments and the maximum amount 
of tax (determined under paragraph (b) of this section) which the 
executor could have elected to pay in installments on the basis of a 
return which reflects in adjustments which resulted in the deficiency. 
This amount is then prorated to the installments in which the executor 
elected to pay the tax. The part of the deficiency prorated to 
installments not yet due shall be paid at the same time as, and as a 
part of, such installments. The part of the deficiency prorated to 
installments already paid or due shall be paid upon notice and demand 
from the district director. At the time the executor receives such 
notice and demand he may, of course, prepay the portions of the 
deficiency which have been prorated to installments not yet due. See 
paragraph (h) of this section.
    (e) Notice of election--(1) Filing of notice. The notice of election 
to pay the estate tax in installments shall be filed with the district 
director on or before the due date of the return. However, if the due 
date of the return is after September 2, 1958, but before November 3, 
1958, the election will be considered as timely made if the notice is 
filed with the district director on or before November 3, 1958. See 
Sec. 20.6075-1 for the due date of the return.
    (2) Form of notice. The notice of election to pay the estate tax in 
installments may be in the form of a letter addressed to the district 
director. The executor shall state in the notice the amount of tax which 
he elects to pay in installments, and the total number of installments 
(including the installment due 9 months (15 months, in the

[[Page 529]]

case of a decedent dying before January 1, 1971) after the date of the 
decedent's death, in which he elects to pay the tax. The properties in 
the gross estate which constitute the decedent's interest in a closely 
held business should be listed in the notice, and identified by the 
schedule and item number at which they appear on the estate tax return. 
The notice should set forth the facts which formed the basis for the 
executor's conclusion that the estate qualifies for the payment of the 
estate tax in installments.
    (3) Protective election. In a case where the estate does not qualify 
under section 6166(a) on the basis of the values as returned, or where 
the return shows no tax as due, an election may be made, contingent upon 
the values as finally determined meeting the percentage requirements set 
forth in section 6166(a), to pay in installments any portion of the 
estate tax, including a deficiency, which may be unpaid at the time of 
such final determination and which does not exceed the limitation 
provided in section 6166(b). The protective election must be made on or 
before the due date of the return and should state that it is a 
protective election. In the absence of a statement in the protective 
election as to the amount of tax to be paid in installments and the 
number of installments, the election will be presumed to be made for the 
maximum amount so payable and for the payment thereof in 10 equal annual 
installments, the first of which would have been due on the date 
prescribed in section 6151(a) for payment of the tax. The unpaid portion 
of the tax which may be paid in installments is prorated to the 
installments which would have been due if the provisions of section 
6166(a) had applied to the tax, if any, shown on the return. The part of 
the unpaid portion of the tax so prorated to installments the date for 
payment of which would not have arrived before the deficiency is 
assessed shall be paid at the time such installments would have been 
due. The part of the unpaid portion of the tax so prorated to any 
installment the date for payment of which would have arrived before the 
deficiency is assessed shall be paid upon receipt of notice and demand 
from the district director. At the time the executor receives such 
notice and demand he may, of course, prepay the unpaid portions of the 
tax which have been prorated to installments not yet due. See paragraph 
(h) of this section.
    (f) Time for paying interest. Under the provisions of section 6601, 
interest at the annual rate referred to in the regulations under section 
6621 shall be paid on the unpaid balance of the estate tax which the 
executor has elected to pay in installments, and on the unpaid balance 
of any deficiency prorated to the installments. Interest on such unpaid 
balance of estate tax shall be paid annually at the same time as, and as 
a part of, each installment of the tax. Accordingly, interest is 
computed on the entire unpaid balance for the period from the preceding 
installment date to the current installment date, and is paid with the 
current installment. In making such a computation, proper adjustment 
shall be made for any advance payments made during the period, whether 
the advance payments are voluntary or are brought about by the operation 
of section 6166(h)(2). In computing the annual interest payment, the 
portion of any deficiency which is prorated to installments the date for 
payment of which has not arrived shall be added to the unpaid balance at 
the beginning of the annual period during which the assessment of the 
deficiency occurs. Interest on such portion of the deficiency for the 
period from the original due date of the tax to the date fixed for the 
payment of the last installment preceding the date of assessment of a 
deficiency shall be paid upon notice and demand from the district 
director. Any extension of time under section 6161(a)(2) (on account of 
undue hardship to the estate) for payment of an installment will not 
extend the time for payment of the interest which is due on the 
installment date.
    (g) Extensions of time for payment in hardship cases. The provisions 
of section 6161, under which extensions of time may be granted for 
payment of estate tax in cases involving undue hardship, apply to both 
the portion of the tax which may be paid in installments under section 
6166 and the portion of

[[Page 530]]

the tax which is not so payable. Therefore, in a case involving undue 
hardship, the executor may elect under section 6166 to pay in 
installments the portion of the tax which is attributable to the 
interest in the closely held business and, in addition, may file an 
application under section 6161 for an extension of time to pay both the 
portion of the tax which is not attributable to the interest in the 
closely held business and such of the installments as are payable within 
the period of the requested extension. If an executor files a notice of 
election to pay the tax in installments and thereafter it is determined 
that the estate does not qualify for the privilege of paying the tax in 
installments, the executor is not deprived of the right to request an 
extension under section 6161 of time for payment of the tax to which the 
purported election applied. See Sec. 20.6161-1 for the circumstances 
under which a timely filed election to pay the tax in installments will 
be treated as a timely filed application for an extension of time to pay 
the tax on account of undue hardship to the estate.
    (h) Prepayments. Voluntary prepayment may be made at any time of 
all, or of any part, of the unpaid portion of the tax (including 
deficiencies) payable in installments. Voluntary prepayments shall be 
applied in payment of such installments, installment, or part of an 
installment as the person making the prepayment shall designate. For 
purposes of this paragraph, a payment described in paragraph (d) (2) of 
Sec. 20.6166-3 of tax in an amount not less than the amount of money or 
other property distributed in a section 303 redemption is considered to 
be a voluntary prepayment to the extent paid before the date prescribed 
for payment of the first installment after the redemption or, if paid on 
the date prescribed for payment of such installment, to the extent it 
exceeds the amount due on the installment. See paragraph (b)(3) of Sec. 
20.6166-3 for the application to be made of the prepayment required by 
section 6166(h)(2).

[T.D. 6522, 25 FR 13886, Dec. 29, 1960, as amended by T.D. 7238, 37 FR 
28724, Dec. 29, 1972; T.D. 7384, 40 FR 49323, Oct. 22, 1975. 
Redesignated by T.D. 7710, 45 FR 50745, July 31, 1980]



Sec. 20.6166A-2  Definition of an interest in a closely held business.

    (a) In general. For purposes of Sec. Sec. 20.6166-1, 20.6166-3, and 
20.6166-4, the term ``interest in a closely held business'' means:
    (1) An interest as a proprietor in a trade or business carried on as 
a proprietorship.
    (2) An interest as a partner in a partnership carrying on a trade or 
business if 20 percent or more of the total capital interest in the 
partnership is included in determining the decedent's gross estate or if 
the partnership had 10 or less partners.
    (3) Stock in a corporation carrying on a trade or business if 20 
percent or more in value of the voting stock of the corporation is 
included in determining the decedent's gross estate or if the 
corporation had 10 or less shareholders.
    (b) Number of partners or shareholders. The number of partners of 
the partnership or shareholders of the corporation is determined as of 
the time immediately before the decedent's death. Where an interest in a 
partnership, or stock in a corporation, is the community property of 
husband and wife, both the husband and the wife are counted as partners 
or shareholders in arriving at the number of partners or shareholders. 
Similarly, if stock is held by co-owners, tenants in common, tenants by 
the entirety, or joint tenants, each co-owner, tenant in common, tenant 
by the entirety, or joint tenant is counted as a shareholder.
    (c) Carrying on a trade or business. (1) In order for the interest 
in a partnership or the stock of a corporation to qualify as an interest 
in a closely held business it is necessary that the partnership or the 
corporation be engaged in carrying on a trade or business at the time of 
the decedent's death. However, it is not necessary that all the assets 
of the partnership or the corporation be utilized in the carrying on of 
the trade or business.
    (2) In the case of a trade or business carried on as a 
proprietorship, the interest in the closely held business includes only 
those assets of the decedent which were actually utilized by him in the 
trade or business. Thus, if a building was used by the decedent in

[[Page 531]]

part as a personal residence and in part for the carrying on of a 
mercantile business, the part of the building used as a residence does 
not form any part of the interest in the closely held business. Whether 
an asset will be considered as used in the trade or business will depend 
on the facts and circumstances of the particular case, for example, if a 
bank account was held by the decedent in his individual name (as 
distinguished from the trade or business name) and it can be clearly 
shown that the amount on deposit represents working capital of the 
business as well as nonbusiness funds (e.g., receipts from investments, 
such as dividends and interest), then that part of the amount on deposit 
which represents working capital of the business will constitute a part 
of the interest in the closely held business. On the other hand, if a 
bank account is held by the decedent in the trade or business name and 
it can be shown that the amount represents nonbusiness funds as well as 
working capital, then only that part of the amount on deposit which 
represents working capital of the business will constitute a part of the 
interest in the closely held business. In a case where an interest in a 
partnership or stock of a corporation qualifies as an interest in a 
closely held business, the decedent's entire interest in the 
partnership, or the decedent's entire holding of stock in the 
corporation, constitutes an interest in a closely held business even 
though a portion of the partnership or corporate assets is used for a 
purpose other than the carrying on of a trade or business.
    (d) Interests in two or more closely held businesses. For purpose of 
paragraphs (a) and (b) of Sec. 20.6166-1 and paragraphs (d) and (e) of 
Sec. 20.6166-3, interests in two or more closely held businesses shall 
be treated as an interest in a single closely held business if more than 
50 percent of the total value of each such business is included in 
determining the value of the decedent's gross estate. For the purpose of 
the 50 percent requirement set forth in the preceding sentence, an 
interest in a closely held business which represents the surviving 
spouse's interest in community property shall be considered as having 
been included in determining the value of the decedent's gross estate.

[T.D. 6522, 25 FR 13888, Dec. 29, 1960. Redesignated by T.D. 7710, 45 FR 
50745, July 31, 1980]



Sec. 20.6166A-3  Acceleration of payment.

    (a) In general. Under the circumstances described in this section 
all or a part of the tax which the executor has elected to pay in 
installments shall be paid before the dates fixed for payment of the 
installments. Upon an estate's having undistributed net income described 
in paragraph (b) of this section for any taxable year after its fourth 
taxable year, the executor shall pay an amount equal to such 
undistributed net income in liquidation of the unpaid portion of the tax 
payable in installments. Upon the happening of any of the events 
described in paragraphs (c), (d), and (e) of this section, any unpaid 
portion of the tax payable in installments shall be paid upon notice and 
demand from the district director.
    (b) Undistributed net income of estate. (1) If an estate has 
undistributed net income for any taxable year after its fourth taxable 
year, the executor shall pay an amount equal to such undistributed net 
income in liquidation of the unpaid portion of the tax payable in 
installments. The amount shall be paid to the district director on or 
before the time prescribed for the filing of the estate's income tax 
return for such taxable year. For this purpose extensions of time 
granted for the filing of the income tax return are taken into 
consideration in determining the time prescribed for filing the return 
and making such payment. In determining the number of taxable years, a 
short taxable year is counted as if it were a full taxable year.
    (2) The term ``undistributed net income'' of the estate for any 
taxable year for purposes of this section is the amount by which the 
distributable net income of the estate, as defined in section 643, 
exceeds the sum of--
    (i) The amount for such year specified in section 661(a) (1) and 
(2),
    (ii) The amount of the Federal income tax imposed on the estate for 
such taxable year under Chapter I of the Code, and

[[Page 532]]

    (iii) The amount of the Federal estate tax, including interest 
thereon, paid for the estate during such taxable year (other than any 
amount paid by reason of the application of this acceleration rule).
    (3) The payment described in subparagraph (1) of this paragraph 
shall be applied against the total unpaid portion of the tax which the 
executor elected to pay in installments, and shall be divided equally 
among the installments due after the date of such payment. The 
application of this subparagraph may be illustrated by the following 
example:

    Example. The decedent died on January 1, 1959. The executor elects 
under section 6166 to pay tax in the amount of $100,000 in 10 
installments of $10,000. The first installment is due on April 1, 1960. 
The estate files its income tax returns on a calendar year basis. For 
its fifth taxable year (calendar year 1963) it has undistributed net 
income of $6,000. If the prepayment of $6,000 required by section 
6166(h)(2)(A), and due on or before April 15, 1964, is paid before the 
fifth installment (due April 1, 1964), the $6,000 is apportioned equally 
among installments 5 through 10, leaving $9,000 as the amount due on 
each of such installments. However, if the prepayment of $6,000 is paid 
after the fifth installment, it is apportioned equally among 
installments 6 through 10, leaving $8,800 as the amount due on each of 
such installments.

    (c) Failure to pay installment on or before due date. If any 
installment of tax is not paid on or before the date fixed for its 
payment (including any extension of time for the payment thereof), the 
whole of the unpaid portion of the tax which is payable in installments 
becomes due and shall be paid upon notice and demand from the district 
director. See paragraph (c) of Sec. 20.6166-1 for the dates fixed for 
the payment of installments. See also Sec. 20.6161-1 for the 
circumstances under which an extension of time for the payment of an 
installment will be granted.
    (d) Withdrawal of funds from business. (1) In any case where money 
or other property is withdrawn from the trade or business and the 
aggregate withdrawals of money or other property equal or exceed 50 
percent of the value of the trade or business, the privilege of paying 
the tax in installments terminates and the whole of the unpaid portion 
of the tax which is payable in installments becomes due and shall be 
paid upon notice and demand from the district director. The withdrawals 
of money or other property from the trade or business must be in 
connection with the interest therein included in the gross estate, and 
must equal or exceed 50 percent of the value of the entire trade or 
business (and not just 50 percent of the value of the interest therein 
included in the gross estate). The withdrawal must be a withdrawal of 
money or other property which constitutes ``included property'' within 
the meaning of that term as used in paragraph (d) of Sec. 20.2032-1. 
The provisions of this section do not apply to the withdrawal of money 
or other property which constitutes ``excluded property'' within the 
meaning of that term as used in such paragraph (d).
    (2) If a distribution in redemption of stock is (by reason of the 
provisions of section 303 or so much of section 304 as relates to 
section 303) treated for income tax purposes as a distribution in full 
payment in exchange for the stock so redeemed, the amount of such 
distribution is not counted as a withdrawal of money or other property 
made with respect to the decedent's interest in the trade or business 
for purposes of determining whether the withdrawals of money or other 
property made with respect to the decedent's interest in the trade or 
business equal or exceed 50 percent of the value of the trade or 
business. However, in the case described in the preceding sentence the 
value of the trade or business for purposes of applying the rule set 
forth in subparagraph (1) of this paragraph is the value thereof reduced 
by the proportionate part thereof which such distribution represents. 
The proportionate part of the value of the trade or business which the 
distribution represents is determined at the time of the distribution, 
but the reduction in the value of the trade or business represented by 
it relates back to the time of the decedent's death, or the alternate 
valuation date if an election is made under section 2032, for purposes 
of determining whether other withdrawals with respect to the decedent's 
interest in the trade or business constitute withdrawals equaling or 
exceeding 50 percent of the value of the trade

[[Page 533]]

or business. See example (3) of paragraph (e)(6) of this section for 
illustration of this principle. The rule stated in the first sentence of 
this subparagraph does not apply unless after the redemption, but on or 
before the date prescribed for payment of the first installment which 
becomes due after the redemption, there is paid an amount of estate tax 
not less than the amount of money or other property distributed. Where 
there are a series of section 303 redemptions, each redemption is 
treated separately and the failure of one redemption to qualify under 
the rule stated in the first sentence of this subparagraph does not 
necessarily mean that another redemption will not qualify.
    (3) The application of this paragraph may be illustrated by the 
following examples, in each of which the executor elected to pay the 
estate tax in installments:

    Example (1). A, who died on July 1, 1957, owned an 80 percent 
interest in a partnership which qualified as an interest in a closely 
held business. B owned the other 20 percent interest in the partnership. 
On the date of A's death the value of the business was $200,000 and the 
value of A's interest therein was included in his gross estate at 
$160,000. On October 1, 1958, when the value of the business was the 
same as at A's death, the executor withdrew $80,000 from the business. 
On December 1, 1958, when the value of the remaining portion of the 
business was $160,000, the executor withdrew $20,000 from the business 
and B withdrew $10,000. On February 1, 1959, when the value of the then 
remaining portion of the business was $150,000 the executor withdrew 
$15,000. The withdrawals of money or other property from the trade or 
business with respect to the interest therein included in the gross 
estate are considered as not having equaled or exceeded 50 percent of 
the value of the trade or business until February 1, 1959. The executor 
is considered as having withdrawn 40 percent of the value of the trade 
or business on October 1, 1958, computed as follows:

$80,000 (withdrawal) / $200,000 (value of trade or business at time of 
          withdrawal) x 100 percent = 40 percent


Immediately following the October withdrawal the remaining portion of 
the business represents 60 percent of the value of the trade or business 
in existence at the time of A's death (100 percent less 40 percent 
withdrawn). The executor is considered as having withdrawn 7.5 percent 
of the value of the trade or business on December 1, 1958, and B as 
having withdrawn 3.75 percent of the value thereof at that time, 
computed as follows:

Executor's withdrawal--
$20,000 (withdrawal) / $160,000 (value of trade or business at time of 
          withdrawal) x 60 percent = 7.5 percent

B's withdrawal--
$10,000 (withdrawal) / $160,000 (value of trade or business at time of 
          withdrawal) x 60 percent = 3.75 percent

Immediately following the December withdrawal the then remaining portion 
of the business represented 48.75 percent of the value of the trade or 
business in existence at the time of A's death (100 percent less 40 
percent withdrawn by executor in October, 7.5 percent withdrawn by 
executor in December, and 3.75 percent withdrawn by B in December). It 
should be noted that while at this point the total withdrawals by the 
executor and B from the trade or business exceed 50 percent of the value 
thereof, the aggregate of the withdrawals by the executor were less than 
50 percent of the value of the trade or business. Also it should be 
noted that while the total withdrawals by the executor exceeded 50 
percent of the value of A's interest in the trade or business, they did 
not exceed 50 percent of the value of the entire trade or business. The 
executor is considered as having withdrawn 4.875 percent of the value of 
the trade or business on February 1, 1959, computed as follows:

$15,000 (withdrawal) / $150,000 (value of trade or business at time of 
          withdrawal) x 48.75 percent = 4.875 percent

As of February 1, 1959, the total withdrawals from the trade or business 
made with respect to A's interest therein was 52.375 percent of the 
value of the trade or business.
    Example (2). The decedent's 40-percent interest in the XYZ 
partnership constituted an interest in a closely held business. Since 
the decedent's interest in the closely held business amounted to less 
than 50 percent of the value of the business, money or other property 
equaling or exceeding 50 percent of the value of the business could not 
be withdrawn from the decedent's interest in the business. Therefore, 
withdrawals of money or other property from this trade or business never 
would accelerate the payment of the tax under the provisions of this 
paragraph.
    Example (3). The decedent died on September 1, 1957. He owned 100 
shares of B Corporation (the total number of shares outstanding at the 
time of his death) and a 75 percent interest in a partnership of which C 
was the other partner. The B Corporation stock and the interest in the 
partnership together make up the interest in the closely held business 
which was included in the decedent's gross estate. The B Corporation 
stock was included in the gross estate at a value of $400,000 and the 
interest in the partnership

[[Page 534]]

was included at a value of $300,000. On November 1, 1957, at which time 
the value of the corporation's assets had not changed, in a section 303 
redemption the executor surrendered 26 shares of B Corporation stock for 
$104,000. On December 1, 1957, at which time the value of the 
partnership's assets had not changed, the partners withdrew 90 percent 
of the assets of the partnership, with the executor receiving $270,000 
and C receiving $90,000. The estate tax amounts to $240,000, of which 
the executor elected under section 6166 to pay $140,000 in 10 
installments of $14,000 each. On December 1, 1958, the due date for 
paying the estate tax which was not payable in installments and for 
paying the first installment under section 6166, the executor paid 
estate tax of $114,000, of which $100,000 represented the tax not 
payable in installments and $14,000 represented the first installment. 
Inasmuch as after the section 303 distribution and on or before the due 
date of the first installment (December 1, 1958) after the section 303 
distribution the executor paid as estate tax an amount not less than the 
amount of the distribution, the section 303 distribution does not 
constitute a withdrawal of money or other property from the business for 
purposes of section 6166(h)(1). Therefore, the value of the trade or 
business is reduced by the amount of the section 303 distribution. 
Accordingly, the value of the entire trade or business is $696,000, of 
which $400,000 represents the value of the partnership and $296,000 
represents the value of the B Corporation stock. Since the executor is 
considered as having withdrawn only $270,000 (the withdrawal from the 
partnership) from the trade or business, the withdrawal of money or 
other property from the trade or business made with respect to the 
decedent's interest therein was 270,000/696,000 of the value of the 
entire trade or business, or less than 50 percent thereof.

    (e) Disposition of interest in business. (1) In any case where in 
the aggregate 50 percent or more of the decedent's interest in a closely 
held business has been distributed, sold, exchanged, or otherwise 
disposed of, the privilege of paying the tax in installments terminates 
and the whole of the unpaid portion of the tax which is payable in 
installments becomes due and shall be paid upon notice and demand from 
the district director. A transfer by the executor of an interest in the 
closely held business to a beneficiary or trustee named in the 
decedent's will or to an heir who is entitled to receive it under the 
applicable intestacy law does not constitute a distribution thereof for 
purposes of determining whether 50 percent or more of an interest in a 
closely held business has been distributed, sold, exchanged, or 
otherwise disposed of. However, a subsequent transfer of the interest by 
the beneficiary, trustee, or heir will constitute a distribution, sale, 
exchange, or other disposition thereof for such purposes. The 
disposition must be a disposition of an interest which constitutes 
``included property'' within the meaning of that term as used in 
paragraph (d) of Sec. 20.2032-1. The provisions of this section do not 
apply to the disposition of an interest which constitutes ``excluded 
property'' within the meaning of that term as used in such paragraph 
(d).
    (2) The phrase ``distributed, sold, exchanged, or otherwise disposed 
of'' comprehends all possible ways by which an interest in a closely 
held business ceases to form a part of the gross estate. The term 
includes the surrender of a stock certificate for corporate assets in 
complete or partial liquidation of a corporation pursuant to section 
331. The term also includes the surrender of stock for stock pursuant to 
a transaction described in subparagraphs (A), (B), or (C) of section 
368(a)(1). In general the term does not, however, extend to transactions 
which are mere changes in form. It does not include a transfer of assets 
to a corporation in exchange for its stock in a transaction with respect 
to which no gain or loss would be recognizable for income tax purposes 
under section 351. It does not include an exchange of stock in a 
corporation for stock in the same corporation or another corporation 
pursuant to a plan of reorganization described in subparagraph (D), (E), 
or (F) of section 368(a)(1), nor to an exchange to which section 355 (or 
so much of section 356 as relates to section 355) applies. However, any 
stock received in an exchange to which the two preceding sentences apply 
shall for purposes of this paragraph be treated as an interest in a 
closely held business.
    (3) An interest in a closely held business may be ``distributed'' by 
either a trustee who received it from the executor, or a trustee of an 
interest which is included in the gross estate under sections 2035 
through 2038, or section 2041. See subparagraph (1) of this paragraph

[[Page 535]]

relative to the distribution of an interest by the executor to the 
person entitled to receive it under the decedent's will or an intestacy 
law.
    (4) An interest in a closely held business may be ``sold, exchanged, 
or otherwise disposed of'' by (i) the executor; (ii) a trustee or other 
donee to whom the decedent in his lifetime transferred the interest 
included in his gross estate under section 2035 through 2038, or section 
2041; (iii) a beneficiary, trustee, or heir entitled to receive the 
property from the executor under the decedent's will or under the 
applicable law of descent and distribution, or to whom title to the 
interest passed directly under local law; (iv) a surviving joint tenant 
or tenant by the entirety; or (v) any other person.
    (5) If a distribution in redemption of stock is (by reason of the 
provisions of section 303 or so much of section 304 as relates to 
section 303) treated for income tax purposes as a distribution in full 
payment in exchange for the stock redeemed, the stock so redeemed is not 
counted as distributed, sold, exchanged, or otherwise disposed of for 
purposes of determining whether 50 percent or more of the decedent's 
interest in a closely held business has been distributed, sold, 
exchanged, or otherwise disposed of. However, in the case described in 
the preceding sentence the interest in the closely held business for 
purposes of applying the rule set forth in subparagraph (1) of this 
paragraph is such interest reduced by the proportionate part thereof 
which the redeemed stock represents. The proportionate part of the 
interest which the redeemed stock represents is determined at the time 
of the redemption, but the reduction in the interest represented by it 
relates back to the time of the decedent's death, or the alternate 
valuation date if an election is made under section 2032, for purposes 
of determining whether other distributions, sales, exchanges, and 
dispositions of the decedent's interest in the closely held business 
equal or exceed in the aggregate 50 percent of such interest. See 
example (3) of subparagraph (6) of this paragraph for illustration of 
this principle. The rule stated in the first sentence of this 
subparagraph does not apply unless after the redemption, but on or 
before the date prescribed for payment of the first installment which 
becomes due after the redemption, there is paid an amount of estate tax 
not less than the amount of money or other property distributed. Where 
there are a series of section 303 redemptions, each redemption is 
treated separately and the failure of one redemption to qualify under 
the rule stated in the first sentence of this subparagraph does not 
necessarily mean that another redemption will not qualify.
    (6) The application of this paragraph may be illustrated by the 
following examples, in each of which the executor elected to pay the tax 
in installments:

    Example (1). The decedent died on October 1, 1957. He owned 8,000 of 
the 12,000 shares of D Corporation outstanding at the time of his death 
and 3,000 of the 5,000 shares of E Corporation outstanding at that time. 
The D Corporation stock was included in the gross estate at $50 per 
share, or a total of $400,000. The E Corporation stock was included in 
the gross estate at $100 per share, or a total of $300,000. On November 
1, 1958, the executor sold the 3,000 shares of E Corporation and on 
February 1, 1959, he sold 1,000 shares of D Corporation. Since the 
decedent's shares of D Corporation and E Corporation together 
constituted the interest in a closely held business, the value of such 
interest was $700,000 ($400,000 plus $300,000) and the D Corporation 
stock represented 400,000/700,000 thereof and the E Corporation stock 
represented 300,000/700,000 thereof. While the sale of 3,000 shares of E 
Corporation on November 1, 1958, was a sale of the decedent's entire 
interest in E Corporation and a sale of more than 50 percent of the 
outstanding stock of E Corporation, nevertheless it constituted a sale 
of only 300,000/700,000 of the interest in the closely held business. 
The sale of 1,000 shares of D Corporation stock on February 1, 1959, 
represented a sale of 50,000/700,000 of the interest in the closely held 
business. The numerator of $50,000 is determined as follows:

1,000 (shares sold) / 8,000 (shares owned) x $400,000 (value of shares 
          owned, as included in gross estate)


Taken together the two sales represented a sale of 50 percent (350,000/
700,000) of the interest in the closely held business. Therefore, as of 
February 1, 1959 (the date of the sale of 1,000 shares of E 
Corporation), 50 percent or more in value of the interest in the closely 
held business is considered as distributed, sold, exchanged, or 
otherwise disposed of.
    Example (2). The decedent died on September 1, 1958. The interest 
owned by him in a closely held business consisted of 100

[[Page 536]]

shares of the M Corporation. On February 1, 1959, in a section 303 
redemption, 20 shares were redeemed for cash and an amount equivalent to 
the proceeds was paid on the Federal estate tax before the date of the 
next installment. On July 1, 1959, the executor sold 40 of the remaining 
shares of the stock. The section 303 redemption is not considered to be 
a distribution, sale, exchange, or other disposition of the portion of 
the interest represented by the 20 shares redeemed. As a result of the 
section 303 redemption the remaining 80 shares represent the decedent's 
entire interest in the closely held business for purposes of determining 
whether in the aggregate 50 percent or more of the interest in the 
closely held business has been distributed, sold, exchanged, or 
otherwise disposed of. The sale on July 1, 1959, of the 40 shares 
represents a sale of 50 percent of the interest in the closely held 
business.
    Example (3). The facts are the same as in example (2) except that 
the 40 shares were sold on December 1, 1958 (before the section 303 
redemption was made) instead of on July 1, 1959 (after the section 303 
redemption was made). The sale of the 40 shares in December represents, 
as of that date, a sale of 40 percent of the interest in the closely 
held business. However, the section 303 redemption of 20 shares does not 
count as a distribution, sale, exchange, or other disposition of the 
interest, but it does reduce the interest to 80 shares (100 shares less 
20 shares redeemed) for purposes of determining whether other 
distributions, sales, exchanges, and dispositions in the aggregate equal 
or exceed 50 percent of the interest in the closely held business. Since 
the reduction of the interest to 80 shares relates back to the time of 
the decedent's death, or the alternate valuation date if an election is 
made under section 2032, the sale of the 40 shares, as recomputed 
represents a sale of 50 percent of the interest. However, since the sale 
of the 40 shares did not represent a sale of 50 percent of the interest 
until the section 303 distribution was made, February 1, 1959 (the date 
of the section 303 distribution) is considered the date on which 50 
percent of the interest was distributed, sold, exchanged, or otherwise 
disposed of.

    (f) Information to be furnished by executor. (1) If the executor 
acquires knowledge of the happening of any transaction described in 
paragraph (d) or (e) of this section which, in his opinion, standing 
alone or when taken together with other transactions of which he has 
knowledge, would result in--
    (i) Aggregate withdrawals of money or other property from the trade 
or business equal to or exceeding 50 percent of the value of the entire 
trade or business, or
    (ii) Aggregate distributions, sales, exchanges, and other 
dispositions equal to or exceeding 50 percent of the interest in the 
closely held business which was included in the gross estate, the 
executor shall so notify the district director, in writing, within 30 
days of acquiring such knowledge.
    (2) On the date fixed for payment of each installment of tax 
(determined without regard to any extension of time for the payment 
thereof), other than the final installment, the executor shall furnish 
the district director, in writing, with either--
    (i) A complete disclosure of all transactions described in 
paragraphs (d) and (e) of this section of which he has knowledge and 
which have not previously been made known by him to the district 
director, or
    (ii) A statement that to the best knowledge of the executor all 
transactions described in paragraphs (d) and (e) of this section which 
have occurred have not produced a result described in subparagraph (1) 
(i) or (ii) of this paragraph.
    (3) The district director may require the submission of such 
additional information as is deemed necessary to establish the estate's 
right to continue payment of the tax in installments.

[T.D. 6522, 25 FR 13888, Dec. 29, 1960. Redesignated by T.D. 7710, 45 FR 
50745, July 31, 1980]



Sec. 20.6166A-4  Special rules applicable where due date of return was
before September 3, 1958.

    (a) In general. Section 206(f) of the Small Business Tax Revision 
Act of 1958 (72 Stat. 1685) provides that section 6166(i) of the Code 
shall apply in cases where the decedent died after August 16, 1954, but 
only if the date for filing the estate tax return (including extensions 
thereof) expired before September 3, 1958. Therefore, the privilege of 
paying the estate tax in installments as described in Sec. Sec. 
20.6166-1 through 20.6166-3 is available also in cases where the due 
date of the return is before September 3, 1958, but under somewhat 
different circumstances. These differences are explained in paragraphs 
(b) through (e) of this section. Therefore except as otherwise provided 
in paragraphs (b)

[[Page 537]]

through (e) of this section, the regulations contained in Sec. Sec. 
20.6166-1 through 20.6166-3 apply also in cases where the due date of 
the return is before September 3, 1958. See Sec. 20-6075-1 for the due 
date of the return. The value of the gross estate as determined for 
purposes of a deficiency in tax assessed after September 2, 1958, and 
the value at which the interest in the closely held business, to which 
the election applies, is included in such value of the gross estate are 
used in ascertaining whether an estate coming within the purview of 
section 6166(i) and this section satisfies the percentage requirements 
as to qualification set forth in section 6166(a).
    (b) Tax to which election applies. In a case where the due date of 
the return was before September 3, 1958, an election to pay estate tax 
in installments does not apply to the tax shown on the return nor to a 
deficiency in tax assessed before that date. It does apply to a 
deficiency in tax assessed after September 2, 1958, unless the 
deficiency is due to negligence, to intentional disregard of rules and 
regulations, or to fraud with intent to evade tax. The amount of the 
deficiency which may be paid in installments shall not exceed that 
proportion of the total tax (including the deficiency) which is 
determined by applying thereto the ratio set forth in paragraph (b) of 
Sec. 20.6166-1. See paragraph (c) of this section for the method of 
prorating the deficiency to the installments.
    (c) Proration of deficiency to installments. The deficiency in tax 
which may be paid in installments is prorated to the installments which 
would have been due if the provisions of section 6166(a) had applied to 
the tax shown on the return and if an election had been timely made at 
the time the estate tax return was filed. The part of the deficiency so 
prorated to any installment the date for payment of which would have 
arrived before the election is made shall be paid at the time the 
election is made. The portion of the deficiency so prorated to 
installments the date for payment of which would not have arrived before 
the election is made shall be paid at the time such installments would 
have been due if such an election had been made.
    (d) Notice of election. The notice of election to pay the deficiency 
in installments shall be filed with the district director not later than 
60 days after issuance of notice and demand by the district director for 
payment of the deficiency. The number of installments in which the 
executor elects to pay the deficiency includes those installments the 
dates for payment of which would have arrived within the meaning of 
paragraph (c) of this section. See paragraph (e)(2) of Sec. 20.6166-1 
for further information relative to the notice of election.
    (e) Undistributed income of estate. In any case where the due date 
of the estate tax return was before September 3, 1958, the provisions of 
paragraph (b) of Sec. 20.6166-3 (providing for acceleration of payment 
of estate tax by amount of estate's undistributed net income for any 
taxable year after its fourth taxable year) shall not apply with respect 
to the estate's undistributed net income for any taxable year ending 
before January 1, 1960.

[T.D. 6522, 25 FR 13891, Dec. 29, 1960. Redesignated by T.D. 7710, 45 FR 
50745, July 31, 1980]



Sec. 20.6302-1  Voluntary payments of estate taxes by electronic funds
transfer.

    Any person may voluntarily remit by electronic funds transfer any 
payment of tax to which this part 20 applies. Such payment must be made 
in accordance with procedures prescribed by the Commissioner.

[T.D. 8828, 64 FR 37676, July 13, 1999]



Sec. 20.6314-1  Duplicate receipts for payment of estate taxes.

    The internal revenue officer with whom the estate tax return is 
filed will, upon request, give to the person paying the tax duplicate 
receipts, either of which will be sufficient evidence of such payment 
and entitle the executor to be credited with the amount by any court 
having jurisdiction to audit or settle his accounts.

[T.D. 7238, 37 FR 28724, Dec. 29, 1972]



Sec. 20.6321  Statutory provisions; lien for taxes.

    Sec. 6321. Lien for taxes. If any person liable to pay any tax 
neglects or refuses to pay the

[[Page 538]]

same after demand, the amount (including any interest, additional 
amount, addition to tax, or assessable penalty, together with any costs 
that may accrue in addition thereto) shall be a lien in favor of the 
United States upon all property and rights to property, whether real or 
personal, belonging to such person.



Sec. 20.6321-1  Lien for taxes.

    For regulations concerning the lien for taxes, see Sec. 301.6321-1 
of this chapter (Regulations on Procedure and Administration).

[T.D. 7710, 45 FR 50747, July 31, 1980]



Sec. 20.6323-1  Validity and priority against certain persons.

    For regulations concerning the validity of the lien imposed by 
section 6321 against certain persons, see Sec. Sec. 301.6323(a)-1 
through 301.6323(i)-1 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 7429, 41 FR 35495, Aug. 23, 1976]



Sec. 20.6324-1  Special lien for estate tax.

    For regulations concerning the special lien for the estate tax, see 
Sec. 301.6324-1 of this chapter (Regulations on Procedure and 
Administration).



Sec. 20.6324A-1  Special lien for estate tax deferred under section 
6166 or 6166A.

    (a) In general. If the executor of an estate of a decedent dying 
after December 31, 1976, makes an election under section 6166 or 6166A 
(as in effect prior to its repeal by the Economic Recovery Tax Act of 
1981) to defer the payment of estate tax, the executor may make an 
election under section 6324A. An election under section 6324A will cause 
a lien in favor of the United States to attach to the estate's section 
6166 lien property, as defined in paragraph (b)(1) of this section. This 
lien is in lieu of the bonds required by sections 2204 and 6165 and in 
lieu of any lien under section 6324 on the same property with respect to 
the same estate. The value of the property which the district director 
may require under section 6324A as section 6166 lien property may not 
exceed the sum of the deferred amount (as defined in paragraph (e)(1) of 
this section) and the required interest amount (as defined in paragraph 
(e)(2) of this section). The unpaid portion of the deferred amount (plus 
any unpaid interest, additional amount, addition to tax, assessable 
penalty, and cost attributable to the deferred amount) shall be a lien 
in favor of the United States on the section 6166 lien property. See 
Sec. 301.6324A-1 of this chapter (Regulations on Procedure and 
Administration) for provisions relating to the election of and agreement 
to the special lien for estate tax deferred under section 6166 or 6166A 
(as in effect prior to its repeal by the Economic Recovery Tax Act of 
1981).
    (b) Section 6166 lien property--(1) In general. Section 6166 lien 
property consists of those interests in real and personal property 
designated in the agreement referred to in section 6324A (c) (see 
paragraph (b) of Sec. 301.6324A-1 of this chapter). An interest in 
property may be designated as section 6166 lien property only to the 
extent such interest can be expected to survive the deferral period (as 
defined in paragraph (e)(3) of this section). Property designated, 
however, need not be property included in the decedent's estate.
    (2) Maximum value of required property. The fair market value of the 
property required by the district director to be designated as section 
6166 lien property with respect to any estate shall not be greater than 
the sum of the deferred amount and the required interest amount, as 
these terms are defined in paragraphs (e) (1) and (2) of this section. 
However, the parties to the agreement referred to in section 6324A (c) 
may voluntarily designate property having a fair market value in excess 
of that sum. The fair market value of the section 6166 lien property 
shall be determined as of the date prescribed in section 6151(a) 
(without regard to any extension) for payment of the estate tax. Such 
value must take into account any encumbrance on the property (such as a 
mortgage or a lien under section 6324B).
    (3) Additional lien property may be required. If, at any time, the 
unpaid portion of the deferred amount and the required interest amount 
exceeds the fair market value of the section 6166 lien property, the 
district director may require the addition of property to the

[[Page 539]]

agreement in an amount up to such excess. When additional property is 
required, the district director shall make notice and demand upon the 
agent designated in the agreement setting forth the amount of additional 
property required. Property having the required value (or other security 
equal to the required value must be added to the agreement within 90 
days after notice and demand from the district director. Failure to 
comply with the demand within the 90-day period shall be treated as an 
act accelerating payment of installments under section 6166(g) or 
6166A(h) (as in effect prior to its repeal by the Economic Recovery Tax 
Act of 1981).
    (4) Partial substitution of bond. See paragraph (c) of Sec. 
301.6324A-1 of this chapter for rules relating to the partial 
substitution of a bond for the lien where the value of property 
designated as section 6166 lien property is less than the amount of 
unpaid estate tax plus interest.
    (c) Special rules--(1) Period of lien. The lien under section 6324A 
arises at the earlier of the date--
    (i) The executor is discharged from liability under section 2204; or
    (ii) Notice of lien is filed in accordance with Sec. 301.6323(f)-1 
of this chapter.

The section 6324A lien continues until the liability for the deterred 
amount is satisfied or becomes unenforceable by reason of lapse of time. 
The provisions of Sec. 301.6325-1(c), relating to release of lien or 
discharge of property, shall apply to this paragraph (c)(1).
    (2) Requirement that lien be filed. The lien imposed by section 
6324A is not valid against a purchaser (as defined in paragraph (f) of 
Sec. 301.6323(h)-1), holder of a security interest (as defined in 
paragraph (a) of Sec. 301.6323(h)-1), mechanic's lienor (as defined in 
paragraph (b) of Sec. 301.6323(h)-1), or judgment lien creditor (as 
defined in paragraph (g) of Sec. 301.6323(h)-1) until notice of the 
lien is filed. Once filed, the notice of lien remains effective without 
being refiled.
    (3) Priorities. Although a notice of lien under section 6324A had 
been properly filed, that lien is not valid--
    (i) To the extent provided in section 6323(b)(6), relating to real 
property tax and special assessment liens, regardless of whether such 
liens came into existence before or after the filing of the notice of 
Federal tax lien;
    (ii) In the case of any real property subject to a lien for repair 
or improvement, as against a mechanic's lienor, whether or not such lien 
came into existence before or after the notice of tax lien was filed; 
and
    (iii) As against any security interest set forth in section 
6323(c)(3), relating to real property construction or improvement 
financing agreements, regardless whether such security interest came 
into existence before or after filing of the notice of tax lien.

However, paragraphs (c)(3) (ii) and (iii) of this section shall not 
apply to any security interest that came into existence after the date 
of filing of notice (in a manner similar to a notice filed under section 
6323(f)) that payment of the deferred amount has been accelerated under 
section 6166(g) or 6166A(h) (as in effect prior to its repeal by the 
Economic Recovery Tax Act of 1981).
    (d) Release or discharge of lien. For rules relating to release of 
the lien imposed by section 6324A or discharge of the section 6166 lien 
property, see section 6325 and Sec. 301.6325-1 of this chapter.
    (e) Definitions. For purposes of section 6324A of this section--
    (1) Deferred amount. The deferred amount is the aggregate amount of 
estate tax deferred under section 6166 or 6166A (as in effect prior to 
its repeal by the Economic Recovery Tax Act of 1981) determined as of 
the date prescribed by section 6151(a) for payment of the estate tax.
    (2) Required interest amount. The required interest amount is the 
aggregate amount of interest payable over the first four years of the 
deferral period. For purposes of computing the required interest amount, 
the interest rate prescribed by section 6621 in effect on the date 
prescribed by section 6151(a) for payment of the estate tax shall be 
used for computing the interest for the first four years of the deferral 
period. The 4-percent interest rate prescribed by section 6601(j) shall 
apply to the extent provided in that section. For purposes of computing 
interest during deferral periods beginning after December 31, 1982, 
interest shall be compounded daily.

[[Page 540]]

    (3) Deferral period. The deferral period is the period for which the 
payment of tax is deferred pursuant to the election under section 6166 
or 6166A (as in effect prior to its repeal by the Economic Recovery Tax 
Act of 1981).
    (4) Application of definitions. In the case of a deficiency, a 
separate deferred amount, required interest amount, and deferral period 
shall be determined as of the due date of the first installment after 
the deficiency is prorated to installments under section 6166 or 6166A 
(as in effect prior to its repeal by the Economic Recovery Tax Act of 
1981).

[T.D. 7941, 49 FR 4468, Feb. 7, 1984]



Sec. 20.6324B-1  Special lien for additional estate tax attributable 
to farm, etc., valuation.

    (a) General rule. In the case of an estate of a decedent dying after 
December 31, 1976, which includes any interest in qualified real 
property, if the executor elects to value part or all of such property 
pursuant to section 2032A, a lien arises in favor of the United States 
on the property to which the election applies. The lien is in the amount 
equal to the adjusted tax difference attributable to such interest (as 
defined by section 2032A(c)(2)(B)). The term ``qualified real property'' 
means qualified real property as defined in section 2032A(b), qualified 
replacement property within the meaning of section 2032A(h)(3)(B), and 
qualified exchange property within the meaning of section 2032A(i)(3). 
The rules set forth in the regulations under section 2032A shall apply 
in determining whether this section is applicable to otherwise qualified 
real property held by a partnership, corporation or trust.
    (b) Period of lien. The lien shall arise at the time the executor 
files an election under section 2032A. It shall remain in effect until 
one of the following occurs:
    (1) The liability for the additional estate tax under section 
2032A(c) with respect to such interest has been satisfied; or
    (2) Such liability has become unenforceable by reason of lapse of 
time; or
    (3) The district director is satisfied that no further liability for 
additional estate tax with respect to such interest may arise under 
section 2032A(c), i.e., the required time period has elapsed since the 
decedent's death without the occurrence of an event described in section 
2032A(c)(1), or the qualified heir (as defined in section 2032A(e)(1)) 
had died.

For procedures regarding the release or subordination of liens or 
discharge of property from liens, see Sec. 301.6325-1 of this chapter 
(Regulations on Procedure and Administration).
    (c) Substitution of security for lien. The district director may, 
upon written application of the qualified heir (as defined in section 
2032A(e) (1)) acquiring any interest in qualified real property to which 
a lien imposed by section 6324B attaches, issue a certificate of 
discharge of any or all property subject to such lien, after receiving a 
bond or other security in an amount or value determined by the district 
director as sufficient security for the maximum potential liability for 
additional estate tax with respect to such interest. Any bond shall be 
in the form and with the security prescribed in Sec. 301.7101-1 of this 
chapter.
    (d) Special rules. The rules set forth in section 6324A(d) (1), (3), 
and (4), and the regulations thereunder, shall apply with respect to a 
lien imposed by section 6324B as if it were a lien imposed by section 
6324A.

[T.D. 7847, 47 FR 50856, Nov. 10, 1982]



Sec. 20.6325-1  Release of lien or partial discharge of property; 
transfer certificates in nonresident estates.

    (a) A transfer certificate is a certificate permitting the transfer 
of property of a nonresident decedent without liability. Except as 
provided in paragraph (b) of this section, no domestic corporation or 
its transfer agent should transfer stock registered in the name of a 
non-resident decedent (regardless of citizenship) except such shares 
which have been submitted for transfer by a duly qualified executor or 
administrator who has been appointed and is acting in the United States, 
without first requiring a transfer certificate covering all of the 
decedent's stock of the corporation and showing that the transfer may be 
made without liability. Corporations, transfer agents of domestic 
corporations, transfer agents of foreign corporations (except

[[Page 541]]

as to shares held in the name of a nonresident decedent not a citizen of 
the United States), banks, trust companies, or other custodians in 
actual or constructive possession of property, of such a decedent can 
insure avoidance of liability for taxes and penalties only by demanding 
and receiving transfer certificates before transfer of property of 
nonresident decedents.
    (b)(1) Subject to the provisions of paragraph (b)(2) of this 
section--
    (i) In the case of a nonresident not a citizen of the United States 
dying on or after January 1, 1977, a transfer certificate is not 
required with respect to the transfer of any property of the decedent if 
the value on the date of death of that part of the decedent's gross 
estate situated in the United States did not exceed the lesser of 
$60,000 or $60,000 reduced by the adjustments, if any, required by 
section 6018(a)(4) for certain taxable gifts made by the decedent and 
for the aggregate amount of certain specific exemptions.
    (ii) In the case of a nonresident not a citizen of the United States 
dying on or after November 14, 1966, a transfer certificate is not 
required with respect to the transfer before June 24, 1981 of any 
property of the decedent if the value on the date of death of that part 
of the decedent's gross estate situated in the United States did not 
exceed $30,000.
    (2)(i) If the transfer of the estate is subject to the tax imposed 
by section 2107(a) (relating to expatriation to avoid tax), any amounts 
which are includible in the decedent's gross estate under section 
2107(b) must be added to the date of death value of the decedent's gross 
estate situated in the United States to determine the value on the date 
of death of the decedent's gross estate for purposes of paragraph (b)(1) 
of this section.
    (ii) If the transfer of the estate is subject to tax pursuant to a 
Presidential proclamation made under section 2108(a) (relating to 
Presidential proclamations of the application of pre-1967 estate tax 
provisions), a transfer certificate is not required with respect to the 
transfer of any property of the decedent if the value on the date of 
death of that part of the decedent's gross estate situated in the United 
States did not exceed $2,000.
    (3) A corporation, transfer agent, bank, trust company, or other 
custodian will not incur liability for a transfer of the decedent's 
property without a transfer certificate if the corporation or other 
person, having no information to the contrary, first receives from the 
executor or other responsible person, who may be reasonably regarded as 
in possession of the pertinent facts, a statement of the facts relating 
to the estate showing that the sum of the value on the date of the 
decedent's death of that part of his gross estate situated in the United 
States, and, if applicable, any amounts includible in his gross estate 
under section 2107(b), is such an amount that, pursuant to the 
provisions of paragraph (b) (1) and (2) of this section, a transfer 
certificate is not required.
    (4) For the determination of the gross estate situated in the United 
States, see Sec. Sec. 20.2103-1 and 20.2104-1.
    (c) A transfer certificate will be issued by the service center 
director or the district director when he is satisfied that the tax 
imposed upon the estate, if any, has been fully discharged or provided 
for. The tax will be considered fully discharged for purposes of the 
issuance of a transfer certificate only when investigation has been 
completed and payment of the tax, including any deficiency finally 
determined, has been made. If the tax liability has not been fully 
discharged, transfer certificates may be issued permitting the transfer 
of particular items of property without liability upon the filing with 
the district director of such security as he may require. No transfer 
certificate is required in an estate of a resident decedent. Further, in 
the case of an estate of a nonresident decedent (regardless of 
citizenship) a transfer certificate is not required with respect to 
property which is being administered by an executor or administrator 
appointed, qualified, and acting within the United States. For 
additional regulations under section 6325, see Sec. 301.6325-1 of this 
chapter (Regulations on Procedure and Administration).

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7296, 38 FR 34201, Dec. 12, 1973; T.D. 7302, 39 FR 796, 
Jan. 3, 1974; T.D. 7825, 47 FR 35189, Aug. 13, 1982]

[[Page 542]]



Sec. 20.6601-1  Interest on underpayment, nonpayment, or extensions 
of time for payment, of tax.

    For regulations concerning interest on underpayments, etc., see 
Sec. 301.6601-1 of this chapter (Regulations on Procedure and 
Administration).



Sec. 20.6694-1  Section 6694 penalties applicable to tax return preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of estate tax returns or claims for 
refund, see Sec. 1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after December 31, 2008.

[T.D. 9436, 73 FR 78450, Dec. 22, 2008, as amended at 74 FR 5105, Jan. 
29, 2009]



Sec. 20.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of estate tax under chapter 11 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under section 
6694(a) of the Code in the manner stated in Sec. 1.6694-2 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 20.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of estate tax under chapter 11 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under section 
6694(b) of the Code in the manner stated in Sec. 1.6694-3 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 20.6694-4  Extension of period of collection when preparer pays 
15 percent of a penalty for understatement of taxpayer's liability and

certain other procedural matters.

    (a) In general. For rules relating to the extension of the period of 
collection when a tax return preparer who prepared a return or claim for 
refund for estate tax under chapter 11 of subtitle B of the Internal 
Revenue Code pays 15 percent of a penalty for understatement of the 
taxpayer's liability, and procedural matters relating to the 
investigation, assessment and collection of the penalties under sections 
6694(a) and (b), the rules under Sec. 1.6694-4 of this chapter will 
apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 20.6695-1  Other assessable penalties with respect to the preparation
of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of estate tax under chapter 11 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties for failure 
to furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure to 
furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec. 1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 20.6696-1  Claims for credit or refund by tax return preparers or 
appraisers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for estate tax 
under chapter 11 of subtitle B of the Internal Revenue

[[Page 543]]

Code, or by an appraiser that prepared an appraisal in connection with 
such a return or claim for refund under section 6695A, the rules under 
Sec. 1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 20.6905-1  Discharge of executor from personal liability for 
decedent's income and gift taxes.

    For regulations concerning the discharge of an executor from 
personal liability for a decedent's income and gift taxes, see Sec. 
301.6905-1 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 7238, 37 FR 28725, Dec. 29, 1972]



Sec. 20.7101-1  Form of bonds.

    See paragraph (b) of Sec. 20.6165-1 for provisions relating to the 
bond required in any case in which the payment of the tax attributable 
to a reversionary or remainder interest has been postponed under the 
provisions of Sec. 20.6163-1. For further provisions relating to bonds, 
see Sec. 20.6165-1 of these regulations and the regulations under 
section 7101 contained in part 301 of this chapter (Regulations on 
Procedure and Administration).

[T.D. 6600, 27 FR 4987, May 29, 1962]

                      General Actuarial Valuations

    Source: Sections 20.7520-1 through 20.7520-4 appear at T.D. 8540, 59 
FR 30170, June 10, 1994, unless otherwise noted.



Sec. 20.7520-1  Valuation of annuities, unitrust interests, interests 
for life or terms of years, and remainder or reversionary interests.

    (a) General actuarial valuations. (1) Except as otherwise provided 
in this section and in Sec. 20.7520-3 (relating to exceptions to the 
use of prescribed tables under certain circumstances), in the case of 
estates of decedents with valuation dates after April 30, 1989, the fair 
market value of annuities, interests for life or for a term of years 
(including unitrust interests), remainders, and reversions is their 
present value determined under this section. See Sec. 20.2031-7(d) 
(and, for periods prior to May 1, 2009, Sec. 20.2031-7A) for the 
computation of the value of annuities, unitrust interests, life estates, 
terms for years, remainders, and reversions, other than interests 
described in paragraphs (a)(2) and (a)(3) of this section.
    (2) In the case of a transfer to a pooled income fund, see Sec. 
1.642(c)-6(e) of this chapter (or, for periods prior to May 1, 2009, 
Sec. 1.642(c)-6A) with respect to the valuation of the remainder 
interest.
    (3) In the case of a transfer to a charitable remainder annuity 
trust with a valuation date after April 30, 1989, see Sec. 1.664-2 of 
this chapter with respect to the valuation of the remainder interest. 
See Sec. 1.664-4 of this chapter with respect to the valuation of the 
remainder interest in property transferred to a charitable remainder 
unitrust.
    (b) Components of valuation--(1) Interest rate component--(i) 
Section 7520 Interest rate. The section 7520 interest rate is the rate 
of return, rounded to the nearest two-tenths of one percent, that is 
equal to 120 percent of the applicable Federal mid-term rate, compounded 
annually, for purposes of section 1274(d)(1), for the month in which the 
valuation date falls. In rounding the rate to the nearest two-tenths of 
a percent, any rate that is midway between one two-tenths of a percent 
and another is rounded up to the higher of those two rates. For example, 
if 120 percent of the applicable Federal mid-term rate is 10.30, the 
section 7520 interest rate component is 10.4. The section 7520 interest 
rate is published monthly by the Internal Revenue Service in the 
Internal Revenue Bulletin (See Sec. 601.601(d)(2)(ii)(b) of this 
chapter).
    (ii) Valuation date. Generally, the valuation date is the date on 
which the transfer takes place. For estate tax purposes, the valuation 
date is the date of the decedent's death, unless the executor elects the 
alternate valuation date in accordance with section 2032, in which 
event, and under the limitations prescribed in section 2032 and the 
regulations thereunder, the valuation date is the alternate valuation 
date. For special rules in the case of charitable transfers, see Sec. 
20.7520-2.

[[Page 544]]

    (2) Mortality component. The mortality component reflects the 
mortality data most recently available from the United States census. As 
new mortality data becomes available after each decennial census, the 
mortality component described in this section will be revised and the 
revised mortality component tables will be published in the regulations 
at that time. For decedent's estates with valuation dates on or after 
May 1, 2009, the mortality component table (Table 2000CM) is contained 
in Sec. 20.2031-7(d)(7). See Sec. 20.2031-7A for mortality component 
tables applicable to decedent's estates with valuation dates before May 
1, 2009.
    (c) Tables. The present value on the valuation date of an annuity, 
life estate, term of years, remainder, or reversion is computed by using 
the section 7520 interest rate component that is described in paragraph 
(b)(1) of this section and the mortality component that is described in 
paragraph (b)(2) of this section. Actuarial factors for determining 
these present values are included in tables in these regulations and in 
publications by the Internal Revenue Service. If a special factor is 
required in order to value an interest, the Internal Revenue Service 
will furnish the factor upon a request for a ruling. The request for a 
ruling must be accompanied by a recitation of the facts, including the 
date of birth for each measuring life and copies of relevant 
instruments. A request for a ruling must comply with the instructions 
for requesting a ruling published periodically in the Internal Revenue 
Bulletin (see Rev. Proc. 94-1, 1994-1 I.R.B. 10, and the first Rev. 
Proc. published each year, and Sec. Sec. 601.201 and 
601.601(d)(2)(ii)(b) of this chapter) and include payment of the 
required user fee.
    (1) (1) Regulation sections containing tables with interest rates 
between 0.2 and 14 percent for valuation dates on or after May 1, 2009. 
Section 1.642(c)-6(e)(6) of this chapter contains Table S used for 
determining the present value of a single life remainder interest in a 
pooled income fund as defined in Sec. 1.642(c)-5. See Sec. 1.642(c)-6A 
for single life remainder factors applicable to valuation dates before 
May 1, 2009. Section 1.664-4(e)(6) contains Table F (payout factors) and 
Table D (actuarial factors used in determining the present value of a 
remainder interest postponed for a term of years). Section 1.664-4(e)(7) 
contains Table U(1) (unitrust single life remainder factors). These 
tables are used in determining the present value of a remainder interest 
in a charitable remainder unitrust as defined in Sec. 1.664-3. See 
Sec. 1.664-4A for unitrust single life remainder factors applicable to 
valuation dates before May 1, 2009. Section 20.2031-7(d)(6) contains 
Table B (actuarial factors used in determining the present value of an 
interest for a term of years), Table K (annuity end-of-interval 
adjustment factors), and Table J (term certain annuity beginning-of-
interval adjustment factors). Section 20.2031-7(d)(7) contains Table S 
(single life remainder factors), and Table 2000CM (mortality 
components). These tables are used in determining the present value of 
annuities, life estates, remainders, and reversions. See Sec. 20.2031-
7A for single life remainder factors applicable to valuation dates 
before May 1, 2009.
    (2) Internal Revenue Service publications containing tables with 
interest rates between 0.2 and 22 percent for valuation dates on or 
after May 1, 2009. The following documents are available, at no charge, 
electronically via the IRS Internet site at http://www.irs.gov:
    (i) Internal Revenue Service Publication 1457, ``Actuarial 
Valuations Version 3A'' (2009). This publication includes tables of 
valuation factors, as well as examples that show how to compute other 
valuation factors, for determining the present value of annuities, life 
estates, terms of years, remainders, and reversions, measured by one or 
two lives. These factors may also be used in the valuation of interests 
in a charitable remainder annuity trust as defined in Sec. 1.664-2 of 
this chapter and a pooled income fund as defined in Sec. 1.642(c)-5.
    (ii) Internal Revenue Service Publication 1458, ``Actuarial 
Valuations Version 3B'' (2009). This publication includes term certain 
tables and tables of one and two life valuation factors for determining 
the present value of remainder interests in a charitable remainder 
unitrust as defined in Sec. 1.664-3 of this chapter.

[[Page 545]]

    (iii) Internal Revenue Service Publication 1459, ``Actuarial 
Valuations Version 3C'' (2009). This publication includes tables for 
computing depreciation adjustment factors. See Sec. 1.170A-12 of this 
chapter.
    (d) Effective/applicability date. This section applies on and after 
May 1, 2009.

[T.D. 8540, 59 FR 30170, June 10, 1994, as amended by T.D. 8819, 64 FR 
23222, 23229, Apr. 30, 1999; T.D. 8886, 65 FR 36939, June 12, 2000; T.D. 
9448, 74 FR 21511, May 7, 2009; T.D. 9540, 76 FR 49637, Aug. 10, 2011]



Sec. 20.7520-2  Valuation of charitable interests.

    (a) In general--(1) Valuation. Except as otherwise provided in this 
section and in Sec. 20.7520-3 (relating to exceptions to the use of 
prescribed tables under certain circumstances), the fair market value of 
annuities, interests for life or for a term of years, remainders, and 
reversions for which an estate tax charitable deduction is allowable is 
the present value of such interests determined under Sec. 20.7520-1.
    (2) Prior-month election rule. If any part of the property interest 
transferred qualifies for an estate tax charitable deduction under 
section 2055 or 2106, the executor may compute the present value of the 
transferred interest by use of the section 7520 interest rate for the 
month during which the interest is transferred or the section 7520 
interest rate for either of the 2 months preceding the month during 
which the interest is transferred. Paragraph (b) of this section 
explains how a prior-month election is made. The interest rate for the 
month so elected is the applicable section 7520 interest rate. If the 
executor elects the alternate valuation date under section 2032 and also 
elects to use the section 7520 interest rate for either of the 2 months 
preceding the month in which the interest is transferred, the month so 
elected (either of the 2 months preceding the month in which the 
alternate valuation date falls) is the valuation date. If the actuarial 
factor for either or both of the 2 months preceding the month during 
which the interest is transferred is based on a mortality experience 
that is different from the mortality experience at the date of the 
transfer and if the executor elects to use the section 7520 rate for a 
prior month with the different mortality experience, the executor must 
use the actuarial factor derived from the mortality experience in effect 
during the month of the section 7520 rate elected. All actuarial 
computations relating to the transfer must be made by applying the 
interest rate component and the mortality component of the month elected 
by the executor.
    (3) Transfers of more than one interest in the same property. If a 
decedent's estate includes the transfer of more than one interest in the 
same property, the executor must, for purposes of valuing the 
transferred interests, use the same interest rate and mortality 
components for each interest in the property transferred.
    (4) Information required with tax return. The following information 
must be attached to the estate tax return (or be filed subsequently as 
supplemental information to the return) if the estate claims a 
charitable deduction for the present value of a temporary or remainder 
interest in property--
    (i) A complete description of the interest that is transferred, 
including a copy of the instrument of transfer;
    (ii) The valuation date of the transfer;
    (iii) The names and identification numbers of the beneficiaries of 
the transferred interest;
    (iv) The names and birthdates of any measuring lives, a description 
of any relevant terminal illness condition of any measuring life, and 
(if applicable) an explanation of how any terminal illness condition was 
taken into account in valuing the interest; and
    (v) A computation of the deduction showing the applicable section 
7520 interest rate that is used to value the transferred interest.
    (5) Place for filing returns. See section 6091 of the Internal 
Revenue Code and the regulations thereunder for the place for filing the 
return or other document required by this section.
    (b) Election of interest rate component--(1) Time for making 
election. An executor makes a prior-month election under paragraph 
(a)(2) of this section by attaching the information described in 
paragraph (b)(2) of this section to the

[[Page 546]]

decedent's estate tax return or by filing a supplemental statement of 
the election information within 24 months after the later of the date 
the original estate tax return was filed or the due date for filing the 
return.
    (2) Manner of making election. A statement that the prior-month 
election under section 7520(a) of the Internal Revenue Code is being 
made and that identifies the elected month must be attached to the 
estate tax return (or by subsequently filing the statement as 
supplemental information to the return).
    (3) Revocability. The prior-month election may be revoked by filing 
a statement of supplemental information within 24 months after the later 
of the date the original return of tax for the decedent's estate was 
filed or the due date for filing the return. The revocation must be 
filed in the place referred to in paragraph (a)(5) of this section.
    (c) Effective dates. Paragraph (a) of this section is effective as 
of May 1, 1989. Paragraph (b) of this section is effective for elections 
made after June 10, 1994.



Sec. 20.7520-3  Limitation on the application of section 7520.

    (a) Internal Revenue Code sections to which section 7520 does not 
apply. Section 7520 of the Internal Revenue Code does not apply for 
purposes of:
    (1) Part I, subchapter D of subtitle A (section 401 et. seq.), 
relating to the income tax treatment of certain qualified plans. 
(However, section 7520 does apply to the estate and gift tax treatment 
of certain qualified plans and for purposes of determining excess 
accumulations under section 4980A);
    (2) Sections 72 and 101(b), relating to the income taxation of life 
insurance, endowment, and annuity contracts, unless otherwise provided 
for in the regulations under sections 72, 101, and 1011 (see, 
particularly, Sec. Sec. 1.101-2(e)(1)(iii)(b)(2), and 1.1011-2(c), 
Example 8);
    (3) Sections 83 and 451, unless otherwise provided for in the 
regulations under those sections;
    (4) Section 457, relating to the valuation of deferred compensation, 
unless otherwise provided for in the regulations under section 457;
    (5) Sections 3121(v) and 3306(r), relating to the valuation of 
deferred amounts, unless otherwise provided for in the regulations under 
those sections;
    (6) Section 6058, relating to valuation statements evidencing 
compliance with qualified plan requirements, unless otherwise provided 
for in the regulations under section 6058;
    (7) Section 7872, relating to income and gift taxation of interest-
free loans and loans with below-market interest rates, unless otherwise 
provided for in the regulations under section 7872; or
    (8) Section 2702(a)(2)(A), relating to the value of a nonqualified 
retained interest upon a transfer of an interest in trust to or for the 
benefit of a member of the transferor's family; and
    (9) Any other sections of the Internal Revenue Code to the extent 
provided by the Internal Revenue Service in revenue rulings or revenue 
procedures. (See Sec. Sec. 601.201 and 601.601 of this chapter).
    (b) Other limitations on the application of section 7520--(1) In 
general--(i) Ordinary beneficial interests. For purposes of this 
section:
    (A) An ordinary annuity interest is the right to receive a fixed 
dollar amount at the end of each year during one or more measuring lives 
or for some other defined period. A standard section 7520 annuity factor 
for an ordinary annuity interest represents the present worth of the 
right to receive $1.00 per year for a defined period, using the interest 
rate prescribed under section 7520 for the appropriate month. If an 
annuity interest is payable more often than annually or is payable at 
the beginning of each period, a special adjustment must be made in any 
computation with a standard section 7520 annuity factor.
    (B) An ordinary income interest is the right to receive the income 
from or the use of property during one or more measuring lives or for 
some other defined period. A standard section 7520 income factor for an 
ordinary income interest represents the present worth of the right to 
receive the use of $1.00 for a defined period, using the interest rate 
prescribed under section 7520 for the appropriate month.
    (C) An ordinary remainder or reversionary interest is the right to 
receive an interest in property at the end of

[[Page 547]]

one or more measuring lives or some other defined period. A standard 
section 7520 remainder factor for an ordinary remainder or reversionary 
interest represents the present worth of the right to receive $1.00 at 
the end of a defined period, using the interest rate prescribed under 
section 7520 for the appropriate month.
    (ii) Certain restricted beneficial interests. A restricted 
beneficial interest is an annuity, income, remainder, or reversionary 
interest that is subject to any contingency, power, or other 
restriction, whether the restriction is provided for by the terms of the 
trust, will, or other governing instrument or is caused by other 
circumstances. In general, a standard section 7520 annuity, income, or 
remainder factor may not be used to value a restricted beneficial 
interest. However, a special section 7520 annuity, income, or remainder 
factor may be used to value a restricted beneficial interest under some 
circumstances. See paragraphs (b)(2)(v) Example 4 and (b)(4) Example 1 
of this section, which illustrate situations where special section 7520 
actuarial factors are needed to take into account limitations on 
beneficial interests. See Sec. 20.7520-1(c) for requesting a special 
factor from the Internal Revenue Service.
    (iii) Other beneficial interests. If, under the provisions of this 
paragraph (b), the interest rate and mortality components prescribed 
under section 7520 are not applicable in determining the value of any 
annuity, income, remainder, or reversionary interest, the actual fair 
market value of the interest (determined without regard to section 7520) 
is based on all of the facts and circumstances if and to the extent 
permitted by the Internal Revenue Code provision applicable to the 
property interest.
    (2) Provisions of governing instrument and other limitations on 
source of payment--(i) Annuities. A standard section 7520 annuity factor 
may not be used to determine the present value of an annuity for a 
specified term of years or the life of one or more individuals unless 
the effect of the trust, will, or other governing instrument is to 
ensure that the annuity will be paid for the entire defined period. In 
the case of an annuity payable from a trust or other limited fund, the 
annuity is not considered payable for the entire defined period if, 
considering the applicable section 7520 interest rate at the valuation 
date of the transfer, the annuity is expected to exhaust the fund before 
the last possible annuity payment is made in full. For this purpose, it 
must be assumed that it is possible for each measuring life to survive 
until age 110. For example, for a fixed annuity payable annually at the 
end of each year, if the amount of the annuity payment (expressed as a 
percentage of the initial corpus) is less than or equal to the 
applicable section 7520 interest rate at the date of the transfer, the 
corpus is assumed to be sufficient to make all payments. If the 
percentage exceeds the applicable section 7520 interest rate and the 
annuity is for a definite term of years, multiply the annual annuity 
amount by the Table B term certain annuity factor, as described in Sec. 
20.7520-1(c)(1), for the number of years of the defined period. If the 
percentage exceeds the applicable section 7520 interest rate and the 
annuity is payable for the life of one or more individuals, multiply the 
annual annuity amount by the Table B annuity factor for 110 years minus 
the age of the youngest individual. If the result exceeds the limited 
fund, the annuity may exhaust the fund, and it will be necessary to 
calculate a special section 7520 annuity factor that takes into account 
the exhaustion of the trust or fund. This computation would be modified, 
if appropriate, to take into account annuities with different payment 
terms. See Sec. 25.7520-3(b)(2)(v) Example 5 of this chapter, which 
provides an illustration involving an annuity trust that is subject to 
exhaustion.
    (ii) Income and similar interests--(A) Beneficial enjoyment. A 
standard section 7520 income factor for an ordinary income interest may 
not be used to determine the present value of an income or similar 
interest in trust for a term of years, or for the life of one or more 
individuals, unless the effect of the trust, will, or other governing 
instrument is to provide the income beneficiary with that degree of 
beneficial enjoyment of the property during the term of the income 
interest that the

[[Page 548]]

principles of the law of trusts accord to a person who is unqualifiedly 
designated as the income beneficiary of a trust for a similar period of 
time. This degree of beneficial enjoyment is provided only if it was the 
transferor's intent, as manifested by the provisions of the governing 
instrument and the surrounding circumstances, that the trust provide an 
income interest for the income beneficiary during the specified period 
of time that is consistent with the value of the trust corpus and with 
its preservation. In determining whether a trust arrangement evidences 
that intention, the treatment required or permitted with respect to 
individual items must be considered in relation to the entire system 
provided for in the administration of the subject trust. Similarly, in 
determining the present value of the right to use tangible property 
(whether or not in trust) for one or more measuring lives or for some 
other specified period of time, the interest rate component prescribed 
under section 7520 and Sec. 1.7520-1 of this chapter may not be used 
unless, during the specified period, the effect of the trust, will or 
other governing instrument is to provide the beneficiary with that 
degree of use, possession, and enjoyment of the property during the term 
of interest that applicable state law accords to a person who is 
unqualifiedly designated as a life tenant or term holder for a similar 
period of time.
    (B) Diversions of income and corpus. A standard section 7520 income 
factor for an ordinary income interest may not be used to value an 
income interest or similar interest in property for a term of years, or 
for one or more measuring lives, if--
    (1) The trust, will, or other governing instrument requires or 
permits the beneficiary's income or other enjoyment to be withheld, 
diverted, or accumulated for another person's benefit without the 
consent of the income beneficiary; or
    (2) The governing instrument requires or permits trust corpus to be 
withdrawn from the trust for another person's benefit without the 
consent of the income beneficiary during the income beneficiary's term 
of enjoyment and without accountability to the income beneficiary for 
such diversion.
    (iii) Remainder and reversionary interests. A standard section 7520 
remainder interest factor for an ordinary remainder or reversionary 
interest may not be used to determine the present value of a remainder 
or reversionary interest (whether in trust or otherwise) unless, 
consistent with the preservation and protection that the law of trusts 
would provide for a person who is unqualifiedly designated as the 
remainder beneficiary of a trust for a similar duration, the effect of 
the administrative and dispositive provisions for the interest or 
interests that precede the remainder or reversionary interest is to 
assure that the property will be adequately preserved and protected 
(e.g., from erosion, invasion, depletion, or damage) until the remainder 
or reversionary interest takes effect in possession and enjoyment. This 
degree of preservation and protection is provided only if it was the 
transferor's intent, as manifested by the provisions of the arrangement 
and the surrounding circumstances, that the entire disposition provide 
the remainder or reversionary beneficiary with an undiminished interest 
in the property transferred at the time of the termination of the prior 
interest.
    (iv) Pooled income fund interests. In general, pooled income funds 
are created and administered to achieve a special rate of return. A 
beneficial interest in a pooled income fund is not ordinarily valued 
using a standard section 7520 income or remainder interest factor. The 
present value of a beneficial interest in a pooled income fund is 
determined according to rules and special remainder factors prescribed 
in Sec. 1.642(c)-6 of this chapter and, when applicable, the rules set 
forth under paragraph (b)(3) of this section if the individual who is 
the measuring life is terminally ill at the time of the transfer.
    (v) Examples. The provisions of this paragraph (b)(2) are 
illustrated by the following examples:
    Example 1. Unproductive property. A died, survived by B and C. B 
died two years after A. A's will provided for a bequest of corporation 
stock in trust under the terms of which all of the trust income was paid 
to B for life. After the death of B, the trust terminated and the trust 
property was distributed to C. The trust specifically authorized, but 
did not require, the trustee to retain the shares of

[[Page 549]]

stock. The corporation paid no dividends on this stock during the 5 
years before A's death and the 2 years before B's death. There was no 
indication that this policy would change after A's death. Under 
applicable state law, the corporation is considered to be a sound 
investment that satisfies fiduciary standards. The facts and 
circumstances, including applicable state law, indicate that B did not 
have the legal right to compel the trustee to make the trust corpus 
productive in conformity with the requirements for a lifetime trust 
income interest under applicable local law. Therefore, B's life income 
interest in this case is considered nonproductive. Consequently, B's 
income interest may not be valued actuarially under this section.
    Example 2. Beneficiary's right to make trust productive. The facts 
are the same as in Example 1, except that the trustee is not 
specifically authorized to retain the shares of stock. Further, the 
terms of the trust specifically provide that B, the life income 
beneficiary, may require the trustee to make the trust corpus productive 
consistent with income yield standards for trusts under applicable state 
law. Under that law, the minimum rate of income that a productive trust 
may produce is substantially below the section 7520 interest rate for 
the month of A's death. In this case, because B has the right to compel 
the trustee to make the trust productive for purposes of applicable 
local law during the beneficiary's lifetime, the income interest is 
considered an ordinary income interest for purposes of this paragraph, 
and the standard section 7520 life income interest factor may be used to 
determine the present value of B's income interest.
    Example 3. Discretionary invasion of corpus. The decedent, A, 
transferred property to a trust under the terms of which all of the 
trust income is to be paid to A's child for life and the remainder of 
the trust is to be distributed to a grandchild. The trust authorizes the 
trustee without restriction to distribute corpus to A's surviving spouse 
for the spouse's comfort and happiness. In this case, because the 
trustee's power to invade trust corpus is unrestricted, the exercise of 
the power could result in the termination of the income interest at any 
time. Consequently, the income interest is not considered an ordinary 
income interest for purposes of this paragraph, and may not be valued 
actuarially under this section.
    Example 4. Limited invasion of corpus. The decedent, A, bequeathed 
property to a trust under the terms of which all of the trust income is 
to be paid to A's child for life and the remainder is to be distributed 
to A's grandchild. The trust authorizes the child to withdraw up to 
$5,000 per year from the trust corpus. In this case, the child's power 
to invade trust corpus is limited to an ascertainable amount each year. 
Annual invasions of any amount would be expected to progressively 
diminish the property from which the child's income is paid. 
Consequently, the income interest is not considered an ordinary income 
interest for purposes of this paragraph, and the standard section 7520 
income interest factor may not be used to determine the present value of 
the income interest. Nevertheless, the present value of the child's 
income interest is ascertainable by making a special actuarial 
calculation that would take into account not only the initial value of 
the trust corpus, the section 7520 interest rate for the month of the 
transfer, and the mortality component for the child's age, but also the 
assumption that the trust corpus will decline at the rate of $5,000 each 
year during the child's lifetime. The child's right to receive an amount 
not in excess of $5,000 per year may be separately valued in this 
instance and, assuming the trust corpus would not exhaust before the 
child would attain age 110, would be considered an ordinary annuity 
interest.
    Example 5. Power to consume. The decedent, A, devised a life estate 
in 3 parcels of real estate to A's surviving spouse with the remainder 
to a child, or, if the child doesn't survive, to the child's estate. A 
also conferred upon the spouse an unrestricted power to consume the 
property, which includes the right to sell part or all of the property 
and to use the proceeds for the spouse's support, comfort, happiness, 
and other purposes. Any portion of the property or its sale proceeds 
remaining at the death of the surviving spouse is to vest by operation 
of law in the child at that time. The child predeceased the surviving 
spouse. In this case, the surviving spouse's power to consume the corpus 
is unrestricted, and the exercise of the power could entirely exhaust 
the remainder interest during the life of the spouse. Consequently, the 
remainder interest that is includible in the child's estate is not 
considered an ordinary remainder interest for purposes of this paragraph 
and may not be valued actuarially under this section.

    (3) Mortality component--(i) Terminal illness. Except as provided in 
paragraph (b)(3)(ii) of this section, the mortality component prescribed 
under section 7520 may not be used to determine the present value of an 
annuity, income interest, remainder interest, or reversionary interest 
if an individual who is a measuring life is terminally ill at the time 
of the decedent's death. For purposes of this paragraph (b)(3), an 
individual who is known to have an incurable illness or other 
deteriorating physical condition is considered terminally ill if there 
is at least a 50 percent probability that the individual will die

[[Page 550]]

within 1 year. However, if the individual survives for eighteen months 
or longer after the date of the decedent's death, that individual shall 
be presumed to have not been terminally ill at the date of death unless 
the contrary is established by clear and convincing evidence.
    (ii) Terminal illness exceptions. In the case of the allowance of 
the credit for tax on a prior transfer under section 2013, if a final 
determination of the federal estate tax liability of the transferor's 
estate has been made under circumstances that required valuation of the 
life interest received by the transferee, the value of the property 
transferred, for purposes of the credit allowable to the transferee's 
estate, shall be the value determined previously in the transferor's 
estate. Otherwise, for purposes of section 2013, the provisions of 
paragraph (b)(3)(i) of this section shall govern in valuing the property 
transferred. The value of a decedent's reversionary interest under 
sections 2037(b) and 2042(2) shall be determined without regard to the 
physical condition, immediately before the decedent's death, of the 
individual who is the measuring life.
    (iii) Death resulting from common accidents. The mortality component 
prescribed under section 7520 may not be used to determine the present 
value of an annuity, income interest, remainder interest, or 
reversionary interest if the decedent, and the individual who is the 
measuring life, die as a result of a common accident or other 
occurrence.
    (4) Examples. The provisions of paragraph (b)(3) of this section are 
illustrated by the following examples:

    Example 1. Terminal illness. The decedent bequeaths $1,000,000 to a 
trust under the terms of which the trustee is to pay $103,000 per year 
to a charitable organization during the life of the decedent's child. 
Upon the death of the child, the remainder in the trust is to be 
distributed to the decedent's grandchild. The child, who is age 60, has 
been diagnosed with an incurable illness, and there is at least a 50 
percent probability of the child dying within 1 year. Assuming the 
presumption provided for in paragraph (b)(3)(i) of this section does not 
apply, the standard life annuity factor for a person age 60 may not be 
used to determine the present value of the charitable organization's 
annuity interest because there is at least a 50 percent probability that 
the child, who is the measuring life, will die within 1 year. Instead, a 
special section 7520 annuity factor must be computed that takes into 
account the projection of the child's actual life expectancy.
    Example 2. Deaths resulting from common accidents, etc. The 
decedent's will establishes a trust to pay income to the decedent's 
surviving spouse for life. The will provides that, upon the spouse's 
death or, if the spouse fails to survive the decedent, upon the 
decedent's death the trust property is to pass to the decedent's 
children. The decedent and the decedent's spouse die simultaneously in 
an accident under circumstances in which it was impossible to determine 
who survived the other. Even if the terms of the will and applicable 
state law presume that the decedent died first with the result that the 
property interest is considered to have passed in trust for the benefit 
of the spouse for life, after which the remainder is to be distributed 
to the decedent's children, the spouse's life income interest may not be 
valued by use of the mortality component described under section 7520. 
The result would be the same even if it was established that the spouse 
survived the decedent.

    (5) Additional limitations. Section 7520 does not apply to the 
extent as may otherwise be provided by the Commissioner.
    (c) Effective date. Section Sec. 20.7520-3(a) is effective as of 
May 1, 1989. The provisions of paragraph (b) of this section are 
effective with respect to estates of decedents dying after December 13, 
1995.

[T.D. 8540, 59 FR 30170, June 10, 1994, as amended by T.D. 8630, 60 FR 
63916, Dec. 13, 1995]



Sec. 20.7520-4  Transitional rules.

    (a) Reliance. If the valuation date is after April 30, 1989, and 
before June 10, 1994, an executor can rely on Notice 89-24, 1989-1 C.B. 
660, or Notice 89-60, 1989-1 C.B. 700 (See Sec. 601.601(d)(2)(ii)(b) of 
this chapter), in valuing the transferred interest.
    (b) Effective date. This section is effective as of May 1, 1989.



Sec. 20.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec. 301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]

[[Page 551]]



PART 22_TEMPORARY ESTATE TAX REGULATIONS UNDER THE ECONOMIC RECOVERY 
TAX ACT OF 1981--Table of Contents



    Authority: 26 U.S.C. 7805.



Sec. 22.0  Certain elections under the Economic Recovery Tax Act of 1981.

    (a) Election of special rules for woodlands--(1) In general. This 
paragraph applies to the election of special rules for woodlands under 
section 2032A(e)(13) of the Code, as added by section 421(h) of the 
Economic Recovery Tax Act of 1981. The executor shall make this election 
for an estate by attaching to the estate tax return a statement that--
    (i) Contains the decedent's name and taxpayer identification number 
as they appear on the estate tax return,
    (ii) Identifies the election as an election under section 
2032A(e)(13) of the Code,
    (iii) Specifies the property with respect to which the election is 
made, and
    (iv) Provides all information necessary to show that the executor is 
entitled to make the election.
    (2) Additional information required. If later regulations issued 
under section 2032A(e)(13) require the executor to furnish information 
in addition to that required under paragraph (a)(1) of this section and 
an office of the Internal Revenue Service requests the executor to 
furnish the additional information, the executor shall furnish the 
additional information in a statement filed with that office of the 
Internal Revenue Service within 60 days after the request is made. The 
statement shall also contain the information required by paragraphs 
(a)(1) (i), (ii), and (iii) of this section. If the additional 
information is not provided within 60 days after the request is made, 
the election may, at the discretion of the Commissioner, be held 
invalid.
    (b) Election of special use valuation for qualified real property. 
This paragraph applies to the election of special use valuation for 
qualified real property under section 2032A(d)(1) of the Code, as 
amended by section 421(j)(3) of the Economic Recovery Tax Act of 1981. 
This election shall be made in the manner prescribed in Sec. 20.2032A-
8(a)(3), except that the election shall be valid even if the estate tax 
return is not timely filed.
    (c) Elections irrevocable. Elections to which this section applies 
may not be revoked.
    (d) Effective date. The elections described in this section are 
available with respect to the estates of decedents dying after 1981.

[T.D. 7793, 46 FR 54540, Nov. 3, 1981]



PART 25_GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954--Table of Contents



                                Gift Tax

Sec.
25.0-1 Introduction.

                     Determination of Tax Liability

25.2207A-1 Right of recovery of gift taxes in the case of certain 
          marital deduction property.
25.2207A-2 Effective date.
25.2501-1 Imposition of tax.
25.2502-1 Rate of tax.
25.2502-2 Donor primarily liable for tax.
25.2503-1 General definitions of ``taxable gifts'' and of ``total amount 
          of gifts.''
25.2503-2 Exclusions from gifts.
25.2503-3 Future interests in property.
25.2503-4 Transfer for the benefit of a minor.
25.2503-6 Exclusion for certain qualified transfer for tuition or 
          medical expenses.
25.2504-1 Taxable gifts for preceding calendar periods.
25.2504-2 Determination of gifts for preceding calendar periods.
25.2505-0T Table of contents (temporary).
25.2505-1T Unified credit against gift tax; in general (temporary).
25.2505-2T Gifts made by a surviving spouse having a DSUE amount 
          available (temporary).

                                Transfers

25.2511-1 Transfers in general.
25.2511-2 Cessation of donor's dominion and control.
25.2511-3 Transfers by nonresidents not citizens.
25.2512-0 Table of contents.
25.2512-1 Valuation of property; in general.
25.2512-2 Stocks and bonds.
25.2512-3 Valuation of interest in businesses.
25.2512-4 Valuation of notes.
25.2512-5 Valuation of annuities, unitrust interests, interests for life 
          or term of years, and remainder or reversionary interests.

[[Page 552]]

25.2512-6 Valuation of certain life insurance and annuity contracts; 
          valuation of shares in an open-end investment company.
25.2512-7 Effect of excise tax.
25.2512-8 Transfers for insufficient consideration.
25.2513-1 Gifts by husband or wife to third party considered as made 
          one-half by each.
25.2513-2 Manner and time of signifying consent.
25.2513-3 Revocation of consent.
25.2513-4 Joint and several liability for tax.
25.2514-1 Transfers under power of appointment.
25.2514-2 Powers of appointment created on or before October 21, 1942.
25.2514-3 Powers of appointment created after October 21, 1942.
25.2515-1 Tenancies by the entirety; in general.
25.2515-2 Tenancies by the entirety; transfers treated as gifts; manner 
          of election and valuation.
25.2515-3 Termination of tenancy by the entirety; cases in which entire 
          value of gift is determined under section 2515(b).
25.2515-4 Termination of tenancy by entirety; cases in which none, or a 
          portion only, of value of gift is determined under section 
          2515(b).
25.2516-1 Certain property settlements.
25.2516-2 Transfers in settlement of support obligations.
25.2518-1 Qualified disclaimers of property; in general.
25.2518-2 Requirements for a qualified disclaimer.
25.2518-3 Disclaimer of less than an entire interest.

             Actuarial Tables Applicable Before May 1, 1999

25.2512-5A Valuation of annuities, unitrust interests, interests for 
          life or term of years, and remainder or reversionary interests 
          transferred before May 1, 2009.

                               Deductions

25.2519-1 Dispositions of certain life estates.
25.2519-2 Effective date.
25.2521-1 Specific exemption.
25.2522(a)-1 Charitable and similar gifts; citizens or residents.
25.2522(a)-2 Transfers not exclusively for charitable, etc., purposes in 
          the case of gifts made before August 1, 1969.
25.2522(b)-1 Charitable and similar gifts; nonresidents not citizens.
25.2522(c)-1 Disallowance of charitable, etc., deductions because of 
          ``prohibited transactions'' in the case of gifts made before 
          January 1, 1970.
25.2522(c)-2 Disallowance of charitable, etc., deductions in the case of 
          gifts made after December 31, 1969.
25.2522(c)-3 Transfers not exclusively for charitable, etc., purposes in 
          the case of gifts made after July 31, 1969.
25.2522(c)-4 Disallowance of double deduction in the case of qualified 
          terminable interest property.
25.2522(d)-1 Additional cross references.
25.2523(a)-1 Gift to spouse; in general.
25.2523(b)-1 Life estate or other terminable interest.
25.2523(c)-1 Interest in unidentified assets.
25.2523(d)-1 Joint interests.
25.2523(e)-1 Marital deduction; life estate with power of appointment in 
          donee spouse.
25.2523(f)-1 Election with respect to life estate transferred to donee 
          spouse.
25.2523(g)-1 Special rule for charitable remainder trusts.
25.2523(h)-1 Denial of double deduction.
25.2523(h)-2 Effective dates.
25.2523(i)-1 Disallowance of marital deduction when spouse is not a 
          United States citizen.
25.2523(i)-2 Treatment of spousal joint tenancy property where one 
          spouse is not a United States citizen.
25.2523(i)-3 Effective date.
25.2524-1 Extent of deductions.

                        Deductions Prior to 1982

25.2523(f)-1A Special rule applicable to community property transferred 
          prior to January 1, 1982.

                         Special Valuation Rules

25.2701-0 Table of contents.
25.2701-1 Special valuation rules in the case of transfers of certain 
          interests in corporations and partnerships.
25.2701-2 Special valuation rules for applicable retained interests.
25.2701-3 Determination of amount of gift.
25.2701-4 Accumulated qualified payments.
25.2701-5 Adjustments to mitigate double taxation.
25.2701-6 Indirect holding of interests.
25.2701-7 Separate interests.
25.2701-8 Effective dates.
25.2702-0 Table of contents.
25.2702-1 Special valuation rules in the case of transfers of interests 
          in trust.
25.2702-2 Definitions and valuation rules.
25.2702-3 Qualified interests.
25.2702-4 Certain property treated as held in trust.
25.2702-5 Personal residence trusts.
25.2702-6 Reduction in taxable gifts.
25.2702-7 Effective dates.
25.2703-1 Property subject to restrictive arrangements.
25.2703-2 Effective date.
25.2704-1 Lapse of certain rights.
25.2704-2 Transfers subject to applicable restrictions.
25.2704-3 Effective date.

[[Page 553]]

                      Procedure and Administration

25.6001-1 Records required to be kept.
25.6011-1 General requirement of return, statement, or list.
25.6011-4 Requirement of statement disclosing participation in certain 
          transactions by taxpayers.
25.6019-1 Persons required to file returns.
25.6019-2 Returns required in case of consent under section 2513.
25.6019-3 Contents of return.
25.6019-4 Description of property listed on return.
25.6060-1 Reporting requirements for tax return preparers.
25.6061-1 Signing of returns and other documents.
25.6065-1 Verification of returns.
25.6075-1 Returns; time for filing gift tax returns for gifts made after 
          December 31, 1981.
25.6075-2 Returns; time for filing gift tax returns for gifts made after 
          December 31, 1976, and before January 1, 1982.
25.6081-1 Automatic extension of time for filing gift tax returns.
25.6091-1 Place for filing returns and other documents.
25.6091-2 Exceptional cases.
25.6107-1 Tax return preparer must furnish copy of return to taxpayer 
          and must retain a copy or record.
25.6109-1 Tax return preparers furnishing identifying numbers for 
          returns or claims for refund.
25.6151-1 Time and place for paying tax shown on return.
25.6161-1 Extension of time for paying tax or deficiency.
25.6165-1 Bonds where time to pay tax or deficiency has been extended.
25.6302-1 Voluntary payments of gift taxes by electronic funds transfer.
25.6321-1 Lien for taxes.
25.6323-1 Validity and priority against certain persons.
25.6324-1 Special lien for gift tax.
25.6601-1 Interest on underpayment, nonpayment, or extensions of time 
          for payment, of tax.
25.6694-1 Section 6694 penalties applicable to tax return preparer.
25.6694-2 Penalties for understatement due to an unreasonable position.
25.6694-3 Penalty for understatement due to willful, reckless, or 
          intentional conduct.
25.6694-4 Extension of period of collection when tax return preparer 
          pays 15 percent of a penalty for understatement of taxpayer's 
          liability and certain other procedural matters.
25.6695-1 Other assessable penalties with respect to the preparation of 
          tax returns for other persons.
25.6696-1 Claims for credit or refund by tax return preparers.
25.6905-1 Discharge of executor from personal liability for decedent's 
          income and gift taxes.
25.7101-1 Form of bonds.

                      General Actuarial Valuations

25.7520-1 Valuation of annuities, unitrust interests, interests for life 
          or terms of years, and remainder or reversionary interests.
25.7520-2 Valuation of charitable interests.
25.7520-3 Limitation on the application of section 7520.
25.7520-4 Transitional rules.
25.7701-1 Tax return preparer.

    Authority: 26 U.S.C. 7805.
    Section 25.2505-2T also issued under 26 U.S.C. 2010(c)(6).
    Section 25.2512-5 also issued under 26 U.S.C. 7520(c)(2).
    Section 25.2512-5A also issued under 26 U.S.C. 7520(c)(2).
    Section 25.2518-2 is also issued under 26 U.S.C. 2518(b).
    Section 25.6060-1 also issued under 26 U.S.C. 6060(a).
    Section 25.6081-1 also issued under the authority of 26 U.S.C. 
6081(a).
    Section 25.6109-2 also issued under 26 U.S.C. 6109(a).
    Section 25.6302-1 also issued under 26 U.S.C. 6302(a) and (h).
    Section 25.6695-1 also issued under 26 U.S.C. 6695(b).
    Section 25.7520-1 also issued under 26 U.S.C. 7520(c)(2).
    Section 25.7520-2 also issued under 26 U.S.C. 7520(c)(2).
    Section 25.7520-3 also issued under 26 U.S.C. 7520(c)(2).
    Section 25.7520-4 also issued under 26 U.S.C. 7520(c)(2).

    Editorial Note: At 74 FR 5105, Jan. 29, 2009, the authority citation 
to part 25 was amended; however, a portion of the amendment could not be 
incorporated due to inaccurate amendatory instruction.

    Source: T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 
1960, unless otherwise noted.

                                Gift Tax



Sec. 25.0-1  Introduction.

    (a) In general. (1) The regulations in this part are designated 
``Gift Tax Regulations.'' These regulations pertain to (i) the gift tax 
imposed by Chapter 12 of Subtitle B of the Internal Revenue Code on the 
transfer of property by gift by individuals in the calendar year 1955, 
in subsequent calendar years beginning before the calendar year 1971, in 
calendar quarters beginning with

[[Page 554]]

the first calendar quarter of calendar year 1971 through the last 
calendar quarter of the calendar year 1981, and in calendar years 
beginning with the calendar year 1982, and (ii) certain related 
administrative provisions of Subtitle F of the Code. It should be noted 
that the application of some of the provisions of these regulations may 
be affected by the provisions of an applicable gift tax convention with 
a foreign country. Unless otherwise indicated, references in these 
regulations to the ``Internal Revenue Code'' or the ``Code'' are 
references to the Internal Revenue Code of 1954, as amended, and 
references to a section or other provision of law are references to a 
section or other provision of the Internal Revenue Code of 1954, as 
amended. The Gift Tax Regulations are applicable to the transfer of 
property by gift by individuals in calendar years 1955 through 1970, in 
calendar quarters beginning with the first calendar quarter of calendar 
year 1971 through the last calendar quarter of the calendar year 1981, 
and in calendar years beginning with the calendar year 1982, and 
supersede the regulations contained in part 86, subchapter B, Chapter 1, 
title 26, Code of Federal Regulations (1939) (Regulations 108, Gift Tax 
(8 FR 10858)), as prescribed and made applicable to the Internal Revenue 
Code of 1954 by Treasury Decision 6091, signed August 16, 1954 (19 FR 
5167, Aug. 17, 1954).
    (2) Section 2501(b) makes the provisions of Chapter 12 of the Code 
apply in the case of gifts made after September 2, 1958, by certain 
citizens of the United States who were residents of a possession thereof 
at the time the gifts were made. Section 2501(c) makes the provisions of 
Chapter 12 apply in the case of gifts made after September 14, 1960, by 
certain other citizens of the United States who were residents of a 
possession thereof at the time the gifts were made. See paragraphs (c) 
and (d) of Sec. 25.2501-1. Except as otherwise provided in paragraphs 
(c) and (d) of Sec. 25.2501-1, the provisions of these regulations do 
not apply to the making of gifts by such citizens.
    (b) Nature of tax. The gift tax is not a property tax. It is a tax 
imposed upon the transfer of property by individuals. It is not 
applicable to transfers by corporations or persons other than 
individuals. However, see paragraph (h)(1) of Sec. 25.2511-1 with 
respect to the extent to which a transfer by or to a corporation is 
considered a transfer by or to its shareholders.
    (c) Scope of regulations--(1) Determination of tax liability. 
subchapter A of Chapter 12 of the Code pertains to the determination of 
tax liability. The regulations pursuant to subchapter A are set forth in 
Sec. Sec. 25.2501-1 through 25.2504-2. Sections 25.2701-5 and 25.2702-6 
contain rules that provide additional adjustments to mitigate double 
taxation where the amount of the transferor's property was previously 
determined under the special valuation provisions of sections 2701 and 
2702.
    (2) Transfer. Subchapter B of chapter 12 and chapter 14 of the 
Internal Revenue Code pertain to the transfers which constitute the 
making of gifts and the valuation of those transfers. The regulations 
pursuant to subchapter B are set forth in Sec. Sec. 25.2511-1 through 
25.2518-3. The regulations pursuant to chapter 14 are set forth in 
Sec. Sec. 25.2701-1 through 25.2704-3.
    (3) Deductions. Subchapter C of Chapter 12 of the Code pertains to 
the deductions which are allowed in determining the amount of taxable 
gifts. The regulations pursuant to Subchapter C are set forth in 
Sec. Sec. 25.2521-1 through 25.2524-1.
    (4) Procedure and administration provisions. Subtitle F of the 
Internal Revenue Code contains some sections which are applicable to the 
gift tax. The regulations pursuant to those sections are set forth in 
Sec. Sec. 25.6001-1 through 25.7101-1. Such regulations do not purport 
to be all the regulations on procedure and administration which are 
pertinent to gift tax matters. For the remainder of the regulations on 
procedure and administration which are pertinent to gift tax matters, 
see part 301 of this chapter (Regulations on Procedure and 
Administration).
    (d) Arrangement and numbering. Each section of the regulations in 
this part (other than this section) is designated by a number composed 
of the part number followed by a decimal point (25.); the section of the 
Internal Revenue Code which it interprets; a hyphen (-); and a number 
identifying this

[[Page 555]]

section. By use of these designations one can ascertain the sections of 
the regulations relating to a provision of the Code. For example, the 
regulations pertaining to section 2521 of the Code are designated Sec. 
25.2521-1.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 6542, 26 FR 
548, Jan. 20, 1961; 45 FR 6089, Jan. 25, 1980; T.D. 7910, 48 FR 40372, 
Sept. 7, 1983; T.D. 8395, 57 FR 4254, Feb. 4, 1992]

                     Determination of Tax Liability



Sec. 25.2207A-1  Right of recovery of gift taxes in the case of certain
marital deduction property.

    (a) In general. If an individual is treated as transferring an 
interest in property by reason of section 2519, the individual or the 
individual's estate is entitled to recover from the person receiving the 
property (as defined in paragraph (e) of this section) the amount of 
gift tax attributable to that property. The value of property to which 
this paragraph (a) applies is the value of all interests in the property 
other than the qualifying income interest. There is no right of recovery 
from any person for the property received by that person for which a 
deduction was allowed from the total amount of gifts, if no Federal gift 
tax is attributable to the property. The right of recovery arises at the 
time the Federal gift tax is actually paid by the transferor subject to 
section 2519.
    (b) Failure of a person to exercise the right of recovery. (1) The 
failure of a person to exercise a right of recovery provided by section 
2207A(b) upon a lifetime transfer subject to section 2519 is treated as 
a transfer for Federal gift tax purposes of the unrecovered amounts to 
the person(s) from whom the recovery could have been obtained. See Sec. 
25.2511-1. The transfer is considered to be made when the right to 
recovery is no longer enforceable under applicable law and is treated as 
a gift even if recovery is impossible. A delay in the exercise of the 
right of recovery without payment of sufficient interest is a below-
market loan. Section 1.7872-5T of this chapter describes factors that 
are used to determine, based on the facts and circumstances of a 
particular case, whether a loan otherwise subject to imputation under 
section 7872 (relating to the treatment of below-market loans) is 
exempted from its provisions.
    (2) The transferor subject to section 2519 may execute a written 
waiver of the right of recovery arising under section 2207A before that 
right of recovery becomes unenforceable. If a waiver is executed, the 
transfer of the unrecovered amounts by the transferor is considered to 
be made on the later of--
    (i) The date of the valid and irrevocable waiver rendering the right 
of recovery no longer enforceable; or
    (ii) The date of the payment of the tax by the transferor.
    (c) Amount of gift tax attributable to all properties. The amount of 
Federal gift tax attributable to all properties includible in the total 
amount of gifts under section 2519 made during the calendar year is the 
amount by which the total Federal gift tax for the calendar year 
(including penalties and interest attributable to the tax) under chapter 
12 of the Internal Revenue Code which has been paid, exceeds the total 
Federal gift tax for the calendar year (including penalties and interest 
attributable to the tax) under chapter 12 of the Internal Revenue Code 
which would have been paid if the value of the properties includible in 
the total amount of gifts by reason of section 2519 had not been 
included.
    (d) Amount of gift tax attributable to a particular property. A 
person's right of recovery with respect to a particular property is an 
amount equal to the amount determined in paragraph (c) of this section 
multiplied by a fraction. The numerator of the fraction is the value of 
the particular property included in the total amount of gifts made 
during the calendar year by reason of section 2519, less any deduction 
allowed with respect to the property. The denominator of the fraction is 
the total value of all properties included in the total amount of gifts 
made during the calendar year by reason of section 2519, less any 
deductions allowed with respect to those properties.
    (e) Person receiving the property. If the property is in a trust at 
the time of the transfer, the person receiving the property is the 
trustee, and any person who has received a distribution of the property 
prior to the expiration of the right

[[Page 556]]

of recovery if the property does not remain in trust. This paragraph (e) 
does not affect the right, if any, under local law, of any person with 
an interest in property to reimbursement or contribution from another 
person with an interest in the property.
    (f) Example. The following example illustrates the application of 
paragraphs (a) through (e) of this section.

    Example. D created an inter vivos trust during 1994 with certain 
income producing assets valued at $1,000,000. The trust provides that 
all income is payable to D's wife, S, for S's life, with the remainder 
at S's death to be divided equally among their four children. In 
computing taxable gifts during calendar year 1994, D deducted, pursuant 
to section 2523(f), $1,000,000 from the total amount of gifts made. In 
addition, assume that S received no other transfers from D and that S 
made a gift during 1996 of the entire life interest to one of the 
children, at which time the value of trust assets was $1,080,000 and the 
value of S's life interest was $400,000. Although the entire value of 
the trust assets ($1,080,000) is, pursuant to sections 2511 and 2519, 
included in the total amount of S's gifts for calendar year 1996, S is 
only entitled to reimbursement for the Federal gift tax attributable to 
the value of the remainder interest, that is, the Federal gift tax 
attributable to $680,000 ($1,080,000 less $400,000). The Federal gift 
tax attributable to $680,000 is equal to the amount by which the total 
Federal gift tax (including penalties and interest) paid for the 
calendar year exceeds the federal gift tax (including penalties and 
interest) that would have been paid if the total amount of gifts during 
1996 had been reduced by $680,000. That amount of tax may be recovered 
by S from the trust.

[T.D. 8522, 59 FR 9655, Mar. 1, 1994, as amended by T.D. 9077, 68 FR 
42595, July 18, 2003]



Sec. 25.2207A-2  Effective date.

    The provisions of Sec. 25.2207A-1 are effective with respect to 
dispositions made after March 1, 1994. With respect to gifts made on or 
before such date, the donor may rely on any reasonable interpretation of 
the statutory provisions. For these purposes, the provisions of Sec. 
25.2207A-1 (as well as project LR-211-76, 1984-1 C.B., page 598, see 
Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable 
interpretation of the statutory provisions.

[T.D. 8522, 59 FR 9656, Mar. 1, 1994]



Sec. 25.2501-1  Imposition of tax.

    (a) In general. (1) The tax applies to all transfers by gift of 
property, wherever situated, by an individual who is a citizen or 
resident of the United States, to the extent the value of the transfers 
exceeds the amount of the exclusions authorized by section 2503 and the 
deductions authorized by sections 2521 (as in effect prior to its repeal 
by the Tax Reform Act of 1976), 2522, and 2523. For each ``calendar 
period'' (as defined in Sec. 25.2502-1(c)(1)), the tax described in 
this paragraph (a) is imposed on the transfer of property by gift during 
such calendar period.
    (2) The tax does not apply to a transfer by gift of intangible 
property before January 1, 1967, by a nonresident not a citizen of the 
United States, unless the donor was engaged in business in the United 
States during the calendar year in which the transfer was made.
    (3)(i) The tax does not apply to any transfer by gift of intangible 
property on or after January 1, 1967, by a nonresident not a citizen of 
the United States (whether or not he was engaged in business in the 
United States), unless the donor is an expatriate who lost his U.S. 
citizenship after March 8, 1965, and within the 10-year period ending 
with the date of transfer, and the loss of citizenship--
    (a) Did not result from the application of section 301(b), 350, or 
355 of the Immigration and Nationality Act, as amended (8 U.S.C. 
1401(b), 1482, or 1487) (For a summary of these sections, see paragraph 
(d)(1) of Sec. 20.2107-1 of this chapter (estate tax regulations)), and
    (b) Had for one of its principal purposes (but not necessarily its 
only principal purpose) the avoidance of Federal income, estate, or gift 
tax.
    (ii) In determining for purposes of subdivision (i)(b) of this 
subparagraph whether a principal purpose for the loss of U.S. 
citizenship by a donor was the avoidance of Federal income, estate, or 
gift tax, the Commissioner must first establish that it is reasonable to 
believe that the donor's loss of U.S. citizenship would, but for section 
2501(a)(3) and this subparagraph, result in a substantial reduction for 
the calendar period (as defined in Sec. 25.2502-1(c)(1)) in the sum of 
(a) the Federal gift tax and (b) all gift taxes imposed by foreign

[[Page 557]]

countries and political subdivisions thereof, in respect of the transfer 
of property by gift. Once the Commissioner has so established, the 
burden of proving that the loss of citizenship by the donor did not have 
for one of its principal purposes the avoidance of Federal income, 
estate, or gift tax shall be on the donor. In the absence of complete 
factual information, the Commissioner may make a tentative 
determination, based on the information available, that the donor's loss 
of U.S. citizenship would, but for section 250(a)(3) and this 
subparagraph, result in a substantial reduction for the calendar period 
in the sum of the Federal and foreign gift taxes described in (a) and 
(b) of this subdivision on the transfer of property by gift. This 
tentative determination may be based upon the fact that the laws of the 
foreign country of which the donor became a citizen and the laws of the 
foreign country of which the donor was a resident at the time of the 
transfer, including the laws of any political subdivision of those 
foreign countries, would ordinarily result, in the case of a 
nonexpatriate donor having the same citizenship and residence as the 
donor, in liability for total gift taxes under such laws for the 
calendar period substantially lower than the amount of the Federal gift 
tax which would be imposed for such period on an amount of comparable 
gifts by a citizen of the United States. In the absence of a 
preponderance of evidence to the contrary, this tentative determination 
shall be sufficient to establish that it is reasonable to believe that 
the donor's loss of U.S. citizenship would, but for section 2501(a)(3) 
and this subparagraph, result in a substantial reduction for the 
calendar period in the sum of the Federal and foreign gift taxes 
described in (a) and (b) of this subdivision on the transfer of property 
by gift.
    (4) For additional rules relating to the application of the tax to 
transfers by nonresidents not citizens of the United States, see section 
2511 and Sec. 25.2511-3.
    (5) The general rule of this paragraph (a) shall not apply to a 
transfer after May 7, 1974, of money or other property to a political 
organization for the use of that organization. However, this exception 
to the general rule applies solely to a transfer to a political 
organization as defined in section 527(e)(1) and including a newsletter 
fund to the extent provided under section 527(g). The general rule 
governs a transfer of property to an organization other than a political 
organization as so defined.
    (b) Resident. A resident is an individual who has his domicile in 
the United States at the time of the gift. For this purpose the United 
States includes the States and the District of Columbia. The term also 
includes the Territories of Alaska and Hawaii prior to admission as a 
State. See section 7701(a)(9). All other individuals are nonresidents. A 
person acquires a domicile in a place by living there, for even a brief 
period of time, with no definite present intention of moving therefrom. 
Residence without the requisite intention to remain indefinitely will 
not constitute domicile, nor will intention to change domicile effect 
such a change unless accompanied by actual removal.
    (c) Certain residents of possessions considered citizens of the 
United States. As used in this part, the term ``citizen of the United 
States'' includes a person who makes a gift after September 2, 1958 and 
who, at the time of making the gift, was domiciled in a possession of 
the United States and was a United States citizen, and who did not 
acquire his United States citizenship solely by reason of his being a 
citizen of such possession or by reason of his birth or residence within 
such possession. The gift of such a person is, therefore, subject to the 
tax imposed by section 2501 in the same manner in which a gift made by a 
resident of the United States is subject to the tax. See paragraph (a) 
of Sec. 25.01 and paragraph (d) of this section for further information 
relating to the application of the Federal gift tax to gifts made by 
persons who were residents of possessions of the United States. The 
application of this paragraph may be illustrated by the following 
example and the examples set forth in paragraph (d) of this section:

    Example. A, a citizen of the United States by reason of his birth in 
the United States at San Francisco, established residence in

[[Page 558]]

Puerto Rico and acquired Puerto Rican citizenship. A makes a gift of 
stock of a Spanish corporation on September 4, 1958, while a citizen and 
domiciliary of Puerto Rico. A's gift is, by reason of the provisions of 
section 2501(b) subject to the tax imposed by section 2501 inasmuch as 
his United States citizenship is based on birth in the United States and 
is not based solely on being a citizen of a possession or solely on 
birth or residence in a possession.

    (d) Certain residents of possessions considered nonresidents not 
citizens of the United States. As used in this part, the term 
``nonresident not a citizen of the United States'' includes a person who 
makes a gift after September 14, 1960, and who at the time of making the 
gift, was domiciled in a possession of the United States and was a 
United States citizen, and who acquired his United States citizenship 
solely by reason of his being a citizen of such possession or by reason 
of his birth or residence within such possession. The gift of such a 
person, is, therefore, subject to the tax imposed by section 2501 in the 
same manner in which a gift is subject to the tax when made by a donor 
who is a ``nonresident not a citizen of the United States.'' See 
paragraph (a) of Sec. 25.01 and paragraph (c) of this section for 
further information relating to the application of the Federal gift tax 
to gifts made by persons who were residents of possessions of the United 
States. The application of this paragraph may be illustrated by the 
following examples and the example set forth in paragraph (c) of this 
section. In each of the following examples the person who makes the gift 
is deemed a ``nonresident not a citizen of the United States'' and his 
gift is subject to the tax imposed by section 2501 in the same manner in 
which a gift is subject to the tax when made by a donor who is a 
nonresident not a citizen of the United States, since he made the gift 
after September 14, 1960, but would not have been so deemed and subject 
to such tax if the person who made the gift had made it on or before 
September 14, 1960.

    Example (1). C, who acquired his United States citizenship under 
section 5 of the Act of March 2, 1917 (39 Stat. 953), by reason of being 
a citizen of Puerto Rico, while domiciled in Puerto Rico makes a gift on 
October 1, 1960, of real estate located in New York. C is considered to 
have acquired his United States citizenship solely by reason of his 
being a citizen of Puerto Rico.
    Example (2). E, whose parents were United States citizens by reason 
of their birth in Boston, was born in the Virgin Islands on March 1, 
1927. On September 30, 1960, while domiciled in the Virgin Islands, he 
made a gift of tangible personal property situated in Kansas. E is 
considered to have acquired his United States citizenship solely by 
reason of his birth in the Virgin Islands (section 306 of the 
Immigration and Nationality Act (66 Stat. 237, 8 U.S.C. 1406)).
    Example (3). N, who acquired United States citizenship by reason of 
being a native of the Virgin Islands and a resident thereof on June 28, 
1932 (section 306 of the Immigration and Nationality Act (66 Stat. 237, 
8 U.S.C. 1406)), made a gift on October 1, 1960, at which time he was 
domiciled in the Virgin Islands, of tangible personal property situated 
in Wisconsin. N is considered to have acquired his United States 
citizenship solely by reason of his birth or residence in the Virgin 
Islands.
    Example (4). P, a former Danish citizen, who on January 17, 1917, 
resided in the Virgin Islands, made the declaration to preserve his 
Danish citizenship required by Article 6 of the treaty entered into on 
August 4, 1916, between the United States and Denmark. Subsequently P 
acquired United States citizenship when he renounced such declaration 
before a court of record (section 306 of the Immigration and Nationality 
Act (66 Stat. 237, 8 U.S.C. 1406)). P, while domiciled in the Virgin 
Islands, made a gift on October 1, 1960, of tangible personal property 
situated in California, P is considered to have acquired his United 
States citizenship solely by reason of his birth of residence in the 
Virgin Islands.
    Example (5). R, a former French citizen, acquired his United States 
citizenship through naturalization proceedings in a court located in the 
Virgin Islands after having qualified for citizenship by residing in the 
Virgin Islands for 5 years. R, while domiciled in the Virgin Islands, 
made a gift of tangible personal property situated in Hawaii on October 
1, 1960. R is considered to have acquired his United States citizenship 
solely by reason of his birth or residence within the Virgin Islands.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 6542, 26 FR 
549 Jan. 20 1961; T.D. 7296, 38 FR 34201, Dec. 12, 1973; T.D. 7871, 45 
FR 8004, Feb. 6, 1980; T.D. 7910, 48 FR 40372, Sept. 7, 1983]



Sec. 25.2502-1  Rate of tax.

    (a) Computation of tax. The rate of tax is determined by the total 
of all gifts made by the donor during the calendar period and all the 
preceding calendar

[[Page 559]]

periods since June 6, 1932. See Sec. 25.2502-1(c)(1) for the definition 
of ``calendar period'' and Sec. 25.2502-1(c)(2) for the definition of 
``preceding calendar periods.'' The following six steps are to be 
followed in computing the tax:
    (1) First step. Ascertain the amount of the ``taxable gifts'' (as 
defined in Sec. 25.2503-1) for the calendar period for which the return 
is being prepared.
    (2) Second step. Ascertain ``the aggregate sum of the taxable gifts 
for each of the preceding calendar periods'' (as defined in Sec. 
25.2504-1), considering only those gifts made after June 6, 1932.
    (3) Third step. Ascertain the total amount of the taxable gifts, 
which is the sum of the amounts determined in the first and second 
steps. See Sec. 25.2702-6 for an adjustment to the total amount of an 
individual's taxable gifts where the individual's current taxable gifts 
include the transfer of certain interests in trust that were previously 
valued under the provisions of section 2702.
    (4) Fourth step. Compute the tentative tax on the total amount of 
taxable gifts (as determined in the third step) using the rate schedule 
in effect at the time the gift (for which the return is being filed) is 
made.
    (5) Fifth step. Compute the tentative tax on the aggregate sum of 
the taxable gifts for each of the preceding calendar periods (as 
determined in the second step), using the same rate schedule set forth 
in the fourth step of this paragraph (a).
    (6) Sixth step. Subtract the amount determined in the fifth step 
from the amount determined in the fourth step. The amount remaining is 
the gift tax for the calendar period for which the return is being 
prepared.
    (b) Rate of tax. The tax is computed in accordance with the rate 
schedule in effect at the time the gift was made as set forth in section 
2001(c) or corresponding provisions of prior law.
    (c) Definitions. (1) The term ``calendar period'' means:
    (i) Each calendar year for the calendar years 1932 (but only that 
portion of such year after June 6, 1932) through 1970;
    (ii) Each calendar quarter for the first calendar quarter of the 
calendar year 1971 through the last calendar quarter of calendar year 
1981; or
    (iii) Each calendar year for the calendar year 1982 and each 
succeeding calendar year.
    (2) The term ``preceding calendar periods'' means all calendar 
periods ending prior to the calendar period for which the tax is being 
computed.
    (d) Examples. The following examples illustrate the application of 
this section with respect to gifts made by citizens or residents of the 
United States:

    Example 1. Assume that in 1955 the donor made taxable gifts, as 
ascertained under the first step (paragraph (a)(2) of this section), of 
$62,500 and that there were no taxable gifts for prior years, with the 
result that the amount ascertainable under the third step is $62,500. 
Under the fourth step a tax is computed on this amount. Reference to the 
tax rate schedule in effect in the year 1955 discloses that the tax on 
this amount is $7,650.
    Example 2. A donor makes gifts (other than gifts of future interests 
in property) during the calendar year 1955 of $30,000 to A and $33,000 
to B. Two exclusions of $3,000 each are allowable, in accordance with 
the provisions of section 2503(b), which results in included gifts for 
1955 of $57,000. Specific exemption was claimed and allowed in a total 
amount of $50,000 in the donor's gift tax returns for the calendar years 
1934 and 1935 so there remains no specific exemption available for the 
donor to claim for 1955. The total amount of gifts made by the donor 
during preceding years, after excluding $5,000 for each donee for each 
calendar year in accordance with the provisions of section 1003(b)(1) of 
the 1939 Code, is computed as follows:

Calendar year 1934...........................................   $120,000
Calendar year 1935...........................................     25,000
                                                              ----------
  Total amount of included gifts for preceding calendar years    145,000
 


The aggregate sum of the taxable gifts for preceding calendar years is 
$115,000, which is determined by deducting a specific exemption of 
$30,000 from $145,000, the total amount of included gifts for preceding 
calendar years. The deduction from the 1934 and 1935 gifts for the 
specific exemption cannot exceed $30,000 for purposes of computing the 
tax on the 1955 gifts even though a specific exemption in a total amount 
of $50,000 was allowed in computing the donor's gift tax liability for 
1934 and 1935. (See paragraph (b) of Sec. 25.2504-1.) The computation 
of the tax for the calendar year 1955 (following the steps set forth in 
paragraph (a) of this section) is shown below:

(1) Amount of taxable gifts for year.........................    $57,000
(2) Total amount of taxable gifts for preceding years........    115,000
                                                              ----------

[[Page 560]]

 
(3) Total taxable gifts......................................    172,000
                                                              ==========
(4) Tax computed on item 3 (in accordance with the rate           31,725
 schedule in effect for the year 1955).......................
(5) Tax computed on item 2 (using same rate schedule)........     18,900
                                                              ----------
(6) Tax for year 1955 (item 4 minus item 5)..................     12,825
 

    Example 3. (i) Facts. During the calendar year 1955, H makes the 
following gifts of present interests:

To his daughter..............................................    $40,000
To his son...................................................      5,000
To W, his wife...............................................      5,000
To a charitable organization.................................     10,000
 


The gifts to W qualify for the marital deduction, and, pursuant to the 
provisions of section 2513 (see Sec. 25.2513-1), H and W consent to 
treat the gifts to third parties as having been made one-half by each 
spouse. The amount of H's taxable gifts for preceding years is $50,000. 
Only $25,000 of H's specific exemption provided under section 2521, 
which was in effect at the time, was claimed and allowed in preceding 
years. H's remaining specific exemption of $5,000 is claimed for the 
calendar year of 1955. See Sec. 25.2521-1. W made no gifts during the 
calendar year 1955 nor during any preceding calendar year. W claims 
sufficient specific exemption on her return to eliminate tax liability.
    (ii) Computation of H's tax for the calendar year 1955--(a) H's 
taxable gifts for year.

  Total gifts of H............................................   $60,000
Less: Portion of items to be reported by spouse (one-half of      27,500
 total gifts to daughter, son and charity)....................
                                                      ----------
  Balance.....................................................    32,500
Less: Exclusions (three of $3,000 each for daughter, wife and     11,500
 charity and one of $2,500 for son)...........................
                                                      ----------
  Total included amount of gifts for year.....................    21,000
Less: Deductions:
  Charity............................................   $2,000
  Marital............................................    2,000
  Specific exemption.................................    5,000
                                                      ---------
   Total deductions..................................  .......     9,000
                                                      ----------
   Amount of taxable gifts for year..................  .......    12,000
 

    (b) Computation of tax. The steps set forth in paragraph (a) of this 
section are followed.

(1) Amount of taxable gifts for year..........................   $12,000
(2) Total taxable gifts for preceding years...................    50,000
                                                               ---------
(3) Total taxable gifts (item (1) plus item (2))..............    62,000
(4) Tax computed on item (3) (in accordance with the rate          7,545
 schedule in effect for the year 1955)........................
(5) Tax computed in item (2) (in accordance with the rate          5,250
 schedule in effect for the year 1955)........................
                                                               ---------
(6) Tax for the calendar year (item (4) minus item (5)).......     2,295
 

    (iii) Computation of W's tax for calendar year 1955--(a) W's taxable 
gifts for year.

  Total gifts of W............................................         0
Less: Portion of items to be reported by spouse...............         0
                                                     -----------
  Balance.....................................................         0
Gifts of spouse to be included................................   $27,500
                                                     -----------
  Total gifts for year........................................    27,500
Less: Exclusions (two of $3,000 each for daughter and charity     $8,500
 and one of $2,500 for son)...................................
                                                     -----------
  Balance.....................................................    19,000
Less--Deductions:
  Charity...........................................    $2,000
  Marital...........................................         0
                                                     ==========
  Specific exemption................................    17,000
                                                     -------------------
      Total deductions........................................   $19,000
                                                     -----------
      Amount of taxable gifts for year........................         0
 

    (b) Computation of tax. Since W had no ``taxable gifts'' during the 
year, there is no tax.
    Example 4. (i) Facts. The facts are the same as in example 3 except 
that W made outright gifts of $10,000 to her niece and $20,000 to H at 
various times during the year. The amount of taxable gifts made by W in 
preceding calendar years is $75,000, and only $20,000 of her specific 
exemption provided under section 2521, which was in effect at the time, 
was claimed and allowed for preceding years. See Sec. 25.2521-1. The 
remaining specific exemption of $10,000 is claimed for the calendar year 
1955.
    (ii) Computation of H's tax for the calendar year 1955--(a) H's 
taxable gifts for year.

  Total gifts of H............................................   $60,000
Less: Portion of items to be reported by spouse...............    27,500
                                                      ----------
  Balance.....................................................    32,500
Gifts of spouse to be included................................     5,000
                                                      ----------
  Total gifts for year........................................    37,500
Less: Exclusions ($11,500 as shown in example (3) plus $3,000     14,500
 exclusion for gift to niece).................................
                                                      ----------
  Total included amount of gifts for year.....................    23,000
Deductions:
  Charity............................................   $2,000
  Marital............................................    2,000
  Specific exemption.................................    5,000
                                                      ---------
Total deductions..............................................     9,000
                                                      ----------
      Amount of taxable gifts for year........................    14,000
 

    $(b) Computation of tax.

(1) Amount of taxable gifts for year..........................   $14,000
(2) Total taxable gifts for preceding years...................    50,000
                                                               ---------
(3) Total taxable gifts (item (1) plus item (2))..............    64,000
(4) Tax computed on item (3)..................................     7,965
(5) Tax computed on item (2)..................................     5,250
                                                               ---------
(6) Tax for year (item (4) minus item (5))....................     2,715
 

    (iii) Computation of W's tax for the calendar year 1955--(a) W's 
taxable gifts for year.

  Total gifts of W............................................   $30,000
Less: Portion of item--to be reported by spouse (one-half of       5,000
 gift to niece)...............................................
                                                     -----------
  Balance.....................................................    25,000
Gifts of spouse to be included................................    27,500
                                                     -----------
  Total gifts for year........................................    52,500

[[Page 561]]

 
Less: Exclusions (four of $3,000 each for daughter, husband,     $14,500
 niece and charity, and one of $2,500 for son)................
                                                     -----------
  Total included amount of gifts for year.....................    38,000
Deductions:
  Charity...........................................    $2,000
  Marital...........................................    10,000
  Specific exemption................................    10,000
                                                     ----------
      Total deductions........................................    22,000
                                                     -----------
      Amount of taxable gifts for year........................   $16,000
 

    (b) Computation of tax.

(1) Amount of taxable gifts for year..........................    16,000
(2) Total taxable gifts for preceding years...................    75,000
                                                               ---------
(3) Total taxable gifts.......................................    91,000
                                                               =========
(4) Tax computed on item (3)..................................    13,635
(5) Tax computed on item (2)..................................    10,275
                                                               ---------
(6) Tax for year (item (4) minus item (5))....................     3,360
 

    Example 5. A makes gifts (other than gifts of future interests in 
property) to B in the first quarter of 1971 of $43,000 and in the second 
quarter of 1971 of $60,000. A gave to C in the second quarter of 1971 
land valued at $11,000. The full amount of A's specific exemption 
provided under section 2521 was claimed and allowed in 1956. In 1966, A 
made taxable gifts totaling $21,000 on which gift tax was timely paid 
and no other taxable gifts were made by A in any other year preceding 
1971. The gift tax return due for the first calendar quarter of 1971 was 
timely filed and the tax paid. With respect to the gifts made to B in 
1971, the $3,000 annual gift tax exclusion provided by section 2503(b) 
is applied in its entirety against the $43,000 gift made to B in the 
first quarter and therefore is not available to offset the $60,000 gift 
made to B in the second quarter (See Sec. 25.2503-2(b)). A further 
$3,000 annual gift tax exclusion is available, however, to offset the 
$11,000 gift made to C in the second quarter of 1971. The computation of 
the gift tax for the second calendar quarter of 1971 due on August 15, 
1971 (following the steps set forth in paragraph (a) of this section) is 
shown below:

(1) Amount of taxable gifts for the second calendar quarter of   $68,000
 1971 ($60,000+$11,000-$3,000)................................
(2) Total amount of taxable gifts for preceding calendar          61,000
 periods ($43,000 -$3,000+$21,000)............................
                                                               ---------
(3) Total taxable gifts.......................................   129,000
                                                               =========
(4) Tax computed on item 3 (in accordance with rate schedule      22,050
 in effect for the year 1971..................................
(5) Tax computed on item 2 (using same rate schedule).........     7,335
                                                               ---------
(6) Tax for second calendar quarter of 1971 (item 4 minus item    14,715
 5)...........................................................
 

    Example 6. A makes gifts (other than gifts of future interests in 
property) during the calendar year 1982 of $160,000 to B and $100,000 to 
C. Two exclusions of $10,000 each are allowable, in accordance with the 
provisions of section 2503(b), which results in taxable gifts for 1982 
of $240,000. In the first calendar quarter of 1978, A made taxable gifts 
totaling $100,000 on which gift tax was paid. For the calendar year 
1969, A made taxable gifts totaling $50,000. The full amount of A's 
specific exemption provided under section 2521, which was in effect at 
the time, was claimed and allowed in 1968. The computation of the gift 
tax for the calendar period 1982 (following the steps set forth in 
paragraph (a) of this section) is shown below.

    (1) Amount of taxable gifts for the calendar year 1982, $240,000.
    (2) Total amount of taxable gifts for preceding calendar periods 
($100,000+$50,000), $150,000.
    (3) Total taxable gifts, $390,000.
    (4) Tax computed on item 3 (in accordance with the rate schedule in 
effect for the year 1982), $118,400.
    (5) Tax computed on item 2 (using same rate schedule), $38,800.
    (6) Tax for year 1982 (item 4 minus item 5), $79,600.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28725, Dec. 29, 1972; T.D. 7910, 48 FR 40372, Sept. 7, 1983; T.D. 8395, 
57 FR 4255, Feb. 4, 1992]



Sec. 25.2502-2  Donor primarily liable for tax.

    Section 2502(d) provides that the donor shall pay the tax. If the 
donor dies before the tax is paid the amount of the tax is a debt due 
the United States from the decedent's estate and his executor or 
administrator is responsible for its payment out of the estate. (See 
Sec. 25.6151-1 for the time and place for paying the tax.) If there is 
no duly qualified executor or administrator, the heirs, legatees, 
devisees, and distributees are liable for and required to pay the tax to 
the extent of the value of their inheritances, bequests, devises, or 
distributive shares of the donor's estate. If a husband and wife 
effectively signify consent, under section 2513, to have gifts made to a 
third party during any ``calendar period'' (as defined in Sec. 25.2502-
1(c)(1)) considered as made one-half by each, the liability with respect 
to the gift tax of each spouse for that calendar period is joint and 
several (see Sec. 25.2513-4). As to the personal liability of the 
donee, see paragraph (b) of Sec. 301.6324-1 of this chapter 
(Regulations on Procedure and Administration). As to the

[[Page 562]]

personal liability of the executor or administrator, see section 3467 of 
the Revised Statutes (31 U.S.C. 192), which reads as follows:

    Every executor, administrator, or assignee, or other person, who 
pays, in whole or in part, any debt due by the person or estate for whom 
or for which he acts before he satisfies and pays the debts due to the 
United States from such person or estate, shall become answerable in his 
own person and estate to the extent of such payments for the debts so 
due to the United States, or for so much thereof as may remain due and 
unpaid.


As used in such section 3467, the word ``debt'' includes a beneficiary's 
distributive share of an estate. Thus if an executor pays a debt due by 
the estate which is being administered by him or distributes any portion 
of the estate before there is paid all of the gift tax which he has a 
duty to pay, the executor is personally liable, to the extent of the 
payment or distribution, for so much of the gift tax as remains due and 
unpaid.

[T.D. 7238, 37 FR 28726, Dec. 29, 1972, as amended by T.D. 7910, 48 FR 
40373, Sept. 7, 1983]



Sec. 25.2503-1  General definitions of ``taxable gifts'' and of ``total
amount of gifts.''

    The term taxable gifts means the ``total amount of gifts'' made by 
the donor during the ``calendar period'' (as defined in Sec. 25.2502-
1(c)(1)) less the deductions provided for in sections 2521 (as in effect 
before its repeal by the Tax Reform Act of 1976), 2522, and 2523 
(specific exemption, charitable, etc., gifts and the marital deduction, 
respectively). The term ``total amount of gifts'' means the sum of the 
values of the gifts made during the calendar period less the amounts 
excludable under section 2503(b). See Sec. 25.2503-2. The entire value 
of any gift of a future interest in property must be included in the 
total amount of gifts for the calendar period in which the gift is made. 
See Sec. 25.2503-3.

[T.D. 7910, 48 FR 40373, Sept. 7, 1983]



Sec. 25.2503-2  Exclusions from gifts.

    (a) Except as provided in paragraph (f) of this section (involving 
gifts to a noncitizen spouse), the first $10,000 of gifts made to any 
one donee during the calendar year 1982 or any calendar year thereafter, 
except gifts of future interests in property as defined in Sec. Sec. 
25.2503-3 and 25.2503-4, is excluded in determining the total amount of 
gifts for the calendar year. In the case of a gift in trust the 
beneficiary of the trust is the donee.
    (b) Gifts made after December 31, 1970 and before January 1, 1982. 
In computing taxable gifts for the calendar quarter, in the case of 
gifts (other than gifts of future interests in property) made to any 
person by the donor during any calendar quarter of the calendar year 
1971 or any subsequent calendar year, $3,000 of such gifts to such 
person less the aggregate of the amounts of such gifts to such person 
during all preceding calendar quarters of any such calendar year shall 
not be included in the total amount of gifts made during such quarter. 
Thus, the first $3,000 of gifts made to any one donee during the 
calendar year 1971 or any calendar year thereafter, except gifts of 
future interests in property as defined in Sec. Sec. 25.2503-3 and 
25.2503-4, is excluded in determining the total amount of gifts for a 
calendar quarter. In the case of a gift in trust the beneficiary of the 
trust is the donee. The application of this paragraph may be illustrated 
by the following examples:

    Example (1). A made a gift of $3,000 to B on January 8, 1971, and on 
April 20, 1971, gave B an additional gift of $10,000. A made no other 
gifts in 1971. The total amount of gifts made by A during the second 
quarter of 1971 is $10,000 because the $3,000 exclusion provided by 
section 2503(b) is first applied to the January 8th gift.
    Example (2). A gave $2,000 to B on January 8, 1971, and on April 20, 
1971, gave him $10,000. The total amount of gifts made by A during the 
second quarter of 1971 is $9,000 because only $2,000 of the $3,000 
exclusion provided by section 2503(b) was applied against the January 
8th gift; $1,000 was available to offset other gifts (except gifts of a 
future interest) made to B during 1971.

    (c) Gifts made before January 1, 1971. The first $3,000 of gifts 
made to any one donee during the calendar year 1955, or 1970, or any 
calendar year intervening between calendar year 1955 and calendar year 
1970, except gifts of future interests in property as defined in 
Sec. Sec. 25.2503-3 and 25.2503-4, is excluded in determining the total 
amount of gifts

[[Page 563]]

for the calendar year. In the case of a gift in trust the beneficiary of 
the trust is the donee.
    (d) Transitional rule. The increased annual gift tax exclusion as 
defined in section 2503(b) shall not apply to any gift subject to a 
power of appointment granted under an instrument executed before 
September 12, 1981, and not amended on or after that date, provided 
that: (1) The power is exercisable after December 31, 1981, (2) the 
power is expressly defined in terms of, or by reference to, the amount 
of the gift tax exclusion under section 2503(b) (or the corresponding 
provision of prior law), and (3) there is not enacted a State law 
applicable to such instrument which construes the power of appointment 
as referring to the increased annual gift tax exclusion provided by the 
Economic Recovery Tax Act of 1981.
    (e) Examples. The provisions of paragraph (d) of this section may be 
illustrated by the following examples:

    Example (1). A executed an instrument to create a trust for the 
benefit of B on July 2, 1981. The trust granted to B the power, for a 
period of 90 days after any transfer of cash to the trust, to withdraw 
from the trust the lesser of the amount of the transferred cash or the 
amount equal to the section 2503(b) annual gift tax exclusion. The trust 
was not amended on or after September 12, 1981. No state statute has 
been enacted which construes the power of appointment as referring to 
the increased annual gift tax exclusion provided by the Economic 
Recovery Tax Act of 1981. Accordingly, the maximum annual gift tax 
exclusion applicable to any gift subject to the exercise of the power of 
appointment is $3,000.
    Example (2). Assume the same facts as in example (1) except that the 
power of appointment granted in the trust refers to section 2503(b) as 
amended at any time. The maximum annual gift tax exclusion applicable to 
any gift subject to the exercise of the power of appointment is $10,000.

    (f) Special rule in the case of gifts made on or after July 14, 
1988, to a spouse who is not a United States citizen--(1) In general. 
Subject to the special rules set forth at Sec. 20.2056A-1(c) of this 
chapter, in the case of gifts made on or after July 14, 1988, if the 
donee of the gift is the donor's spouse and the donee spouse is not a 
citizen of the United States at the time of the gift, the first $100,000 
of gifts made during the calendar year to the donee spouse (except gifts 
of future interests) is excluded in determining the total amount of 
gifts for the calendar year. The rule of this paragraph (f) applies 
regardless of whether the donor is a citizen or resident of the United 
States for purposes of chapter 12 of the Internal Revenue Code.
    (2) Gifts made after June 29, 1989. In the case of gifts made after 
June 29, 1989, the $100,000 exclusion provided in paragraph (f)(1) of 
this section applies only if the gift in excess of the otherwise 
applicable annual exclusion is in a form that qualifies for the gift tax 
marital deduction under section 2523(a) but for the provisions of 
section 2523(i)(1) (disallowing the marital deduction if the donee 
spouse is not a United States citizen.) See Sec. 25.2523(i)-1(d), 
Example 4.
    (3) Effective date. This paragraph (f) is effective with respect to 
gifts made after August 22, 1995.

[T.D. 7238, 37 FR 28727, Dec. 29, 1972, as amended by T.D. 7910, 48 FR 
40373, Sept. 7, 1983; T.D. 7978, 49 FR 38541, Oct. 1, 1984; T.D. 8612, 
60 FR 43552, Aug. 22, 1995]



Sec. 25.2503-3  Future interests in property.

    (a) No part of the value of a gift of a future interest may be 
excluded in determining the total amount of gifts made during the 
``calendar period'' (as defined in Sec. 25.2502-1(c)(1)). ``Future 
interest'' is a legal term, and includes reversions, remainders, and 
other interests or estates, whether vested or contingent, and whether or 
not supported by a particular interest or estate, which are limited to 
commence in use, possession, or enjoyment at some future date or time. 
The term has no reference to such contractual rights as exist in a bond, 
note (though bearing no interest until maturity), or in a policy of life 
insurance, the obligations of which are to be discharged by payments in 
the future. But a future interest or interests in such contractual 
obligations may be created by the limitations contained in a trust or 
other instrument of transfer used in effecting a gift.
    (b) An unrestricted right to the immediate use, possession, or 
enjoyment

[[Page 564]]

of property or the income from property (such as a life estate or term 
certain) is a present interest in property. An exclusion is allowable 
with respect to a gift of such an interest (but not in excess of the 
value of the interest). If a donee has received a present interest in 
property, the possibility that such interest may be diminished by the 
transfer of a greater interest in the same property to the donee through 
the exercise of a power is disregarded in computing the value of the 
present interest, to the extent that no part of such interest will at 
any time pass to any other person (see example (4) of paragraph (c) of 
this section). For an exception to the rule disallowing an exclusion for 
gifts of future interests in the case of certain gifts to minors, see 
Sec. 25.2503-4.
    (c) The operation of this section may be illustrated by the 
following examples:

    Example (1). Under the terms of a trust created by A the trustee is 
directed to pay the net income to B, so long as B shall live. The 
trustee is authorized in his discretion to withhold payments of income 
during any period he deems advisable and add such income to the trust 
corpus. Since B's right to receive the income payments is subject to the 
trustee's discretion, it is not a present interest and no exclusion is 
allowable with respect to the transfer in trust.
    Example (2). C transfers certain insurance policies on his own life 
to a trust created for the benefit of D. Upon C's death the proceeds of 
the policies are to be invested and the net income therefrom paid to D 
during his lifetime. Since the income payments to D will not begin until 
after C's death the transfer in trust represents a gift of a future 
interest in property against which no exclusion is allowable.
    Example (3). Under the terms of a trust created by E the net income 
is to be distributed to E's three children in such shares as the 
trustee, in his uncontrolled discretion deems advisable. While the terms 
of the trust provide that all of the net income is to be distributed, 
the amount of income any one of the three beneficiaries will receive 
rests entirely within the trustee's discretion and cannot be presently 
ascertained. Accordingly, no exclusions are allowable with respect to 
the transfers to the trust.
    Example (4). Under the terms of a trust the net income is to be paid 
to F for life, with the remainder payable to G on F's death. The trustee 
has the uncontrolled power to pay over the corpus to F at any time. 
Although F's present right to receive the income may be terminated, no 
other person has the right to such income interest. Accordingly, the 
power in the trustee is disregarded in determining the value of F's 
present interest. The power would not be disregarded to the extent that 
the trustee during F's life could distribute corpus to persons other 
than F.
    Example (5). The corpus of a trust created by J consists of certain 
real property, subject to a mortgage. The terms of the trust provide 
that the net income from the property is to be used to pay the mortgage. 
After the mortgage is paid in full the net income is to be paid to K 
during his lifetime. Since K's right to receive the income payments will 
not begin until after the mortgage is paid in full the transfer in trust 
represents a gift of a future interest in property against which no 
exclusion is allowable.
    Example (6). L pays premiums on a policy of insurance on his life, 
all the incidents of ownership in the policy (including the right to 
surrender the policy) are vested in M. The payment of premiums by L 
constitutes a gift of a present interest in property.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28727, Dec. 29, 1972; T.D. 7910, 48 FR 40373, Sept. 7, 1983]



Sec. 25.2503-4  Transfer for the benefit of a minor.

    (a) Section 2503(c) provides that no part of a transfer for the 
benefit of a donee who has not attained the age of 21 years on the date 
of the gift will be considered a gift of a future interest in property 
if the terms of the transfer satisfy all of the following conditions:
    (1) Both the property itself and its income may be expended by or 
for the benefit of the donee before he attains the age of 21 years;
    (2) Any portion of the property and its income not disposed of under 
subparagraph (1) of this paragraph will pass to the donee when he 
attains the age of 21 years; and
    (3) Any portion of the property and its income not disposed of under 
subparagraph (1) of this paragraph will be payable either to the estate 
of the donee or as he may appoint under a general power of appointment 
as defined in section 2514(c) if he dies before attaining the age of 21 
years.
    (b) Either a power of appointment exercisable by the donee by will 
or a power of appointment exercisable by the donee during his lifetime 
will satisfy the conditions set forth in paragraph (a)(3) of this 
section. However, if

[[Page 565]]

the transfer is to qualify for the exclusion under this section, there 
must be no restrictions of substance (as distinguished from formal 
restrictions of the type described in paragraph (g)(4) of Sec. 
25.2523(e)-1 by the terms of the instrument of transfer on the exercise 
of the power by the donee. However, if the minor is given a power of 
appointment exercisable during lifetime or is given a power of 
appointment exercisable by will, the fact that under the local law a 
minor is under a disability to exercise an intervivos power or to 
execute a will does not cause the transfer to fail to satisfy the 
conditions of section 2503(c). Further, a transfer does not fail to 
satisfy the conditions of section 2503(c) by reason of the mere fact 
that--
    (1) There is left to the discretion of a trustee the determination 
of the amounts, if any, of the income or property to be expended for the 
benefit of the minor and the purpose for which the expenditure is to be 
made, provided there are no substantial restrictions under the terms of 
the trust instrument on the exercise of such discretion;
    (2) The donee, upon reaching age 21, has the right to extend the 
term of the trust; or
    (3) The governing instrument contains a disposition of the property 
or income not expended during the donee's minority to persons other than 
the donee's estate in the event of the default of appointment by the 
donee.
    (c) A gift to a minor which does not satisfy the requirements of 
section 2503(c) may be either a present or a future interest under the 
general rules of Sec. 25.2503-3. Thus, for example, a transfer of 
property in trust with income required to be paid annually to a minor 
beneficiary and corpus to be distributed to him upon his attaining the 
age of 25 is a gift of a present interest with respect to the right to 
income but is a gift of a future interest with respect to the right to 
corpus.



Sec. 25.2503-6  Exclusion for certain qualified transfer for tuition or
medical expenses.

    (a) In general. Section 2503(e) provides that any qualified transfer 
after December 31, 1981, shall not be treated as a transfer of property 
by gift for purposes of Chapter 12 of Subtitle B of the Code. Thus, a 
qualified transfer on behalf of any individual is excluded in 
determining the total amount of gifts in calendar year 1982 and 
subsequent years. This exclusion is available in addition to the $10,000 
annual gift tax exclusion. Furthermore, an exclusion for a qualified 
transfer is permitted without regard to the relationship between the 
donor and the donee.
    (b) Qualified transfers--(1) Definition. For purposes of this 
paragraph, the term ``qualified transfer'' means any amount paid on 
behalf of an individual--
    (i) As tuition to a qualifying educational organization for the 
education or training of that individual, or
    (ii) To any person who provides medical care with respect to that 
individual as payment for the qualifying medical expenses arising from 
such medical care.
    (2) Tuition expenses. For purposes of paragraph (b)(1)(i) of this 
section, a qualifying educational organization is one which normally 
maintains a regular faculty and curriculum and normally has a regularly 
enrolled body of pupils or students in attendance at the place where its 
educational activities are regularly carried on. See section 
170(b)(1)(A)(ii) and the regulations thereunder. The unlimited exclusion 
is permitted for tuition expenses of full-time or part-time students 
paid directly to the qualifying educational organization providing the 
education. No unlimited exclusion is permitted for amounts paid for 
books, supplies, dormitory fees, board, or other similar expenses which 
do not constitute direct tuition costs.
    (3) Medical expenses. For purposes of paragraph (b)(1)(ii) of this 
section, qualifying medical expenses are limited to those expenses 
defined in section 213(d) (section 213(e) prior to January 1, 1984) and 
include expenses incurred for the diagnosis, cure, mitigation, treatment 
or prevention of disease, or for the purpose of affecting any structure 
or function of the body or for transportation primarily for and 
essential to medical care. In addition, the unlimited exclusion from the 
gift tax

[[Page 566]]

includes amounts paid for medical insurance on behalf of any individual. 
The unlimited exclusion from the gift tax does not apply to amounts paid 
for medical care that are reimbursed by the donee's insurance. Thus, if 
payment for a medical expense is reimbursed by the donee's insurance 
company, the donor's payment for that expense, to the extent of the 
reimbursed amount, is not eligible for the unlimited exclusion from the 
gift tax and the gift is treated as having been made on the date the 
reimbursement is received by the donee.
    (c) Examples. The provisions of paragraph (b) of this section may be 
illustrated by the following examples.

    Example (1). In 1982, A made a tuition payment directly to a foreign 
university on behalf of B. A had no legal obligation to make this 
payment. The foreign university is described in section 170(b)(1)(A)(ii) 
of the Code. A's tuition payment is exempt from the gift tax under 
section 2503(e) of the Code.
    Example (2). A transfers $100,000 to a trust the provisions of which 
state that the funds are to be used for tuition expenses incurred by A's 
grandchildren. A's transfer to the trust is a completed gift for Federal 
gift tax purposes and is not a direct transfer to an educational 
organization as provided in paragraph (b)(2) of this section and does 
not qualify for the unlimited exclusion from gift tax under section 
2503(e).
    Example (3). C was seriously injured in an automobile accident in 
1982. D, who is unrelated to C, paid C's various medical expenses by 
checks made payable to the physician. D also paid the hospital for C's 
hospital bills. These medical and hospital expenses were types described 
in section 213 of the Code and were not reimbursed by insurance or 
otherwise. Because the medical and hospital bills paid in 1982 for C 
were medical expenses within the meaning of section 213 of the Code, and 
since they were paid directly by D to the person rendering the medical 
care, they are not treated as transfers subject to the gift tax.
    Example (4). Assume the same facts as in example (2) except that 
instead of making the payments directly to the medical service provider, 
D reimbursed C for the medical expenses which C had previously paid. The 
payments made by D to C do not qualify for the exclusion under section 
2503(e) of the Code and are subject to the gift tax on the date the 
reimbursement is received by C to the extent the reimbursement and all 
other gifts from D to C during the year of the reimbursement exceed the 
$10,000 annual exclusion provided in section 2503(b).

[T.D. 7978, 49 FR 38541, Oct. 1, 1984; 49 FR 39843, Oct. 11, 1984]



Sec. 25.2504-1  Taxable gifts for preceding calendar periods.

    (a) In order to determine the correct gift tax liability for any 
calendar period it is necessary to ascertain the correct amount, if any, 
of the aggregate sum of the taxable gifts for each of the ``preceding 
calendar periods'' (as defined in Sec. 25.2502-1(c)(2)). See paragraph 
(a) of Sec. 25.2502-1. The term ``aggregate sum of the taxable gifts 
for each of the preceding calendar periods'' means the correct aggregate 
of such gifts, not necessarily that returned for those calendar periods 
and in respect of which tax was paid. All transfers that constituted 
gifts in prior calendar periods under the laws, including the provisions 
of law relating to exclusions from gifts, in effect at the time the 
transfers were made are included in determining the amount of taxable 
gifts for preceding calendar periods. The deductions other than for the 
specific exemption (see paragraph (b) of this section) allowed by the 
laws in effect at the time the transfers were made also are taken into 
account in determining the aggregate sum of the taxable gifts for 
preceding calendar periods. (The allowable exclusion from a gift is 
$5,000 for years before 1939, $4,000 for the calendar years 1939 through 
1942, $3,000 for the calendar years 1943 through 1981, and $10,000 
thereafter.)
    (b) In determining the aggregate sum of the taxable gifts for the 
``preceding calendar periods'' (as defined in Sec. 25.2502-1(c)(2)), 
the total of the amounts allowed as deductions for the specific 
exemption, under section 2521 (as in effect prior to its repeal by the 
Tax Reform Act of 1976) and the corresponding provisions of prior laws, 
shall not exceed $30,000. Thus, if the only prior gifts by a donor were 
made in 1940 and 1941 (at which time the specific exemption allowable 
was $40,000), and if in the donor's returns for those years the donor 
claimed deductions totaling $40,000 for the specific exemption and 
reported taxable gifts totaling $110,000, then in determining the 
aggregate sum of the taxable gifts for the

[[Page 567]]

preceding calendar periods, the deductions for the specific exemption 
cannot exceed $30,000, and the donor's taxable gifts for such periods 
will be $120,000 (instead of the $110,000 reported on the donor's 
returns). (The allowable deduction for the specific exemption was 
$50,000 for calendar years before 1936, $40,000 for calendar years 1936 
through 1942, and $30,000 for 1943 through 1976.)
    (c) If the donor and the donor's spouse consented to have gifts made 
to third parties considered as made one-half by each spouse, pursuant to 
the provisions of section 2513 or section 1000(f) of the Internal 
Revenue Code of 1939 (which corresponds to section 2513), these 
provisions shall be taken into account in determining the aggregate sum 
of the taxable gifts for the preceding calendar periods (under paragraph 
(a) of this section).
    (d) If interpretations of the gift tax law in preceding calendar 
periods resulted in the erroneous inclusion of property for gift tax 
purposes that should have been excluded, or the erroneous exclusion of 
property that should have been included, adjustments must be made in 
order to arrive at the correct aggregate of taxable gifts for the 
preceding calendar periods (under paragraph (a) of this section). 
However, see section 1000 (e) and (g) of the 1939 Code relating to 
certain discretionary trusts and reciprocal trusts. However, see Sec. 
25.2504-2(b) regarding certain gifts made after August 5, 1997.

[T.D. 7238, 37 FR 28727, Dec. 29, 1972, as amended by T.D. 7910, 48 FR 
40373, Sept. 7, 1983; T.D. 8845, 64 FR 67770, Dec. 3, 1999]



Sec. 25.2504-2  Determination of gifts for preceding calendar periods.

    (a) Gifts made before August 6, 1997. If the time has expired within 
which a tax may be assessed under chapter 12 of the Internal Revenue 
Code (or under corresponding provisions of prior laws) on the transfer 
of property by gift made during a preceding calendar period, as defined 
in Sec. 25.2502-1(c)(2), the gift was made prior to August 6, 1997, and 
a tax has been assessed or paid for such prior calendar period, the 
value of the gift, for purposes of arriving at the correct amount of the 
taxable gifts for the preceding calendar periods (as defined under Sec. 
25.2504-1(a)), is the value used in computing the tax for the last 
preceding calendar period for which a tax was assessed or paid under 
chapter 12 of the Internal Revenue Code or the corresponding provisions 
of prior laws. However, this rule does not apply where no tax was paid 
or assessed for the prior calendar period. Furthermore, this rule does 
not apply to adjustments involving issues other than valuation. See 
Sec. 25.2504-1(d).
    (b) Gifts made or section 2701(d) taxable events occurring after 
August 5, 1997. If the time has expired under section 6501 within which 
a gift tax may be assessed under chapter 12 of the Internal Revenue Code 
(or under corresponding provisions of prior laws) on the transfer of 
property by gift made during a preceding calendar period, as defined in 
Sec. 25.2502-1(c)(2), or with respect to an increase in taxable gifts 
required under section 2701(d) and Sec. 25.2701-4, and the gift was 
made, or the section 2701(d) taxable event occurred, after August 5, 
1997, the amount of the taxable gift or the amount of the increase in 
taxable gifts, for purposes of determining the correct amount of taxable 
gifts for the preceding calendar periods (as defined in Sec. 25.2504-
1(a)), is the amount that is finally determined for gift tax purposes 
(within the meaning of Sec. 20.2001-1(c) of this chapter) and such 
amount may not be thereafter adjusted. The rule of this paragraph (b) 
applies to adjustments involving all issues relating to the gift 
including valuation issues and legal issues involving the interpretation 
of the gift tax law. For purposes of determining if the time has expired 
within which a gift tax may be assessed, see Sec. 301.6501(c)-1(e) and 
(f) of this chapter.
    (c) Examples. The following examples illustrate the rules of 
paragraphs (a) and (b) of this section:

    Example 1. (i) Facts. In 1996, A transferred closely-held stock in 
trust for the benefit of B, A's child. A timely filed a Federal gift tax 
return reporting the 1996 transfer to B. No gift tax was assessed or 
paid as a result of the gift tax annual exclusion and the application of 
A's available unified credit. In 2001, A transferred additional closely-
held stock to the trust. A's Federal gift tax return reporting the 2001 
transfer was timely filed and the transfer was adequately disclosed 
under Sec. 301.6501(c)-1(f)(2) of this chapter. In computing the amount 
of taxable gifts, A claimed annual exclusions with respect to

[[Page 568]]

the transfers in 1996 and 2001. In 2003, A transfers additional property 
to B and timely files a Federal gift tax return reporting the gift. (ii) 
Application of the rule limiting adjustments to prior gifts. Under 
section 2504(c), in determining A's 2003 gift tax liability, the amount 
of A's 1996 gift can be adjusted for purposes of computing prior taxable 
gifts, since that gift was made prior to August 6, 1997, and therefore, 
the provisions of paragraph (a) of this section apply. Adjustments can 
be made with respect to the valuation of the gift and legal issues 
presented (for example, the availability of the annual exclusion with 
respect to the gift). However, A's 2001 transfer was adequately 
disclosed on a timely filed gift tax return and, thus, under paragraph 
(b) of this section, the amount of the 2001 taxable gift by A may not be 
adjusted (either with respect to the valuation of the gift or any legal 
issue) for purposes of computing prior taxable gifts in determining A's 
2003 gift tax liability.
    Example 2. (i) Facts. In 1996, A transferred closely-held stock to 
B, A's child. A timely filed a Federal gift tax return reporting the 
1996 transfer to B and paid gift tax on the value of the gift reported 
on the return. On August 1, 1997, A transferred additional closely-held 
stock to B in exchange for a promissory note signed by B. Also, on 
September 10, 1997, A transferred closely-held stock to C, A's other 
child. On April 15, 1998, A timely filed a gift tax return for 1997 
reporting the September 10, 1997, transfer to C and, under Sec. 
301.6501(c)-1(f)(2) of this chapter, adequately disclosed that transfer 
and paid gift tax with respect to the transfer. However, A believed that 
the transfer to B on August 1, 1997, was for full and adequate 
consideration and A did not report the transfer to B on the 1997 Federal 
gift tax return. In 2002, A transfers additional property to B and 
timely files a Federal gift tax return reporting the gift.
    (ii) Application of the rule limiting adjustments to prior gifts. 
Under section 2504(c), in determining A's 2002 gift tax liability, the 
value of A's 1996 gift cannot be adjusted for purposes of computing the 
value of prior taxable gifts, since that gift was made prior to August 
6, 1997, and a timely filed Federal gift tax return was filed on which a 
gift tax was assessed and paid. However, A's prior taxable gifts can be 
adjusted to reflect the August 1, 1997, transfer because, although a 
gift tax return for 1997 was timely filed and gift tax was paid, under 
Sec. 301.6501(c)-1(f) of this chapter the period for assessing gift tax 
with respect to the August 1, 1997, transfer did not commence to run 
since that transfer was not adequately disclosed on the 1997 gift tax 
return. Accordingly, a gift tax may be assessed with respect to the 
August 1, 1997, transfer and the amount of the gift would be reflected 
in prior taxable gifts for purposes of computing A's gift tax liability 
for 2002. A's September 10, 1997, transfer to C was adequately disclosed 
on a timely filed gift tax return and, thus, under paragraph (b) of this 
section, the amount of the September 10, 1997, taxable gift by A may not 
be adjusted for purposes of computing prior taxable gifts in determining 
A's 2002 gift tax liability.
    Example 3. (i) Facts. In 1994, A transferred closely-held stock to B 
and C, A's children. A timely filed a Federal gift tax return reporting 
the 1994 transfers to B and C and paid gift tax on the value of the 
gifts reported on the return. Also in 1994, A transferred closely-held 
stock to B in exchange for a bona fide promissory note signed by B. A 
believed that the transfer to B in exchange for the promissory note was 
for full and adequate consideration and A did not report that transfer 
to B on the 1994 Federal gift tax return. In 2002, A transfers 
additional property to B and timely files a Federal gift tax return 
reporting the gift.
    (ii) Application of the rule limiting adjustments to prior gifts. 
Under section 2504(c), in determining A's 2002 gift tax liability, the 
value of A's 1994 gifts cannot be adjusted for purposes of computing 
prior taxable gifts because those gifts were made prior to August 6, 
1997, and a timely filed Federal gift tax return was filed with respect 
to which a gift tax was assessed and paid, and the period of limitations 
on assessment has expired. The provisions of paragraph (a) of this 
section apply to the 1994 transfers. However, for purposes of 
determining A's adjusted taxable gifts in computing A's estate tax 
liability, the gifts may be adjusted. See Sec. 20.2001-1(a) of this 
chapter.

    (d) Effective dates. Paragraph (a) of this section applies to 
transfers of property by gift made prior to August 6, 1997. Paragraphs 
(b) and (c) of this section apply to transfers of property by gift made 
after August 5, 1997, if the gift tax return for the calendar period in 
which the transfer is reported is filed after December 3, 1999.

[T.D. 8845, 64 FR 67770, Dec. 3, 1999]



Sec. 25.2505-0T  Table of contents (temporary).

    This section lists the table of contents for Sec. Sec. 25.2505-1T 
and 25.2505-2T.

Sec. 25.2505-1T Unified credit against gift tax; in general 
          (temporary).

    (a) General rule.
    (b) Applicable rate of tax.
    (c) Special rule in case of certain gifts made before 1977.
    (d) Credit limitation.
    (e) Effective/applicability date.
    (f) Expiration date.


[[Page 569]]


Sec. 25.2505-2T Gifts made by a surviving spouse having a DSUE amount 
          available (temporary).

    (a) Donor who is surviving spouse is limited to DSUE amount of last 
deceased spouse.
    (1) In general.
    (2) No DSUE amount available from last deceased spouse.
    (3) Identity of last deceased spouse unchanged by subsequent 
marriage or divorce.
    (b) Manner in which DSUE amount is applied.
    (c) Special rule in case of multiple deceased spouses and 
previously-applied DSUE amount.
    (1) In general.
    (2) Example.
    (d) Date DSUE amount taken into consideration by donor who is a 
surviving spouse.
    (1) General rule.
    (2) Special rule when property passes to surviving spouse in a 
qualified domestic trust.
    (e) Authority to examine returns of deceased spouses.
    (f) Availability of DSUE amount for nonresidents who are not 
citizens.
    (g) Effective/applicability date.
    (h) Expiration date.

[T.D. 9593, 77 FR 36161, June 18, 2012]



Sec. 25.2505-1T  Unified credit against gift tax; in general 
(temporary).

    (a) General rule. Section 2505(a) allows a citizen or resident of 
the United States a credit against the tax imposed by section 2501 for 
each calendar year. The allowable credit is the applicable credit amount 
in effect under section 2010(c) that would apply if the donor died as of 
the end of the calendar year, reduced by the sum of the amounts 
allowable as a credit against the gift tax due for all preceding 
calendar periods. See Sec. Sec. 25.2505-2T, 20.2010-1T, and 20.2010-2T 
of this chapter for additional rules and definitions related to 
determining the applicable credit amount in effect under section 
2010(c).
    (b) Applicable rate of tax. In determining the amounts allowable as 
a credit against the gift tax due for all preceding calendar periods, 
the unified rate schedule under section 2001(c) in effect for such 
calendar year applies instead of the rates of tax actually in effect for 
preceding calendar periods. See sections 2505(a) and 2502(a)(2).
    (c) Special rule in case of certain gifts made before 1977. The 
applicable credit amount allowable under paragraph (a) of this section 
must be reduced by an amount equal to 20 percent of the aggregate amount 
allowed as a specific exemption under section 2521 (as in effect before 
its repeal by the Tax Reform Act of 1976) for gifts made by the decedent 
after September 8, 1976, and before January 1, 1977.
    (d) Credit limitation. The applicable credit amount allowed under 
paragraph (a) of this section for any calendar year shall not exceed the 
amount of the tax imposed by section 2501 for such calendar year.
    (e) Effective/applicability date. Paragraph (a) of this section 
applies to gifts made on or after January 1, 2011. Paragraphs (b), (c), 
and (d) of this section apply to gifts made on or after June 15, 2012.
    (f) Expiration date. The applicability of this section expires on or 
before June 15, 2015.

[T.D. 9593, 77 FR 36161, June 18, 2012]



Sec. 25.2505-2T  Gifts made by a surviving spouse having a DSUE amount
available (temporary).

    (a) Donor who is surviving spouse is limited to DSUE amount of last 
deceased spouse--(1) In general. In computing a surviving spouse's gift 
tax liability with regard to a transfer subject to the tax imposed by 
section 2501 (taxable gift), a deceased spousal unused exclusion (DSUE) 
amount of a decedent, computed under Sec. 20.2010-2T(c) of this 
chapter, is included in determining the surviving spouse's applicable 
exclusion amount under section 2010(c)(2), provided:
    (i) Such decedent is the last deceased spouse of such surviving 
spouse within the meaning of Sec. 20.2010-1T(d)(5) of this chapter at 
the time of the surviving spouse's taxable gift; and
    (ii) The executor of the decedent's estate elected portability (see 
Sec. 20.2010-2T(a) and (b) of this chapter for applicable 
requirements).
    (2) No DSUE amount available from last deceased spouse. If on the 
date of the surviving spouse's taxable gift the last deceased spouse of 
such surviving spouse had no DSUE amount or if the executor of the 
estate of such last deceased spouse did not elect portability, the 
surviving spouse has no DSUE amount (except as and to the extent

[[Page 570]]

provided in paragraph (c)(1)(ii) of this section) to be included in 
determining his or her applicable exclusion amount, even if the 
surviving spouse previously had a DSUE amount available from another 
decedent who, prior to the death of the last deceased spouse, was the 
last deceased spouse of such surviving spouse. See paragraph (c) of this 
section for a special rule in the case of multiple deceased spouses.
    (3) Identity of last deceased spouse unchanged by subsequent 
marriage or divorce. A decedent is the last deceased spouse (as defined 
in Sec. 20.2010-1T(d)(5) of this chapter) of a surviving spouse even 
if, on the date of the surviving spouse's taxable gift, the surviving 
spouse is married to another (then-living) individual. If a surviving 
spouse marries again and that marriage ends in divorce or an annulment, 
the subsequent death of the divorced spouse does not end the status of 
the prior deceased spouse as the last deceased spouse of the surviving 
spouse. The divorced spouse, not being married to the surviving spouse 
at death, is not the last deceased spouse as that term is defined in 
Sec. 20.2010-1T(d)(5) of this chapter.
    (b) Manner in which DSUE amount is applied. If a donor who is a 
surviving spouse makes a taxable gift and a DSUE amount is included in 
determining the surviving spouse's applicable exclusion amount under 
section 2010(c)(2), such surviving spouse will be considered to apply 
such DSUE amount to the taxable gift before the surviving spouse's own 
basic exclusion amount.
    (c) Special rule in case of multiple deceased spouses and 
previously-applied DSUE amount--(1) In general. A special rule applies 
to compute the DSUE amount included in the applicable exclusion amount 
of a surviving spouse who previously has applied the DSUE amount of one 
or more deceased spouses. If a surviving spouse applied the DSUE amount 
of one or more last deceased spouses to the surviving spouse's previous 
lifetime transfers, and if any of those last deceased spouses is 
different from the surviving spouse's last deceased spouse as defined in 
Sec. 20.2010-1T(d)(5) of this chapter at the time of the current 
taxable gift by the surviving spouse, then the DSUE amount to be 
included in determining the applicable exclusion amount of the surviving 
spouse that will be applicable at the time of the current taxable gift 
is the sum of--
    (i) The DSUE amount of the surviving spouse's last deceased spouse 
as described in paragraph (a)(1) of this section; and
    (ii) The DSUE amount of each other deceased spouse of the surviving 
spouse to the extent that such amount was applied to one or more 
previous taxable gifts of the surviving spouse.
    (2) Example. The following example, in which all described 
individuals are US citizens, illustrates the application of this 
paragraph (c):

    Example. (i) Facts.
    Husband 1 (H1) dies on January 15, 2011, survived by Wife (W). 
Neither has made any taxable gifts during H1's lifetime. H1's executor 
elects portability of H1's deceased spousal unused exclusion (DSUE) 
amount. The DSUE amount of H1 as computed on the estate tax return filed 
on behalf of H1's estate is $5,000,000. On December 31, 2011, W makes 
taxable gifts to her children valued at $2,000,000. W reports the gifts 
on a timely-filed gift tax return. W is considered to have applied 
$2,000,000 of H1's DSUE amount to the 2011 taxable gifts, in accordance 
with paragraph (b) of this section, and, therefore, W owes no gift tax. 
W is considered to have an applicable exclusion amount remaining in the 
amount of $8,000,000 ($3,000,000 of H1's remaining DSUE amount plus W's 
own $5,000,000 basic exclusion amount). After the death of H1, W marries 
Husband 2 (H2). H2 dies on June 30, 2012. H2's executor elects 
portability of H2's DSUE amount, which is properly computed on H2's 
estate tax return to be $2,000,000.
    (ii) Application. The DSUE amount to be included in determining the 
applicable exclusion amount available to W for gifts during the second 
half of 2012 is $4,000,000, determined by adding the $2,000,000 DSUE 
amount of H2 and the $2,000,000 DSUE amount of H1 that was applied by W 
to W's 2011 taxable gifts. Thus, W's applicable exclusion amount during 
the balance of 2012 is $9,000,000.

    (d) Date DSUE amount taken into consideration by donor who is a 
surviving spouse--(1) General rule. A portability election made by an 
executor of a decedent's estate (see Sec. 20.2010-2T(a) and (b) of this 
chapter for applicable requirements) applies as of the date of the 
decedent's death. Thus, the decedent's DSUE amount is included in the 
applicable exclusion amount of the decedent's surviving spouse under 
section

[[Page 571]]

2010(c)(2) and will be applicable to transfers made by the surviving 
spouse after the decedent's death. However, such decedent's DSUE amount 
will not be included in the applicable exclusion amount of the surviving 
spouse, even if the surviving spouse had made a taxable gift in reliance 
on the availability or computation of the decedent's DSUE amount:
    (i) If the executor of the decedent's estate supersedes the 
portability election by filing a subsequent estate tax return in 
accordance with Sec. 20.2010-2T(a)(4) of this chapter;
    (ii) To the extent that the DSUE amount subsequently is reduced by a 
valuation adjustment or the correction of an error in calculation; or
    (iii) To the extent that the DSUE amount claimed on the decedent's 
return cannot be determined.
    (2) Special rule when property passes to surviving spouse in a 
qualified domestic trust--(i) In general. When property passes from a 
decedent for the benefit of a surviving spouse in one or more qualified 
domestic trusts (QDOT) as defined in section 2056A(a) and the decedent's 
executor elects portability, the DSUE amount available to be included in 
the applicable exclusion amount of the surviving spouse under section 
2010(c)(2) is the DSUE amount of the decedent as redetermined in 
accordance with Sec. 20.2010-2T(c)(4) of this chapter. The earliest 
date on which the decedent's DSUE amount may be included in the 
applicable exclusion amount of the surviving spouse under section 
2010(c)(2) is the date of the occurrence of the final QDOT distribution 
or final other event (generally, the death of the surviving spouse or 
the earlier termination of all QDOTs for that surviving spouse) on which 
tax under section 2056A is imposed. However, the decedent's DSUE amount 
as redetermined in accordance with Sec. 20.2010-2T(c)(4) of this 
chapter may be applied to the surviving spouse's taxable gifts made in 
the year of the surviving spouse's death, or if the terminating event 
occurs prior to the surviving spouse's death, then in the year of that 
terminating event and/or any subsequent year during the surviving 
spouse's life.
    (ii) Example. The following example illustrates the application of 
this paragraph (d)(2):

    Example. (i) Facts. Husband (H), a US citizen, dies in January 2011 
having made no taxable gifts during his lifetime. H's gross estate is 
$3,000,000. H's wife (W) is a US resident but not a citizen of the 
United States and, under H's will, a pecuniary bequest of $2,000,000 
passes to a QDOT for the benefit of W. H's executor timely files an 
estate tax return and makes the QDOT election for the property passing 
to the QDOT, and H's estate is allowed a marital deduction of $2,000,000 
under section 2056(d) for the value of that property. H's taxable estate 
is $1,000,000. On H's estate tax return, H's executor computes H's 
preliminary DSUE amount to be $4,000,000. No taxable events within the 
meaning of section 2056A occur during W's lifetime with respect to the 
QDOT. W makes a taxable gift of $1,000,000 to X in December 2011 and a 
taxable gift of $1,000,000 to Y in January 2012. W dies in September 
2012, not having married again, when the value of the assets of the QDOT 
is $2,200,000.
    (ii) Application. H's DSUE amount is redetermined to be $1,800,000 
(the lesser of the $5,000,000 basic exclusion amount in 2011, or the 
excess of H's $5,000,000 applicable exclusion amount over $3,200,000 
(the sum of the $1,000,000 taxable estate augmented by the $2,200,000 of 
QDOT assets)). On W's gift tax return filed for 2011, W cannot apply any 
DSUE amount to the gift made to X. However, because W's gift to Y was 
made in the year that W died, W's executor will apply $1,000,000 of H's 
redetermined DSUE amount to the gift on W's gift tax return filed for 
2012. The remaining $800,000 of H's redetermined DSUE amount is included 
in W's applicable exclusion amount to be used in computing W's estate 
tax liability.

    (e) Authority to examine returns of deceased spouses. For the 
purpose of determining the DSUE amount to be included in the applicable 
exclusion amount of the surviving spouse, the Internal Revenue Service 
(IRS) may examine returns of each of the surviving spouse's deceased 
spouses whose DSUE amount is claimed to be included in the surviving 
spouse's applicable exclusion amount, regardless of whether the period 
of limitations on assessment has expired for any such return. The IRS's 
authority to examine returns of a deceased spouse applies with respect 
to each transfer by the surviving spouse to which a DSUE amount is or 
has been applied. Upon examination, the IRS may adjust or eliminate the 
DSUE amount reported on such a return;

[[Page 572]]

however, the IRS may assess additional tax on that return only if that 
tax is assessed within the period of limitations on assessment under 
section 6501 applicable to the tax shown on that return. See also 
section 7602 for the IRS's authority, when ascertaining the correctness 
of any return, to examine any returns that may be relevant or material 
to such inquiry.
    (f) Availability of DSUE amount for nonresidents who are not 
citizens. A nonresident surviving spouse who was not a citizen of the 
United States at the time of making a transfer subject to tax under 
chapter 12 of the Internal Revenue Code shall not take into account the 
DSUE amount of any deceased spouse except to the extent allowed under 
any applicable treaty obligation of the United States. See section 
2102(b)(3).
    (g) Effective/applicability date. This section applies to gifts made 
in calendar year 2011 or in a subsequent year in which the applicable 
exclusion amount is determined under section 2010(c) of the Code by 
adding the basic exclusion amount and, in the case of a surviving 
spouse, the DSUE amount.
    (h) Expiration date. The applicability of this section expires on or 
before June 15, 2015.

[T.D. 9593, 77 FR 36161, June 18, 2012]

                                Transfers



Sec. 25.2511-1  Transfers in general.

    (a) The gift tax applies to a transfer by way of gift whether the 
transfer is in trust or otherwise, whether the gift is direct or 
indirect, and whether the property is real or personal, tangible or 
intangible. For example, a taxable transfer may be effected by the 
creation of a trust, the forgiving of a debt, the assignment of a 
judgment, the assignment of the benefits of an insurance policy, or the 
transfer of cash, certificates of deposit, or Federal, State or 
municipal bonds. Statutory provisions which exempt bonds, notes, bills 
and certificates of indebtedness of the Federal Government or its 
agencies and the interest thereon from taxation are not applicable to 
the gift tax, since the gift tax is an excise tax on the transfer, and 
is not a tax on the subject of the gift.
    (b) In the case of a gift by a nonresident not a citizen of the 
United States--
    (1) If the gift was made on or after January 1, 1967, by a donor who 
was not an expatriate to whom section 2501(a)(2) was inapplicable on the 
date of the gift by reason of section 2501(a)(3) and paragraph (a)(3) of 
Sec. 25.2501-1, or
    (2) If the gift was made before January 1, 1967, by a donor who was 
not engaged in business in the United States during the calendar year in 
which the gift was made, the gift tax applies only if the gift consisted 
of real property or tangible personal property situated within the 
United States at the time of the transfer. See Sec. Sec. 25.2501-1 and 
25.2511-3.
    (c)(1) The gift tax also applies to gifts indirectly made. Thus, any 
transaction in which an interest in property is gratuitously passed or 
conferred upon another, regardless of the means or device employed, 
constitutes a gift subject to tax. See further Sec. 25.2512-8 relating 
to transfers for insufficient consideration. However, in the case of a 
transfer creating an interest in property (within the meaning of Sec. 
25.2518-2(c)(3) and (c)(4)) made after December 31, 1976, this paragraph 
(c)(1) shall not apply to the donee if, as a result of a qualified 
disclaimer by the donee, the interest passes to a different donee. Nor 
shall it apply to a donor if, as a result of a qualified disclaimer by 
the donee, a completed transfer of an interest in property is not 
effected. See section 2518 and the corresponding regulations for rules 
relating to a qualified disclaimer.
    (2) In the case of taxable transfers creating an interest in the 
person disclaiming made before January 1, 1977, where the law governing 
the administration of the decedent's estate gives a beneficiary, heir, 
or next-of-kin a right completely and unqualifiedly to refuse to accept 
ownership of property transferred from a decedent (whether the transfer 
is effected by the decedent's will or by the law of descent and 
distribution), a refusal to accept ownership does not constitute the 
making of a gift if the refusal is made within a reasonable time after 
knowledge of the existence of the transfer. The refusal

[[Page 573]]

must be unequivocal and effective under the local law. There can be no 
refusal of ownership of property after its acceptance. In the absence of 
the facts to the contrary, if a person fails to refuse to accept a 
transfer to him of ownership of a decedent's property within a 
reasonable time after learning of the existence of the transfer, he will 
be presumed to have accepted the property. Where the local law does not 
permit such a refusal, any disposition by the beneficiary, heir, or 
next-of-kin whereby ownership is transferred gratuitously to another 
constitutes the making of a gift by the beneficiary, heir, or next-of-
kin. In any case where a refusal is purported to relate to only a part 
of the property, the determination of whether or not there has been a 
complete and unqualified refusal to accept ownership will depend on all 
of the facts and circumstances in each particular case, taking into 
account the recognition and effectiveness of such a purported refusal 
under the local law. In illustration, if Blackacre was devised to A 
under the decedent's will (which also provided that all lapsed legacies 
and devises shall go to B, the residuary beneficiary), and under the 
local law A could refuse to accept ownership in which case title would 
be considered as never having passed to A, A's refusal to accept 
Blackacre within a reasonable time of learning of the devise will not 
constitute the making of a gift by A to B. However, if a decedent who 
owned Greenacre died intestate with C and D as his only heirs, and under 
local law the heir of a decedent cannot, by refusal to accept, prevent 
himself from becoming an owner of intestate property, any gratuitous 
disposition by C (by whatever term it is known) whereby he gives up his 
ownership of a portion of Greenacre and D acquires the whole thereof 
constitutes the making of a gift by C to D.
    (3) The fourth sentence of paragraph (c)(1) of this section is 
applicable for transfers creating an interest to be disclaimed made on 
or after December 31, 1997.
    (d) If a joint income tax return is filed by a husband and wife for 
a taxable year, the payment by one spouse of all or part of the income 
tax liability for such year is not treated as resulting in a transfer 
that is subject to gift tax. The same rule is applicable to the payment 
of gift tax for a ``calendar period'' (as defined in Sec. 25.2502-
1(c)(1)) in the case of a husband and wife who have consented to have 
the gifts made considered as made half by each of them in accordance 
with the provisions of section 2513.
    (e) If a donor transfers by gift less than his entire interest in 
property, the gift tax is applicable to the interest transferred. The 
tax is applicable, for example, to the transfer of an undivided half 
interest in property, or to the transfer of a life estate when the 
grantor retains the remainder interest, or vice versa. However, if the 
donor's retained interest is not susceptible of measurement on the basis 
of generally accepted valuation principles, the gift tax is applicable 
to the entire value of the property subject to the gift. Thus if a 
donor, aged 65 years, transfers a life estate in property to A, aged 25 
years, with remainder to A's issue, or in default of issue, with 
reversion to the donor, the gift tax will normally be applicable to the 
entire value of the property.
    (f) If a donor is the owner of only a limited interest in property, 
and transfers his entire interest, the interest is in every case to be 
valued by the rules set forth in Sec. Sec. 25.2512-1 through 25.2512-7. 
If the interest is a remainder or reversion or other future interest, it 
is to be valued on the basis of actuarial principles set forth in Sec. 
25.2512-5, or if it is not susceptible of valuation in that manner, in 
accordance with the principles set forth in Sec. 25.2512-1.
    (g)(1) Donative intent on the part of the transferor is not an 
essential element in the application of the gift tax to the transfer. 
The application of the tax is based on the objective facts of the 
transfer and the circumstances under which it is made, rather than on 
the subjective motives of the donor. However, there are certain types of 
transfers to which the tax is not applicable. It is applicable only to a 
transfer of a beneficial interest in property. It is not applicable to a 
transfer of bare legal title to a trustee. A transfer by a trustee of 
trust property in which he has no beneficial interest does not 
constitute a gift by the trustee (but such a

[[Page 574]]

transfer may constitute a gift by the creator of the trust, if until the 
transfer he had the power to change the beneficiaries by amending or 
revoking the trust). The gift tax is not applicable to a transfer for a 
full and adequate consideration in money or money's worth, or to 
ordinary business transactions, described in Sec. 25.2512-8.
    (2) If a trustee has a beneficial interest in trust property, a 
transfer of the property by the trustee is not a taxable transfer if it 
is made pursuant to a fiduciary power the exercise or nonexercise of 
which is limited by a reasonably fixed or ascertainable standard which 
is set forth in the trust instrument. A clearly measurable standard 
under which the holder of a power is legally accountable is such a 
standard for this purpose. For instance, a power to distribute corpus 
for the education, support, maintenance, or health of the beneficiary; 
for his reasonable support and comfort; to enable him to maintain his 
accustomed standard of living; or to meet an emergency, would be such a 
standard. However, a power to distribute corpus for the pleasure, 
desire, or happiness of a beneficiary is not such a standard. The entire 
context of a provision of a trust instrument granting a power must be 
considered in determining whether the power is limited by a reasonably 
definite standard. For example, if a trust instrument provides that the 
determination of the trustee shall be conclusive with respect to the 
exercise or nonexercise of a power, the power is not limited by a 
reasonably definite standard. However, the fact that the governing 
instrument is phrased in discretionary terms is not in itself an 
indication that no such standard exists.
    (h) The following are examples of transactions resulting in taxable 
gifts and in each case it is assumed that the transfers were not made 
for an adequate and full consideration in money or money's worth:
    (1) A transfer of property by a corporation to B is a gift to B from 
the stockholders of the corporation. If B himself is a stockholder, the 
transfer is a gift to him from the other stockholders but only to the 
extent it exceeds B's own interest in such amount as a shareholder. A 
transfer of property by B to a corporation generally represents gifts by 
B to the other individual shareholders of the corporation to the extent 
of their proportionate interests in the corporation. However, there may 
be an exception to this rule, such as a transfer made by an individual 
to a charitable, public, political or similar organization which may 
constitute a gift to the organization as a single entity, depending upon 
the facts and circumstances in the particular case.
    (2) The transfer of property to B if there is imposed upon B the 
obligation of paying a commensurate annuity to C is a gift to C.
    (3) The payment of money or the transfer of property to B in 
consideration of B's promise to render a service to C is a gift to C, or 
to both B and C, depending on whether the service to be rendered to C is 
or is not an adequate and full consideration in money or money's worth 
for that which is received by B. See section 2512(b) and the regulations 
thereunder.
    (4) If A creates a joint bank account for himself and B (or a 
similar type of ownership by which A can regain the entire fund without 
B's consent), there is a gift to B when B draws upon the account for his 
own benefit, to the extent of the amount drawn without any obligation to 
account for a part of the proceeds to A. Similarly, if A purchases a 
United States savings bond registered as payable to ``A or B,'' there is 
a gift to B when B surrenders the bond for cash without any obligation 
to account for a part of the proceeds to A.
    (5) If A with his own funds purchases property and has the title 
conveyed to himself and B as joint owners, with rights of survivorship 
(other than a joint ownership described in example (4) but which rights 
may be defeated by either party severing his interest, there is a gift 
to B in the amount of half the value of the property. However, see Sec. 
25.2515-1 relative to the creation of a joint tenancy (or tenancy by the 
entirety) between husband and wife in real property with rights of 
survivorship which, unless the donor elects otherwise is not considered 
as a transfer includible for Federal gift tax purposes at the time of 
the creation of the

[[Page 575]]

joint tenancy. See Sec. 25.2515-2 with respect to determining the 
extent to which the creation of a tenancy by the entirety constitutes a 
taxable gift if the donor elects to have the creation of the tenancy so 
treated. See also Sec. 25.2523(d)-1 with respect to the marital 
deduction allowed in the case of the creation of a joint tenancy or a 
tenancy by the entirety.
    (6) If A is possessed of a vested remainder interest in property, 
subject to being divested only in the event he should fail to survive 
one or more individuals or the happening of some other event, an 
irrevocable assignment of all or any part of his interest would result 
in a transfer includible for Federal gift tax purposes. See especially 
Sec. 25.2512-5 for the valuation of an interest of this type.
    (7) If A, without retaining a power to revoke the trust or to change 
the beneficial interests therein, transfers property in trust whereby B 
is to receive the income for life and at his death the trust is to 
terminate and the corpus is to be returned to A, provided A survives, 
but if A predeceases B the corpus is to pass to C, A has made a gift 
equal to the total value of the property less the value of his retained 
interest. See Sec. 25.2512-5 for the valuation of the donor's retained 
interest.
    (8) If the insured purchases a life insurance policy, or pays a 
premium on a previously issued policy, the proceeds of which are payable 
to a beneficiary or beneficiaries other than his estate, and with 
respect to which the insured retains no reversionary interest in himself 
or his estate and no power to revest the economic benefits in himself or 
his estate or to change the beneficiaries or their proportionate 
benefits (or if the insured relinquishes by assignment, by designation 
of a new beneficiary or otherwise, every such power that was retained in 
a previously issued policy), the insured has made a gift of the value of 
the policy, or to the extent of the premium paid, even though the right 
of the assignee or beneficiary to receive the benefits is conditioned 
upon his surviving the insured. For the valuation of life insurance 
policies see Sec. 25.2512-6.
    (9) Where property held by a husband and wife as community property 
is used to purchase insurance upon the husband's life and a third person 
is revocably designated as beneficiary and under the State law the 
husband's death is considered to make absolute the transfer by the wife, 
there is a gift by the wife at the time of the husband's death of half 
the amount of the proceeds of such insurance.
    (10) If under a pension plan (pursuant to which he has an 
unqualified right to an annuity) an employee has an option to take 
either a retirement annuity for himself alone or a smaller annuity for 
himself with a survivorship annuity payable to his wife, an irrevocable 
election by the employee to take the reduced annuity in order that an 
annuity may be paid, after the employee's death, to his wife results in 
the making of a gift. However, see section 2517 and the regulations 
thereunder for the exemption from gift tax of amounts attributable to 
employers' contributions under qualified plans and certain other 
contracts.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7150, 36 FR 
22900, Dec. 2, 1971; T.D. 7238, 37 FR 28728, Dec. 29, 1972; T.D. 7296, 
38 FR 34202, Dec. 12, 1973; T.D. 7910, 48 FR 40374, Sept. 7, 1983; T.D. 
8095, 51 FR 28369, Aug. 7, 1986; T.D. 8540, 59 FR 30103, June 10, 1994; 
T.D. 8744, 62 FR 68185, Dec. 31, 1997]



Sec. 25.2511-2  Cessation of donor's dominion and control.

    (a) The gift tax is not imposed upon the receipt of the property by 
the donee, nor is it necessarily determined by the measure of enrichment 
resulting to the donee from the transfer, nor is it conditioned upon 
ability to identify the donee at the time of the transfer. On the 
contrary, the tax is a primary and personal liability of the donor, is 
an excise upon his act of making the transfer, is measured by the value 
of the property passing from the donor, and attaches regardless of the 
fact that the identity of the donee may not then be known or 
ascertainable.
    (b) As to any property, or part thereof or interest therein, of 
which the donor has so parted with dominion and control as to leave in 
him no power to change its disposition, whether for his own benefit or 
for the benefit of another, the gift is complete. But if upon a transfer 
of property (whether in trust

[[Page 576]]

or otherwise) the donor reserves any power over its disposition, the 
gift may be wholly incomplete, or may be partially complete and 
partially incomplete, depending upon all the facts in the particular 
case. Accordingly, in every case of a transfer of property subject to a 
reserved power, the terms of the power must be examined and its scope 
determined. For example, if a donor transfers property to another in 
trust to pay the income to the donor or accumulate it in the discretion 
of the trustee, and the donor retains a testamentary power to appoint 
the remainder among his descendants, no portion of the transfer is a 
completed gift. On the other hand, if the donor had not retained the 
testamentary power of appointment, but instead provided that the 
remainder should go to X or his heirs, the entire transfer would be a 
completed gift. However, if the exercise of the trustee's power in favor 
of the grantor is limited by a fixed or ascertainable standard (see 
paragraph (g)(2) of Sec. 25.2511-1), enforceable by or on behalf of the 
grantor, then the gift is incomplete to the extent of the ascertainable 
value of any rights thus retained by the grantor.
    (c) A gift is incomplete in every instance in which a donor reserves 
the power to revest the beneficial title to the property in himself. A 
gift is also incomplete if and to the extent that a reserved power gives 
the donor the power to name new beneficiaries or to change the interests 
of the beneficiaries as between themselves unless the power is a 
fiduciary power limited by a fixed or ascertainable standard. Thus, if 
an estate for life is transferred but, by an exercise of a power, the 
estate may be terminated or cut down by the donor to one of less value, 
and without restriction upon the extent to which the estate may be so 
cut down, the transfer constitutes an incomplete gift. If in this 
example the power was confined to the right to cut down the estate for 
life to one for a term of five years, the certainty of an estate for not 
less than that term results in a gift to that extent complete.
    (d) A gift is not considered incomplete, however, merely because the 
donor reserves the power to change the manner or time of enjoyment. 
Thus, the creation of a trust the income of which is to be paid annually 
to the donee for a period of years, the corpus being distributable to 
him at the end of the period, and the power reserved by the donor being 
limited to a right to require that, instead of the income being so 
payable, it should be accumulated and distributed with the corpus to the 
donee at the termination of the period, constitutes a completed gift.
    (e) A donor is considered as himself having a power if it is 
exercisable by him in conjunction with any person not having a 
substantial adverse interest in the disposition of the transferred 
property or the income therefrom. A trustee, as such, is not a person 
having an adverse interest in the disposition of the trust property or 
its income.
    (f) The relinquishment or termination of a power to change the 
beneficiaries of transferred property, occurring otherwise than by the 
death of the donor (the statute being confined to transfers by living 
donors), is regarded as the event that completes the gift and causes the 
tax to apply. For example, if A transfers property in trust for the 
benefit of B and C but reserves the power as trustee to change the 
proportionate interests of B and C, and if A thereafter has another 
person appointed trustee in place of himself, such later relinquishment 
of the power by A to the new trustee completes the gift of the 
transferred property, whether or not the new trustee has a substantial 
adverse interest. The receipt of income or of other enjoyment of the 
transferred property by the transferee or by the beneficiary (other than 
by the donor himself) during the interim between the making of the 
initial transfer and the relinquishment or termination of the power 
operates to free such income or other enjoyment from the power, and 
constitutes a gift of such income or of such other enjoyment taxable as 
of the ``calendar period'' (as defined in Sec. 25.2502-1(c)(1)) of its 
receipt. If property is transferred in trust to pay the income to A for 
life with remainder to B, powers to distribute corpus to A, and to 
withhold income from A for future distribution to B, are powers to 
change the beneficiaries of the transferred property.

[[Page 577]]

    (g) If a donor transfers property to himself as trustee (or to 
himself and some other person, not possessing a substantial adverse 
interest, as trustees), and retains no beneficial interest in the trust 
property and no power over it except fiduciary powers, the exercise or 
nonexercise of which is limited by a fixed or ascertainable standard, to 
change the beneficiaries of the transferred property, the donor has made 
a completed gift and the entire value of the transferred property is 
subject to the gift tax.
    (h) If a donor delivers a properly indorsed stock certificate to the 
donee or the donee's agent, the gift is completed for gift tax purposes 
on the date of delivery. If the donor delivers the certificate to his 
bank or broker as his agent, or to the issuing corporation or its 
transfer agent, for transfer into the name of the donee, the gift is 
completed on the date the stock is transferred on the books of the 
corporation.
    (i) [Reserved]
    (j) If the donor contends that a power is of such nature as to 
render the gift incomplete, and hence not subject to the tax as of the 
calendar period (as defined in Sec. 25.2502-1(c)(1)) of the initial 
transfer, see Sec. 301.6501(c)-1(f)(5) of this chapter.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28728, Dec. 29, 1972; T.D. 7910, 48 FR 40374, Sept. 7, 1983; T.D. 8845, 
64 FR 67771, Dec. 3, 1999]



Sec. 25.2511-3  Transfers by nonresidents not citizens.

    (a) In general. Sections 2501 and 2511 contain rules relating to the 
taxation of transfers of property by gift by a donor who is a 
nonresident not a citizen of the United States. (See paragraph (b) of 
Sec. 25.2501-1 for the definition of the term ``resident'' for purposes 
of the gift tax.) As combined these rules are:
    (1) The gift tax applies only to the transfer of real property and 
tangible personal property situated in the United States at the time of 
the transfer if either--
    (i) The gift was made on or after January 1, 1967, by a nonresident 
not a citizen of the United States who was not an expatriate to whom 
section 2501(a)(2) was inapplicable on the date of the gift by reason of 
section 2501(a)(3) and paragraph (a)(3) of Sec. 25.2501-1, or
    (ii) The gift was made before January 1, 1967, by a nonresident not 
a citizen of the United States who was not engaged in business in the 
United States during the calendar year in which the gift was made.
    (2) The gift tax applies to the transfer of all property (whether 
real or personal, tangible or intangible) situated in the United States 
at the time of the transfer if either--
    (i) The gift was made on or after January 1, 1967, by a nonresident 
not a citizen of the United States who was an expatriate to whom section 
2501(a)(2) was inapplicable on the date of the gift by reason of section 
2501(a)(3) and paragraph (a)(3) of Sec. 25.2501-1, or
    (ii) The gift was made before January 1, 1967, by a nonresident not 
a citizen of the United States who was engaged in business in the United 
States during the calendar year in which the gift was made.
    (b) Situs of property. For purposes of applying the gift tax to the 
transfer of property owned and held by a nonresident not a citizen of 
the United States at the time of the transfer--
    (1) Real property and tangible personal property. Real property and 
tangible personal property constitute property within the United States 
only if they are physically situated therein.
    (2) Intangible personal property. Except as provided otherwise in 
subparagraphs (3) and (4) of this paragraph, intangible personal 
property constitutes property within the United States if it consists of 
a property right issued by or enforceable against a resident of the 
United States or a domestic corporation (public or private), 
irrespective of where the written evidence of the property is physically 
located at the time of the transfer.
    (3) Shares of stock. Irrespective of where the stock certificates 
are physically located at the time of the transfer--
    (i) Shares of stock issued by a domestic corporation constitute 
property within the United States, and

[[Page 578]]

    (ii) Shares of stock issued by a corporation which is not a domestic 
corporation constitute property situated outside the United States.
    (4) Debt obligations. (i) In the case of gifts made on or after 
January 1, 1967, a debt obligation, including a bank deposit, the 
primary obligor of which is a United States person (as defined in 
section 7701(a)(30)), the United States, a State, or any political 
subdivision thereof, the District of Columbia, or any agency or 
instumentality of any such government constitutes property situated 
within the United States. This subdivision applies--
    (a) In the case of a debt obligation of a domestic corporation, 
whether or not any interest on the obligation would be treated under 
section 862(a)(1) as income from sources without the United States by 
reason of section 861(a)(1)(B) (relating to interest received from a 
domestic corporation less than 20 percent of whose gross income for a 3-
year period was derived from sources within the United States) and the 
regulations thereunder;
    (b) In the case of an amount described in section 861(c) (relating 
to certain bank deposits, withdrawable accounts, and amounts held by an 
insurance company under an agreement to pay interest), whether or not 
any interest thereon would be treated under section 862(a)(1) as income 
from sources without the United States by reason of section 861(a)(1)(A) 
(relating to interest on amounts described in section 861(c) which is 
not effectively connected with the conduct of a trade or business within 
the United States) and the regulations thereunder;
    (c) In the case of a deposit with a domestic corporation or domestic 
partnership, whether or not the deposit is with a foreign branch thereof 
engaged in the commercial banking business; and
    (d) Irrespective of where the written evidence of the debt 
obligation is physically located at the time of the transfer.


For purposes of this subdivision, a debt obligation on which there are 
two or more primary obligors shall be apportioned among such obligors, 
taking into account to the extent appropriate under all the facts and 
circumstances any choate or inchoate rights of contribution existing 
among such obligors with respect to the indebtedness. The term ``agency 
or instrumentality'', as used in this subdivision, does not include a 
possession of the United States or an agency or instrumentality of a 
possession.
    (ii) In the case of gifts made on or after January 1, 1967, a debt 
obligation, including a bank deposit, not deemed under subdivision (i) 
of this subparagraph to be situated within the United States, 
constitutes property situated outside the United States.
    (iii) In the case of gifts made before January 1, 1967, a debt 
obligation the written evidence of which is treated as being the 
property itself constitutes property situated within the United States 
if the written evidence of the obligation is physically located in the 
United States at the time of the transfer, irrespective of who is the 
primary obligor on the debt. If the written evidence of the obligation 
is physically located outside the United States, the debt obligation 
constitutes property situated outside the United States.
    (iv) Currency is not a debt obligation for purposes of this 
subparagraph.

[T.D. 7296, 38 FR 34202, Dec. 12, 1973]



Sec. 25.2512-0  Table of contents.

    This section lists the section headings that appear in the 
regulations under section 2512.

Sec. 25.2512-1 Valuation of property; in general.
Sec. 25.2512-2 Stocks and bonds.
Sec. 25.2512-3 Valuation of interests in businesses.
Sec. 25.2512-4 Valuation of notes.
Sec. 25.2512-5 Valuation of annuities, unitrust interests, interests 
          for life or term of years, and remainder or reversionary 
          interests.
Sec. 25.2512-6 Valuation of certain life insurance and annuity 
          contracts; valuation of shares in an open-end investment 
          company.
Sec. 25.2512-7 Effect of excise tax.
Sec. 25.2512-8 Transfers for insufficient consideration.

             Actuarial Tables Applicable Before May 1, 2009

Sec. 25.2512-5A Valuation of annuities, unitrust interests, interests 
          for life or term of

[[Page 579]]

          years, and remainder or reversionary interests transferred 
          before May 1, 2009.

[T.D. 9448, 74 FR 21512, May 7, 2009; T.D. 9540, 76 FR 49638, Aug. 10, 
2011]



Sec. 25.2512-1  Valuation of property; in general.

    Section 2512 provides that if a gift is made in property, its value 
at the date of the gift shall be considered the amount of the gift. The 
value of the property is the price at which such property would change 
hands between a willing buyer and a willing seller, neither being under 
any compulsion to buy or to sell, and both having reasonable knowledge 
of relevant facts. The value of a particular item of property is not the 
price that a forced sale of the property would produce. Nor is the fair 
market value of an item of property the sale price in a market other 
than that in which such item is most commonly sold to the public, taking 
into account the location of the item wherever appropriate. Thus, in the 
case of an item of property made the subject of a gift, which is 
generally obtained by the public in the retail market, the fair market 
value of such an item of property is the price at which the item or a 
comparable item would be sold at retail. For example, the value of an 
automobile (an article generally obtained by the public in the retail 
market) which is the subject of a gift, is the price for which an 
automobile of the same or approximately the same description, make, 
model, age, condition, etc., could be purchased by a member of the 
general public and not the price for which the particular automobile of 
the donor would be purchased by a dealer in used automobiles. Examples 
of items of property which are generally sold to the public at retail 
may be found in Sec. 25.2512-6. The value is generally to be determined 
by ascertaining as a basis the fair market value at the time of the gift 
of each unit of the property. For example, in the case of shares of 
stocks or bonds, such unit of property is generally a share or a bond. 
Property shall not be returned at the value at which it is assessed for 
local tax purposes unless that value represents the fair market value 
thereof on the date of the gift. All relevant facts and elements of 
value as of the time of the gift shall be considered. Where the subject 
of a gift is an interest in a business, the value of items of property 
in the inventory of the business generally should be reflected in the 
value of the business. For valuation of interests in businesses, see 
Sec. 25.2512-3. See Sec. 25.2512-2 and Sec. Sec. 25.2512-4 through 
25.2512-6 for further information concerning the valuation of other 
particular kinds of property. See Sec. 25.2702-6 for an adjustment to 
the total amount of an individual's taxable gifts where the individual's 
current taxable gifts include the transfer of certain interests in trust 
that were previously valued under the provisions of section 2702.

[T.D. 6826, 30 FR 7709, June 15, 1965; as amended by T.D. 8395, 57 FR 
4254, Feb. 4, 1992]



Sec. 25.2512-2  Stocks and bonds.

    (a) In general. The value of stocks and bonds is the fair market 
value per share or bond on the date of the gift.
    (b) Based on selling prices. (1) In general, if there is a market 
for stocks or bonds, on a stock exchange, in an over-the-counter market 
or otherwise, the mean between the highest and lowest quoted selling 
prices on the date of the gift is the fair market value per share or 
bond. If there were no sales on the date of the gift but there were 
sales on dates within a reasonable period both before and after the date 
of the gift, the fair market value is determined by taking a weighted 
average of the means between the highest and lowest sales on the nearest 
date before and the nearest date after the date of the gift. The average 
is to be weighted inversely by the respective numbers of trading days 
between the selling dates and the date of the gift. If the stocks or 
bonds are listed on more than one exchange, the records of the exchange 
where the stocks or bonds are principally dealt in should be employed if 
such records are available in a generally available listing or 
publication of general circulation. In the event that such records are 
not so available and such stocks or bonds are listed on a composite 
listing of combined exchanges available in a generally available listing 
or publication of general circulation, the records of such combined 
exchanges should be employed. In valuing listed securities,

[[Page 580]]

the donor should be careful to consult accurate records to obtain values 
as of the date of the gift. If quotations of unlisted securities are 
obtained from brokers, or evidence as to their sale is obtained from the 
officers of the issuing companies, copies of letters furnishing such 
quotations or evidence of sale should be attached to the return.
    (2) If it is established with respect to bonds for which there is a 
market on a stock exchange, that the highest and lowest selling prices 
are not available for the date of the gift in a generally available 
listing or publication of general circulation but that closing prices 
are so available, the fair market value per bond is the mean between the 
quoted closing selling price on the date of the gift and the quoted 
closing selling price on the trading day before the date of the gift. If 
there were no sales on the trading day before the date of the gift but 
there were sales on dates within a reasonable period before the date of 
the gift, the fair market value is determined by taking a weighted 
average of the quoted closing selling prices on the date of the gift and 
the nearest date before the date of the gift. The closing selling price 
for the date of the gift is to be weighted by the respective number of 
trading days between the previous selling date and the date of the gift. 
If there were no sales within a reasonable period before the date of the 
gift but there were sales on the date of the gift, the fair market value 
is the closing selling price on the date of the gift. If there were no 
sales on the date of the gift but there were sales within a reasonable 
period both before and after the date of the gift, the fair market value 
is determined by taking a weighted average of the quoted closing selling 
prices on the nearest date before and the nearest date after the date of 
the gift. The average is to be weighed inversely by the respective 
numbers of trading days between the selling dates and the date of the 
gift. If the bonds are listed on more than one exchange, the records of 
the exchange where the bonds are principally dealt in should be 
employed. In valuing listed securities, the donor should be careful to 
consult accurate records to obtain values as of the date of the gift.
    (3) The application of this paragraph may be illustrated by the 
following examples:

    Example (1). Assume that sales of stock nearest the date of the gift 
(Friday, June 15) occurred two trading days before (Wednesday, June 13) 
and three trading days after (Wednesday, June 20) and on these days the 
mean sale prices per share were $10 and $15, respectively. The price of 
$12 is taken as representing the fair market value of a share of stock 
as of the date of the gift

[(3x10)+(2x15)]/5
    Example (2). Assume the same facts as in example 1 except that the 
mean sale prices per share on June 13 and June 20 were $15 and $10 
respectively. The price of $13 is taken as representing the fair market 
value of a share of stock as of the date of the gift

[(3x15)+(2x10)]/5
    Example (3). Assume that on the date of the gift (Tuesday, April 3, 
1973) the closing selling price of certain listed bonds was $25 per bond 
and that the highest and lowest selling prices are not available in a 
generally available listing or publication of general circulation for 
that date. Assume further, that the closing selling price of such bonds 
was $21 per bond on the day before the date of the gift (Monday, April 
2, 1973). Thus, under paragraph (b)(2) of this section, the price of $23 
is taken as representing the fair market value per bond as of the date 
of the gift

[(25+21)]/2
    Example (4). Assume the same facts as in example 3 except that there 
were no sales on the day before the date of the gift. Assume further, 
that there were sales on Thursday, March 29, 1973, and that the closing 
selling price on that day was $23. The price of $24.50 is taken as 
representing the fair market value per bond as of the date of the gift

[(1x23)+(3x25)]/4
    Example (5). Assume that no bonds were traded on the date of the 
gift (Friday, April 20). Assume further, that sales of bonds nearest the 
date of the gift occurred two trading days before (Wednesday, April 18) 
and three trading days after (Wednesday, April 25) the date of the gift 
and that on these two days the closing selling prices per bond were $29 
and $22, respectively. The highest and lowest selling prices are not 
available for these dates in a generally available listing or 
publication of general circulation. Thus, under paragraph (b)(2) of this 
section the price of $26.20 is taken as representing the fair market 
value of a bond as of the date of the gift

[(3x29)+(2x22)]/5

    (c) Based on bid and asked prices. If the provisions of paragraph 
(b) of this section are inapplicable because actual

[[Page 581]]

sales are not available during reasonable period beginning before and 
ending after the date of the gift, the fair market value may be 
determined by taking the mean between the bona fide bid and asked prices 
on the date of the gift, or if none, by taking a weighted average of the 
means between the bona fide bid and asked prices on the nearest trading 
date before and the nearest trading date after the date of the gift, if 
both such nearest dates are within a reasonable period. The average is 
to be determined in the manner described in paragraph (b) of this 
section.
    (d) Where selling prices and bid and asked prices are not available 
for dates both before and after the date of gift. If the provisions of 
paragraphs (b) and (c) of this section are inapplicable because no 
actual sale prices or quoted bona fide bid and asked prices are 
available on a date within a reasonable period before the date of the 
gift, but such prices are available on a date within a reasonable period 
after the date of the gift, or vice versa, then the mean between the 
highest and lowest available sale prices or bid and asked prices may be 
taken as the value.
    (e) Where selling prices or bid and asked prices do not represent 
fair market value. In cases in which it is established that the value 
per bond or share of any security determined on the basis of the selling 
or bid and asked prices as provided under paragraphs (b), (c), and (d) 
of this section does not represent the fair market value thereof, then 
some reasonable modification of the value determined on that basis or 
other relevant facts and elements of value shall be considered in 
determining fair market value. Where sales at or near the date of the 
gift are few or of a sporadic nature, such sales alone may not indicate 
fair market value. In certain exceptional cases, the size of the block 
of securities made the subject of each separate gift in relation to the 
number of shares changing hands in sales may be relevant in determining 
whether selling prices reflect the fair market value of the block of 
stock to be valued. If the donor can show that the block of stock to be 
valued, with reference to each separate gift, is so large in relation to 
the actual sales on the existing market that it could not be liquidated 
in a reasonable time without depressing the market, the price at which 
the block could be sold as such outside the usual market, as through an 
underwriter, may be a more accurate indication of value than market 
quotations. Complete data in support of any allowance claimed due to the 
size of the block of stock being valued should be submitted with the 
return. On the other hand, if the block of stock to be valued represents 
a controlling interest, either actual or effective, in a going business, 
the price at which other lots change hands may have little relation to 
its true value.
    (f) Where selling prices or bid and asked prices are unavailable. If 
the provisions of paragraphs (b), (c), and (d) of this section are 
inapplicable because actual sale prices and bona fide bid and asked 
prices are lacking, then the fair market value is to be determined by 
taking the following factors into consideration:
    (1) In the case of corporate or other bonds, the soundness of the 
security, the interest yield, the date of maturity, and other relevant 
factors; and
    (2) In the case of shares of stock, the company's net worth, 
prospective earning power and dividend-paying capacity, and other 
relevant factors.

Some of the ``other relevant factors'' referred to in subparagraphs (1) 
and (2) of this paragraph are: The goodwill of the business; the 
economic outlook in the particular industry; the company's position in 
the industry and its management; the degree of control of the business 
represented by the block of stock to be valued; and the values of 
securities of corporations engaged in the same or similar lines of 
business which are listed on a stock exchange. However, the weight to be 
accorded such comparisons or any other evidentiary factors considered in 
the determination of a value depends upon the facts of each case. 
Complete financial and other data upon which the valuation is based 
should be submitted with the return, including copies of reports of any 
examinations of the company made by accountants, engineers,

[[Page 582]]

or any technical experts as of or near the date of the gift.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7327, 39 FR 35355, Oct. 1, 1974; T.D. 7432, 41 FR 38769, 
Sept. 13, 1976]



Sec. 25.2512-3  Valuation of interest in businesses.

    (a) Care should be taken to arrive at an accurate valuation of any 
interest in a business which the donor transfers without an adequate and 
full consideration in money or money's worth. The fair market value of 
any interest in a business, whether a partnership or a proprietorship, 
is the net amount which a willing purchaser, whether an individual or a 
corporation, would pay for the interest to a willing seller, neither 
being under any compulsion to buy or to sell and both having reasonable 
knowledge of the relevant facts. The net value is determined on the 
basis of all relevant factors including--
    (1) A fair appraisal as of the date of the gift of all the assets of 
the business, tangible and intangible, including good will;
    (2) The demonstrated earning capacity of the business; and
    (3) The other factors set forth in paragraph (f) of Sec. 25.2512-2 
relating to the valuation of corporate stock, to the extent applicable.

Special attention should be given to determining an adequate value of 
the good will of the business. Complete financial and other data upon 
which the valuation is based should be submitted with the return, 
including copies of reports of examinations of the business made by 
accountants, engineers, or any technical experts as of or near the date 
of the gift.
    (b) [Reserved]



Sec. 25.2512-4  Valuation of notes.

    The fair market value of notes, secured or unsecured, is presumed to 
be the amount of unpaid principal, plus accrued interest to the date of 
the gift, unless the donor establishes a lower value. Unless returned at 
face value, plus accrued interest, it must be shown by satisfactory 
evidence that the note is worth less than the unpaid amount (because of 
the interest rate, or date of maturity, or other cause), or that the 
note is uncollectible in part (by reason of the insolvency of the party 
or parties liable, or for other cause), and that the property, if any, 
pledged or mortgaged as security is insufficient to satisfy it.



Sec. 25.2512-5  Valuation of annuities, unitrust interests, interests
for life or term of years, and remainder or reversionary interests.

    (a) In general. Except as otherwise provided in paragraph (b) of 
this section and Sec. 25.7520-3(b), the fair market value of annuities, 
unitrust interests, life estates, terms of years, remainders, and 
reversions transferred by gift is the present value of the interests 
determined under paragraph (d) of this section. Section 20.2031-7 of 
this chapter (Estate Tax Regulations) and related sections provide 
tables with standard actuarial factors and examples that illustrate how 
to use the tables to compute the present value of ordinary annuity, 
life, and remainder interests in property. These sections also refer to 
standard and special actuarial factors that may be necessary to compute 
the present value of similar interests in more unusual fact situations. 
These factors and examples are also generally applicable for gift tax 
purposes in computing the values of taxable gifts.
    (b) Commercial annuities and insurance contracts. The value of life 
insurance contracts and contracts for the payment of annuities issued by 
companies regularly engaged in their sale is determined under Sec. 
25.2512-6.
    (c) Actuarial valuations. The present value of annuities, unitrust 
interests, life estates, terms of years, remainders, and reversions 
transferred by gift on or after May 1, 2009, is determined under 
paragraph (d) of this section. The present value of annuities, unitrust 
interests, life estates, terms of years, remainders, and reversions 
transferred by gift before May 1, 2009, is determined under the 
following sections:

------------------------------------------------------------------------
                      Transfers
-----------------------------------------------------     Applicable
              After                     Before            regulations
------------------------------------------------------------------------
--                                01-01-52..........  25.2512-5A(a).
12-31-51........................  01-01-71..........  25.2512-5A(b).
12-31-70........................  12-01-83..........  25.2512-5A(c).
11-30-83........................  05-01-89..........  25.2512-5A(d).
04-30-89........................  05-01-99..........  25.2512-5A(e).

[[Page 583]]

 
04-30-99........................  05-01-09..........  25.2512-5A(f).
------------------------------------------------------------------------

    (d) Actuarial valuations on or after May 1, 2009--(1) In general. 
Except as otherwise provided in paragraph (b) of this section and Sec. 
25.7520-3(b) (relating to exceptions to the use of prescribed tables 
under certain circumstances), if the valuation date for the gift is on 
or after May 1, 2009, the fair market value of annuities, life estates, 
terms of years, remainders, and reversions transferred on or after May 
1, 2009, is the present value of such interests determined under 
paragraph (d)(2) of this section and by use of standard or special 
section 7520 actuarial factors. These factors are derived by using the 
appropriate section 7520 interest rate and, if applicable, the mortality 
component for the valuation date of the interest that is being valued. 
See Sec. Sec. 25.7520-1 through 25.7520-4. The fair market value of a 
qualified annuity interest described in section 2702(b)(1) and a 
qualified unitrust interest described in section 2702(b)(2) is the 
present value of such interests determined under Sec. 25.7520-1(c).
    (2) Specific interests. When the donor transfers property in trust 
or otherwise and retains an interest therein, generally, the value of 
the gift is the value of the property transferred less the value of the 
donor's retained interest. However, if the donor transfers property 
after October 8, 1990, to or for the benefit of a member of the donor's 
family, the value of the gift is the value of the property transferred 
less the value of the donor's retained interest as determined under 
section 2702. If the donor assigns or relinquishes an annuity, life 
estate, remainder, or reversion that the donor holds by virtue of a 
transfer previously made by the donor or another, the value of the gift 
is the value of the interest transferred. However, see section 2519 for 
a special rule in the case of the assignment of an income interest by a 
person who received the interest from a spouse.
    (i) Charitable remainder trusts. The fair market value of a 
remainder interest in a pooled income fund, as defined in Sec. 
1.642(c)-5 of this chapter, is its value determined under Sec. 
1.642(c)-6(e) (see Sec. 1.642(c)-6A for certain prior periods). The 
fair market value of a remainder interest in a charitable remainder 
annuity trust, as described in Sec. 1.664-2(a), is its present value 
determined under Sec. 1.664-2(c). The fair market value of a remainder 
interest in a charitable remainder unitrust, as defined in Sec. 1.664-
3, is its present value determined under Sec. 1.664-4(e). The fair 
market value of a life interest or term for years in a charitable 
remainder unitrust is the fair market value of the property as of the 
date of transfer less the fair market value of the remainder interest, 
determined under Sec. 1.664-4(e)(4) and (e)(5).
    (ii) Ordinary remainder and reversionary interests. If the interest 
to be valued is to take effect after a definite number of years or after 
the death of one individual, the present value of the interest is 
computed by multiplying the value of the property by the appropriate 
remainder interest actuarial factor (that corresponds to the applicable 
section 7520 interest rate and remainder interest period) in Table B 
(for a term certain) or in Table S (for one measuring life), as the case 
may be. Table B is contained in Sec. 20.2031-7(d)(6) of this chapter 
and Table S (for one measuring life when the valuation date is on or 
after May 1, 2009) is included in Sec. 20.2031-7(d)(7) and Internal 
Revenue Service Publication 1457. See Sec. 20.2031-7A containing Table 
S for valuation of interests before May 1, 2009. For information about 
obtaining actuarial factors for other types of remainder interests, see 
paragraph (d)(4) of this section.
    (iii) Ordinary term-of-years and life interests. If the interest to 
be valued is the right of a person to receive the income of certain 
property, or to use certain nonincome-producing property, for a term of 
years or for the life of one individual, the present value of the 
interest is computed by multiplying the value of the property by the 
appropriate term-of-years or life interest actuarial factor (that 
corresponds to the applicable section 7520 interest rate and term-of-
years or life interest period). Internal Revenue Service Publication 
1457 includes actuarial factors for a remainder interest after a term of

[[Page 584]]

years in Table B and after the life of one individual in Table S (for 
one measuring life when the valuation date is on or after May 1, 2009). 
However, term-of-years and life interest actuarial factors are not 
included in Table B in Sec. 20.2031-7(d)(6) of this chapter or Table S 
in Sec. 20.2031-7(d)(7) (or in Sec. 20.2031-7A). If Internal Revenue 
Service Publication 1457 (or any other reliable source of term-of-years 
and life interest actuarial factors) is not conveniently available, an 
actuarial factor for the interest may be derived mathematically. This 
actuarial factor may be derived by subtracting the correlative remainder 
factor (that corresponds to the applicable section 7520 interest rate) 
in Table B (for a term of years) in Sec. 20.2031-7(d)(6) or in Table S 
(for the life of one individual) in Sec. 20.2031-7(d)(7), as the case 
may be, from 1.000000. For information about obtaining actuarial factors 
for other types of term-of-years and life interests, see paragraph 
(d)(4) of this section.
    (iv) Annuities. (A) If the interest to be valued is the right of a 
person to receive an annuity that is payable at the end of each year for 
a term of years or for the life of one individual, the present value of 
the interest is computed by multiplying the aggregate amount payable 
annually by the appropriate annuity actuarial factor (that corresponds 
to the applicable section 7520 interest rate and annuity period). 
Internal Revenue Service Publication 1457 includes actuarial factors in 
Table B (for a remainder interest after an annuity payable for a term of 
years) and in Table S (for a remainder interest after an annuity payable 
for the life of one individual when the valuation date is on or after 
May 1, 2009). However, annuity actuarial factors are not included in 
Table B in Sec. 20.2031-7(d)(6) of this chapter or Table S in Sec. 
20.2031-7(d)(7) (or in Sec. 20.2031-7A). If Internal Revenue Service 
Publication 1457 (or any other reliable source of annuity actuarial 
factors) is not conveniently available, an annuity factor for a term of 
years or for one life may be derived mathematically. This annuity factor 
may be derived by subtracting the applicable remainder factor (that 
corresponds to the applicable section 7520 interest rate and annuity 
period) in Table B (in the case of a term-of-years annuity) in Sec. 
20.2031-7(d)(6) or in Table S (in the case of a one-life annuity) in 
Sec. 20.2031-7(d)(7), as the case may be, from 1.000000 and then 
dividing the result by the applicable section 7520 interest rate 
expressed as a decimal number. See Sec. 20.2031-7(d)(2)(iv) for an 
example that illustrates the computation of the present value of an 
annuity.
    (B) If the annuity is payable at the end of semiannual, quarterly, 
monthly, or weekly periods, the product obtained by multiplying the 
annuity factor by the aggregate amount payable annually is then 
multiplied by the applicable adjustment factor set forth in Table K in 
Sec. 20.2031-7(d)(6) at the appropriate interest rate component for 
payments made at the end of the specified periods. The provisions of 
this paragraph (d)(2)(iv)(B) are illustrated by the following example:

    Example. In July of a year after 2009 but before 2019, the donor 
agreed to pay the annuitant the sum of $10,000 per year, payable in 
equal semiannual installments at the end of each period. The semiannual 
installments are to be made on each December 31st and June 30th. The 
annuity is payable until the annuitant's death. On the date of the 
agreement, the annuitant is 68 years and 5 months old. The donee 
annuitant's age is treated as 68 for purposes of computing the present 
value of the annuity. The section 7520 rate on the date of the agreement 
is 6.6 percent. Under Table S in Sec. 20.2031-7(d)(7), the factor at 
6.6 percent for determining the present value of a remainder interest 
payable at the death of an individual aged 68 is .42001. Converting the 
remainder factor to an annuity factor, as described above, the annuity 
factor for determining the present value of an annuity transferred to an 
individual age 68 is 8.7877 (1.000000 minus .42001 divided by .066). The 
adjustment factor from Table K in Sec. 20.2031-7(d)(6) in the column 
for payments made at the end of each semiannual period at the rate of 
6.6 percent is 1.0162. The aggregate annual amount of the annuity, 
$10,000, is multiplied by the factor 8.7877 and the product is 
multiplied by 1.0162. The present value of the donee's annuity is, 
therefore, $89,300.61 ($10,000 x 8.7877 x 1.0162).

    (C) If an annuity is payable at the beginning of annual, semiannual, 
quarterly, monthly, or weekly periods for a term of years, the value of 
the annuity is computed by multiplying the aggregate amount payable 
annually by the annuity factor described in paragraph

[[Page 585]]

(d)(2)(iv)(A) of this section; and the product so obtained is then 
multiplied by the adjustment factor in Table J in Sec. 20.2031-7(d)(6) 
of this chapter at the appropriate interest rate component for payments 
made at the beginning of specified periods. If an annuity is payable at 
the beginning of annual, semiannual, quarterly, monthly, or weekly 
periods for one or more lives, the value of the annuity is the sum of 
the first payment and the present value of a similar annuity, the first 
payment of which is not to be made until the end of the payment period, 
determined as provided in paragraph (d)(2)(iv)(B) of this section.
    (v) Annuity and unitrust interests for a term of years or until the 
prior death of an individual--(A) Annuity interests. The present value 
of an annuity interest that is payable until the earlier to occur of the 
lapse of a specific number of years or the death of an individual may be 
computed with values from the tables in Sec. Sec. 20.2031-7(d)(6) and 
20.2031-7(d)(7) of this chapter as described in the following example:

    Example. The donor transfers $100,000 into a trust early in 2010, 
and retains the right to receive an annuity from the trust in the amount 
of $6,000 per year, payable in equal semiannual installments at the end 
of each period. The semiannual installments are to be made on each June 
30th and December 31st.
    The annuity is payable for 10 years or until the donor's prior 
death. At the time of the transfer, the donor is 59 years and 6 months 
old. The donor's age is deemed to be 60 for purposes of computing the 
present value of the retained annuity. If the section 7520 rate for the 
month in which the transfer occurs in 5.8 percent, the present value of 
the donor's retained interest would be $42,575.65, determined as 
follows:

TABLE S value at 5.8 percent, age 60.......................        34656
TABLE S value at 5.8 percent, age 70.......................       .49025
TABLE 2000CM value at age 70...............................        74794
TABLE 2000CM value at age 60...............................        87595
TABLE B value at 5.8 percent, 10 years.....................       569041
TABLE K value at 5.8 percent...............................       1.0143
 

                                                             [GRAPHIC] [TIFF OMITTED] TR10AU11.061
                                                             
    Factor for donor's retained interest at 5.8 percent:
    Present value of donor's retained interest:

($6,000 x 6.9959 x 1.0143)..............................      $42,575.65
 

    (B) Unitrust interests. The present value of a unitrust interest 
that is payable until the earlier to occur of the lapse of a specific 
number of years or the death of an individual may be computed with 
values from the tables in Sec. Sec. 1.664-4(e)(6) and 1.664-4(e)(7) of 
this chapter as described in the following example:

    Example. The donor who, as of the nearest birthday, is 60 years old, 
transfers $100,000 to a unitrust on January 1st of a year after 2009 but 
before 2019. The trust instrument requires that each year the trust pay 
to the donor, in equal semiannual installments on June 30th and December 
31st, 6 percent of the fair market value of the trust assets, valued as 
of January 1st each year, for 10 years or until the prior death of the 
donor. The section 7520 rate for the January in which the transfer 
occurs is 6.6 percent. Under Table F(6.6) in Sec. 1.664-4(e)(6), the 
appropriate adjustment factor is .953317 for semiannual payments payable 
at the end of the semiannual period. The adjusted payout rate is 5.720 
percent (6% x .953317). The present value of the donor's retained 
interest is $41,920.00 determined as follows:

TABLE U(1) value at 5.6 percent, age 60....................       .33970
TABLE U(1) value at 5.6 percent, age 70....................       .48352
TABLE 2000CM value at age 70...............................        74794
TABLE 2000CM value at age 60...............................        87595
TABLE D value at 5.6 percent, 10 years.....................      .561979
 


    Factor for donor's retained interest at 5.6 percent:

(1.000000-.33970) - (.561979 x (74794/87595) x (1.000000-.48352)) = 
          .41247

TABLE U(1) value at 5.8 percent, age 60....................       .32846

[[Page 586]]

 
TABLE U(1) value at 5.8 percent, age 70....................       .47241
TABLE 2000CM value at age 70...............................        74794
TABLE 2000CM value at age 60...............................        87595
TABLE D value at 5.8 percent, 10 years.....................      .550185
 

                                                             [GRAPHIC] [TIFF OMITTED] TR10AU11.062
                                                             
    Factor for donor's retained interest at 5.8 percent:
    (3) Transitional rule. If the valuation date of a transfer of 
property by gift is on or after May 1, 2009, and before July 1, 2009, 
the fair market value of the interest transferred is determined by use 
of the section 7520 interest rate for the month in which the valuation 
date occurs (see Sec. Sec. 25.7520-1(b) and 25.7520-2(a)(2)) and the 
appropriate actuarial tables under either Sec. 20.2031-7(d)(7) or Sec. 
20.2031-7A(f)(4) of this chapter, at the option of the donor. However, 
with respect to each individual transaction and with respect to all 
transfers occurring on the valuation date, the donor must use the same 
actuarial tables (for example, gift and income tax charitable deductions 
with respect to the same transfer must be determined based on the same 
tables, and all transfers made on the same date must be valued based on 
the same tables).
    (4) Publications and actuarial computations by the Internal Revenue 
Service. Many standard actuarial factors not included in Sec. 20.2031-
7(d)(6) or Sec. 20.2031-7(d)(7) of this chapter are included in 
Internal Revenue Service Publication 1457, ``Actuarial Valuations 
Version 3A'' (2009). Internal Revenue Service Publication 1457 also 
includes examples that illustrate how to compute many special factors 
for more unusual situations. A copy of this publication is available, at 
no charge, electronically via the IRS Internet site at http://
www.irs.gov. If a special factor is required in the case of a completed 
gift, the Internal Revenue Service may furnish the factor to the donor 
upon a request for a ruling. The request for a ruling must be 
accompanied by a recitation of the facts including a statement of the 
date of birth for each measuring life, the date of the gift, any other 
applicable dates, and a copy of the will, trust, or other relevant 
documents. A request for a ruling must comply with the instructions for 
requesting a ruling published periodically in the Internal Revenue 
Bulletin (see Sec. Sec. 601.201 and 601.601(d)(2)(ii)(b) of this 
chapter) and include payment of the required user fee.

[[Page 587]]

    (e) Effective/applicability date. This section applies on and after 
May 1, 2009.

[T.D. 8540, 59 FR 30174, June 10, 1994, as amended by T.D. 8819, 64 FR 
23224, Apr. 30, 1999; T.D. 8886, 65 FR 36940, June 12, 2000; 65 FR 
39470, June 26, 2000; 65 FR 58222, Sept. 28, 2000; T.D. 9448, 74 FR 
21512, May 7, 2009; T.D. 9540, 76 FR 49639, Aug. 10, 2011]



Sec. 25.2512-6  Valuation of certain life insurance and annuity 
contracts; valuation of shares in an open-end investment company.

    (a) Valuation of certain life insurance and annuity contracts. The 
value of a life insurance contract or of a contract for the payment of 
an annuity issued by a company regularly engaged in the selling of 
contracts of that character is established through the sale of the 
particular contract by the company, or through the sale by the company 
of comparable contracts. As valuation of an insurance policy through 
sale of comparable contracts is not readily ascertainable when the gift 
is of a contract which has been in force for some time and on which 
further premium payments are to be made, the value may be approximated 
by adding to the interpolated terminal reserve at the date of the gift 
the proportionate part of the gross premium last paid before the date of 
the gift which covers the period extending beyond that date. If, 
however, because of the unusual nature of the contract such 
approximation is not reasonably close to the full value, this method may 
not be used. The following examples, so far as relating to life 
insurance contracts, are of gifts of such contracts on which there are 
no accrued dividends or outstanding indebtedness.

    Example (1). A donor purchases from a life insurance company for the 
benefit of another a life insurance contract or a contract for the 
payment of an annuity. The value of the gift is the cost of the 
contract.
    Example (2). An annuitant purchased from a life insurance company a 
single payment annuity contract by the terms of which he was entitled to 
receive payments of $1,200 annually for the duration of his life. Five 
years subsequent to such purchase, and when of the age of 50 years, he 
gratuitously assigns the contract. The value of the gift is the amount 
which the company would charge for an annuity contract providing for the 
payment of $1,200 annually for the life of a person 50 years of age.
    Example (3). A donor owning a life insurance policy on which no 
further payments are to be made to the company (e.g., a single premium 
policy or paid-up policy) makes a gift of the contract. The value of the 
gift is the amount which the company would charge for a single premium 
contract of the same specified amount on the life of a person of the age 
of the insured.
    Example (4). A gift is made four months after the last premium due 
date of an ordinary life insurance policy issued nine years and four 
months prior to the gift thereof by the insured, who was 35 years of age 
at date of issue. The gross annual premium is $2,811. The computation 
follows:

Terminal reserve at end of tenth year.......................  $14,601.00
Terminal reserve at end of ninth year.......................   12,965.00
                                                             -----------
   Increase.................................................    1,636.00
One-third of such increase (the gift having been made four        545.33
 months following the last preceding premium due date), is..
Terminal reserve at end of ninth year                          12,965.00
                                                             -----------
Interpolated terminal reserve at date of gift...............   13,510.33
Two-thirds of gross premium ($2,811)........................    1,874.00
                                                             -----------
 Value of the gift..........................................   15,384.33
 

    Example (5). A donor purchases from a life insurance company for 
$15,198, a joint and survivor annuity contract which provides for the 
payment of $60 a month to the donor during his lifetime, and then to his 
sister for such time as she may survive him. The premium which would 
have been charged by the company for an annuity of $60 monthly payable 
during the life of the donor alone is $10,690. The value of the gift is 
$4,508 ($15,198 less $10,690).

    (b) Valuation of shares in an open-end investment company. (1) The 
fair market value of a share in an open-end investment company (commonly 
known as a ``mutual fund'') is the public redemption price of a share. 
In the absence of an affirmative showing of the public redemption price 
in effect at the time of the gift, the last public redemption price 
quoted by the company for the date of the gift shall be presumed to be 
the applicable public redemption price. If there is no public redemption 
price quoted by the company for the date of the gift (e.g., the date of 
the gift is a Saturday, Sunday, or holiday), the fair market value of 
the mutual fund share is the last public redemption price quoted by the 
company for the first day preceding the date of the gift for which there 
is a quotation. As used in

[[Page 588]]

this paragraph the term ``open-end investment company'' includes only a 
company which on the date of the gift was engaged in offering its shares 
to the public in the capacity of an open-end investment company.
    (2) The provisions of this paragraph shall apply with respect to 
gifts made after December 31, 1954.

[T.D. 6680, 28 FR 10872, Oct. 10, 1963, as amended by T.D. 7319, 39 FR 
26723, July 23, 1974]



Sec. 25.2512-7  Effect of excise tax.

    If jewelry, furs or other property, the purchase of which is subject 
to an excise tax, is purchased at retail by a taxpayer and made the 
subject of gifts within a reasonable time after purchase, the purchase 
price, including the excise tax, is considered to be the fair market 
value of the property on the date of the gift, in the absence of 
evidence that the market price of similar articles has increased or 
decreased in the meantime. Under other circumstances, the excise tax is 
taken into account in determining the fair market value of property to 
the extent, and only to the extent, that it affects the price at which 
the property would change hands between a willing buyer and a willing 
seller, as provided in Sec. 25.2512-1.



Sec. 25.2512-8  Transfers for insufficient consideration.

    Transfers reached by the gift tax are not confined to those only 
which, being without a valuable consideration, accord with the common 
law concept of gifts, but embrace as well sales, exchanges, and other 
dispositions of property for a consideration to the extent that the 
value of the property transferred by the donor exceeds the value in 
money or money's worth of the consideration given therefor. However, a 
sale, exchange, or other transfer of property made in the ordinary 
course of business (a transaction which is bona fide, at arm's length, 
and free from any donative intent), will be considered as made for an 
adequate and full consideration in money or money's worth. A 
consideration not reducible to a value in money or money's worth, as 
love and affection, promise of marriage, etc., is to be wholly 
disregarded, and the entire value of the property transferred 
constitutes the amount of the gift. Similarly, a relinquishment or 
promised relinquishment of dower or curtesy, or of a statutory estate 
created in lieu of dower or curtesy, or of other marital rights in the 
spouse's property or estate, shall not be considered to any extent a 
consideration ``in money or money's worth.'' See, however, section 2516 
and the regulations thereunder with respect to certain transfers 
incident to a divorce. See also sections 2701, 2702, 2703 and 2704 and 
the regulations at Sec. Sec. 25.2701-0 through 25.2704-3 for special 
rules for valuing transfers of business interests, transfers in trust, 
and transfers pursuant to options and purchase agreements.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960; as 
amended by T.D. 8395, 57 FR 4255, Feb. 4, 1992]



Sec. 25.2513-1  Gifts by husband or wife to third party considered as 
made one-half by each.

    (a) A gift made by one spouse to a person other than his (or her) 
spouse may, for the purpose of the gift tax, be considered as made one-
half by his spouse, but only if at the time of the gift each spouse was 
a citizen or resident of the United States. For purposes of this 
section, an individual is to be considered as the spouse of another 
individual only if he was married to such individual at the time of the 
gift and does not remarry during the remainder of the ``calendar 
period'' (as defined in Sec. 25.2502-1(c)(1)).
    (b) The provisions of this section will apply to gifts made during a 
particular ``calendar period'' (as defined in Sec. 25.2502-1(c)(1)) 
only if both spouses signify their consent to treat all gifts made to 
third parties during that calendar period by both spouses while married 
to each other as having been made one-half by each spouse. As to the 
manner and time for signifying consent, see Sec. 25.2513-2. Such 
consent, if signified with respect to any calendar period, is effective 
with respect to all gifts made to third parties during such calendar 
period except as follows:
    (1) If the consenting spouses were not married to each other during 
a portion of the calendar period, the consent is not effective with 
respect to any gifts

[[Page 589]]

made during such portion of the calendar period. Where the consent is 
signified by an executor or administrator of a deceased spouse, the 
consent is not effective with respect to gifts made by the surviving 
spouse during the portion of the calendar period that his spouse was 
deceased.
    (2) If either spouse was a nonresident not a citizen of the United 
States during any portion of the calendar period, the consent is not 
effective with respect to any gift made during that portion of the 
calendar period.
    (3) The consent is not effective with respect to a gift by one 
spouse of a property interest over which he created in his spouse a 
general power of appointment (as defined in section 2514(c)).
    (4) If one spouse transferred property in part to his spouse and in 
part to third parties, the consent is effective with respect to the 
interest transferred to third parties only insofar as such interest is 
ascertainable at the time of the gift and hence severable from the 
interest transferred to his spouse. See Sec. 25.2512-5 for the 
principles to be applied in the valuation of annuities, life estates, 
terms for years, remainders and reversions.
    (5) The consent applies alike to gifts made by one spouse alone and 
to gifts made partly by each spouse, provided such gifts were to third 
parties and do not fall within any of the exceptions set forth in 
subparagraphs (1) through (4) of this paragraph. The consent may not be 
applied only to a portion of the property interest constituting such 
gifts. For example, a wife may not treat gifts made by her spouse from 
his separate property to third parties as having been made one-half by 
her if her spouse does not consent to treat gifts made by her to third 
parties during the same calendar period as having been made one-half by 
him. If the consent is effectively signified on either the husband's 
return or the wife's return, all gifts made by the spouses to third 
parties (except as described in subparagraphs (1) through (4) of this 
paragraph), during the calendar period will be treated as having been 
made one-half by each spouse.
    (c) If a husband and wife consent to have the gifts made to third 
party donees considered as made one-half by each spouse, and only one 
spouse makes gifts during the ``calendar period'' (as defined in Sec. 
25.2502-1(c)(1)), the other spouse is not required to file a gift tax 
return provided: (1) The total value of the gifts made to each third 
party donee since the beginning of the calendar year is not in excess of 
$20,000 ($6,000 for calendar years prior to 1982), and (2) no portion of 
the property transferred constitutes a gift of a future interest. If a 
transfer made by either spouse during the calendar period to a third-
party represents a gift of a future interest in property and the spouses 
consent to have the gifts considered as made one-half by each, a gift 
tax return for such calendar period must be filed by each spouse 
regardless of the value of the transfer. (See Sec. 25.2503-3 for the 
definition of a future interest.)
    (d) The following examples illustrate the application of this 
section relating to the requirements for the filing of a return, 
assuming that a consent was effectively signified:
    (1) A husband made gifts valued at $7,000 during the second quarter 
of 1971 to a third party and his wife made no gifts during this time. 
Each spouse is required to file a return for the second calendar quarter 
of 1971.
    (2) A husband made gifts valued at $5,000 to each of two third 
parties during the year 1970 and his wife made no gifts. Only the 
husband is required to file a return. (See Sec. 25.6019-2.)
    (3) During the third quarter of 1971, a husband made gifts valued at 
$5,000 to a third party, and his wife made gifts valued at $2,000 to the 
same third party. Each spouse is required to file a return for the third 
calendar quarter of 1971.
    (4) A husband made gifts valued at $5,000 to a third party and his 
wife made gifts valued at $3,000 to another third party during the year 
1970. Only the husband is required to file a return for the calendar 
year 1970. (See Sec. 25.6019-2.)
    (5) A husband made gifts valued at $2,000 during the first quarter 
of 1971 to third parties which represented gifts of future interests in 
property (see Sec. 25.2503-3), and his wife made no gifts during such 
calendar quarter. Each

[[Page 590]]

spouse is required to file a return for the first calendar quarter of 
1971.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28729, Dec. 29, 1972; T.D. 7910, 48 FR 40374, Sept. 7, 1983]



Sec. 25.2513-2  Manner and time of signifying consent.

    (a)(1) Consent to the application of the provisions of section 2513 
with respect to a ``calendar period'' (as defined in Sec. 25.2502-
1(c)(1)) shall, in order to be effective, be signified by both spouses. 
If both spouses file gift tax returns within the time for signifying 
consent, it is sufficient if--
    (i) The consent of the husband is signified on the wife's return, 
and the consent of the wife is signified on the husband's return;
    (ii) The consent of each spouse is signified on his own return; or
    (iii) The consent of both spouses is signified on one of the 
returns.

If only one spouse files a gift tax return within the time provided for 
signifying consent, the consent of both spouses shall be signified on 
that return. However, whereover possible, the notice of the consent is 
to be shown on both returns and it is preferred that the notice be 
executed in the manner described in subdivision (i) of this 
subparagraph. The consent may be revoked only as provided in Sec. 
25.2513-3. If one spouse files more than one gift tax return for a 
calendar period on or before the due date of the return, the last return 
so filed shall, for the purpose of determining whether a consent has 
been signified, be considered as the return. (See Sec. Sec. 25.6075-1 
and 25.6075-2 for the due date of a gift tax return.)
    (2) For gifts made after December 31, 1970, and before January 1, 
1982 subject to the limitations of paragraph (b) of this section, the 
consent signified on a return filed for a calendar quarter will be 
effective for a previous calendar quarter of the same calendar year for 
which no return was filed because the gifts made during such previous 
calendar quarter did not exceed the annual exclusion provided by section 
2503(b), if the gifts in such previous calendar quarter are listed on 
that return. Thus, for example, if A gave $2,000 to his son in the first 
quarter of 1972 (and filed no return because of section 2503(b)) and 
gave a further $4,000 to such son in the last quarter of the year, A and 
his spouse could signify consent to the application of section 2513 on 
the return filed for the fourth quarter and have it apply to the first 
quarter as well, provided that the $2,000 gift is listed on such return.
    (b)(1) With respect to gifts made after December 31, 1981, or before 
January 1, 1971, the consent may be signified at any time following the 
close of the calendar year, subject to the following limitations:
    (i) The consent may not be signified after the 15th day of April 
following the close of the calendar year, unless before such 15th day no 
return has been filed for the year by either spouse, in which case the 
consent may not be signified after a return for the year is filed by 
either spouse; and
    (ii) The consent may not be signified for a calendar year after a 
notice of deficiency in gift tax for that year has been sent to either 
spouse in accordance with the provisions of section 6212(a).
    (2) With respect to gifts made after December 31, 1970 and before 
January 1, 1982, the consent may be signified at any time following the 
close of the calendar quarter in which the gift was made, subject to the 
following limitations:
    (i) The consent may not be signified after the 15th day of the 
second month following the close of such calendar quarter, unless before 
such 15th day, no return has been filed for such calendar quarter by 
either spouse, in which case the consent may not be signified after a 
return for such calendar quarter is filed by either spouse; and
    (ii) The consent may not be signified after a notice of deficiency 
with respect to the tax for such calendar quarter has been sent to 
either spouse in accordance with section 6212(a).
    (c) The executor or administrator of a deceased spouse, or the 
guardian or committee of a legally incompetent spouse, as the case may 
be, may signify the consent.
    (d) If the donor and spouse consent to the application of section 
2513, the return or returns for the ``calendar period'' (as defined in 
Sec. 25.2502-1(c)(1)) must set forth, to the extent provided

[[Page 591]]

thereon, information relative to the transfers made by each spouse.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28730, Dec. 29, 1972; T.D. 7910, 48 FR 40375, Sept. 7, 1983]



Sec. 25.2513-3  Revocation of consent.

    (a)(1) With respect to gifts made after December 31, 1981, or before 
January 1, 1971, if the consent to the application of the provisions of 
section 2513 for a calendar year was effectively signified on or before 
the 15th day of April following the close of the calendar year, either 
spouse may revoke the consent by filing in duplicate a signed statement 
of revocation, but only if the statement is filed on or before such 15th 
day of April. Therefore, a consent that was not effectively signified 
until after the 15th day of April following the close of the calendar 
year to which it applies may not be revoked.
    (2) With respect to gifts made after December 31, 1970, and before 
January 1, 1982, if the consent to the application of the provisions of 
section 2513 for a calendar quarter was effectively signified on or 
before the 15th day of the second month following the close of such 
calendar quarter, either spouse may revoke the consent by filing in 
duplicate a signed statement of revocation, but only if the statement is 
filed on or before such 15th day of the second month following the close 
of such calendar quarter. Therefore, a consent that was not effectively 
signified until after the 15th day of the second month following the 
close of the calendar quarter to which it applies may not be revoked.
    (b) Except as provided in paragraph (b) of Sec. 301.6091-1 of this 
chapter (relating to hand-carried documents), the statement referred to 
in paragraph (a) of this section shall be filed with the internal 
revenue officer with whom the gift tax return is required to be filed, 
or with whom the gift tax return would be required to be filed if a 
return were required.

[T.D. 7238, 37 FR 28730, Dec. 29, 1972, as amended by T.D. 7910, 48 FR 
40375, Sept. 7, 1983]



Sec. 25.2513-4  Joint and several liability for tax.

    If consent to the application of the provisions of section 2513 is 
signified as provided in Sec. 25.2513-2, and not revoked as provided in 
Sec. 25.2513-3, the liability with respect to the entire gift tax of 
each spouse for such ``calendar period'' (as defined in Sec. 25.2502-
1(c)(1)) is joint and several. See paragraph (d) of Sec. 25.2511-1.

[T.D. 7238, 37 FR 28730, Dec. 29, 1972, as amended by T.D. 7910, 48 FR 
40375, Sept. 7, 1983]



Sec. 25.2514-1  Transfers under power of appointment.

    (a) Introductory. (1) Section 2514 treats the exercise of a general 
power of appointment created on or before October 21, 1942, as a 
transfer of property for purposes of the gift tax. The section also 
treats as a transfer of property the exercise or complete release of a 
general power of appointment created after October 21, 1942, and under 
certain circumstances the exercise of a power of appointment (not a 
general power of appointment) created after October 21, 1942, by the 
creation of another power of appointment. See paragraph (d) of Sec. 
25.2514-3. Under certain circumstances, also, the failure to exercise a 
power of appointment created after October 21, 1942, within a specified 
time, so that the power lapses, constitutes a transfer of property. 
Paragraphs (b) through (e) of this section contain definitions of 
certain terms used in Sec. Sec. 25.2514-2 and 25.2514-3. See Sec. 
25.2514-2 for specific rules applicable to certain powers created on or 
before October 21, 1942. See Sec. 25.2514-3 for specific rules 
applicable to powers created after October 21, 1942.
    (2) [Reserved]
    (b) Definition of ``power of appointment''--(1) In general. The term 
``power of appointment'' includes all powers which are in substance and 
effect powers of appointment received by the donee of the power from 
another person, regardless of the nomenclature used in creating the 
power and regardless of local property law connotations. For example, if 
a trust instrument provides that the beneficiary may appropriate or 
consume the principal of the

[[Page 592]]

trust, the power to consume or appropriate is a power of appointment. 
Similarly, a power given to a donee to affect the beneficial enjoyment 
of a trust property or its income by altering, amending or revoking the 
trust instrument or terminating the trust is a power of appointment. A 
power in a donee to remove or discharge a trustee and appoint himself 
may be a power of appointment. For example, if under the terms of a 
trust instrument, the trustee or his successor has the power to appoint 
the principal of the trust for the benefit of individuals including 
himself, and A, another person, has the unrestricted power to remove or 
discharge the trustee at any time and appoint any other person, 
including himself, A is considered as having a power of appointment. 
However, he would not be considered to have a power of appointment if he 
only had the power to appoint a successor, including himself, under 
limited conditions which did not exist at the time of exercise, release 
or lapse of the trustee's power, without an accompanying unrestricted 
power of removal. Similarly, a power to amend only the administrative 
provisions of a trust instrument, which cannot substantially affect the 
beneficial enjoyment of the trust property or income, is not a power of 
appointment. The mere power of management, investment, custody of 
assets, or the power to allocate receipts and disbursements as between 
income and principal, exercisable in a fiduciary capacity, whereby the 
holder has no power to enlarge or shift any of the beneficial interests 
therein except as an incidental consequence of the discharge of such 
fiduciary duties is not a power of appointment. Further, the right in a 
beneficiary of a trust to assent to a periodic accounting, thereby 
relieving the trustee from further accountability, is not a power of 
appointment if the right of assent does not consist of any power or 
right to enlarge or shift the beneficial interest of any beneficiary 
therein.
    (2) Relation to other sections. For purposes of Sec. Sec. 25.2514-1 
through 25.2514-3, the term ``power of appointment'' does not include 
powers reserved by a donor to himself. No provision of section 2514 or 
of Sec. Sec. 25.2514-1 through 25.2514-3 is to be construed as in any 
way limiting the application of any other section of the Internal 
Revenue Code or of these regulations. The power of the owner of a 
property interest already possessed by him to dispose of his interest, 
and nothing more, is not a power of appointment, and the interest is 
includible in the amount of his gifts to the extent it would be 
includible under section 2511 or other provisions of the Internal 
Revenue Code. For example, if a trust created by S provides for payment 
of the income to A for life with power in A to appoint the entire trust 
property by deed during her lifetime to a class consisting of her 
children, and a further power to dispose of the entire corpus by will to 
anyone, including her estate, and A exercises the inter vivos power in 
favor of her children, she has necessarily made a transfer of her income 
interest which constitutes a taxable gift under section 2511(a), without 
regard to section 2514. This transfer also results in a relinquishment 
of her general power to appoint by will which constitutes a transfer 
under section 2514 if the power was created after October 21, 1942.
    (3) Powers over a portion of property. If a power of appointment 
exists as to part of an entire group of assets or only over a limited 
interest in property, section 2514 applies only to such part or 
interest.
    (c) Definition of ``general power of appointment''--(1) In general. 
The term ``general power of appointment'' as defined in section 2514(c) 
means any power of appointment exercisable in favor of the person 
possessing the power (referred to as the ``possessor''), his estate, his 
creditors, or the creditors of his estate, except (i) joint powers, to 
the extent provided in Sec. Sec. 25.2514-2 and 25.2514-3 and (ii) 
certain powers limited by an ascertainable standard, to the extent 
provided in subparagraph (2) of this paragraph. A power of appointment 
exercisable to meet the estate tax, or any other taxes, debts, or 
charges which are enforceable against the possessor or his estate, is 
included within the meaning of a power of appointment exercisable in 
favor of the possessor, his estate, his creditors, or the creditors of 
his estate. A power of

[[Page 593]]

appointment exercisable for the purpose of discharging a legal 
obligation of the possessor or for his pecuniary benefit is considered a 
power of appointment exercisable in favor of the possessor or his 
creditors. However, for purposes of Sec. Sec. 25.2514-1 through 
25.2514-3, a power of appointment not otherwise considered to be a 
general power of appointment is not treated as a general power of 
appointment merely by reason of the fact that an appointee may, in fact, 
be a creditor of the possessor or his estate. A power of appointment is 
not a general power if by its terms it is either--
    (a) Exercisable only in favor of one or more designated persons or 
classes other than the possessor or his creditors, or the possessor's 
estate, or the creditors of his estate, or
    (b) Expressly not exercisable in favor of the possessor or his 
creditors, the possessor's estate, or the creditors of his estate.


A beneficiary may have two powers under the same instrument, one of 
which is a general power of appointment and the other of which is not. 
For example, a beneficiary may have a general power to withdraw a 
limited portion of trust corpus during his life, and a further power 
exercisable during his lifetime to appoint the corpus among his 
children. The later power is not a general power of appointment (but its 
exercise may result in the exercise of the former power; see paragraph 
(d) of this section).
    (2) Powers limited by an ascertainable standard. A power to consume, 
invade, or appropriate income or corpus, or both, for the benefit of the 
possessor which is limited by an ascertainable standard relating to the 
health, education, support, or maintenance of the possessor is, by 
reason of section 2514(c)(1), not a general power of appointment. A 
power is limited by such a standard if the extent of the possessor's 
duty to exercise and not to exercise the power is reasonably measurable 
in terms of his needs for health, education, or support (or any 
combination of them). As used in this subparagraph, the words 
``support'' and ``maintenance'' are synonymous and their meaning is not 
limited to the bare necessities of life. A power to use property for the 
comfort, welfare, or happiness of the holder of the power is not limited 
by the requisite standard. Examples of powers which are limited by the 
requisite standard are powers exercisable for the holder's ``support,'' 
``support in reasonable comfort,'' ``maintenance in health and 
reasonable comfort,'' ``support in his accustomed manner of living,'' 
``education, including college and professional education,'' ``health,'' 
and ``medical, dental, hospital and nursing expenses and expenses of 
invalidism.'' In determining whether a power is limited by an 
ascertainable standard, it is immaterial whether the beneficiary is 
required to exhaust his other income before the power can be exercised.
    (3) Certain powers under wills of decedents dying between January 1 
and April 2, 1948. Section 210 of the Technical Changes Act of 1953 
provides that if a decedent died after December 31, 1947, but before 
April 3, 1948, certain property interests described therein may, if the 
decedent's surviving spouse so elects, be accorded special treatment in 
the determination of the marital deduction to be allowed the decedent's 
estate under the provisions of section 812(e) of the Internal Revenue 
Code of 1939. See paragraph (h) of Sec. 81.47a of Regulations 105 (26 
CFR (1939) 81.47a(h)). The section further provides that property 
affected by the election shall be considered property with respect to 
which the surviving spouse has a general power of appointment. 
Therefore, notwithstanding any other provision of law or of Sec. Sec. 
25.2514-1 through 25.2514-3, if the surviving spouse has made an 
election under section 210 of the Technical Changes Act of 1953, the 
property which was the subject of the election shall be considered as 
property with respect to which she has a general power of appointment 
created after October 21, 1942, exercisable by deed or will, to the 
extent it was treated as an interest passing to the surviving spouse and 
not passing to any other person for the purpose of the marital deduction 
in the prior decedent's estate.
    (d) Definition of ``exercise.'' Whether a power of appointment is in 
fact exercised may depend upon local law. However, regardless of local 
law, a power of

[[Page 594]]

appointment is considered as exercised for purposes of section 2514 even 
though the exercise is in favor of the taker in default of appointment, 
and irrespective of whether the appointed interest and the interest in 
default of appointment are identical or whether the appointee renounces 
any right to take under the appointment. A power of appointment is also 
considered as exercised even though the disposition cannot take effect 
until the occurrence of an event after the exercise takes place, if the 
exercise is irrevocable and, as of the time of the exercise, the 
condition was not impossible of occurrence. For example, if property is 
left in trust to A for life, with a power in A to appoint the remainder 
by an instrument filed with the trustee during his life, and A exercises 
his power by appointing the remainder to B in the event that B survives 
A, A is considered to have exercised his power if the exercise was 
irrevocable. Furthermore, if a person holds both a presently exercisable 
general power of appointment and a presently exercisable nongeneral 
power of appointment over the same property, the exercise of the 
nongeneral power is considered the exercise of the general power only to 
the extent that immediately after the exercise of the nongeneral power 
the amount of money or property subject to being transferred by the 
exercise of the general power is decreased. For example, assume A has a 
noncumulative annual power to withdraw the greater of $5,000 or 5 
percent of the value of a trust having a value of $300,000 and a 
lifetime nongeneral power to appoint all or a portion of the trust 
corpus to A's child or grandchildren. If A exercises the nongeneral 
power by appointing $150,000 to A's child, the exercise of the 
nongeneral power is treated as the exercise of the general power to the 
extent of $7,500 (maximum exercise of general power before the exercise 
of the nongeneral power, 5% of $300,000 or $15,000, less maximum 
exercise of the general power after the exercise of the nongeneral 
power, 5% of $150,000 or $7,500).
    (e) Time of creation of power. A power of appointment created by 
will is, in general, considered as created on the date of the testator's 
death. However, section 2514(f) provides that a power of appointment 
created by a will executed on or before October 21, 1942, is considered 
a power created on or before that date if the testator dies before July 
1, 1949, without having republished the will, by codicil or otherwise, 
after October 21, 1942. A power of appointment created by an inter vivos 
instrument is considered as created on the date the instrument takes 
effect. Such a power is not considered as created at some future date 
merely because it is not exercisable on the date the instrument takes 
effect, or because it is revocable, or because the identity of its 
holders is not ascertainable until after the date the instrument takes 
effect. However, if the holder of a power exercises it by creating a 
second power, the second power is considered as created at the time of 
the exercise of the first. The application of this paragraph may be 
illustrated by the following examples:
    Example (1). A created a revocable trust before October 22, 1942, 
providing for payment of income to B for life with remainder as B shall 
appoint by deed or will. Even though A dies after October 21, 1942, 
without having exercised his power of revocation, B's power of 
appointment is considered a power created before October 22, 1942.
    Example (2). C created an irrevocable inter vivos trust before 
October 22, 1942, naming T as trustee and providing for payment of 
income to D for life with remainder to E. T was given the power to pay 
corpus to D and the power to appoint a successor trustee. If T resigns 
after October 21, 1942, and appoints D as successor trustee, D is 
considered to have a power of appointment created before October 22, 
1942.
    Example (3). F created an irrevocable inter vivos trust before 
October 22, 1942, providing for payment of income to G for life with 
remainder as G shall appoint by deed or will, but in default of 
appointment income to H for life with remainder as H shall appoint by 
deed or will. If G died after October 21, 1942, without having exercised 
his power of appointment, H's power of appointments is considered a 
power created before October 22, 1942, even though it was only a 
contingent interest until G's death.
    Example (4). If in example (3) above G had exercised by will his 
power of appointment, by creating a similar power in J, J's power of 
appointment would be considered a power created after October 21, 1942.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 6582, 26 FR 
11861, Dec. 12, 1961, T.D. 9757, 46 FR 6929, Jan. 22, 1981]

[[Page 595]]



Sec. 25.2514-2  Powers of appointment created on or before October 
21, 1942.

    (a) In general. The exercise of a general power of appointment 
created on or before October 21, 1942, is deemed to be a transfer of 
property by the individual possessing the power.
    (b) Joint powers created on or before October 21, 1942. Section 
2514(c)(2) provides that a power created on or before October 21, 1942, 
which at the time of the exercise is not exercisable by the possessor 
except in conjunction with another person, is not deemed a general power 
of appointment.
    (c) Release or lapse. A failure to exercise a general power of 
appointment created on or before October 21, 1942, or a complete release 
of such a power is not considered to be an exercise of a general power 
of appointment. The phrase ``a complete release'' means a release of all 
powers over all or a portion of the property subject to a power of 
appointment, as distinguished from the reduction of a power of 
appointment to a lesser power. Thus, if the possessor completely 
relinquished all powers over one-half of the property subject to a power 
of appointment, the power is completely released as to that one-half. If 
at or before the time a power of appointment is relinquished, the holder 
of the power exercises the power in such a manner or to such an extent 
that the relinquishment results in the reduction, enlargement, or shift 
in a beneficial interest in property, the relinquishment will be 
considered to be an exercise and not a release of the power. For 
example, assume that A created a trust in 1940 providing for payment of 
the income to B for life with the power in B to amend the trust, and for 
payment of the remainder to such persons as B shall appoint or, upon 
default of appointment, to C. If B amended the trust in 1948 by 
providing that upon his death the remainder was to be paid to D, and if 
he further amended the trust in 1955 by deleting his power to amend the 
trust, such relinquishment will be considered an exercise and not a 
release of a general power of appointment. On the other hand, if the 
1948 amendment became ineffective before or at the time of the 1955 
amendment, or if B in 1948 merely amended the trust by changing the 
purely ministerial powers of the trustee, his relinquishment of the 
power in 1955 will be considered as release of a power of appointment.
    (d) Partial release. If a general power of appointment created on or 
before October 21, 1942, is partially released so that it is not 
thereafter a general power of appointment, a subsequent exercise of the 
partially released power is not an exercise of a general power of 
appointment if the partial release occurs before whichever is the later 
of the following dates:
    (1) November 1, 1951; or
    (2) If the possessor was under a legal disability to release the 
power on October 21, 1942, the day after the expiration of 6 months 
following the termination of such legal disability.

However, if a general power created on or before October 21, 1942, is 
partially released on or after the later of those dates, a subsequent 
exercise of the power will constitute an exercise of a general power of 
appointment. The legal disability referred to in this paragraph is 
determined under local law and may include the disability of an insane 
person, a minor, or an unborn child. The fact that the type of general 
power of appointment possessed by the holder actually was not generally 
releasable under the local law does not place the holder under a legal 
disability within the meaning of this paragraph. In general, however, it 
is assumed that all general powers of appointment are releasable, unless 
the local law on the subject is to the contrary, and it is presumed that 
the method employed to release the power is effective, unless it is not 
in accordance with the local law relating specifically to releases or, 
in the absence of such local law, is not in accordance with the local 
law relating to similar transactions.
    (e) Partial exercise. If a general power of appointment created on 
or before October 21, 1942, is exercised only as to a portion of the 
property subject to the power, the exercise is considered to be a 
transfer only as to the value of that portion.

[[Page 596]]



Sec. 25.2514-3  Powers of appointment created after October 21, 1942.

    (a) In general. The exercise, release, or lapse (except as provided 
in paragraph (c) of this section) of a general power of appointment 
created after October 21, 1942, is deemed to be a transfer of property 
by the individual possessing the power. The exercise of a power of 
appointment that is not a general power is considered to be a transfer 
if it is exercised to create a further power under certain circumstances 
(see paragraph (d) of this section). See paragraph (c) of Sec. 25.2514-
1 for the definition of various terms used in this section. See 
paragraph (b) of this section for the rules applicable to determine the 
extent to which joint powers created after October 21, 1942, are to be 
treated as general powers of appointment.
    (b) Joint powers created after October 21, 1942. The treatment of a 
power of appointment created after October 21, 1942, which is 
exercisable only in conjuction with another person is governed by 
section 2514(c)(3), which provides as follows:
    (1) Such a power is not considered as a general power of appointment 
if it is not exercisable by the possessor except with the consent or 
joinder of the creator of the power.
    (2) Such power is not considered as a general power of appointment 
if it is not exercisable by the possessor except with the consent or 
joinder of a person having a substantial interest in the property 
subject to the power which is adverse to the exercise of the power in 
favor of the possessor, his estate, his creditors, or the creditors of 
his estate. An interest adverse to the exercise of a power is considered 
as substantial if its value in relation to the total value of the 
property subject to the power is not insignificant. For this purpose, 
the interest is to be valued in accordance with the actuarial principles 
set forth in Sec. 25.2512-5 or, if it is not susceptible to valuation 
under those provisions, in accordance with the general principles set 
forth in Sec. 25.2512-1. A taker in default of appointment under a 
power has an interest which is adverse to an exercise of the power. A 
coholder of the power has no adverse interest merely because of his 
joint possession of the power nor merely because he is a permissible 
appointee under a power. However, a coholder of a power is considered as 
having an adverse interest where he may possess the power after the 
possessor's death and may exercise it at that time in favor of himself, 
his estate, his creditors, or the creditors of his estate. Thus, for 
example, if X, Y, and Z held a power jointly to appoint among a group of 
persons which includes themselves and if on the death of X the power 
will pass to Y and Z jointly, then Y and Z are considered to have 
interests adverse to the exercise of the power in favor of X. Similarly, 
if on Y's death the power will pass to Z, Z is considered to have an 
interest adverse to the exercise of the power in favor of Y. The 
application of this subparagraph may be further illustrated by the 
following examples in each of which it is assumed that the value of the 
interest in question is substantial:

    Example (1). The taxpayer and R are trustees of a trust under which 
the income is to be paid to the taxpayer for life and then to M for 
life, and R is remainderman. The trustees have power to distribute 
corpus to the taxpayer. Since R's interest is substantially adverse to 
an exercise of the power in favor of the taxpayer, the latter does not 
have a general power of appointment. If M and the taxpayer were 
trustees, M's interest would likewise be adverse.
    Example (2). The taxpayer and L are trustees of a trust under which 
the income is to be paid to L for life and then to M for life, and the 
taxpayer is remainderman. The trustees have power to distribute corpus 
to the taxpayer during L's life. Since L's interest is adverse to an 
exercise of the power in favor of the taxpayer, the taxpayer does not 
have a general power of appointment. If the taxpayer and M were 
trustees, M's interest would likewise be adverse.
    Example (3). The taxpayer and L are trustees of a trust under which 
the income is to be paid to L for life. The trustees can designate 
whether corpus is to be distributed to the taxpayer or to A after L's 
death. L's interest is not adverse to an exercise of the power in favor 
of the taxpayer, and the taxpayer therefore has a general power of 
appointment.

    (3) A power which is exercisable only in conjunction with another 
person, and which after application of the rules set forth in 
subparagraphs (1) and (2) of this paragraph, constitutes a general power 
of appointment, will be treated as though the holders of the power who

[[Page 597]]

are permissible appointees of the property were joint owners of property 
subject to the power. The possessor, under this rule, will be treated as 
possessed of a general power of appointment over an aliquot share of the 
property to be determined with reference to the number of joint holders, 
including the possessor, who (or whose estates or creditors) are 
permissible appointees. Thus, for example, if X, Y, and Z hold an 
unlimited power jointly to appoint among a group of persons, including 
themselves, but on the death of X the power does not pass to Y and Z 
jointly, then Y and Z are not considered to have interests adverse to 
the exercise of the power in favor of X. In this case, X is considered 
to possess a general power of appointment as to one-third of the 
property subject to the power.
    (c) Partial releases, lapses, and disclaimers of general powers of 
appointment created after October 21, 1942--(1) Partial release of 
power. The general principles set forth in Sec. 25.2511-2 for 
determining whether a donor of property (or of a property right or 
interest) has divested himself of all or any portion of his interest 
therein to the extent necessary to effect a completed gift are 
applicable in determining whether a partial release of a power of 
appointment constitutes a taxable gift. Thus, if a general power of 
appointment is partially released so that thereafter the donor may still 
appoint among a limited class of persons not including himself the 
partial release does not effect a complete gift, since the possessor of 
the power has retained the right to designate the ultimate beneficiaries 
of the property over which he holds the power and since it is only the 
termination of such control which completes a gift.
    (2) Power partially released before June 1, 1951. If a general power 
of appointment created after October 21, 1942, was partially released 
prior to June 1, 1951, so that it no longer represented a general power 
of appointment, as defined in paragraph (c) of Sec. 25.2514-1, the 
subsequent exercise, release, or lapse of the partially released power 
at any time thereafter will not constitute the exercise or release of a 
general power of appointment. For example, assume that A created a trust 
in 1943 under which B possessed a general power of appointment. By an 
instrument executed in 1948 such general power of appointment was 
reduced in scope by B to an excepted power. The inter vivos exercise in 
1955, or in any ``calendar period'' (as defined in Sec. 25.2502-
1(c)(1)) thereafter, of such excepted power is not considered an 
exercise or release of a general power of appointment for purposes of 
the gift tax.
    (3) Power partially released after May 31, 1951. If a general power 
of appointment created after October 21, 1942, was partially released 
after May 31, 1951, the subsequent exercise, release or a lapse of the 
power at any time thereafter, will constitute the exercise or release of 
a general power of appointment for gift tax purposes.
    (4) Release or lapse of power. A release of a power of appointment 
need not be formal or express in character. For example, the failure to 
exercise a general power of appointment created after October 21, 1942, 
within a specified time so that the power lapses, constitutes a release 
of the power. In any case where the possessor of a general power of 
appointment is incapable of validly exercising or releasing a power, by 
reason of minority, or otherwise, and the power may not be validly 
exercised or released on his behalf, the failure to exercise or release 
the power is not a lapse of the power. If a trustee has in his capacity 
as trustee a power which is considered as a general power of 
appointment, his resignation or removal as trustee will cause a lapse of 
his power. However, section 2514(e) provides that a lapse during any 
calendar year is considered as a release so as to be subject to the gift 
tax only to the extent that the property which could have been appointed 
by exercise of the lapsed power of appointment exceeds the greater of 
(i) $5,000, or (ii) 5 percent of the aggregate value, at the time of the 
lapse, of the assets out of which, or the proceeds of which, the 
exercise of the lapsed power could be satisfied. For example, if an 
individual has a noncumulative right to withdraw $10,000 a year from the 
principal of a trust fund, the failure to exercise this right of 
withdrawal in a particular year will not constitute a gift if the fund 
at the end of the year equals or exceeds $200,000. If, however, at the 
end of the

[[Page 598]]

particular year the fund should be worth only $100,000, the failure to 
exercise the power will be considered a gift to the extent of $5,000, 
the excess of $10,000 over 5 percent of a fund of $100,000. Where the 
failure to exercise a power, such as a right of withdrawal, occurs in 
more than a single year, the value of the taxable transfer will be 
determined separately for each year.
    (5) Disclaimer of power created after December 31, 1976. A 
disclaimer or renunciation of a general power of appointment created in 
a transfer made after December 31, 1976, is not considered a release of 
the power for gift tax purposes if the disclaimer or renunciation is a 
qualified disclaimer as described in section 2518 and the corresponding 
regulations. For rules relating to when a transfer creating the power 
occurs, see Sec. 25.2518-2(c)(3). If the disclaimer or renunciation is 
not a qualified disclaimer, it is considered a release of the power.
    (6) Disclaimer of power created before January 1, 1977. A disclaimer 
or renunciation of a general power of appointment created in a taxable 
transfer before January 1, 1977, in the person disclaiming is not 
considered a release of the power. The disclaimer or renunciation must 
be unequivocal and effective under local law. A disclaimer is a complete 
and unqualified refusal to accept the rights to which one is entitled. 
There can be no disclaimer or renunciation of a power after its 
acceptance. In the absence of facts to the contrary, the failure to 
renounce or disclaim within a reasonable time after learning of the 
existence of a power shall be presumed to constitute an acceptance of 
the power. In any case where a power is purported to be disclaimed or 
renounced as to only a portion of the property subject to the power, the 
determination as to whether there has been a complete and unqualified 
refusal to accept the rights to which one is entitled will depend on all 
the facts and circumstances of the particular case, taking into account 
the recognition and effectiveness of such a disclaimer under local law. 
Such rights refer to the incidents of the power and not to other 
interests of the possessor of the power in the property. If effective 
under local law, the power may be disclaimed or renounced without 
disclaiming or renouncing such other interests.
    (7) The first and second sentences of paragraph (c)(5) of this 
section are applicable for transfers creating the power to be disclaimed 
made on or after December 31, 1997.
    (d) Creation of another power in certain cases. Paragraph (d) of 
section 2514 provides that there is a transfer for purposes of the gift 
tax of the value of property (or of property rights or interests) with 
respect to which a power of appointment, which is not a general power of 
appointment, created after October 21, 1942, is exercised by creating 
another power of appointment which, under the terms of the instruments 
creating and exercising the first power and under applicable local law, 
can be validly exercised so as to (1) postpone the vesting of any estate 
or interest in the property for a period ascertainable without regard to 
the date of the creation of the first power, or (2) (if the applicable 
rule against perpetuities is stated in terms of suspensions of ownership 
or of the power of alienation, rather than of vesting) suspend the 
absolute ownership or the power of alienation of the property for a 
period ascertainable without regard to the date of the creation of the 
first power. For the purpose of section 2514(d), the value of the 
property subject to the second power of appointment is considered to be 
its value unreduced by any precedent or subsequent interest which is not 
subject to the second power. Thus, if a donor has a power to appoint 
$100,000 among a group consisting of his children or grandchildren and 
during his lifetime exercises the power by making an outright 
appointment of $75,000 and by giving one appointee a power to appoint 
$25,000, no more than $25,000 will be considered a gift under section 
2514(d). If, however, the donor appoints the income from the entire fund 
to a beneficiary for life with power in the beneficiary to appoint the 
remainder, the entire $100,000 will be considered a gift under section 
2514(d), if the exercise of the second power can validly postpone the 
vesting of any estate or interest in the property or can suspend the 
absolute ownership or power of alienation of the property for

[[Page 599]]

a period ascertainable without regard to the date of the creation of the 
first power.
    (e) Examples. The application of this section may be further 
illustrated by the following examples in each of which it is assumed, 
unless otherwise stated, that S has transferred property in trust after 
October 21, 1942, with the remainder payable to R at L's death, and that 
neither L nor R has any interest in or power over the enjoyment of the 
trust property except as is indicated separately in each example:

    Example (1). The income is payable to L for life. L has the power to 
cause the income to be paid to R. The exercise of the right constitutes 
the making of a transfer of property under section 2511. L's power does 
not constitute a power of appointment since it is only a power to 
dispose of his income interest, a right otherwise possessed by him.
    Example (2). The income is to be accumulated during L's life. L has 
the power to have the income distributed to himself. If L's power is 
limited by an ascertainable standard (relating to health, etc.) as 
defined in paragraph (c)(2) of Sec. 25.2514-1, the lapse of such power 
will not constitute a transfer of property for gift tax purposes. If L's 
power is not so limited, its lapse or release during L's lifetime may 
constitute a transfer of property for gift tax purposes. See especially 
paragraph (c)(4) of Sec. 25.2514-3.
    Example (3). The income is to be paid to L for life. L has a power, 
exercisable at any time, to cause the corpus to be distributed to 
himself. L has a general power of appointment over the remainder 
interest, the release of which constitutes a transfer for gift tax 
purposes of the remainder interest. If in this example L had a power to 
cause the corpus to be distributed only to X, L would have a power of 
appointment which is not a general power of appointment, the exercise or 
release of which would not constitute a transfer of property for 
purposes of the gift tax. Although the exercise or release of the 
nongeneral power is not taxable under this section, see Sec. 25.2514-
1(b)(2) for the gift tax consequences of the transfer of the life income 
interest.
    Example (4). The income is payable to L for life. R has the right to 
cause the corpus to be distributed to L at any time. R's power is not a 
power of appointment, but merely a right to dispose of his remainder 
interest, a right already possessed by him. In such a case, the exercise 
of the right constitutes the making of a transfer of property under 
section 2511 of the value, if any, of his remainder interest. See 
paragraph (e) of Sec. 25.2511-1.
    Example (5). The income is to be paid to L. R has the right to 
appoint the corpus to himself at any time. R's general power of 
appointment over the corpus includes a general power to dispose of L's 
income interest therein. The lapse or release of R's general power over 
the income interest during his life may constitute the making of a 
transfer of property. See especially paragraph (c)(4) of Sec. 25.2514-
3.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28730, Dec. 29, 1972; T.D. 7776, 46 FR 27642, May 21, 1981; T.D. 7910, 
48 FR 40375, Sept. 7, 1983; T.D. 8095, 51 FR 28370, Aug. 7, 1986; T.D. 
8744, 62 FR 68185, Dec. 31, 1997]



Sec. 25.2515-1  Tenancies by the entirety; in general.

    (a) Scope--(1) In general. This section and Sec. Sec. 25.2515-2 
through 25.2515-4 do not apply to the creation of a tenancy by the 
entirety after December 31, 1981, and do not reflect changes made to the 
Internal Revenue Code by sections 702(k)(1)(A) of the Revenue Act of 
1978, or section 2002(c)(2) of the Tax Reform Act of 1976.
    (2) Special rule in the case of tenancies created after July 13, 
1988, if the donee spouse is not a United States citizen. Under section 
2523(i)(3), applicable (subject to the special treaty rule contained in 
Public Law 101-239, section 7815(d)(14)) in the case of tenancies by the 
entirety and joint tenancies created between spouses after July 13, 
1988, if the donee spouse is not a citizen of the United States, the 
principles contained in section 2515 and Sec. Sec. 25.2515-1 through 
25.2515-4 apply in determining the gift tax consequences with respect to 
the creation and termination of the tenancy, except that the election 
provided in section 2515(a) (prior to repeal by the Economic Recovery 
Tax Act of 1981) and Sec. 25.2515-2 (relating to the donor's election 
to treat the creation of the tenancy as a transfer for gift tax 
purposes) does not apply.
    (3) Nature of. An estate by the entirety in real property is 
essentially a joint tenancy between husband and wife with the right of 
survivorship. As used in this section and Sec. Sec. 25.2515-2 through 
25.2515-4, the term ``tenancy by the entirety'' includes a joint tenancy 
between husband and wife in real property with right of survivorship, or 
a tenancy which accords to the spouses rights equivalent thereto 
regardless of

[[Page 600]]

the term by which such a tenancy is described in local property law.
    (b) Gift upon creation of tenancy by the entirety; in general. 
During calendar years prior to 1955 the contribution made by a husband 
or wife in the creation of a tenancy by the entirety constituted a gift 
to the extent that the consideration furnished by either spouse exceeded 
the value of the rights retained by that spouse. The contribution made 
by either or both spouses in the creation of such a tenancy during the 
calendar year 1955, any calendar year beginning before January 1, 1971, 
or any calendar quarter beginning after December 31, 1970, is not deemed 
a gift by either spouse, regardless of the proportion of the total 
consideration furnished by either spouse, unless the donor spouse elects 
(see Sec. 25.2515-2) under section 2515(c) to treat such transaction as 
a gift in the calendar quarter or calendar year in which the transaction 
is effected. See Sec. 25.2502-1(c)(1) for the definition of calendar 
quarter. However, there is a gift upon the termination of such a 
tenancy, other than by the death of a spouse, if the proceeds received 
by one spouse on termination of the tenancy are larger than the proceeds 
allocable to the consideration furnished by that spouse to the tenancy. 
The creation of a tenancy by the entirety takes place if (1) a husband 
or his wife purchases property and causes the title thereto to be 
conveyed to themselves as tenants by the entirety, (2) both join in such 
a purchase, or (3) either or both cause to be created such a tenancy in 
property already owned by either or both of them. The rule prescribed 
herein with respect to the creation of a tenancy by the entirety applies 
also to contributions made in the making of additions to the value of 
such a tenancy (in the form of improvements, reductions in the 
indebtedness, or otherwise), regardless of the proportion of the 
consideration furnished by each spouse. See Sec. 25.2516-1 for 
transfers made pursuant to a property settlement agreement incident to 
divorce.
    (c) Consideration--(1) In general. (i) The consideration furnished 
by a person in the creation of a tenancy by the entirety or the making 
of additions to the value thereof is the amount contributed by him in 
connection therewith. The contribution may be made by either spouse or 
by a third party. It may be furnished in the form of money, other 
property, or an interest in property. If it is furnished in the form of 
other property or an interest in property, the amount of the 
contribution is the fair market value of the property or interest at the 
time it was transferred to the tenancy or was exchanged for the property 
which became the subject of the tenancy. For example, if a decedent 
devised real property to the spouses as tenants by the entirety and the 
fair market value of the property was $30,000 at the time of the 
decedent's death, the amount of the decedent's contribution to the 
creation of the tenancy was $30,000. As another example, assume that in 
1950 the husband purchased real property for $25,000, taking it in his 
own name as sole owner, and that in 1956 when the property had a fair 
market value of $40,000 he caused it to be transferred to himself and 
his wife as tenants by the entirety. Here, the amount of the husband's 
contribution to the creation of the tenancy was $40,000 (the fair market 
value of the property at the time it was transferred to the tenancy). 
Similarly, assume that in 1950 the husband purchased, as sole owner, 
corporate shares for $25,000 and in 1956, when the shares had a fair 
market value of $35,000, he exchanged them for real property which was 
transferred to the husband and his wife as tenants by the entirety. The 
amount of the husband's contribution to the creation of the tenancy was 
$35,000 (the fair market value of the shares at the time he exchanged 
them for the real property which became the subject of the tenancy).
    (ii) Whether consideration derived from third-party sources is 
deemed to have been furnished by a third party or to have been furnished 
by the spouses will depend upon the terms under which the transfer is 
made. If a decedent devises real property to the spouses as tenants by 
the entirety, the decedent, and not the spouses, is the person who 
furnished the consideration for the creation of the tenancy. Likewise, 
if a decedent in his will directs his executor to discharge an 
indebtedness of the tenancy, the decedent, and

[[Page 601]]

not the spouses, is the person who furnished the consideration for the 
addition to the value of the tenancy. However, if the decedent 
bequeathed a general legacy to the husband and the wife and they used 
the legacy to discharge an indebtedness of the tenancy, the spouses, and 
not the decedent, are the persons who furnished the consideration for 
the addition to the value of the tenancy. The principles set forth in 
this subdivision with respect to transfers by decedents apply equally 
well to inter vivos transfers by third parties.
    (iii) Where a tenancy is terminated in part (e.g., where a portion 
of the property subject to the tenancy is sold to a third party, or 
where the original property is disposed of and in its place there is 
substituted other property of lesser value acquired through reinvestment 
under circumstances which satisfy the requirements of paragraph 
(d)(2)(ii) of this section), the proportionate contribution of each 
person to the remaining tenancy is in general the same as his 
proportionate contribution to the original tenancy, and the character of 
his contribution remains the same. These proportions are applied to the 
cost of the remaining or substituted property. Thus, if the total 
contribution to the cost of the property was $20,000 and a fourth of the 
property was sold, the contribution to the remaining portion of the 
tenancy is normally $15,000. However, if it is shown that at the time of 
the contribution more or less than one-fourth thereof was attributable 
to the portion sold, the contribution is divided between the portion 
sold and the portion retained in the proper proportion. If the portion 
sold was acquired as a separate tract, it is treated as a separate 
tenancy. As another example of the application of this subdivision, 
assume that in 1950 X (a third party) gave to H and W (H's wife), as 
tenants by the entirety, real property then having a value of $15,000. 
In 1955, H spent $5,000 thereon in improvements and under section 
2515(c) elected to treat his contribution as a gift. In 1956, W spent 
$10,000 in improving the property but did not elect to treat her 
contribution as a gift. Between 1957 and 1960 the property appreciated 
in value by $30,000. In 1960, the property was sold for $60,000, and 
$45,000 of the proceeds of the sale were, under circumstances that 
satisfy the requirements of paragraph (d)(2)(ii) of this section, 
reinvested in other real property. Since X contributed one-half of the 
total consideration for the original property and the additions to its 
value, he is considered as having furnished $22,500 (one-half of 
$45,000) toward the creation of the remaining portion of the tenancy and 
the making of additions to the value thereof. Similarly, H is considered 
as having furnished $7,500 (one-sixth of $45,000) which was treated as a 
gift in the year furnished, and W is considered as having furnished 
$15,000 (one-third of $45,000) which was not treated as a gift in the 
year furnished.
    (2) Proportion of consideration attributable to appreciation. Any 
general appreciation (appreciation due to fluctuations in market value) 
in the value of the property occurring between two successive 
contribution dates which can readily be measured and which can be 
determined with reasonable certainty to be allocable to any particular 
contribution or contributions previously furnished is to be treated, for 
the purpose of the computations in Sec. Sec. 25.2515-3 and 25.2515-4, 
as though it were additional consideration furnished by the person who 
furnished the prior consideration. Any general depreciation in value is 
treated in a comparable manner. For the purpose of the first sentence of 
this subparagraph, successive contribution dates are the two consecutive 
dates on which any contributions to the tenancy are made, not 
necessarily by the same party. Further, appreciation allocable to the 
prior consideration falls in the same class as the prior consideration 
to which it relates. The application of this subparagraph may be 
illustrated by the following examples:

    Example (1). In 1940, H purchased real property for $15,000 which he 
caused to be transferred to himself and W (his wife) as tenants by the 
entirety. In 1956 when the fair market value of the property was 
$30,000, W made $5,000 improvements to the property. In 1957 the 
property was sold for $35,000. The general appreciation of $15,000 which 
occurred between the date of purchase and the date of W's improvements 
to the property constitutes an additional contribution by H,

[[Page 602]]

having the same characteristics as his original contribution of $15,000.
    Example (2). In 1955 real property was purchased by H and W and 
conveyed to them as tenants by the entirety. The purchase price of the 
property was $15,000 of which H contributed $10,000 and W, $5,000. In 
1960 when the fair market value of the property is $21,000, W makes 
improvements thereto of $5,000. The property then is sold for $26,000. 
The appreciation in value of $6,000 results in an additional 
contribution of $4,000 (10,000/15,000x$6,000) by H, and an additional 
contribution by W of $2,000 (5,000/15,000x$6,000). H's total 
contribution to the tenancy is $14,000 ($10,000+$4,000) and W's total 
contribution is $12,000 ($5,000+ $2,000+$5,000).
    Example (3). In 1956 real property was purchased by H and W and 
conveyed to them as tenants by the entirety. The purchase price of the 
property was $15,000, on which a down payment of $3,000 was made. The 
remaining $12,000 was to be paid in monthly installments over a period 
of 15 years. H furnished $2,000 of the down payment and W, $1,000. H 
paid all the monthly installments. During the period 1956 to 1971 the 
property gradually appreciates in value to $24,000. Here, the 
appreciation is so gradual and the contributions so numerous that the 
amount allocable to any particular contribution cannot be ascertained 
with any reasonable certainty. Accordingly, in such a case the 
appreciation in value may be disregarded in determining the amount of 
consideration furnished in making the computations provided for in 
Sec. Sec. 25.2515-3 and 25.2515-4.

    (d) Gift upon termination of tenancy by the entirety--(1) In 
general. Upon the termination of the tenancy, whether created before, 
during, or subsequent to the calendar year 1955, a gift may result, 
depending upon the disposition made of the proceeds of the termination 
(whether the proceeds be in the form of cash, property, or interests in 
property). A gift may result notwithstanding the fact that the 
contribution of either spouse to the tenancy was treated as a gift. See 
Sec. 25.2515-3 for the method of determining the amount of any gift 
that may result from the termination of the tenancy in those cases in 
which no portion of the consideration contributed was treated as a gift 
by the spouses in the calendar quarter or calendar year in which it was 
furnished. See Sec. 25.2515-4 for the method of determining the amount 
of any gift that may result from the termination of the tenancy in those 
cases in which all or a portion of the consideration contributed was 
treated as constituting a gift by the spouses in the calendar quarter or 
calendar year in which it was furnished. See Sec. 25.2515-2 for the 
procedure to be followed by a donor who elects under section 2515(c) to 
treat the creation of a tenancy by the entirety (or the making of 
additions to its value) as a transfer subject to the gift tax in the 
calendar quarter (calendar year with respect to such transfers made 
before January 1, 1971) in which the transfer is made, and for the 
method of determining the amount of the gift. See Sec. 25.2502-1(c)(1) 
for the definition of calendar quarter.
    (2) Termination--(i) In general. Except as indicated in subdivision 
(ii) of this subparagraph, a termination of a tenancy is effected when 
all or a portion of the property so held by the spouses is sold, 
exchanged, or otherwise disposed of, by gift or in any other manner, or 
when the spouses through any form of conveyance or agreement become 
tenants in common of the property or otherwise alter the nature of their 
respective interests in the property formerly held by them as tenants by 
the entirety. In general, any increase in the indebtedness on a tenancy 
constitutes a termination of the tenancy to the extent of the increase 
in the indebtedness. However, such an increase will not constitute a 
termination of the tenancy to the extent that the increase is offset by 
additions to the tenancy within a reasonable time after such increase. 
Such additions (to the extent of the increase in the indebtedness) shall 
not be treated by the spouses as contributions within the meaning of 
paragraph (c) of this section.
    (ii) Exchange or reinvestment. A termination is not considered as 
effected to the extent that the property subject to the tenancy is 
exchanged for other real property, the title of which is held by the 
spouses in an identical tenancy. For this purpose, a tenancy is 
considered identical if the proportionate values of the spouses' 
respective rights (other than any change in the proportionate values 
resulting solely from the passing of time) are identical to those held 
in the property which was sold. In addition the sale, exchange (other 
than an exchange described above), or other disposition of property held 
as tenants by the entirety is not

[[Page 603]]

considered as a termination if all three of the following conditions are 
satisfied:
    (a) There is no division of the proceeds of the sale, exchange or 
other disposition of the property held as tenants by the entirety;
    (b) On or before the due date for the filing of a gift tax return 
for the calendar quarter or calendar year (see Sec. 25.6075-1 for the 
time for filing gift tax returns) in which the property held as tenants 
by the entirety was sold, exchanged, or otherwise disposed of, the 
spouses enter into a binding contract for the purchase of other real 
property; and
    (c) After the sale, exchange or other disposition of the former 
property and within a reasonable time after the date of the contract 
referred to in $(b) of this subdivision, such other real property 
actually is acquired by the spouses and held by them in an identical 
tenancy.


To the extent that all three of the conditions set forth in this 
subdivision are not met (whether by reason of the death of one of the 
spouses or for any other reason), the provisions of the preceding 
sentence shall not apply, and the sale, exchange or other disposition of 
the property will constitute a termination of the tenancy. As used in 
subdivision (c) the expression ``a reasonable time'' means the time 
which, under the particular facts in each case, is needed for those 
matters which are incident to the acquisition of the other property 
(i.e., perfecting of title, arranging for financing, construction, 
etc.). The fact that proceeds of a sale are deposited in the name of one 
tenant or of both tenants separately or jointly as a convenience does 
not constitute a division within the meaning of subdivision (a) if the 
other requirements of this subdivision are met. The proceeds of a sale, 
exchange, or other disposition of property held as tenants by the 
entirety will be deemed to have been used for the purchase of other real 
property if applied to the purchase or construction of improvements 
which themselves constitute real property and which are additions to 
other real property held by the spouses in a tenancy identical to that 
in which they held the property which was sold, exchanged, or otherwise 
disposed of.
    (3) Proceeds of termination. (i) The proceeds of termination may be 
received by a spouse in the form of money, property, or an interest in 
property. Where the proceeds are received in the form of property (other 
than money) or an interest in property, the value of the proceeds 
received by that spouse is the fair market value, on the date of 
termination of the tenancy by the entirety, of the property or interest 
received. Thus, if a tenancy by the entirety is terminated so that 
thereafter each spouse owns an undivided half interest in the property 
as tenant in common, the value of the proceeds of termination received 
by each spouse is one-half the value of the property at the time of the 
termination of the tenancy by the entirety. If under local law one 
spouse, without the consent of the other, can bring about a severance of 
his or her interest in a tenancy by the entirety and does so by making a 
gift of his or her interest to a third party, that spouse is considered 
as having received proceeds of termination in the amount of the fair 
market value, at the time of the termination, of his severable interest 
determined in accordance with the rules prescribed in Sec. 25.2512-5. 
He has, in addition, made a gift to the third party of the fair market 
value of the interest conveyed to the third party. In such a case, the 
other spouse also is considered as having received as proceeds of 
termination the fair market value, at the time of termination, of the 
interest which she thereafter holds in the property as tenant in common 
with the third party. However, since section 2515(b) contemplates that 
the spouses may divide the proceeds of termination in some proportion 
other than that represented by the values of their respective legal 
interests in the property, if both spouses join together in making a 
gift to a third party of property held by them as tenants by the 
entirety, the value of the proceeds of termination which will be treated 
as received by each is the amount which each reports (on his or her gift 
tax return filed for the calendar quarter or calendar year in which the 
termination occurs) as the value of his or her gift to the third party. 
This amount is the

[[Page 604]]

amount which each reports without regard to whether the spouses elect 
under section 2513 to treat the gifts as made one-half by each. For 
example, assume that H and W (his wife) hold real property as tenants by 
the entirety; that in the first calendar quarter of 1972, when the 
property has a fair market value of $60,000, they give it to their son; 
and that on their gift tax returns for such calendar quarter, H reports 
himself as having made a gift to the son of $36,000 and W reports 
herself as having made a gift to the son of $24,000. Under these 
circumstances, H is considered as having received proceeds of 
termination valued at $36,000, and W is considered as having received 
proceeds of termination valued at $24,000.
    (ii) Except as provided otherwise in subparagraph (2)(ii) of this 
paragraph (under which certain tenancies by the entirety are considered 
not to be terminated), where the proceeds of a sale, exchange, or other 
disposition of the property are not actually divided between the spouses 
but are held (whether in a bank account or otherwise) in their joint 
names or in the name of one spouse as custodian or trustee for their 
joint interests, each spouse is presumed, in the absence of a showing to 
the contrary, to have received, as of the date of termination, proceeds 
of termination equal in value to the value of his or her enforceable 
property rights in respect of the proceeds.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28731, Dec. 29, 1972, as amended by T.D. 8522, 59 FR 9656, Mar. 1, 1994]



Sec. 25.2515-2  Tenancies by the entirety; transfers treated as gifts;
manner of election and valuation.

    (a) The election to treat the creation of a tenancy by the entirety 
in real property, or additions made to its value, as constituting a gift 
in the calendar quarter or calendar year in which effected, shall be 
exercised by including the value of such gifts in the gift tax return of 
the donor for such calendar quarter or calendar year in which the 
tenancy was created, or the additions in value were made to the 
property. See section 6019 and the regulations thereunder. The election 
may be exercised only in a return filed within the time prescribed by 
law, or before the expiration of any extension of time granted pursuant 
to law for the filing of the return. See section 6075 for the time for 
filing the gift tax return and section 6081 for extensions of time for 
filing the return, together with the regulations thereunder. In order to 
make the election, a gift tax return must be filed for the calendar 
quarter or calendar year in which the tenancy was created, or additions 
in value thereto made, even though the value of the gift involved does 
not exceed the amount of the exclusion provided by section 2503(b). See 
Sec. 25.2502-1(c)(1) for the definition of calendar quarter.
    (b) If the donor spouse exercises the election as provided in 
paragraph (a) of this section, the amount of the gift at the creation of 
the tenancy is the amount of his contribution to the tenancy less the 
value of his retained interest in it, determined as follows:
    (1) If under the law of the jurisdiction governing the rights of the 
spouses, either spouse, acting alone, can bring about a severance of his 
or her interest in the property, the value of the donor's retained 
interest is one-half the value of the property.
    (2) If, under the law of the jurisdiction governing the rights of 
the spouses each is entitled to share in the income or other enjoyment 
of the property but neither, acting alone, may defeat the right of the 
survivor of them to the whole of the property, the amount of retained 
interest of the donor is determined by use of the appropriate actuarial 
factors for the spouses at their respective attained ages at the time 
the transaction is effected.
    (c) Factors representing the respective interests of the spouses, 
under a tenancy by the entirety, at their attained ages at the time of 
the transaction may be readily computed based on the method described in 
Sec. 25.2512-5. State law may provide that the husband only is entitled 
to all of the income or other enjoyment of the real property held as 
tenants by the entirety, and the wife's interest consists only of the 
right of survivorship with no right of severance. In such a case, a 
special factor may be needed to determine the value of the interests of 
the

[[Page 605]]

respective spouses. See Sec. 25.2512-5(d)(4) for the procedure for 
obtaining special factors from the Internal Revenue Service in 
appropriate cases.
    (d) The application of this paragraph may be illustrated by the 
following example:

    Example. A husband with his own funds acquires real property valued 
at $10,000 and has it conveyed to himself and his wife as tenants by the 
entirety. Under the law of the jurisdiction governing the rights of the 
parties, each spouse is entitled to share in the income from the 
property but neither spouse acting alone could bring about a severance 
of his or her interest. The husband elects to treat the transfer as a 
gift in the year in which effected. At the time of transfer, the ages of 
the husband and wife are 45 and 40, respectively, on their birthdays 
nearest to the date of transfer. The value of the gift to the wife is 
$5,502.90, computed as follows:

Value of property transferred...............................  $10,000.00
Less $10,000x0.44971 (factor for value of donor's retained      4,497.10
 rights)....................................................
                                                             -----------
Value of gift...............................................    5,502.90
 


[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7150, 36 FR 
22900, Dec. 2, 1971; T.D. 7238, 37 FR 28731, Dec. 29, 1972; T.D. 8540, 
59 FR 30177, June 10, 1994]



Sec. 25.2515-3  Termination of tenancy by the entirety; cases in which
entire value of gift is determined under section 2515(b).

    (a) In any case in which--(1) The creation of a tenancy by the 
entirety (including additions in value thereto) was not treated as a 
gift, and
    (2) The entire consideration for the creation of the tenancy, and 
any additions in value thereto, was furnished solely by the spouses (see 
paragraph (c)(1)(ii) of Sec. 25.2515-1),

the termination of the tenancy (other than by the death of a spouse) 
always results in the making of a gift by a spouse who receives a 
smaller share of the proceeds of the termination (whether received in 
cash, property or interests in property) than the share of the proceeds 
attributable to the total consideration furnished by him. See paragraph 
(c) of Sec. 25.2515-1 for a discussion of what constitutes 
consideration and the value thereof. Thus, a gift is effected at the 
time of termination of the tenancy by the spouse receiving less than 
one-half of the proceeds of termination if such spouse (regardless of 
age) furnished one-half or more of the total consideration for the 
purchase and improvements, if any, of the property held in the tenancy. 
Also, if one spouse furnished the entire consideration, a gift is made 
by such spouse to the extent that the other spouse receives any portion 
of the proceeds of termination. See Sec. 25.2515-4 for determination of 
the amount of the gift, if any, in cases in which the creation of the 
tenancy was treated as a gift or a portion of the consideration was 
furnished by a third person. See paragraph (d)(2) of Sec. 25.2515-1 as 
to the acts which effect a termination of the tenancy.
    (b) In computing the value of the gift under the circumstances 
described in paragraph (a) of this section, it is first necessary to 
determine the spouse's share of the proceeds attributable to the 
consideration furnished by him. This share is computed by multiplying 
the total value of the proceeds of the termination by a fraction, the 
numerator of which is the total consideration furnished by the donor 
spouse and the denominator of which is the total consideration furnished 
by both spouses. From this amount there is subtracted the value of the 
proceeds of termination received by the donor spouse. The amount 
remaining is the value of the gift. In arriving at the ``total 
consideration furnished by the donor spouse'' and the ``total 
consideration furnished by both spouses'', for purposes of the 
computation provided for in this paragraph, the consideration furnished 
(see paragraph (c) of Sec. 25.2515-1) is not reduced by any amounts 
which otherwise would have been excludable under section 2503(b) in 
determining the amounts of taxable gifts for calendar quarters or 
calendar years in which the consideration was furnished. (See Sec. 
25.2502-1 (c)(1) for the definition of calendar quarter.) As an example 
assume that in 1955, real property was purchased for $30,000, the 
husband and wife each contributing $12,000 and the remaining $6,000 
being obtained through a mortgage on the property. In each of the years 
1956 and 1957, the husband paid $3,000 on the principal of the 
indebtedness, but did not disclose the value of these transfers on his 
gift tax returns for those years. The total consideration furnished by 
the husband is

[[Page 606]]

$18,000, the total consideration furnished by the wife is $12,000, and 
the total consideration furnished by both spouses is $30,000.
    (c) The application of this section may be illustrated by the 
following examples:

    Example (1). In 1956 the husband furnished $30,000 and his wife 
furnished $10,000 of the consideration for the purchase and subsequent 
improvement of real property held by them as tenants by the entirety. 
The husband did not elect to treat the consideration furnished as a 
gift. The property later is sold for $60,000, the husband receiving 
$35,000 and his wife receiving $25,000 of the proceeds of the 
termination. The termination of the tenancy results in a gift of $10,000 
by the husband to his wife, computed as follows:

[$30,000 (consideration furnished by husband)/$40,000 (total 
          consideration furnished by both spouses)]x$60,000 (proceeds of 
          termination)=$45,000
$45,000-$35,000 (proceeds received by husband)=$10,000 gift by husband 
          to wife
    Example (2). In 1950 the husband purchased shares of X Company for 
$10,000. In 1955 when those shares had a fair market value of $30,000, 
he and his wife purchased real property from A and had it conveyed to 
them as tenants by the entirety. In payment for the real property, the 
husband transferred his shares of X Company to A and the wife paid A the 
sum of $10,000. They later sold the real property for $60,000, divided 
$24,000 (each taking $12,000) and reinvested the remaining $36,000 in 
other real property under circumstances that satisfied the conditions 
set forth in paragraph (d)(2)(ii) of Sec. 25.2515-1. The tenancy was 
terminated only with respect to the $24,000 divided between them. This 
termination of the tenancy resulted in a gift of $6,000 by the husband 
to the wife, computed as follows:

[$30,000 (consideration furnished by husband)/$40,000 (total 
          consideration furnished by both spouses)]x$24,000 (proceeds of 
          termination)=$18,000
$18,000-$12,000 (proceeds received by husband)=$6,000 gift by husband to 
          wife.


Since the tenancy was terminated only in part, with respect to the 
remaining portion of the tenancy each spouse is considered as having 
furnished that proportion of the total consideration for the remaining 
portion of the tenancy as the consideration furnished by him before the 
sale bears to the total consideration furnished by both spouses before 
the sale. See paragraph (c) of Sec. 25.2515-1. The consideration 
furnished by the husband for the reduced tenancy is $27,000, computed as 
follows:

[$30,000 (consideration furnished by husband before sale)/$40,000 (total 
          consideration furnished by both spouses before sale)]x$36,000 
          (consideration for reduced tenancy)=$27,000

The consideration furnished by the wife is $9,000, computed in a similar 
manner.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28732, Dec. 29, 1972]



Sec. 25.2515-4  Termination of tenancy by entirety; cases in which none,
or a portion only, of value of gift is determined under section 2515(b).

    (a) In general. The rules provided in section 2515(b) (see Sec. 
25.2515-3) are not applied in determining whether a gift has been made 
at the termination of a tenancy to the extent that the consideration 
furnished for the creation of the tenancy was treated as a gift or if 
the consideration for the creation of the tenancy was furnished by a 
third party. Consideration furnished for the creation of the tenancy was 
treated as a gift if it was furnished either (1) during calendar years 
prior to 1955, or (2) during the calendar year 1955 and subsequent 
calendar years and calendar quarters and the donor spouse exercised the 
election to treat the furnishing of consideration as a gift. (For the 
definition of calendar quarter see Sec. 25.2502-1(c)(1).) See paragraph 
(b) of this section for the manner of computing the value of gifts 
resulting from the termination of the tenancy under these circumstances. 
See paragraph (c) of this section for the rules to be applied where part 
of the total consideration for the creation of the tenancy and additions 
to the value thereof was not treated as a gift and part either was 
treated as a gift or was furnished by a third party.
    (b) Value of gift when entire consideration is of the type described 
in paragraph (a) of this section. If the entire consideration for the 
creation of a tenancy by the entirety was treated as a gift or 
contributed by a third party, the determination of the amount, if any, 
of a gift made at the termination of the tenancy will be made by the 
application of the general principles set forth in Sec. 25.2511-1. 
Under those principles, when a spouse surrenders a property interest in 
a tenancy, the creation of which was treated as a gift, and in return 
receives an amount (whether in the form of cash, property, or an 
interest in property) less than

[[Page 607]]

the value of the property interest surrendered, that spouse is deemed to 
have made a gift in an amount equal to the difference between the value 
at the time of termination, of the property interest surrendered by such 
spouse and the amount received in exchange. Thus, if the husband's 
interest in such a tenancy at the time of termination is worth $44,971 
and the wife's interest therein at the time is worth $55,029, the 
property is sold for $100,000, and each spouse received $50,000 out of 
the proceeds of the sale, the wife has made a gift to the husband of 
$5,029. The principles applied in paragraph (c) of Sec. 25.2515-2 for 
the method of determining the value of the respective interests of the 
spouses at the time of the creation of a tenancy by the entirety are 
equally applicable in determining the value of each spouse's interest in 
the tenancy at termination, except that the actuarial factors to be 
applied are those for the respective spouses at the ages attained at the 
date of termination.
    (c) Valuation of gift where both types of consideration are 
involved. If the consideration furnished consists in part of the type 
described in paragraph (a) of Sec. 25.2515-3 (consideration furnished 
by the spouses after 1954, and not treated as a gift in the calendar 
quarter or calendar year in which it was furnished) and in part of the 
type described in paragraph (a) of this section (consideration furnished 
by the spouses and treated as a gift or furnished by a third party), the 
amount of the gift is determined as follows:
    (1) By applying the principles set forth in paragraph (b) of Sec. 
25.2515-3 to that portion of the total proceeds of termination which the 
consideration described in paragraph (a) of Sec. 25.2515-3 bears to the 
total consideration furnished;
    (2) By applying the principles set forth in paragraph (b) of this 
section to the remaining portion of the total proceeds of termination; 
and
    (3) By subtracting the proceeds of termination received by the donor 
from the total of the amounts which under the principles referred to in 
subparagraphs (1) and (2) of this paragraph are to be compared with the 
proceeds of termination received by a spouse in determining whether a 
gift was made by that spouse. For example, assume that consideration of 
$30,000 was furnished by the husband in 1954. Assume also that on 
February 1, 1955, the husband contributed $12,000 and the wife $8,000, 
the husband's contribution not being treated as a gift (see paragraph 
(b) of Sec. 25.2515-1). Assume further that between 1957 and 1965 the 
property appreciated in value by $40,000 and was sold in 1965 for 
$90,000 (of which the husband received $40,000 and the wife $50,000). 
The principles set forth in paragraph (b) of Sec. 25.2515-3 are applied 
to $36,000 (20,000/50,000x$90,000) in arriving at the amount which is 
compared with the proceeds of termination received by a spouse. Applying 
the principles set forth in paragraph (b) of Sec. 25.2515-3, this 
amount in the case of the husband is $21,600 (12,000/20,000x$36,000). 
Similarly, the principles set forth in paragraph (b) of this section are 
applied to $54,000 ($90,000-36,000), the remaining portion of the 
proceeds of termination, in arriving at the amount which is compared 
with the proceeds of termination received by a spouse. If in this case 
either spouse, without the consent of the other spouse, can bring about 
a severance of his interest in the tenancy, the amount determined under 
paragraph (b) of this section in the case of the husband would be 
$27,000 (\1/2\ of $54,000). The total of the two amounts which are to be 
compared with the proceeds of termination received by the husband is 
$48,600 ($21,600+27,000). This sum of $48,600 is then compared with the 
$40,000 proceeds received by the husband, and the termination of the 
tenancy has resulted, for gift tax purposes, in a transfer of $8,600 by 
the husband to his wife in 1965. See paragraph (d) of this section for 
an additional example illustrating the application of this paragraph.
    (d) The application of paragraph (c) of this section may further be 
illustrated by the following example:

    Example. X died in 1948 and devised real property to Y and Z (Y's 
wife) as tenant by the entirety. Under the law of the jurisdiction, both 
spouses are entitled to share equally in the income from, or the 
enjoyment of, the property, but neither spouse, acting alone, may defeat 
the right of the survivor of them to the whole of the property. The fair 
market value of the property at the

[[Page 608]]

time of X's death was $100,000 and this amount is the consideration 
which X furnished toward the creation of the tenancy. In 1955, at which 
time the fair market value of the property was the same as at the time 
of X's death, improvements of $50,000 were made to the property, of 
which Y furnished $40,000 out of his own funds and Z furnished $10,000 
out of her own funds. Y did not elect to treat his transfer to the 
tenancy as resulting in the making of a gift in 1955. In 1956 the 
property was sold for $300,000 and Y and Z each received $150,000 of the 
proceeds. At the time the property was sold Y and Z were 45 and 40 years 
of age, respectively, on their birthdays nearest the date of sale. The 
value of the gift made by Y to Z is $19,942, computed as follows:
    Amount determined under principles set forth in Sec. 25.2515-3:
$50,000 (consideration not treated as gift in year furnished)/$150,000 
          (total consideration furnished)x$300,000 (proceeds of 
          termination)=$100,000 (proceeds of termination to which 
          principles set forth in Sec. 25.2515-3 apply)
$40,000 (consideration furnished by H and not treated as gift)/$50,000 
          (total consideration not treated as gift)x$100,000=$80,000

    Amount determined under principles set forth in paragraph (b) of 
this section:
$300,000 (total proceeds of termination)--$100,000 (proceeds to which 
          principles set forth in Sec. 25.2515-3 apply)=$200,000 
          (proceeds to which principles set forth in paragraph (b) 
          apply) 0.44971 (factor for Y's latest)x$200,000=$89,942

Amount of gift:
  Amount determined under Sec. 25.2515-3....................   $80,000
  Amount determined under paragraph (b).......................    89,942
                                                               ---------
   Total......................................................   169,942
Less: Proceeds received by Y..................................   150,000
                                                               ---------
  Amount of gift made by Y to Z...............................    19,942
 


[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28732, Dec. 29, 1972]



Sec. 25.2516-1  Certain property settlements.

    (a) Section 2516 provides that transfers of property or interests in 
property made under the terms of a written agreement between spouses in 
settlement of their marital or property rights are deemed to be for an 
adequate and full consideration in money or money's worth and, 
therefore, exempt from the gift tax (whether or not such agreement is 
approved by a divorce decree), if the spouses obtain a final decree of 
divorce from each other within two years after entering into the 
agreement.
    (b) See paragraph (b) of Sec. 25.6019-3 for the circumstances under 
which information relating to property settlements must be disclosed on 
the transferor's gift tax return for the ``calendar period'' (as defined 
in Sec. 25.2502-1(c)(1)) in which the agreement becomes effective.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28732, Dec. 29, 1972; T.D. 7910, 48 FR 40375, Sept. 7, 1983]



Sec. 25.2516-2  Transfers in settlement of support obligations.

    Transfers to provide a reasonable allowance for the support of 
children (including legally adopted children) of a marriage during 
minority are not subject to the gift tax if made pursuant to an 
agreement which satisfies the requirements of section 2516.



Sec. 25.2518-1  Qualified disclaimers of property; in general.

    (a) Applicability--(1) In general. The rules described in this 
section, Sec. 25.2518-2, and Sec. 25.2518-3 apply to the qualified 
disclaimer of an interest in property which is created in the person 
disclaiming by a transfer made after December 31, 1976. In general, a 
qualified disclaimer is an irrevocable and unqualified refusal to accept 
the ownership of an interest in property. For rules relating to the 
determination of when a transfer creating an interest occurs, see Sec. 
25.2518-2(c) (3) and (4).
    (2) Example. The provisions of paragraph (a)(1) of this section may 
be illustrated by the following example:

    Example. W creates an irrevocable trust on December 10, 1968, and 
retains the right to receive the income for life. Upon the death of W, 
which occurs after December 31, 1976, the trust property is 
distributable to W's surviving issue, per stirpes. The transfer creating 
the remainder interest in the trust occurred in 1968. See Sec. 25.2511-
1(c)(2). Therefore, section 2518 does not apply to the disclaimer of the 
remainder interest because the transfer creating the interest was made 
prior to January 1, 1977. If, however, W had caused the gift to be 
incomplete by also retaining the power to designate the person or 
persons to receive the trust principal at death, and, as a result, no 
transfer (within the meaning of Sec. 25.2511-1(c)(2)) of the remainder 
interest was made at the time of the creation of the trust, section 2518 
would apply to any disclaimer made after W's death with respect to an 
interest in the trust property.


[[Page 609]]


    (3) Paragraph (a)(1) of this section is applicable for transfers 
creating the interest to be disclaimed made on or after December 31, 
1997.
    (b) Effect of a qualified disclaimer. If a person makes a qualified 
disclaimer as described in section 2518(b) and Sec. 25.2518-2, for 
purposes of the Federal estate, gift, and generation-skipping transfer 
tax provisions, the disclaimed interest in property is treated as if it 
had never been transferred to the person making the qualified 
disclaimer. Instead, it is considered as passing directly from the 
transferor of the property to the person entitled to receive the 
property as a result of the disclaimer. Accordingly, a person making a 
qualified disclaimer is not treated as making a gift. Similarly, the 
value of a decedent's gross estate for purposes of the Federal estate 
tax does not include the value of property with respect to which the 
decedent, or the decedent's executor or administrator on behalf of the 
decedent, has made a qualified disclaimer. If the disclaimer is not a 
qualified disclaimer, for the purposes of the Federal estate, gift, and 
generation-skipping transfer tax provisions, the disclaimer is 
disregarded and the disclaimant is treated as having received the 
interest.
    (c) Effect of local law--(1) In general--(i) Interests created 
before 1982. A disclaimer of an interest created in a taxable transfer 
before 1982 which otherwise meets the requirements of a qualified 
disclaimer under section 2518 and the corresponding regulations but 
which, by itself, is not effective under applicable local law to divest 
ownership of the disclaimed property from the disclaimant and vest it in 
another, is nevertheless treated as a qualified disclaimer under section 
2518 if, under applicable local law, the disclaimed interest in property 
is transferred, as a result of attempting the disclaimer, to another 
person without any direction on the part of the disclaimant. An interest 
in property will not be considered to be transferred without any 
direction on the part of the disclaimant if, under applicable local law, 
the disclaimant has any discretion (whether or not such discretion is 
exercised) to determine who will receive such interest. Actions by the 
disclaimant which are required under local law merely to divest 
ownership of the property from the disclaimant and vest ownership in 
another person will not disqualify the disclaimer for purposes of 
section 2518(a). See Sec. 25.2518-2(d)(1) for rules relating to the 
immediate vesting of title in the disclaimant.
    (ii) Interests created after 1981. [Reserved]
    (2) Creditor's claims. The fact that a disclaimer is voidable by the 
disclaimant's creditors has no effect on the determination of whether 
such disclaimer constitutes a qualified disclaimer. However, a 
disclaimer that is wholly void or that is voided by the disclaimant's 
creditors cannot be a qualified disclaimer.
    (3) Examples. The provisions of paragraphs (c) (1) and (2) of this 
section may be illustrated by the following examples:

    Example (1). F dies testate in State Y on June 17, 1978. G and H are 
beneficiaries under the will. The will provides that any disclaimed 
property is to pass to the residuary estate. H has no interest in the 
residuary estate. Under the applicable laws of State Y, a disclaimer 
must be made within 6 months of the death of the testator. Seven months 
after F's death, H disclaimed the real property H received under the 
will. The disclaimer statute of State Y has a provision stating that an 
untimely disclaimer will be treated as an assignment of the interest 
disclaimed to those persons who would have taken had the disclaimer been 
valid. Pursuant to this provision, the disclaimed property became part 
of the residuary estate. Assuming the remaining requirements of section 
2518 are met, H has made a qualified disclaimer for purposes of section 
2518 (a).
    Example (2). Assume the same facts as in example (1) except that the 
law of State Y does not treat an ineffective disclaimer as a transfer to 
alternative takers. H assigns the disclaimed interest by deed to those 
who would have taken had the disclaimer been valid. Under these 
circumstances, H has not made a qualified disclaimer for purposes of 
section 2518 (a) because the disclaimant directed who would receive the 
property.
    Example (3). Assume the same facts as in example (1) except that the 
law of State Y requires H to pay a transfer tax in order to effectuate 
the transfer under the ineffective disclaimer provision. H pays the 
transfer tax. H has make a qualified disclaimer for purposes of section 
2518 (a).

    (d) Cross-reference. For rules relating to the effect of qualified 
disclaimers on

[[Page 610]]

the estate tax charitable and marital deductions, see Sec. Sec. 
20.2055-2(c) and 20.2056(d)-1 respectively. For rules relating to the 
effect of a qualified disclaimer of a general power of appointment, see 
Sec. 20.2041-3(d).

[T.D. 8095, 51 FR 28370, Aug. 7, 1986, as amended by T.D. 8744, 62 FR 
68185, Dec. 31, 1997]



Sec. 25.2518-2  Requirements for a qualified disclaimer.

    (a) In general. For the purposes of section 2518(a), a disclaimer 
shall be a qualified disclaimer only if it satisfies the requirements of 
this section. In general, to be a qualified disclaimer--
    (1) The disclaimer must be irrevocable and unqualified:
    (2) The disclaimer must be in writing;
    (3) The writing must be delivered to the person specified in 
paragraph (b) (2) of this section within the time limitations specified 
in paragraph (c)(1) of this section;
    (4) The disclaimant must not have accepted the interest disclaimed 
or any of its benefits; and
    (5) The interest disclaimed must pass either to the spouse of the 
decedent or to a person other than the disclaimant without any direction 
on the part of the person making the disclaimer.
    (b) Writing--(1) Requirements. A disclaimer is a qualified 
disclaimer only if it is in writing. The writing must identify the 
interest in property disclaimed and be signed either by the disclaimant 
or by the disclaimant's legal representative.
    (2) Delivery. The writing described in paragraph (b)(1) of this 
section must be delivered to the transferor of the interest, the 
transferor's legal representative, the holder of the legal title to the 
property to which the interest relates, or the person in possession of 
such property.
    (c) Time limit--(1) In general. A disclaimer is a qualified 
disclaimer only if the writing described in paragraph (b)(1) of this 
section is delivered to the persons described in paragraph (b)(2) of 
this section no later than the date which is 9 months after the later 
of--
    (i) The date on which the transfer creating the interest in the 
disclaimant is made, or
    (ii) The day on which the disclaimant attains age 21.
    (2) A timely mailing of a disclaimer treated as a timely delivery. 
Although section 7502 and the regulations under that section apply only 
to documents to be filed with the Service, a timely mailing of a 
disclaimer to the person described in paragraph (b)(2) of this section 
is treated as a timely delivery if the mailing requirements under 
paragraphs (c)(1), (c)(2) and (d) of Sec. 301.7502-1 are met. Further, 
if the last day of the period specified in paragraph (c)(1) of this 
section falls on Saturday, Sunday or a legal holiday (as defined in 
paragraph (b) of Sec. 301.7503-1), then the delivery of the writing 
described in paragraph (b)(1) of this section shall be considered timely 
if delivery is made on the first succeeding day which is not Saturday, 
Sunday or a legal holiday. See paragraph (d)(3) of this section for 
rules applicable to the exception for individuals under 21 years of age.
    (3) Transfer. (i) For purposes of the time limitation described in 
paragraph (c)(1)(i) of this section, the 9-month period for making a 
disclaimer generally is to be determined with reference to the transfer 
creating the interest in the disclaimant. With respect to inter vivos 
transfers, a transfer creating an interest occurs when there is a 
completed gift for Federal gift tax purposes regardless of whether a 
gift tax is imposed on the completed gift. Thus, gifts qualifying for 
the gift tax annual exclusion under section 2503(b) are regarded as 
transfers creating an interest for this purpose. With respect to 
transfers made by a decedent at death or transfers that become 
irrevocable at death, the transfer creating the interest occurs on the 
date of the decedent's death, even if an estate tax is not imposed on 
the transfer. For example, a bequest of foreign-situs property by a 
nonresident alien decedent is regarded as a transfer creating an 
interest in property even if the transfer would not be subject to estate 
tax. If there is a transfer creating an interest in property during the 
transferor's lifetime and such interest is later included in the 
transferor's gross estate for estate tax purposes (or would have been 
included if such interest were subject to estate tax), the 9-month 
period for making the qualified disclaimer is determined with reference 
to the earlier

[[Page 611]]

transfer creating the interest. In the case of a general power of 
appointment, the holder of the power has a 9-month period after the 
transfer creating the power in which to disclaim. If a person to whom 
any interest in property passes by reason of the exercise, release, or 
lapse of a general power desires to make a qualified disclaimer, the 
disclaimer must be made within a 9-month period after the exercise, 
release, or lapse regardless of whether the exercise, release, or lapse 
is subject to estate or gift tax. In the case of a nongeneral power of 
appointment, the holder of the power, permissible appointees, or takers 
in default of appointment must disclaim within a 9-month period after 
the original transfer that created or authorized the creation of the 
power. If the transfer is for the life of an income beneficiary with 
succeeding interests to other persons, both the life tenant and the 
other remaindermen, whether their interests are vested or contingent, 
must disclaim no later than 9 months after the original transfer 
creating an interest. In the case of a remainder interest in property 
which an executor elects to treat as qualified terminable interest 
property under section 2056(b)(7), the remainderman must disclaim within 
9 months of the transfer creating the interest, rather than 9 months 
from the date such interest is subject to tax under section 2044 or 
2519. A person who receives an interest in property as the result of a 
qualified disclaimer of the interest must disclaim the previously 
disclaimed interest no later than 9 months after the date of the 
transfer creating the interest in the preceding disclaimant. Thus, if A 
were to make a qualified disclaimer of a specific bequest and as a 
result of the qualified disclaimer the property passed as part of the 
residue, the beneficiary of the residue could make a qualified 
disclaimer no later than 9 months after the date of the testator's 
death. See paragraph (d)(3) of this section for the time limitation rule 
with reference to recipients who are under 21 years of age.
    (ii) Sentences 1 through 10 and 12 of paragraph (c)(3)(i) of this 
section are applicable for transfers creating the interest to be 
disclaimed made on or after December 31, 1997.
    (4) Joint property--(i) Interests in joint tenancy with right of 
survivorship or tenancies by the entirety. Except as provided in 
paragraph (c)(4)(iii) of this section (with respect to joint bank, 
brokerage, and other investment accounts), in the case of an interest in 
a joint tenancy with right of survivorship or a tenancy by the entirety, 
a qualified disclaimer of the interest to which the disclaimant succeeds 
upon creation of the tenancy must be made no later than 9 months after 
the creation of the tenancy regardless of whether such interest can be 
unilaterally severed under local law. A qualified disclaimer of the 
survivorship interest to which the survivor succeeds by operation of law 
upon the death of the first joint tenant to die must be made no later 
than 9 months after the death of the first joint tenant to die 
regardless of whether such interest can be unilaterally severed under 
local law and, except as provided in paragraph (c)(4)(ii) of this 
section (with respect to certain tenancies created on or after July 14, 
1988), such interest is deemed to be a one-half interest in the 
property. (See, however, section 2518(b)(2)(B) for a special rule in the 
case of disclaimers by persons under age 21.) This is the case 
regardless of the portion of the property attributable to consideration 
furnished by the disclaimant and regardless of the portion of the 
property that is included in the decedent's gross estate under section 
2040 and regardless of whether the interest can be unilaterally severed 
under local law. See paragraph (c)(5), Examples (7) and (8), of this 
section.
    (ii) Certain tenancies in real property between spouses created on 
or after July 14, 1988. In the case of a joint tenancy between spouses 
or a tenancy by the entirety in real property created on or after July 
14, 1988, to which section 2523(i)(3) applies (relating to the creation 
of a tenancy where the spouse of the donor is not a United States 
citizen), the surviving spouse may disclaim any portion of the joint 
interest that is includible in the decedent's gross estate under section 
2040. See paragraph (c)(5), Example (9), of this section.

[[Page 612]]

    (iii) Special rule for joint bank, brokerage, and other investment 
accounts (e.g., accounts held at mutual funds) established between 
spouses or between persons other than husband and wife. In the case of a 
transfer to a joint bank, brokerage, or other investment account (e.g., 
an account held at a mutual fund), if a transferor may unilaterally 
regain the transferor's own contributions to the account without the 
consent of the other cotenant, such that the transfer is not a completed 
gift under Sec. 25.2511-1(h)(4), the transfer creating the survivor's 
interest in the decedent's share of the account occurs on the death of 
the deceased cotenant. Accordingly, if a surviving joint tenant desires 
to make a qualified disclaimer with respect to funds contributed by a 
deceased cotenant, the disclaimer must be made within 9 months of the 
cotenant's death. The surviving joint tenant may not disclaim any 
portion of the joint account attributable to consideration furnished by 
that surviving joint tenant. See paragraph (c)(5), Examples (12), (13), 
and (14), of this section, regarding the treatment of disclaimed 
interests under sections 2518, 2033 and 2040.
    (iv) Effective date. This paragraph (c)(4) is applicable for 
disclaimers made on or after December 31, 1997.
    (5) Examples. The provisions of paragraphs (c)(1) through (c)(4) of 
this section may be illustrated by the following examples. For purposes 
of the following examples, assume that all beneficiaries are over 21 
years of age.

    Example (1). On May 13, 1978, in a transfer which constitutes a 
completed gift for Federal gift tax purposes, A creates a trust in which 
B is given a lifetime interest in the income from the trust. B is also 
given a nongeneral testamentary power of appointment over the corpus of 
the trust. The power of appointment may be exercised in favor of any of 
the issue of A and B. If there are no surviving issue at B's death or if 
the power is not exercised, the corpus is to pass to E. On May 13, 1978, 
A and B have two surviving children, C and D. If A, B, C or D wishes to 
make a qualified disclaimer, the disclaimer must be made no later than 9 
months after May 13, 1978.
    Example (2). Assume the same facts as in example (1) except that B 
is given a general power of appointment over the corpus of the trust. B 
exercises the general power of appointment in favor of C upon B's death 
on June 17, 1989. C may make a qualified disclaimer no later than 9 
months after June 17, 1989. If B had died without exercising the general 
power of appointment, E could have made a qualified disclaimer no later 
than 9 months after June 17, 1989.
    Example (3). F creates a trust on April 1, 1978, in which F's child 
G is to receive the income from the trust for life. Upon G's death, the 
corpus of the trust is to pass to G's child H. If either G or H wishes 
to make a qualified disclaimer, it must be made no later than 9 months 
after April 1, 1978.
    Example (4). A creates a trust on February 15, 1978, in which B is 
named the income beneficiary for life. The trust further provides that 
upon B's death the proceeds of the trust are to pass to C, if then 
living. If C predeceases D, the proceeds shall pass to D or D's estate. 
To have timely disclaimers for purposes of section 2518, B, C, and D 
must disclaim their respective interests no later than 9 months after 
February 15, 1978.
    Example (5). A, a resident of State Q, dies on January 10, 1979, 
devising certain real property to B. The disclaimer laws of State Q 
require that a disclaimer be made within a reasonable time after a 
transfer. B disclaims the entire interest in real property on November 
10, 1979. Although B's disclaimer may be effective under State Q law, it 
is not a qualified disclaimer under section 2518 because the disclaimer 
was made later than 9 months after the taxable transfer to B.
    Example (6). A creates a revocable trust on June 1, 1980, in which B 
and C are given the income interest for life. Upon the death of the last 
income beneficiary, the remainder interest is to pass to D. The creation 
of the trust is not a completed gift for Federal gift tax purposes, but 
each distribution of trust income to B and C is a completed gift at the 
date of distribution. B and C must disclaim each income distribution no 
later than 9 months after the date of the particular distribution. In 
order to disclaim an income distribution in the form of a check, the 
recipient must return the check to the trustee uncashed along with a 
written disclaimer. A dies on September 1, 1982, causing the trust to 
become irrevocable, and the trust corpus is includible in A's gross 
estate for Federal estate tax purposes under section 2038. If B or C 
wishes to make a qualified disclaimer of his income interest, he must do 
so no later than 9 months after September 1, 1982. If D wishes to make a 
qualified disclaimer of his remainder interest, he must do so no later 
than 9 months after September 1, 1982.
    Example (7). On February 1, 1990, A purchased real property with A's 
funds. Title to the property was conveyed to ``A and B, as joint tenants 
with right of survivorship.'' Under applicable state law, the joint 
interest is unilaterally severable by either tenant. B dies on May 1, 
1998, and is survived by A. On

[[Page 613]]

January 1, 1999, A disclaims the one-half survivorship interest in the 
property to which A succeeds as a result of B's death. Assuming that the 
other requirements of section 2518(b) are satisfied, A has made a 
qualified disclaimer of the one-half survivorship interest (but not the 
interest retained by A upon the creation of the tenancy, which may not 
be disclaimed by A). The result is the same whether or not A and B are 
married and regardless of the proportion of consideration furnished by A 
and B in purchasing the property.
    Example (8). Assume the same facts as in Example (7) except that A 
and B are married and title to the property was conveyed to ``A and B, 
as tenants by the entirety.'' Under applicable state law, the tenancy 
cannot be unilaterally severed by either tenant. Assuming that the other 
requirements of section 2518(b) are satisfied, A has made a qualified 
disclaimer of the one-half survivorship interest (but not the interest 
retained by A upon the creation of the tenancy, which may not be 
disclaimed by A). The result is the same regardless of the proportion of 
consideration furnished by A and B in purchasing the property.
    Example (9). On March 1, 1989, H and W purchase a tract of vacant 
land which is conveyed to them as tenants by the entirety. The entire 
consideration is paid by H. W is not a United States citizen. H dies on 
June 1, 1998. W can disclaim the entire joint interest because this is 
the interest includible in H's gross estate under section 2040(a). 
Assuming that W's disclaimer is received by the executor of H's estate 
no later than 9 months after June 1, 1998, and the other requirements of 
section 2518(b) are satisfied, W's disclaimer of the property would be a 
qualified disclaimer. The result would be the same if the property was 
held in joint tenancy with right of survivorship that was unilaterally 
severable under local law.
    Example (10). In 1986, spouses A and B purchased a personal 
residence taking title as tenants by the entirety. B dies on July 10, 
1998. A wishes to disclaim the one-half undivided interest to which A 
would succeed by right of survivorship. If A makes the disclaimer, the 
property interest would pass under B's will to their child C. C, an 
adult, and A resided in the residence at B's death and will continue to 
reside there in the future. A continues to own a one-half undivided 
interest in the property. Assuming that the other requirements of 
section 2518(b) are satisfied, A may make a qualified disclaimer with 
respect to the one-half undivided survivorship interest in the residence 
if A delivers the written disclaimer to the personal representative of 
B's estate by April 10, 1999, since A is not deemed to have accepted the 
interest or any of its benefits prior to that time and A's occupancy of 
the residence after B's death is consistent with A's retained undivided 
ownership interest. The result would be the same if the property was 
held in joint tenancy with right of survivorship that was unilaterally 
severable under local law.
    Example (11). H and W, husband and wife, reside in state X, a 
community property state. On April 1, 1978, H and W purchase real 
property with community funds. The property is not held by H and W as 
jointly owned property with rights of survivorship. H and W hold the 
property until January 3, 1985, when H dies. H devises his portion of 
the property to W. On March 15, 1985, W disclaims the portion of the 
property devised to her by H. Assuming all the other requirements of 
section 2518 (b) have been met, W has made a qualified disclaimer of the 
interest devised to her by H. However, W could not disclaim the interest 
in the property that she acquired on April 1, 1978.
    Example (12). On July 1, 1990, A opens a bank account that is held 
jointly with B, A's spouse, and transfers $50,000 of A's money to the 
account. A and B are United States citizens. A can regain the entire 
account without B's consent, such that the transfer is not a completed 
gift under Sec. 25.2511-1(h)(4). A dies on August 15, 1998, and B 
disclaims the entire amount in the bank account on October 15, 1998. 
Assuming that the remaining requirements of section 2518(b) are 
satisfied, B made a qualified disclaimer under section 2518(a) because 
the disclaimer was made within 9 months after A's death at which time B 
had succeeded to full dominion and control over the account. Under state 
law, B is treated as predeceasing A with respect to the disclaimed 
interest. The disclaimed account balance passes through A's probate 
estate and is no longer joint property includible in A's gross estate 
under section 2040. The entire account is, instead, includible in A's 
gross estate under section 2033. The result would be the same if A and B 
were not married.
    Example (13). The facts are the same as Example (12), except that B, 
rather than A, dies on August 15, 1998. A may not make a qualified 
disclaimer with respect to any of the funds in the bank account, because 
A furnished the funds for the entire account and A did not relinquish 
dominion and control over the funds.
    Example (14). The facts are the same as Example (12), except that B 
disclaims 40 percent of the funds in the account. Since, under state 
law, B is treated as predeceasing A with respect to the disclaimed 
interest, the 40 percent portion of the account balance that was 
disclaimed passes as part of A's probate estate, and is no longer 
characterized as joint property. This 40 percent portion of the account 
balance is, therefore, includible in A's gross estate under section 
2033. The remaining 60 percent of the account balance that was not 
disclaimed retains its character

[[Page 614]]

as joint property and, therefore, is includible in A's gross estate as 
provided in section 2040(b). Therefore, 30 percent (\1/2\x60 percent) of 
the account balance is includible in A's gross estate under section 
2040(b), and a total of 70 percent of the aggregate account balance is 
includible in A's gross estate. If A and B were not married, then the 40 
percent portion of the account subject to the disclaimer would be 
includible in A's gross estate as provided in section 2033 and the 60 
percent portion of the account not subject to the disclaimer would be 
includible in A's gross estate as provided in section 2040(a), because A 
furnished all of the funds with respect to the account.

    (d) No acceptance of benefits--(1) Acceptance. A qualified 
disclaimer cannot be made with respect to an interest in property if the 
disclaimant has accepted the interest or any of its benefits, expressly 
or impliedly, prior to making the disclaimer. Acceptance is manifested 
by an affirmative act which is consistent with ownership of the interest 
in property. Acts indicative of acceptance include using the property or 
the interest in property; accepting dividends, interest, or rents from 
the property; and directing others to act with respect to the property 
or interest in property. However, merely taking delivery of an 
instrument of title, without more, does not constitute acceptance. 
Moreover, a disclaimant is not considered to have accepted property 
merely because under applicable local law title to the property vests 
immediately in the disclaimant upon the death of a decedent. The 
acceptance of one interest in property will not, by itself, constitute 
an acceptance of any other separate interests created by the transferor 
and held by the disclaimant in the same property. In the case of 
residential property, held in joint tenancy by some or all of the 
residents, a joint tenant will not be considered to have accepted the 
joint interest merely because the tenant resided on the property prior 
to disclaiming his interest in the property. The exercise of a power of 
appointment to any extent by the donee of the power is an acceptance of 
its benefits. In addition, the acceptance of any consideration in return 
for making the disclaimer is an acceptance of the benefits of the entire 
interest disclaimed.
    (2) Fiduciaries. If a beneficiary who disclaims an interest in 
property is also a fiduciary, actions taken by such person in the 
exercise of fiduciary powers to preserve or maintain the disclaimed 
property shall not be treated as an acceptance of such property or any 
of its benefits. Under this rule, for example, an executor who is also a 
beneficiary may direct the harvesting of a crop or the general 
maintenance of a home. A fiduciary, however, cannot retain a wholly 
discretionary power to direct the enjoyment of the disclaimed interest. 
For example, a fiduciary's disclaimer of a beneficial interest does not 
meet the requirements of a qualified disclaimer if the fiduciary 
exercised or retains a discretionary power to allocate enjoyment of that 
interest among members of a designated class. See paragraph (e) of this 
section for rules relating to the effect of directing the redistribution 
of disclaimed property.
    (3) Under 21 years of age. A beneficiary who is under 21 years of 
age has until 9 months after his twenty-first birthday in which to make 
a qualified disclaimer of his interest in property. Any actions taken 
with regard to an interest in property by a beneficiary or a custodian 
prior to the beneficiary's twenty-first birthday will not be an 
acceptance by the beneficiary of the interest.
    (4) Examples. The provisions of paragraphs (d) (1), (2) and (3) of 
this section may be illustrated by the following examples:

    Example (1). On April 9, 1977, A established a trust for the benefit 
of B, then age 22. Under the terms of the trust, the current income of 
the trust is to be paid quarterly to B. Additionally, one half the 
principal is to be distributed to B when B attains the age of 30 years. 
The balance of the principal is to be distributed to B when B attains 
the age of 40 years. Pursuant to the terms of the trust, B received a 
distribution of income on June 30, 1977. On August 1, 1977, B disclaimed 
B's right to receive both the income from the trust and the principal of 
the trust, B's disclaimer of the income interest is not a qualified 
disclaimer for purposes of section 2518(a) because B accepted income 
prior to making the disclaimer. B's disclaimer of the principal, 
however, does satisfy section 2518(b)(3). See also Sec. 25.2518-3 for 
rules relating to the disclaimer of less than an entire interest in 
property.
    Example (2). B is the recipient of certain property devised to B 
under the will of A.

[[Page 615]]

The will stated that any disclaimed property was to pass to C. B and C 
entered into negotiations in which it was decided that B would disclaim 
all interest in the real property that was devised to B. In exchange, C 
promised to let B live in the family home for life. B's disclaimer is 
not a qualified disclaimer for purposes of section 2518(a) because B 
accepted consideration for making the disclaimer.
    Example (3). A received a gift of Blackacre on December 25, 1978. A 
never resided on Blackacre but when property taxes on Blackacre became 
due on July 1, 1979, A paid them out personal funds. On August 15, 1979, 
A disclaimed the gift of Blackacre. Assuming all the requirements of 
section 2518 (b) have been met, A has made a qualified disclaimer of 
Blackacre. Merely paying the property taxes does not constitute an 
acceptance of Blackacre even though A's personal funds were used to pay 
the taxes.
    Example (4). A died on February 15, 1978. Pursuant to A's will, B 
received a farm in State Z. B requested the executor to sell the farm 
and to give the proceeds to B. The executor then sold the farm pursuant 
to B's request. B then disclaimed $50,000 of the proceeds from the sale 
of the farm. B's disclaimer is not a qualified disclaimer. By requesting 
the executor to sell the farm B accepted the farm even though the 
executor may not have been legally obligated to comply with B's request. 
See also Sec. 25.2518-3 for rules relating to the disclaimer of less 
than an entire interest in property.
    Example (5). Assume the same facts as in example (4) except that 
instead of requesting the executor to sell the farm, B pledged the farm 
as security for a short-term loan which was paid off prior to 
distribution of the estate. B then disclaimed his interest in the farm. 
B's disclaimer is not a qualified disclaimer. By pledging the farm as 
security for the loan, B accepted the farm.
    Example (6). A delivered 1,000 shares of stock in Corporation X to B 
as a gift on February 1, 1980. A had the shares registered in B's name 
on that date. On April 1, 1980, B disclaimed the interest in the 1,000 
shares. Prior to making the disclaimer, B did not pledge the shares, 
accept any dividends or otherwise commit any acts indicative of 
acceptance. Assuming the remaining requirements of section 2518 are 
satisfied, B's disclaimer is a qualified disclaimer.
    Example (7). On January 1, 1980, A created an irrevocable trust in 
which B was given a testamentary general power of appointment over the 
trust's corpus. B executed a will on June 1, 1980, in which B provided 
for the exercise of the power of appointment. On September 1, 1980, B 
disclaimed the testamentary power of appointment. Assuming the remaining 
requirements of section 2518 (b) are satisfied, B's disclaimer of the 
testamentary power of appointment is a qualified disclaimer.
    Example (8). H and W reside in X, a community property state. On 
January 1, 1981, H and W purchase a residence with community funds. They 
continue to reside in the house until H dies testate on February 1, 
1990. Although H could devise his portion of the residence to any 
person, H devised his portion of the residence to W. On September 1, 
1990, W disclaims the portion of the residence devised to her pursuant 
to H's will but continues to live in the residence. Assuming the 
remaining requirements of section 2518(b) are satisfied, W's disclaimer 
is a qualified disclaimer under section 2518 (a). W's continued 
occupancy of the house prior to making the disclaimer will not by itself 
be treated as an acceptance of the benefits of the portion of the 
residence devised to her by H.
    Example (9). In 1979, D established a trust for the benefit of D's 
minor children E and F. Under the terms of the trust, the trustee is 
given the power to make discretionary distributions of current income 
and corpus to both children. The corpus of the trust is to be 
distributed equally between E and F when E becomes 35 years of age. 
Prior to attaining the age of 21 years on April 8, 1982, E receives 
several distributions of income from the trust. E receives no 
distributions of income between April 8, 1982 and August 15, 1982, which 
is the date on which E disclaims all interest in the income from the 
trust. As a result of the disclaimer the income will be distributed to 
F. If the remaining requirements of section 2518 are met, E's disclaimer 
is a qualified disclaimer under section 2518(a). To have a qualified 
disclaimer of the interest in corpus, E must disclaim the interest no 
later than 9 months after April 8, 1982, E's 21st birthday.
    Example (10). Assume the same facts as in example (9) except that E 
accepted a distribution of income on May 13, 1982. E's disclaimer is not 
a qualified disclaimer under section 2518 because by accepting an income 
distribution after attaining the age of 21, E accepted benefits from the 
income interest.
    Example (11). F made a gift of 10 shares of stock to G as custodian 
for H under the State X Uniform Gifts to Minors Act. At the time of the 
gift, H was 15 years old. At age 18, the local age of majority, the 10 
shares were delivered to and registered in the name of H. Between the 
receipt of the shares and H's 21st birthday, H received dividends from 
the shares. Within 9 months of attaining age 21, H disclaimed the 10 
shares. Assuming H did not accept any dividends from the shares after 
attaining age 21, the disclaimer by H is a qualified disclaimer under 
section 2518.

    (e) Passage without direction by the disclaimant of beneficial 
enjoyment of disclaimed interest--(1) In general. A disclaimer is not a 
qualified disclaimer

[[Page 616]]

unless the disclaimed interest passes without any direction on the part 
of the disclaimant to a person other than the disclaimant (except as 
provided in paragraph (e)(2) of this section). If there is an express or 
implied agreement that the disclaimed interest in property is to be 
given or bequeathed to a person specified by the disclaimant, the 
disclaimant shall be treated as directing the transfer of the property 
interest. The requirements of a qualified disclaimer under section 2518 
are not satisfied if--
    (i) The disclaimant, either alone or in conjunction with another, 
directs the redistribution or transfer of the property or interest in 
property to another person (or has the power to direct the 
redistribution or transfer of the property or interest in property to 
another person unless such power is limited by an ascertainable 
standard); or
    (ii) The disclaimed property or interest in property passes to or 
for the benefit of the disclaimant as a result of the disclaimer (except 
as provided in paragraph (e)(2) of this section).

If a power of appointment is disclaimed, the requirements of this 
paragraph (e)(1) are satisfied so long as there is no direction on the 
part of the disclaimant with respect to the transfer of the interest 
subject to the power or with respect to the transfer of the power to 
another person. A person may make a qualified disclaimer of a beneficial 
interest in property even if after such disclaimer the disclaimant has a 
fiduciary power to distribute to designated beneficiaries, but only if 
the power is subject to an ascertainable standard. See examples (11) and 
(12) of paragraph (e)(5) of this section.
    (2) Disclaimer by surviving spouse. In the case of a disclaimer made 
by a decedent's surviving spouse with respect to property transferred by 
the decedent, the disclaimer satisfies the requirements of this 
paragraph (e) if the interest passes as a result of the disclaimer 
without direction on the part of the surviving spouse either to the 
surviving spouse or to another person. If the surviving spouse, however, 
retains the right to direct the beneficial enjoyment of the disclaimed 
property in a transfer that is not subject to Federal estate and gift 
tax (whether as trustee or otherwise), such spouse will be treated as 
directing the beneficial enjoyment of the disclaimed property, unless 
such power is limited by an ascertainable standard. See examples (4), 
(5), and (6) in paragraph (e)(5) of this section.
    (3) Partial failure of disclaimer. If a disclaimer made by a person 
other than the surviving spouse is not effective to pass completely an 
interest in property to a person other than the disclaimant because--
    (i) The disclaimant also has a right to receive such property as an 
heir at law, residuary beneficiary, or by any other means; and
    (ii) The disclaimant does not effectively disclaim these rights, the 
disclaimer is not a qualified disclaimer with respect to the portion of 
the disclaimed property which the disclaimant has a right to receive. If 
the portion of the disclaimed interest in property which the disclaimant 
has a right to receive is not severable property or an undivided portion 
of the property, then the disclaimer is not a qualified disclaimer with 
respect to any portion of the property. Thus, for example, if a 
disclaimant who is not a surviving spouse receives a specific bequest of 
a fee simple interest in property and as a result of the disclaimer of 
the entire interest, the property passes to a trust in which the 
disclaimant has a remainder interest, then the disclaimer will not be a 
qualified disclaimer unless the remainder interest in the property is 
also disclaimed. See Sec. 25.2518-3 (a)(1)(ii) for the definition of 
severable property.
    (4) Effect of precatory language. Precatory language in a disclaimer 
naming takers of disclaimed property will not be considered as directing 
the redistribution or transfer of the property or interest in property 
to such persons if the applicable State law gives the language no legal 
effect.
    (5) Examples. The provisions of this paragraph (e) may be 
illustrated by the following examples:

    Example (1). A, a resident of State X, died on July 30, 1978. 
Pursuant to A's will, B, A's son and heir at law, received the family 
home. In addition, B and C each received 50 percent of A's residuary 
estate. B disclaimed

[[Page 617]]

the home. A's will made no provision for the distribution of property in 
the case of a beneficiary's disclaimer. Therefore, pursuant to the 
disclaimer laws of State X, the disclaimed property became part of the 
residuary estate. Because B's 50 percent share of the residuary estate 
will be increased by 50 percent of the value of the family home, the 
disclaimed property will not pass solely to another person. 
Consequently, B's disclaimer of the family home is a qualified 
disclaimer only with respect to the 50 percent portion that passes 
solely to C. Had B also disclaimed B's 50 percent interest in the 
residuary estate, the disclaimer would have been a qualified disclaimer 
under section 2518 of the entire interest in the home (assuming the 
remaining requirements of a qualified disclaimer were satisfied). 
Similarly, if under the laws of State X, the disclaimer has the effect 
of divesting B of all interest in the home, both as devisee and as a 
beneficiary of the residuary estate, including any property resulting 
from its sale, the disclaimer would be a qualified disclaimer of B's 
entire interest in the home.
    Example (2). D, a resident of State Y, died testate on June 30, 
1978. E, an heir at law of D, received specific bequests of certain 
severable personal property from D. E disclaimed the property 
transferred by D under the will. The will made no provision for the 
distribution of property in the case of a beneficiary's disclaimer. The 
disclaimer laws of State Y provide that such property shall pass to the 
decedent's heirs at law in the same manner as if the disclaiming 
beneficiary had died immediately before the testator's death. Because 
State Y's law treats E as predeceasing D, the property disclaimed by E 
does not pass to E as an heir at law or otherwise. Consequently, if the 
remaining requirements of section 2518(b) are satisfied, E's disclaimer 
is a qualified disclaimer under section 2518(a).
    Example (3). Assume the same facts as in example (2) except that 
State Y has no provision treating the disclaimant as predeceasing the 
testator. E's disclaimer satisfies section 2518 (b)(4) only to the 
extent that E does not have a right to receive the property as an heir 
at law. Had E disclaimed both the share E received under D's will and 
E's intestate share, the requirement of section 2518 (b)(4) would have 
been satisfied.
    Example (4). B died testate on February 13, 1980. B's will 
established both a marital trust and a nonmarital trust. The decedent's 
surviving spouse, A, is an income beneficiary of the marital trust and 
has a testamentary general power of appointment over its assets. A is 
also an income beneficiary of the nonmarital trust, but has no power to 
appoint or invade the corpus. The provisions of the will specify that 
any portion of the marital trust disclaimed is to be added to the 
nonmarital trust. A disclaimed 30 percent of the marital trust. (See 
Sec. 25.2518-3 (b) for rules relating to the disclaimer of an undivided 
portion of an interest in property.) Pursuant to the will, this portion 
of the marital trust property was transferred to the nonmarital trust 
without any direction on the part of A. This disclaimer by A satisfies 
section 2518 (b)(4).
    Example (5). Assume the same facts as in example (4) except that A, 
the surviving spouse, has both an income interest in the nonmarital 
trust and a testamentary nongeneral power to appoint among designated 
beneficiaries. This power is not limited by an ascertainable standard. 
The requirements of section 2518 (b)(4) are not satisfied unless A also 
disclaims the nongeneral power to appoint the portion of the trust 
corpus that is attributable to the property that passed to the 
nonmarital trust as a result of A's disclaimer. Assuming that the fair 
market value of the disclaimed property on the date of the disclaimer is 
$250,000 and that the fair market value of the nonmarital trust 
(including the disclaimed property) immediately after the disclaimer is 
$750,000, A must disclaim the power to appoint one-third of the 
nonmarital trust's corpus. The result is the same regardless of whether 
the nongeneral power is testamentary or inter vivos.
    Example (6). Assume the same facts as in example (4) except that A 
has both an income interest in the nonmarital trust and a power to 
invade corpus if needed for A's health or maintenance. In addition, an 
independent trustee has power to distribute to A any portion of the 
corpus which the trustee determines to be desirable for A's happiness. 
Assuming the other requirements of section 2518 are satisfied. A may 
make a qualified disclaimer of interests in the marital trust without 
disclaiming any of A's interests in the nonmarital trust.
    Example (7). B died testate on June 1, 1980. B's will created both a 
marital trust and a nonmarital trust. The decedent's surviving spouse, 
C, is an income beneficiary of the marital trust and has a testamentary 
general power of appointment over its assets. C is an income beneficiary 
of the nonmarital trust, and additionally has the noncumulative right to 
withdraw yearly the greater of $5,000 or 5 percent of the aggregate 
value of the principal. The provisions of the will specify that any 
portion of the marital trust disclaimed is to be added to the nonmarital 
trust. C disclaims 50 percent of the marital trust corpus. Pursuant to 
the will, this amount is transferred to the nonmarital trust. Assuming 
the remaining requirements of section 2518(b) are satisfied, C's 
disclaimer is a qualified disclaimer.
    Example (8). A, a resident of State X, died on July 19, 1979. A was 
survived by a spouse B, and three children, C, D, and E. Pursuant to A's 
will, B received one-half of A's estate and the children received equal 
shares of the

[[Page 618]]

remaining one-half of the estate. B disclaimed the entire interest B had 
received. The will made no provisions for the distribution of property 
in the case of a beneficiary's disclaimer. The disclaimer laws of State 
X provide that under these circumstances disclaimed property passes to 
the decedent's heirs at law in the same manner as if the disclaiming 
beneficiary had died immediately before the testator's death. As a 
result, C, D, and E are A's only remaining heirs at law, and will divide 
the disclaimed property equally among themselves. B's disclaimer 
includes language stating that ``it is my intention that C, D, and E 
will share equally in the division of this property as a result of my 
disclaimer.'' State X considers these to be precatory words and gives 
them no legal effect. B's disclaimer meets all other requirements 
imposed by State X on disclaimers, and is considered an effective 
disclaimer under which the property will vest solely in C, D, and E in 
equal shares without any further action required by B. Therefore, B is 
not treated as directing the redistribution or transfer of the property. 
If the remaining requirements of secton 2518 are met, B's disclaimer is 
a qualified disclaimer.
    Example (9). C died testate on January 1, 1979. According to C's 
will, D was to receive \1/3\ of the residuary estate with any disclaimed 
property going to E. D was also to receive a second \1/3\ of the 
residuary estate with any disclaimed property going to F. Finally, D was 
to receive a final \1/3\ of the residuary estate with any disclaimed 
property going to G. D specifically states that he is disclaiming the 
interest in which the disclaimed property is designated to pass to E. D 
has effectively directed that the disclaimed property will pass to E and 
therefore D's disclaimer is not a qualified disclaimer under section 
2518(a).
    Example (10). Assume the same facts as in example (9) except that 
C's will also states that D was to receive Blackacre and Whiteacre. C's 
will further provides that if D disclaimed Blackacre then such property 
was to pass to E and that if D disclaimed Whiteacre then Whiteacre was 
to pass to F. D specifically disclaims Blackacre with the intention that 
it pass to E. Assuming the other requirements of section 2518 are met, D 
has made a qualified disclaimer of Blackacre. Alternatively, D could 
disclaim an undivided portion of both Blackacre and Whiteacre. Assuming 
the other requirements of section 2518 are met, this would also be a 
qualified disclaimer.
    Example (11). G creates an irrevocable trust on February 16, 1983, 
naming H, I and J as the income beneficiaries for life and F as the 
remainderman. F is also named the trustee and as trustee has the 
discretionary power to invade the corpus and make discretionary 
distributions to H, I or J during their lives. F disclaims the remainder 
interest on August 8, 1983, but retains his discretionary power to 
invade the corpus. F has not made a qualified disclaimer because F 
retains the power to direct enjoyment of the corpus and the retained 
fiduciary power is not limited by an ascertainable standard.
    Example (12). Assume the same facts as in example (11) except that F 
may only invade the corpus to make distributions for the health, 
maintenance or support of H, I or J during their lives. If the other 
requirements of section 2518(b) are met, F has made a qualified 
disclaimer of the remainder interest because the retained fiduciary 
power is limited by an ascertainable standard.

[T.D. 8095, 51 FR 28371, Aug. 7, 1986; 51 FR 31939, Sept. 8, 1986, as 
amended by T.D. 8744, 62 FR 68185, Dec. 31, 1997]



Sec. 25.2518-3  Disclaimer of less than an entire interest.

    (a) Disclaimer of a partial interest--(1) In general--(i) Interest. 
If the requirements of this section are met, the disclaimer of all or an 
undivided portion of any separate interest in property may be a 
qualified disclaimer even if the disclaimant has another interest in the 
same property. In general, each interest in property that is separately 
created by the transferor is treated as a separate interest. For 
example, if an income interest in securities is bequeathed to A for 
life, then to B for life, with the remainder interest in such securities 
bequeathed to A's estate, and if the remaining requirements of section 
2518(b) are met, A could make a qualified disclaimer of either the 
income interest or the remainder, or an undivided portion of either 
interest. A could not, however, make a qualified disclaimer of the 
income interest for a certain number of years. Further, where local law 
merges interests separately created by the transferor, a qualified 
disclaimer will be allowed only if there is a disclaimer of the entire 
merged interest or an undivided portion of such merged interest. See 
example (12) in paragraph (d) of this section. See Sec. 25.2518-3(b) 
for rules relating to the disclaimer of an undivided portion. Where the 
merger of separate interests would occur but for the creation by the 
transferor of a nominal interest (as defined in paragraph (a)(1)(iv) of 
this section), a qualified disclaimer will be allowed only if there is a 
disclaimer of all the separate interests, or an undivided portion of all

[[Page 619]]

such interests, which would have merged but for the nominal interest.
    (ii) Severable property. A disclaimant shall be treated as making a 
qualified disclaimer of a separate interest in property if the 
disclaimer relates to severable property and the disclaimant makes a 
disclaimer which would be a qualified disclaimer if such property were 
the only property in which the disclaimant had an interest. If 
applicable local law does not recognize a purported disclaimer of 
severable property, the disclaimant must comply with the requirements of 
paragraph (c)(1) of Sec. 25.2518-1 in order to make a qualified 
disclaimer of the severable property. Severable property is property 
which can be divided into separate parts each of which, after severance, 
maintains a complete and independent existence. For example, a legatee 
of shares of corporate stock may accept some shares of the stock and 
make a qualified disclaimer of the remaining shares.
    (iii) Powers of appointment. A power of appointment with respect to 
property is treated as a separate interest in such property and such 
power of appointment with respect to all or an undivided portion of such 
property may be disclaimed independently from any other interests 
separately created by the transferor in the property if the requirements 
of section 2518(b) are met. See example (21) of paragraph (d) of this 
section. Further, a disclaimer of a power of appointment with respect to 
property is a qualified disclaimer only if any right to direct the 
beneficial enjoyment of the property which is retained by the 
disclaimant is limited by an ascertainable standard. See example (9) of 
paragraph (d) of this section.
    (iv) Nominal interest. A nominal interest is an interest in property 
created by the transferor that--
    (A) Has an actuarial value (as determined under Sec. 20.2031-7) of 
less than 5 percent of the total value of the property at the time of 
the taxable transfer creating the interest,
    (B) Prevents the merger under local law or two or more other 
interests created by the transferor, and
    (C) Can be clearly shown from all the facts and circumstances to 
have been created primarily for the purpose of preventing the merger of 
such other interests.

Factors to be considered in determining whether an interest is created 
primarily for the purpose of preventing merger include (but are not 
limited to) the following: the relationship between the transferor and 
the interest holder; the age difference between the interest holder and 
the beneficiary whose interests would have merged; the interest holder's 
state of health at the time of the taxable transfer; and, in the case of 
a contingent remainder, any other factors which indicate that the 
possibility of the interest vesting as a fee simple is so remote as to 
be negligible.
    (2) In trust. A disclaimer is not a qualified disclaimer under 
section 2518 if the beneficiary disclaims income derived from specific 
property transferred in trust while continuing to accept income derived 
from the remaining properties in the same trust unless the disclaimer 
results in such property being removed from the trust and passing, 
without any direction on the part of the disclaimant, to persons other 
than the disclaimant or to the spouse of the decedent. Moreover, a 
disclaimer of both an income interest and a remainder interest in 
specific trust assets is not a qualified disclaimer if the beneficiary 
retains interests in other trust property unless, as a result of the 
disclaimer, such assets are removed from the trust and pass, without any 
direction on the part of the disclaimant, to persons other than the 
disclaimant or to the spouse of the decedent. The disclaimer of an 
undivided portion of an interest in a trust may be a qualified 
disclaimer. See also paragraph (b) of this section for rules relating to 
the disclaimer of an undivided portion of an interest in property.
    (b) Disclaimer of undivided portion. A disclaimer of an undivided 
portion of a separate interest in property which meets the other 
requirements of a qualified disclaimer under section 2518(b) and the 
corresponding regulations is a qualified disclaimer. An undivided 
portion of a disclaimant's separate interest in property must consist of 
a fraction or percentage of each and every substantial interest or right 
owned by the disclaimant in such property and must extend over the 
entire

[[Page 620]]

term of the disclaimant's interest in such property and in other 
property into which such property is converted. A disclaimer of some 
specific rights while retaining other rights with respect to an interest 
in the property is not a qualified disclaimer of an undivided portion of 
the disclaimant's interest in property. Thus, for example, a disclaimer 
made by the devisee of a fee simple interest in Blackacre is not a 
qualified disclaimer if the disclaimant disclaims a remainder interest 
in Blackacre but retains a life estate.
    (c) Disclaimer of a pecuniary amount. A disclaimer of a specific 
pecuniary amount out of a pecuniary or nonpecuniary bequest or gift 
which satisfies the other requirements of a qualified disclaimer under 
section 2518 (b) and the corresponding regulations is a qualified 
disclaimer provided that no income or other benefit of the disclaimed 
amount inures to the benefit of the disclaimant either prior to or 
subsequent to the disclaimer. Thus, following the disclaimer of a 
specific pecuniary amount from a bequest or gift, the amount disclaimed 
and any income attributable to such amount must be segregated from the 
portion of the gift or bequest that was not disclaimed. Such a 
segregation of assets making up the disclaimer of a pecuniary amount 
must be made on the basis of the fair market value of the assets on the 
date of the disclaimer or on a basis that is fairly representative of 
value changes that may have occurred between the date of transfer and 
the date of the disclaimer. A pecuniary amount distributed to the 
disclaimant from the bequest or gift prior to the disclaimer shall be 
treated as a distribution of corpus from the bequest or gift. However, 
the acceptance of a distribution from the gift or bequest shall also be 
considered to be an acceptance of a proportionate amount of income 
earned by the bequest or gift. The proportionate share of income 
considered to be accepted by the disclaimant shall be determined at the 
time of the disclaimer according to the following formula:
[GRAPHIC] [TIFF OMITTED] TC16OC91.014


See examples (17), (18), and (19) in Sec. 25.2518-3(d) for 
illustrations of the rules set forth in this paragraph (c).
    (d) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). A, a resident of State Q, died on August 1, 1978. A's 
will included specific bequests of 100 shares of stock in X corporation; 
200 shares of stock in Y corporation; 500 shares of stock in Z 
corporation; personal effects consisting of paintings, home furnishings, 
jewelry, and silver, and a 500 acre farm consisting of a residence, 
various outbuildings, and 500 head of cattle. The laws of State Q 
provide that a disclaimed interest passes in the same manner as if the 
disclaiming beneficiary had died immediately before the testator's 
death. Pursuant to A's will, B was to receive both the personal effects 
and the farm. C was to receive all the shares of stock in Corporation X 
and Y and D was to receive all the shares of stock in Corporation Z. B 
disclaimed 2 of the paintings and all the jewelry, C disclaimed 50 
shares of Y corporation stock, and D disclaimed 100 shares of Z 
corporation stock. If the remaining requirements of section 2518(b) and 
the corresponding regulations are met, each of these disclaimers is a 
qualified disclaimer for purposes of section 2518(a).
    Example (2). Assume the same facts as in example (1) except that D 
disclaimed the income interest in the shares of Z corporation stock 
while retaining the remainder interest in such shares. D's disclaimer is 
not a qualified disclaimer.
    Example (3). Assume the same facts as in example (1) except that B 
disclaimed 300 identified acres of the 500 acres. Assuming that B's 
disclaimer meets the remaining requirements of section 2518(b), it is a 
qualified disclaimer.
    Example (4). Assume the same facts as in example (1) except that A 
devised the income from the farm to B for life and the remainder 
interest to C. B disclaimed 40 percent of the

[[Page 621]]

income from the farm. Assuming that it meets the remaining requirements 
of section 2518(b), B's disclaimer of an undivided portion of the income 
is a qualified disclaimer.
    Example (5). E died on September 13, 1978. Under the provisions of 
E's will, E's shares of stock in X, Y, and Z corporations were to be 
transferred to a trust. The trust provides that all income is to be 
distributed currently to F and G in equal parts until F attains the age 
of 45 years. At that time the corpus of the trust is to be divided 
equally between F and G. F disclaimed the income arising from the shares 
of X stock. G disclaimed 20 percent of G's interest in the trust. F's 
disclaimer is not a qualified disclaimer because the X stock remains in 
the trust. If the remaining requirements of section 2518(b) are met, G's 
disclaimer is a qualified disclaimer.
    Example (6). Assume the same facts as in example (5) except that F 
disclaimed both the income interest and the remainder interest in the 
shares of X stock. F's disclaimer results in the X stock being 
transferred out of the trust to G without any direction on F's part. F's 
disclaimer is a qualified disclaimer under section 2518(b).
    Example (7). Assume the same facts as in example (5) except that F 
is only an income beneficiary of the trust. The X stock remains in the 
trust after F's disclaimer of the income arising from the shares of X 
stock. F's disclaimer is not a qualified disclaimer under section 2518.
    Example (8). Assume the same facts as in example (5) except that F 
disclaimed the entire income interest in the trust while retaining the 
interest F has in corpus. Alternatively, assume that G disclaimed G's 
entire corpus interest while retaining G's interest in the income from 
the trust. If the remaining requirements of section 2518(b) are met, 
either disclaimer will be a qualified disclaimer.
    Example (9). G creates an irrevocable trust on May 13, 1980, with H, 
I, and J as the income beneficiaries. In addition, H, who is the 
trustee, holds the power to invade corpus for H's health, maintenance, 
support and happiness and a testamentary power of appointment over the 
corpus. In the absence of the exercise of the power of appointment, the 
property passes to I and J in equal shares. H disclaimed the power to 
invade corpus for H's health, maintenance, support and happiness. 
Because H retained the testamentary power to appoint the property in the 
corpus, H's disclaimer is not a qualified disclaimer. If H also 
disclaimed the testamentary power of appointment, H's disclaimer would 
have been a qualified disclaimer.
    Example (10). E creates an irrevocable trust on May 1, 1980, in 
which D is the income beneficiary for life. Subject to the trustee's 
discretion, E's children, A, B, and C, have the right to receive corpus 
during D's lifetime. The remainder passes to D if D survives A, B, C, 
and all their issue. D also holds an inter vivos power to appoint the 
trust corpus to A, B, and C. On September 1, 1980, D disclaimed the 
remainder interest. D's disclaimer is not a qualified disclaimer because 
D retained the power to direct the use and enjoyment of corpus during 
D's life.
    Example (11). Under H's will, a trust is created from which W is to 
receive all of the income for life. The trustee has the power to invade 
the trust corpus for the support or maintenance of D during the life of 
W. The trust is to terminate at W's death, at which time the trust 
property is to be distributed to D. D makes a timely disclaimer of the 
right to corpus during W's lifetime, but does not disclaim the remainder 
interest. D's disclaimer is a qualified disclaimer assuming the 
remaining requirements of section 2518 are met.
    Example (12). Under the provisions of G's will A received a life 
estate in a farm, and was the sole beneficiary of property in the 
residuary estate. The will also provided that the remainder interest in 
the farm pass to the residuary estate. Under local law A's interests 
merged to give A a fee simple in the farm. A made a timely disclaimer of 
the life estate. A's disclaimer of a partial interest is not a qualified 
disclaimer under section 2518(a). If A makes a disclaimer of the entire 
merged interest in the farm or an undivided portion of such merged 
interest then A would be making a qualified disclaimer assuming all the 
other requirements of section 2518(b) are met.
    Example (13). A, a resident of State Z, dies on September 3, 1980. 
Under A's will, Blackacre is devised to C for life, then to D for 1 
month, remainder to C. Had A not created D's interest, State Z law would 
have merged C's life estate and the remainder to C to create a fee 
simple interest in C. Assume that the actuarial value of D's interest is 
less than 5 percent of the total value of Blackacre on the date of A's 
death. Further assume that facts and circumstances (particularly the 
duration of D's interest) clearly indicate that D's interest was created 
primarily for the purpose of preventing the merger of C's two interests 
in Blackacre. D's interest in Blackacre is a nominal interest and C's 
two interests will, for purposes of making a qualified disclaimer, be 
considered to have merged. Thus, C cannot make a qualified disclaimer of 
his remainder while retaining the life estate. C can, however, make a 
qualified disclaimer of both of these interests entirely or an undivided 
portion of both.
    Example (14). A, a resident of State X, dies on October 12, 1978. 
Under A's will, Blackacre was devised to B for life, then to C for life 
if C survives B, remainder to B's estate. On the date of A's death, B 
and C are both 8 year old grandchildren of A. In addition, C is in good 
health. The actual value of C's interest is

[[Page 622]]

less than 5 percent of the total value of Blackacre on the date of A's 
death. No facts are present which would indicate that the possibility of 
C's contingent interest vesting is so remote as to be negligible. Had 
C's contingent life estate not been created, B's life estate and 
remainder interests would have merged under local law to give B a fee 
simple interest in Blackacre. Although C's interest prevents the merger 
of B's two interests and has an actual value of less than 5 percent, C's 
interest is not a nominal interest within the meaning of Sec. 25.2518-
3(a)(1)(iv) because the facts and circumstances do not clearly indicate 
that the interest was created primarily for the purpose of preventing 
the merger of other interests in the property. Assuming all the other 
requirements of section 2518(b) are met, B can make a qualified 
disclaimer of the remainder while retaining his life estate.
    Example (15). In 1981, A transfers $60,000 to a trust created for 
the benefit of B who was given the income interest for life and who also 
has a testamentary nongeneral power of appointment over the corpus. A 
transfers an additional $25,000 to the trust on June 1, 1984. At that 
time the trust corpus (exclusive of the $25,000 transfer) has a fair 
market value of $75,000. On January 1, 1985, B disclaims the right to 
receive income attributable to 25 percent of the corpus
[GRAPHIC] [TIFF OMITTED] TC16OC91.015


Assuming that no distributions were made to B attributable to the 
$25,000, B's disclaimer is a qualified disclaimer for purposes of 
section 2518(a) if all the remaining requirements of section 2518(b) are 
met.
    Example (16). Under the provisions of B's will, A is left an 
outright cash legacy of $50,000 and has no other interest in B's estate. 
A timely disclaimer by A of any stated dollar amount is a qualified 
disclaimer under section 2518(a).
    Example (17). D bequeaths his brokerage account to E. The account 
consists of stocks and bonds and a cash amount earning interest. The 
total value of the cash and assets in the account on the date of D's 
death is $100,000. Four months after D's death, E makes a withdrawal of 
cash from the account for personal use amounting to $40,000. Eight 
months after D's death, E disclaims $60,000 of the account without 
specifying any particular assets or cash. The cumulative fair market 
value of the stocks and bonds in the account on the date of the 
disclaimer is equal to the value of such stocks and bonds on the date of 
D's death. The income earned by the account between the date of D's 
death and the date of E's disclaimer was $20,000. The amount of income 
earned by the account that E accepted by withdrawing $40,000 from the 
account prior to the disclaimer is determined by applying the formula 
set forth in Sec. 25.2518-3(c) as follows:
[GRAPHIC] [TIFF OMITTED] TC16OC91.016


E is considered to have accepted $8,000 of the income earned by the 
account. If (i) the $60,000 disclaimed by E and the $12,000 of income 
earned prior to the disclaimer which is attributable to that amount are 
segregated from the $8,000 of income E is considered to have accepted, 
(ii) E does not accept any benefits of the $72,000 so segregated, and 
(iii) the other requirements of section 2518 (b) are met, then E's 
disclaimer of $60,000 from the account is a qualified disclaimer.
    Example (18). A bequeathed his residuary estate to B. The residuary 
estate had a value of $1 million on the date of A's death. Six months 
later, B disclaimed $200,000 out of this bequest. B received 
distributions of all the income from the entire estate during the period 
of administration. When the estate was distributed, B received the 
entire residuary estate except for $200,000 in cash. B did not make a 
qualified disclaimer since he accepted the benefits of the $200,000 
during the period of estate administration.
    Example (19). Assume the same facts as in example (18) except that 
no income was paid to B and the value of the residuary estate on the 
date of the disclaimer (including interest earned from date of death) 
was $1.5 million. In addition, as soon as B's disclaimer was made, the 
executor of A's estate set aside assets worth $300,000
[GRAPHIC] [TIFF OMITTED] TC16OC91.017


[[Page 623]]



and the interest earned after the disclaimer on that amount in a 
separate fund so that none of the income was paid to B. B's disclaimer 
is a qualified disclaimer under section 2518(a).
    Example (20). A bequeathed his residuary estate to B. B disclaims a 
fractional share of the residuary estate. Any disclaimed property will 
pass to A's surviving spouse, W. The numerator of the fraction 
disclaimed is the smallest amount which will allow A's estate to pass 
free of Federal estate tax and the denominator is the value of the 
residuary estate. B's disclaimer is a qualified disclaimer.
    Example (21). A created a trust on July 1, 1979. The trust provides 
that all current income is to be distributed equally between B and C for 
the life of B. B also is given a testamentary general power of 
appointment over the corpus. If the power is not exercised, the corpus 
passes to C or C's heirs. B disclaimed the testamentary power to appoint 
an undivided one-half of the trust corpus. Assuming the remaining 
requirements of section 2518(b) are satisfied, B's disclaimer is a 
qualified disclaimer under section 2518(a).

[T.D. 8095, 51 FR 28375, Aug. 7, 1986; 51 FR 31939, Sept. 8, 1986, as 
amended by T.D. 8540, 59 FR 30103, June 10, 1994]

             Actuarial Tables Applicable Before May 1, 2009



Sec. 25.2512-5A  Valuation of annuities, unitrust interests, interests
for life or term of years, and remainder or reversionary interests 

transferred before May 1, 2009.

    (a) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests transferred before January 1, 1952. 
Except as otherwise provided in Sec. 25.2512-5(b), if the transfer was 
made before January 1, 1952, the present value of annuities, life 
estates, terms of years, remainders, and reversions is their present 
value determined under this section. If the valuation of the interest 
involved is dependent upon the continuation or termination of one or 
more lives or upon a term certain concurrent with one or more lives, the 
factor for the present value is computed on the basis of interest at the 
rate of 4 percent a year, compounded annually, and life contingencies 
for each life involved from values that are based upon the ``Actuaries' 
or Combined Experience Table of Mortality, as extended.'' This table and 
many additional factors are described in former Sec. 86.19 (as 
contained in the 26 CFR part 81 edition revised as of April 1, 1958). 
The present value of an interest measured by a term of years is computed 
on the basis of interest at the rate of 4 percent a year.
    (b) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests transferred after December 31, 1951, 
and before January 1, 1971. Except as otherwise provided in Sec. 
25.2512-5(b), the present value of annuities, life estates, terms of 
years, remainders, and reversions transferred after December 31, 1951, 
and before January 1, 1971, is the present value of such interests 
determined under this section. If the value of the interest involved is 
dependent upon the continuation or termination of one or more lives, the 
factor for the present value is computed on the basis of interest at the 
rate of 3\1/2\ percent a year, compounded annually, and life 
contingencies for each life involved from U.S. Life Table 38. This table 
and many accompanying factors are set forth in former Sec. 25.2512-5 
(as contained in the 26 CFR part 25 edition revised as of April 1, 
1984). Special factors involving one and two lives may be found in or 
computed with the use of tables contained in Internal Revenue Service 
Publication Number 11, ``Actuarial Values for Estate and Gift Tax,'' 
(Rev. 5-59). This publication is no longer available for purchase from 
the Superintendent of Documents. However, it may be obtained by 
requesting a copy from: CC:DOM:CORP:T:R (IRS Publication 11), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 
20044. The present value of an interest measured by a term of years is 
computed on the basis of interest at the rate of 3\1/2\ percent a year.
    (c) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests transferred after December 31, 1970, 
and before December 1, 1983. Except as otherwise provided in Sec. 
25.2512-5(b), the present value of annuities, life estates, terms of 
years, remainders, and reversions transferred after December 31, 1970, 
and before December 1, 1983, is the present value of such interests 
determined under this section. If the interest to be valued is dependent 
upon the continuation or

[[Page 624]]

termination of one or more lives or upon a term certain concurrent with 
one or more lives, the factor for the present value is computed on the 
basis of interest at the rate of 6 percent a year, compounded annually, 
and life contingencies determined for each male and female life 
involved, from the values that are set forth in Table LN. Table LN 
contains values that are taken from the life table for total males and 
the life table for total females appearing as Tables 2 and 3, 
respectively, in United States Life Tables: 1959-61, published by the 
Department of Health and Human Services, Public Health Service. Table LN 
and accompanying factors are set forth in former Sec. 25.2512-9 (as 
contained in the 26 CFR part 25 edition revised as of April 1, 1994). 
Special factors involving one and two lives may be found in or computed 
with the use of tables contained in Internal Revenue Service Publication 
723, entitled ``Actuarial Values I: Valuation of Last Survivor 
Charitable Remainders'' (12-70), and Internal Revenue Service 
Publication 723A, entitled ``Actuarial Values II: Factors at 6 Percent 
Involving One and Two Lives'' (12-70). These publications are no longer 
available for purchase from the Superintendent of Documents. However, a 
copy of each may be obtained from: CC:DOM:CORP:T:R (IRS Publication 723/
723A), room 5228, Internal Revenue Service, POB 7604, Ben Franklin 
Station, Washington, DC 20044. The present value of an interest measured 
by a term of years is computed on the basis of interest at the rate of 6 
percent a year.
    (d) Valuation of annuities, interests for life or term of years, and 
remainder or reversionary interests transferred after November 30, 1983, 
and before May 1, 1989--(1) In general. (i)(A) Except as otherwise 
provided in Sec. 25.2512-5(b) and in this paragraph (d)(1)(i)(A), the 
fair market value of annuities, life estates, terms of years, 
remainders, and reversions transferred after November 30, 1983, and 
before May 1, 1989, is the present value of such interests determined 
under this section. The value of annuities issued by companies regularly 
engaged in their sale and of insurance policies issued by companies 
regularly engaged in their sale is determined under Sec. 25.2512-6. The 
fair market value of a remainder interest in a charitable remainder 
unitrust, as defined in Sec. 1.664-3, is its present value determined 
under Sec. 1.664-4. The fair market value of a life interest or term 
for years in a charitable remainder unitrust is the fair market value of 
the property as of the date of transfer less the fair market value of 
the remainder interest on such date determined under Sec. 1.664-4. The 
fair market value of interests in a pooled income fund, as defined in 
Sec. 1.642(c)-5, is their value determined under Sec. 1.642(c)-6. 
Where the donor transfers property in trust or otherwise and retains an 
interest therein, the value of the gift is the value of the property 
transferred less the value of the donor's retained interest. See section 
2702 and the regulations at Sec. 25.2702 for special rules for valuing 
transfers of interests in trust after October 8, 1990. See Sec. 
25.2512-9 with respect to the valuation of annuities, life estates, 
terms for years, remainders, and reversions transferred after December 
31, 1970, and before December 1, 1983.
    (B) If the donor transfers in December of 1983, either--
    (1) A remainder or a reversion subject to a life interest or a term 
for years where the life interest or term for years was transferred by 
the donor after December 31, 1982, and before December 1, 1983, or
    (2) A life interest or term for years, the remainder interest of 
which was transferred by the donor after December 31, 1982, and before 
December 1, 1983,

the donor shall make an election. The donor may elect to value both 
interests transferred in 1983 under Sec. 25.2512-5A(c) as if such 
section applied to all transfers made before January 1, 1984, or the 
donor may elect to have both interests transferred valued under this 
section. The donor shall indicate the election being made in a statement 
attached to the donor's gift tax return for 1983.
    (C) If the donor transfers in calendar year 1984, either--
    (1) A remainder on a reversion subject to a life interest or a term 
for years where the life interest or term for years was transferred by 
the donor in the first eleven months of 1983, or

[[Page 625]]

    (2) A life interest or term for years, the remainder interest of 
which was transferred by the donor in the first eleven months of 1983,

the donor shall make an election. The donor may elect to value the 
interest transferred in 1984 under Sec. 25.2512-5A(c) as if such 
section applied to all transfers made before January 1, 1985, or the 
donor may elect to have the transfer valued under this section. If the 
donor elects to value the interest transferred in 1984 under Sec. 
25.2512-5A(c), the donor shall indicate that the election is being made 
by attaching a statement to the donor's gift tax return for 1984. If the 
donor elects to value the interest transferred in 1984 under this 
section the election shall not be effective unless the donor declares, 
in a statement attached to the donor's gift tax return for 1984, that 
the donor has filed an amended gift tax return for 1983, in which the 
donor has revalued the transfers made in the first eleven months of 1983 
under this section as if this section applied to transfers made after 
December 31, 1982.
    (ii) The present value of an annuity, life estate, remainder, or 
reversion determined under this section which is dependent on the 
continuation or termination of the life of one person is computed by the 
use of Table A in paragraph (d)(6) of this section. The present value of 
an annuity, term for years, remainder, or reversion dependent on a term 
certain is computed by the use of Table B in paragraph (d)(6) of this 
section. If the interest to be valued is dependent upon more than one 
life or there is a term certain concurrent with one or more lives, see 
paragraph (d)(5) of this section. For purposes of the computations 
described in this section, the age of the person is to be taken at his 
or her nearest birthday.
    (iii) In all examples set forth in this section, the interest is 
assumed to have been transferred after November 30, 1983, and before May 
1, 1989.
    (2) Annuities. (i) If an annuity is payable annually at the end of 
each year during the life of an individual (as for example if the first 
payment is due one year after the date of the gift), the amount payable 
annually is multiplied by the figure in column 2 of Table A opposite the 
number of years in column 1 nearest the age of the individual whose life 
measures the duration of the annuity. If the annuity is payable annually 
at the end of each year for a definite number of years, the amount 
payable annually is multiplied by the figure in column 2 of Table B 
opposite the number of years in column 1 representing the duration of 
the annuity. The application of this paragraph (d)(2)(i) may be 
illustrated by the following examples:

    Example (1). The donor assigns an annuity of $10,000 a year payable 
annually during the donor's life immediately after an annual payment has 
been made. The age of the donor on the date of assignment is 40 years 
and eight months. By reference to Table A, it is found that the figure 
in column 2 opposite 41 years is 9.1030. The value of the gift is, 
therefore, $91,030 ($10,000 multiplied by 9.1030).
    Example (2). The donor was entitled to receive an annuity of $10,000 
a year payable annually at the end of annual periods throughout a term 
of 20 years. The donor, when 15 years have elapsed, makes a gift thereof 
to the donor's son. By reference to Table B, it is found that the figure 
in column 2 opposite five years, the unexpired portion of the 20-year 
period, is 3.7908. The present value of the annuity is, therefore, 
$37,908 (10,000 multiplied by 3.7908).

    (ii) If an annuity is payable at the end of semiannual, quarterly, 
monthly, or weekly periods during the life of an individual (as for 
example if the first payment is due one month after the date of the 
gift), the aggregate amount to be paid within a year is first multiplied 
by the figure in column 2 of Table A opposite the number of years in 
column 1 nearest the age of the individual whose life measures the 
duration of the annuity. The product so obtained is then multiplied by 
whichever of the following factors is appropriate:

1.0244 for semiannual payments,
1.0368 for quarterly payments,
1.0450 for monthly payments,
1.0482 for weekly payments.


If the annuity is payable at the end of semiannual, quarterly, monthly, 
or weekly periods for a definite number of years the aggregate amount to 
be paid within a year is first multiplied by the figure in column 2 of 
Table B opposite the number of years in column 1 representing the 
duration of the annuity.

[[Page 626]]

The product so obtained is then multiplied by whichever of the above 
factors is appropriate. The application of this paragraph (d)(2)(ii) may 
be illustrated by the following example:

    Example. The facts are the same as those contained in example (1) 
set forth in paragraph (d)(2)(i) above, except that the annuity is 
payable semiannually. The aggregate annual amount, $10,000 is multiplied 
by the factor 9.1030, and the product multiplied by 1.0244. The value of 
the gift is, therefore, $93,251.13 ($10,000x9.1030x1.0244).

    (iii)(A) If the first payment of an annuity for the life of an 
individual is due at the beginning of the annual or other payment period 
rather than at the end (as for example if the first payment is to be 
made immediately after the date of the gift), the value of the annuity 
is the sum of (A) the first payment plus (B) the present value of a 
similar annuity, the first payment of which is not to be made until the 
end of the payment period, determined as provided in paragraph (d)(2)(i) 
or (ii) of this section. The application of this paragraph 
(d)(2)(iii)(A) may be illustrated by the following example:

    Example. The donee is made the beneficiary for life of an annuity of 
$50 a month from the income of a trust, subject to the right reserved by 
the donor to cause the annuity to be paid for the donor's own benefit or 
for the benefit of another. On the day a payment is due, the donor 
relinquishes the reserved power. The donee is then 50 years of age. The 
value of the gift is $50 plus the product of $50x12x8.4743 (see Table 
A)x1.0450. That is, $50 plus $5,313.39, or $5,363.39.

    (B) If the first payment of an annuity for a definite number of 
years is due at the beginning of the annual or other payment period, the 
applicable factor is the product of the factor shown in Table B 
multiplied by whichever of the following factors is appropriate:

1.1000 for annual payments,
1.0744 for semiannual payments,
1.0618 for quarterly payments,
1.0534 for monthly payments, or
1.0502 for weekly payments.


The application of this paragraph (d)(2)(iii)(B) may be illustrated by 
the following example:

    Example. The donee is the beneficiary of an annuity of $50 a month, 
subject to a reserved right in the donor to cause the annuity or the 
cash value thereof to be paid for the donor's own benefit or the benefit 
of another. On the day a payment is due, the donor relinquishes the 
power. There are 300 payments to be made covering a period of 25 years, 
including the payment due. The value of the gift is the product of 
$50x12x9.0770 (factor for 25 years Table B)x1.0534, or $5,737.03.

    (3) Life estates and terms for years. If the interest to be valued 
is the right of a person for his or her life, or for the life of another 
person, to receive the income of certain property or to use non-income-
producing property, the value of the interest is the value of the 
property multiplied by the figure in column 3 of Table A opposite the 
number of years nearest to the actual age of the measuring life. If the 
interest to be valued is the right to receive income of property or to 
use nonincome-producing property for a term of years, column 3 of Table 
B is used. The application of this paragraph (d)(3) may be illustrated 
by the following example:

    Example. The donor who during the donor's life is entitled to 
receive the income from property worth $50,000, makes a gift of such 
interest. The donor is 31 years old on the date of the gift. The value 
of the gift is $47,627 ($50,000x.95254).

    (4) Remainders or reversionary interests. If the interest to be 
valued is a remainder or reversionary interest subject to a life estate, 
the value of the interest should be obtained by multiplying the value of 
the property at the date of the gift by the figure in column 4 of Table 
A opposite the number of years nearest the age of the life tenant. If 
the remainder or reversion is to take effect at the end of a term for 
years, column 4 of Table B should be used. The application of this 
paragraph (d)(4) may be illustrated by the following example:

    Example. The donor transfers by gift a remainder interest in 
property worth $50,000, subject to the donor's sister's right to receive 
the income therefrom for her life. The sister at the date of the gift is 
31 years of age. By reference to Table A it is found that the figure in 
column 4 opposite age 31 is .04746. The value of the gift is, therefore, 
$2,373 ($50,000x.04746).

    (5) Actuarial computations by the Internal Revenue Service. If the 
interest to be valued is dependent upon the continuation or termination 
of more than one life, or there is a term certain concurrent with one or 
more lives, or if the

[[Page 627]]

retained interest of the donor is conditioned upon survivorship, a 
special factor is necessary. The factor is to be computed on the basis 
of interest at the rate of 10 percent a year, compounded annually, and 
life contingencies are determined for each person involved from the 
values of lx that are set forth in column 2 of Table LN in Sec. 
20.2031-7A(d)(6) of this chapter. Table LN contains values of lx taken 
from the life table for the total population appearing as Table 1 in 
United States Life Tables: 1969-71, published by the Department of 
Health and Human Services, Public Health Service. A copy of the 
publication containing many such special factors, may be purchased from 
the Superintendent of Documents, United States Government Printing 
Office, Washington, DC 20402. However, if a special factor is required 
in the case of an actual gift, the Commissioner will furnish the factor 
to the donor upon request. The request must be accompanied by a 
statement of the date of birth of each person the duration of whose life 
may affect the value of the interest, and by copies of the relevant 
instruments. Special factors are not furnished for prospective 
transfers.
    (6) Tables. (i) For actuarial factors showing the present worth at 
10 percent of a single life annuity, a life interest, and a remainder 
interest postponed for a single life, see Sec. 20.2031-7A(d)(6) of this 
chapter, Table A, of the Estate Tax Regulations.
    (ii) For actuarial factors showing the present worth at 10 percent 
of an annuity for a term certain, an income interest for a term certain, 
and a remainder interest postponed for a term certain, see Sec. 
20.2031-7A(d)(6) of this chapter, Table B, of the Estate Tax 
Regulations.
    (e) Valuation of annuities, unitrust interests, interests for life 
or term of years, and remainder or reversionary interests transferred 
after April 30, 1989, and before May 1, 1999--(1) In general. Except as 
otherwise provided in Sec. Sec. 25.2512-5(b) and 25.7520-3(b) 
(pertaining to certain limitations on the use of prescribed tables), if 
the valuation date of the transferred interest is after April 30, 1989, 
and before May 1, 1999, the fair market value of annuities, unitrust 
interests, life estates, terms of years, remainders, and reversions 
transferred by gift is the present value of the interests determined by 
use of standard or special section 7520 actuarial factors and the 
valuation methodology described in Sec. 25.2512-5(d). Sections 20.2031-
7(d)(6) and 20.2031-7A(e)(4) of this chapter and related sections 
provide tables with standard actuarial factors and examples that 
illustrate how to use the tables to compute the present value of 
ordinary annuity, life, and remainder interests in property. These 
sections also refer to standard and special actuarial factors that may 
be necessary to compute the present value of similar interests in more 
unusual fact situations. These factors and examples are also generally 
applicable for gift tax purposes in computing the values of taxable 
gifts.
    (2) Transitional rule. (i) If the valuation date of a transfer of an 
interest in property by gift is after April 30, 1989, and before June 
10, 1994, a donor can rely on Notice 89-24 (1989-1 C.B. 660), or Notice 
89-60 (1989-1 C.B. 700), in valuing the transferred interest. (See Sec. 
601.601(d)(2)(ii)(b) of this chapter.)
    (ii) If a donor transferred an interest in property by gift after 
December 31, 1988, and before May 1, 1989, retaining an interest in the 
same property, and after April 30, 1989, and before January 1, 1990, 
transferred the retained interest in property, the donor may, at the 
option of the donor, value the transfer of the retained interest under 
this paragraph (e) or paragraph (d) of this section.
    (3) Publications and actuarial computations by the Internal Revenue 
Service. Many standard actuarial factors not included in Sec. Sec. 
20.2031-7(d)(6) and 20.2031-7A(e)(4) of this chapter are included in 
Internal Revenue Service Publication 1457, ``Actuarial Values, Alpha 
Volume,'' (8-89). Internal Revenue Service Publication 1457 also 
includes examples that illustrate how to compute many special factors 
for more unusual situations. Publication 1457 is no longer available for 
purchase from the Superintendent of Documents, United States Government 
Printing Office, Washington, DC 20402. However, pertinent factors in 
this publication may be obtained from: CC:DOM:CORP:R (IRS Publication 
1457), room 5226, Internal

[[Page 628]]

Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. 
If a special factor is required in the case of a completed gift, the 
Internal Revenue Service may furnish the factor to the donor upon a 
request for a ruling. The request for a ruling must be accompanied by a 
recitation of the facts including a statement of the date of birth for 
each measuring life, the date of the gift, any other applicable dates, 
and a copy of the will, trust, or other relevant documents. A request 
for a ruling must comply with the instructions for requesting a ruling 
published periodically in the Internal Revenue Bulletin (see Sec. Sec. 
601.201 and 601.601(d)(2)(ii)(b) of this chapter) and include payment of 
the required user fee.
    (f) Valuation of annuities, unitrust interests, interests for life 
or term of years, and remainder or reversionary interests transferred 
after April 30, 1999, and before May 1, 2009--(1) In general. Except as 
otherwise provided in Sec. Sec. 25.2512-5(b) and 25.7520-3(b) 
(pertaining to certain limitations on the use of prescribed tables), if 
the valuation date of the transferred interest is after April 30, 1999, 
and before May 1, 2009, the fair market value of annuities, unitrust 
interests, life estates, terms of years, remainders, and reversions 
transferred by gift is the present value of the interests determined by 
use of standard or special section 7520 actuarial factors and the 
valuation methodology described in Sec. 25.2512-5(d). Sections 20.2031-
7(d)(6) and 20.2031-7A(f)(4) and related sections provide tables with 
standard actuarial factors and examples that illustrate how to use the 
tables to compute the present value of ordinary annuity, life, and 
remainder interests in property. These sections also refer to standard 
and special actuarial factors that may be necessary to compute the 
present value of similar interests in more unusual fact situations. 
These factors and examples are also generally applicable for gift tax 
purposes in computing the values of taxable gifts.
    (2) Transitional rule. If the valuation date of a transfer of 
property by gift is after April 30, 1999, and before July 1, 1999, the 
fair market value of the interest transferred is determined by use of 
the section 7520 interest rate for the month in which the valuation date 
occurs (see Sec. Sec. 25.7520-1(b) and 25.7520-2(a)(2)) and the 
appropriate actuarial tables under either Sec. 20.2031-7A(e)(4) or 
Sec. 20.2031-7A(f)(4), at the option of the donor. However, with 
respect to each individual transaction and with respect to all transfers 
occurring on the valuation date, the donor must use the same actuarial 
tables (for example, gift and income tax charitable deductions with 
respect to the same transfer must be determined based on the same 
tables, and all transfers made on the same date must be valued based on 
the same tables).
    (3) Publications and actuarial computations by the Internal Revenue 
Service. Many standard actuarial factors not included in Sec. Sec. 
20.2031-7(d)(6) and 20.2031-7A(f)(4) are included in Internal Revenue 
Service Publication 1457, ``Actuarial Values, Book Aleph,'' (7-99). 
Internal Revenue Service Publication 1457 also includes examples that 
illustrate how to compute many special factors for more unusual 
situations. Publication 1457 is no longer available for purchase from 
the Superintendent of Documents, United States Government Printing 
Office. However, pertinent factors in this publication may be obtained 
from: CC:PA:LPD:PR (IRS Publication 1457), Room 5205, Internal Revenue 
Service, P.O.Box 7604, Ben Franklin Station, Washington, DC 20044. If a 
special factor is required in the case of a completed gift, the Internal 
Revenue Service may furnish the factor to the donor upon a request for a 
ruling. The request for a ruling must be accompanied by a recitation of 
the facts including a statement of the date of birth for each measuring 
life, the date of the gift, any other applicable dates, and a copy of 
the will, trust, or other relevant documents. A request for a ruling 
must comply with the instructions for requesting a ruling published 
periodically in the Internal Revenue Bulletin (see Sec. Sec. 601.201 
and 601.601(d)(2)(ii)(b)) and include payment of the required user fee.

[[Page 629]]

    (4) Effective/applicability dates. Paragraphs (f)(1) through (f)(3) 
apply after April 30, 1999, and before May 1, 2009.

[T.D. 8540, 59 FR 30173, June 10, 1994, as amended at 59 FR 30173, 
30174, June 10, 1994; T.D. 8819, 64 FR 23226, Apr. 30, 1999; T.D. 8886, 
65 FR 36943, June 12, 2000; T.D. 9448, 74 FR 21515, May 7, 2009; T.D. 
9540, 76 FR 49641, Aug. 10, 2011]

                               Deductions



Sec. 25.2519-1  Dispositions of certain life estates.

    (a) In general. If a donee spouse makes a disposition of all or part 
of a qualifying income interest for life in any property for which a 
deduction was allowed under section 2056(b)(7) or section 2523(f) for 
the transfer creating the qualifying income interest, the donee spouse 
is treated for purposes of chapters 11 and 12 of subtitle B of the 
Internal Revenue Code as transferring all interests in property other 
than the qualifying income interest. For example, if the donee spouse 
makes a disposition of part of a qualifying income interest for life in 
trust corpus, the spouse is treated under section 2519 as making a 
transfer subject to chapters 11 and 12 of the entire trust other than 
the qualifying income interest for life. Therefore, the donee spouse is 
treated as making a gift under section 2519 of the entire trust less the 
qualifying income interest, and is treated for purposes of section 2036 
as having transferred the entire trust corpus, including that portion of 
the trust corpus from which the retained income interest is payable. A 
transfer of all or a portion of the income interest of the spouse is a 
transfer by the spouse under section 2511. See also section 2702 for 
special rules applicable in valuing the gift made by the spouse under 
section 2519.
    (b) Presumption. Unless the donee spouse establishes to the 
contrary, section 2519 applies to the entire trust at the time of the 
disposition. If a deduction is taken on either the estate or gift tax 
return with respect to the transfer which created the qualifying income 
interest, it is presumed that the deduction was allowed for purposes of 
section 2519. To avoid the application of section 2519 upon a transfer 
of all or part of the donee spouse's income interest, the donee spouse 
must establish that a deduction was not taken for the transfer of 
property which created the qualifying income interest. For example, to 
establish that a deduction was not taken, the donee spouse may produce a 
copy of the estate or gift tax return filed with respect to the transfer 
creating the qualifying income interest for life establishing that no 
deduction was taken under section 2056(b)(7) or section 2523(f). In 
addition, the donee spouse may establish that no return was filed on the 
original transfer by the donor spouse because the value of the first 
spouse's gross estate was below the threshold requirement for filing 
under section 6018. Similarly, the donee spouse could establish that the 
transfer creating the qualifying income interest for life was made 
before the effective date of section 2056(b)(7) or section 2523(f), 
whichever is applicable.
    (c) Amount treated as a transfer--(1) In general. The amount treated 
as a transfer under this section upon a disposition of all or part of a 
qualifying income interest for life in qualified terminable interest 
property is equal to the fair market value of the entire property 
subject to the qualifying income interest, determined on the date of the 
disposition (including any accumulated income and not reduced by any 
amount excluded from total gifts under section 2503(b) with respect to 
the transfer creating the interest), less the value of the qualifying 
income interest in the property on the date of the disposition. The gift 
tax consequences of the disposition of the qualifying income interest 
are determined separately under Sec. 25.2511-2. See paragraph (c)(4) of 
this section for the effect of gift tax that the donee spouse is 
entitled to recover under section 2207A.
    (2) Disposition of interest in property with respect to which a 
partial election was made. If, in connection with the transfer of 
property that created the spouse's qualifying income interest for life, 
a deduction was allowed under section 2056(b)(7) or section 2523(f) for 
less than the entire interest in the property (i.e., for a fractional or 
percentage share of the entire interest in the transferred property) the 
amount

[[Page 630]]

treated as a transfer by the donee spouse under this section is equal to 
the fair market value of the entire property subject to the qualifying 
income interest on the date of the disposition, less the value of the 
qualifying income interest for life, multiplied by the fractional or 
percentage share of the interest for which the deduction was taken.
    (3) Reduction for distributions charged to nonelective portion of 
trust. The amount determined under paragraph (c)(2) of this section (if 
applicable) is appropriately reduced if--
    (i) The donee spouse's interest is in a trust and distributions of 
principal have been made to the donee spouse;
    (ii) The trust provides that distributions of principal are made 
first from the qualified terminable interest share of the trust; and
    (iii) The donee spouse establishes the reduction in that share based 
on the fair market value of the trust assets at the time of each 
distribution.
    (4) Effect of gift tax entitled to be recovered under section 2207A 
on the amount of the transfer. The amount treated as a transfer under 
paragraph (c)(1) of this section is further reduced by the amount the 
donee spouse is entitled to recover under section 2207A(b) (relating to 
the right to recover gift tax attributable to the remainder interest). 
If the donee spouse is entitled to recover gift tax under section 
2207A(b), the amount of gift tax recoverable and the value of the 
remainder interest treated as transferred under section 2519 are 
determined by using the same interrelated computation applicable for 
other transfers in which the transferee assumes the gift tax liability. 
The gift tax consequences of failing to exercise the right of recovery 
are determined separately under Sec. 25.2207A-1(b).
    (5) Interest in previously severed trust. If the donee spouse's 
interest is in a trust consisting of only qualified terminable interest 
property, and the trust was previously severed (in compliance with Sec. 
20.2056(b)-7(b)(2)(ii) of this chapter or Sec. 25.2523(f)-l(b)(3)(ii) 
from a trust that, after the severance, held only property that was not 
qualified terminable interest property, only the value of the property 
in the severed portion of the trust at the time of the disposition is 
treated as transferred under this section.
    (d) Identification of property transferred. If only part of the 
property in which a donee spouse has a qualifying income interest for 
life is qualified terminable interest property, the donee spouse is, in 
the case of a disposition of all or part of the income interest within 
the meaning of section 2519, deemed to have transferred a pro rata 
portion of the entire qualified terminable interest property for 
purposes of this section.
    (e) Exercise of power of appointment. The exercise by any person of 
a power to appoint qualified terminable interest property to the donee 
spouse is not treated as a disposition under section 2519, even though 
the donee spouse subsequently disposes of the appointed property.
    (f) Conversion of qualified terminable interest property. The 
conversion of qualified terminable interest property into other property 
in which the donee spouse has a qualifying income interest for life is 
not, for purposes of this section, treated as a disposition of the 
qualifying income interest. Thus, the sale and reinvestment of assets of 
a trust holding qualified terminable interest property is not a 
disposition of the qualifying income interest, provided that the donee 
spouse continues to have a qualifying income interest for life in the 
trust after the sale and reinvestment. Similarly, the sale of real 
property in which the spouse possesses a legal life estate and thus 
meets the requirements of qualified terminable interest property, 
followed by the transfer of the proceeds into a trust which also meets 
the requirements of qualified terminable interest property, or by the 
reinvestment of the proceeds in income producing property in which the 
donee spouse has a qualifying income interest for life, is not 
considered a disposition of the qualifying income interest. On the other 
hand, the sale of qualified terminable interest property, followed by 
the payment to the donee spouse of a portion of the proceeds equal to 
the value of the donee spouse's income interest, is considered a 
disposition of the qualifying income interest.

[[Page 631]]

    (g) Examples. The following examples illustrate the application of 
paragraphs (a) through (f) of this section. Except as provided otherwise 
in the examples, assume that the decedent, D, was survived by spouse, S, 
that in each example the section 2503(b) exclusion has already been 
fully utilized for each year with respect to the donee in question, that 
section 2503(e) is not applicable to the amount deemed transferred, and 
that the gift taxes on the amount treated as transferred under paragraph 
(c) are offset by S's unified credit. The examples are as follows:

    Example 1. Transfer of the spouse's life estate in residence. Under 
D's will, a personal residence valued for estate tax purposes at 
$250,000 passes to S for life, and after S's death to D's children. D's 
executor made a valid election to treat the property as qualified 
terminable interest property. During 1995, when the fair market value of 
the property is $300,000 and the value of S's life interest in the 
property is $100,000, S makes a gift of S's entire interest in the 
property to D's children. Pursuant to section 2519, S makes a gift in 
the amount of $200,000 (i.e., the fair market value of the qualified 
terminable interest property of $300,000 less the fair market value of 
S's qualifying income interest in the property of $100,000). In 
addition, under section 2511, S makes a gift of $100,000 (i.e., the fair 
market value of S's income interest in the property). See Sec. 25.2511-
2.
    Example 2. Sale of spouse's life estate. The facts are the same as 
in Example 1 except that during 1995, S sells S's interest in the 
property to D's children for $100,000. Pursuant to section 2519, S makes 
a gift of $200,000 ($300,000 less $100,000 value of the qualifying 
income interest in the property). S does not make a gift of the income 
interest under section 2511, because the consideration received for S's 
income interest is equal to the value of the income interest.
    Example 3. Transfer of income interest in trust subject to partial 
election. D's will established a trust valued for estate tax purposes at 
$500,000, all of the income of which is payable annually to S for life. 
After S's death, the principal of the trust is to be distributed to D's 
children. Assume that only 50 percent of the trust was treated as 
qualified terminable interest property. During 1995, S makes a gift of 
all of S's interest in the trust to D's children at which time the fair 
market value of the trust is $400,000 and the fair market value of S's 
life income interest in the trust is $100,000. Pursuant to section 2519, 
S makes a gift of $150,000 (the fair market value of the qualified 
terminable interest property, 50 percent of $400,000, less the $50,000 
income interest in the qualified terminable interest property). S also 
makes a gift pursuant to section 2511 of $100,000 (i.e., the fair market 
value of S's life income interest).
    Example 4. Transfer of a portion of income interest in trust subject 
to a partial election. The facts are the same as in Example 3 except 
that S makes a gift of only 40 percent of S's interest in the trust. 
Pursuant to section 2519, S makes a gift of $150,000 (i.e., the fair 
market value of the qualified terminable interest property, 50 percent 
of $400,000, less the $50,000 value of S's qualified income interest in 
the qualified terminable interest property). S also makes a gift 
pursuant to section 2511 of $40,000 (i.e., the fair market value of 40 
percent of S's life income interest). See also section 2702 for 
additional rules that may affect the value of the total amount of S's 
gift under section 2519 to take into account the fact that S's 30 
percent retained income interest attributable to the qualifying income 
interest is valued at zero under that section, thereby increasing the 
value of S's section 2519 gift to $180,000. In addition, under Sec. 
25.2519-1(d), S's disposition of 40 percent of the income interest is 
deemed to be a transfer of a pro rata portion of the qualified 
terminable interest property. Thus, assuming no further lifetime 
dispositions by S, 30 percent (60 percent of 50 percent) of the trust 
property is included in S's gross estate under section 2036 and an 
adjustment is made to S's adjusted taxable gifts under section 
2001(b)(1)(B). If S later disposes of all or a portion of the retained 
income interest, see Sec. 25.2702-6.
    Example 5. Transfer of a portion of spouse's interest in a trust 
from which corpus was previously distributed to the spouse. D's will 
established a trust valued for estate tax purposes at $500,000, all of 
the income of which is payable annually to S for life. The trustee is 
granted the discretion to distribute trust principal to S. All 
appointments of principal must be made from the portion of the trust 
subject to the section 2056(b)(7) election. After S's death, the 
principal of the trust is to be distributed to D's children. The 
executor makes the section 2056(b)(7) election with respect to 50 
percent of the trust. In 1994, pursuant to the terms of D's will, the 
trustee distributed $50,000 of principal to S and charged the entire 
distribution to the qualified terminable interest portion of the trust.
    Immediately prior to the distribution, the value of the entire trust 
was $550,000 and the value of the qualified terminable interest portion 
was $275,000 (50 percent of $550,000). Provided S can establish the 
above facts, the qualified terminable interest portion of the trust 
immediately after the distribution is $225,000 or 45 percent of the 
value of the trust ($225,000/$500,000). In 1996, when the value of the 
trust is $400,000 and the value of S's income interest is $100,000, S 
makes a transfer of 40 percent of S's income interest. S's gift under 
section 2519 is $135,000; i.e., the fair

[[Page 632]]

market value of the qualified terminable interest property, 45 percent 
of $400,000 ($180,000), less the value of the income interest in the 
qualified terminable interest property, $45,000 (45 percent of 
$100,000). S also makes a gift under section 2511 of $40,000; i.e., the 
fair market value of 40 percent of S's income interest. S's disposition 
of 40 percent of the income interest is deemed to be a transfer under 
section 2519 of the entire 45 percent portion of the remainder subject 
to the section 2056(b)(7) election. Since S retained 60 percent of the 
income interest, 27 percent (60 percent of 45 percent) of the trust 
property is includible in S's gross estate under section 2036. See also 
section 2702 and Example 4 as to the principles applicable in valuing 
S's gift under section 2702 and adjusted taxable gifts upon S's 
subsequent death.
    Example 6. Transfer of Spousal Annuity Payable From Trust. D died 
prior to October 24, 1992. D's will established a trust valued for 
estate tax purposes at $500,000. The trust instrument required the 
trustee to pay an annuity to S of $20,000 a year for life. All the trust 
income other than the amounts paid to S as an annuity are to be 
accumulated in the trust and may not be distributed during S's lifetime 
to any person other than S. After S's death, the principal of the trust 
is to be distributed to D's children. Because D died prior to the 
effective date of section 1941 of the Energy Policy Act of 1992, S's 
annuity interest qualifies as a qualifying income interest for life. 
Under Sec. 20.2056(b)-7(e) of this chapter, based on an applicable 10 
percent interest rate, 40 percent of the property, or $200,000, is the 
value of the deductible interest. During 1996, S makes a gift of the 
annuity interest to D's children at which time the fair market value of 
the trust is $800,000 and the fair market value of S's annuity interest 
in the trust is $100,000. Pursuant to section 2519, S is treated as 
making a gift of $220,000 (the fair market value of the qualified 
terminable interest property, 40 percent of $800,000 ($320,000), less 
the $100,000 annuity interest in the qualified terminable interest 
property). S is also treated pursuant to section 2511 as making a gift 
of $100,000 (the fair market value of S's annuity interest).

[T.D. 8522, 59 FR 9656, Mar. 1, 1994, as amended by T.D. 9077, 68 FR 
42595, July 18, 2003]



Sec. 25.2519-2  Effective date.

    Except as specifically provided in Sec. 25.2519-1(g), Example 6, 
the provisions of Sec. 25.2519-1 are effective with respect to gifts 
made after March 1, 1994. With respect to gifts made on or before such 
date, the donee spouse of a section 2056(b)(7) or section 2523(f) 
transfer may rely on any reasonable interpretation of the statutory 
provisions. For these purposes, the provisions of Sec. 25.2519-1 (as 
well as project LR-211-76, 1984-1 C.B., page 598, see Sec. 
601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable 
interpretation of the statutory provisions.

[T.D. 8522, 59 FR 9658, Mar. 1, 1994]



Sec. 25.2521-1  Specific exemption.

    (a) In determining the amount of taxable gifts for the calendar 
quarter (calendar year with respect to gifts made before January 1, 
1971) there may be deducted, if the donor was a resident or citizen of 
the United States at the time the gifts were made, a specific exemption 
of $30,000, less the sum of the amounts claimed and allowed as an 
exemption in prior calendar quarters or calendar years. The exemption, 
at the option of the donor, may be taken in the full amount of $30,000 
in a single calendar quarter or calendar year, or be spread over a 
period of time in such amounts as the donor sees fit, but after the 
limit has been reached no further exemption is allowable. Except as 
otherwise provided in a tax convention between the United States and 
another country, a donor who was a nonresident not a citizen of the 
United States at the time the gift or gifts were made is not entitled to 
this exemption. For the definition of calendar quarter see Sec. 
25.2502-1(c)(1).
    (b) No part of a donor's lifetime specific exemption of $30,000 may 
be deducted from the value of a gift attributable to his spouse where a 
husband and wife consent, under the provisions of section 2513, to have 
the gifts made during a calendar quarter or calendar year considered as 
made one-half by each of them. The ``gift-splitting'' provisions of 
section 2513 do not authorize the filing of a joint gift tax return nor 
permit a donor to claim any of his spouse's specific exemption. For 
example, if a husband has no specific exemption remaining available, but 
his wife does, and the husband makes a gift to which his wife consents 
under the provisions of section 2513, the specific exemption remaining 
available may be claimed only on the return of the wife with respect to 
one-half of the gift. The husband may not claim any specific exemption 
since he has none available.

[[Page 633]]

    (c)(1) With respect to gifts made after December 31, 1970, the 
amount by which the specific exemption claimed and allowed in gift tax 
returns for prior calendar quarters and calendar years exceeds $30,000 
is includible in determining the aggregate sum of the taxable gifts for 
preceding calendar years and calendar quarters. See paragraph (b) of 
Sec. 25.2504-1.
    (2) With respect to gifts made before January 1, 1971, the amount by 
which the specific exemption claimed and allowed in gift tax returns for 
prior calendar years exceeds $30,000 is includible in determining the 
aggregate sum of the taxable gifts for preceding calendar years. See 
paragraph (b) of Sec. 25.2504-1.

[T.D. 7238, 37 FR 28732, Dec. 29, 1972]



Sec. 25.2522(a)-1  Charitable and similar gifts; citizens or residents.

    (a) In determining the amount of taxable gifts for the ``calendar 
period'' (as defined in Sec. 25.2502-1(c)(1)) there may be deducted, in 
the case of a donor who was a citizen or resident of the United States 
at the time the gifts were made, all gifts included in the ``total 
amount of gifts'' made by the donor during the calendar period (see 
section 2503 and the regulations thereunder) and made to or for the use 
of:
    (1) The United States, any State, Territory, or any political 
subdivision thereof, or the District of Columbia, for exclusively public 
purposes.
    (2) Any corporation, trust, community chest, fund, or foundation 
organized and operated exclusively for religious charitable, scientific, 
literary, or educational purposes, including the encouragement of art 
and the prevention of cruelty to children or animals, if no part of the 
net earnings of the organization inures to the benefit of any private 
shareholder or individual, if it is not disqualified for tax exemption 
under section 501(c)(3) by reason of attempting to influence 
legislation, and if, in the case of gifts made after December 31, 1969, 
it does not participate in, or intervene in (including the publishing or 
distributing of statements), any political campaign on behalf of or in 
opposition to any candidate for public office.
    (3) A fraternal society, order, or association, operating under the 
lodge system, provided the gifts are to be used by the society, order or 
association exclusively for one or more of the purposes set forth in 
subparagraph (2) of this paragraph.
    (4) Any post or organization of war veterans or auxiliary unit or 
society thereof, if organized in the United States or any of its 
possessions, and if no part of its net earnings inures to the benefit of 
any private shareholder or individual.

The deduction is not limited to gifts for use within the United States, 
or to gifts to or for the use of domestic corporations, trusts, 
community chests, funds, or foundations, or fraternal societies, orders, 
or associations operating under the lodge system. An organization will 
not be considered to meet the requirements of subparagraph (2) of this 
paragraph, or of paragraph (b) (2) or (3) of this section, if such 
organization engages in any activity which would cause it to be 
classified as an ``action'' organization under paragraph (c)(3) of Sec. 
1.501(c)(3)-1 of this chapter (Income Tax Regulations). For the 
deductions for charitable and similar gifts made by a nonresident who 
was not a citizen of the United States at the time the gifts were made, 
see Sec. 25.2522(b)-1. See Sec. Sec. 25.2522(c)-1 and 25.2522(c)-2 for 
rules relating to the disallowance of deductions to trusts and 
organizations which engage in certain prohibited transactions or whose 
governing instruments do not contain certain specified requirements.
    (b) The deduction under section 2522 is not allowed for a transfer 
to a corporation, trust, community chest, fund, or foundation unless the 
organization or trust meets the following four tests:
    (1) It must be organized and operated exclusively for one or more of 
the specified purposes.
    (2) It must not be disqualified for tax exemption under section 
501(c)(3) by reason of attempting to influence legislation.
    (3) In the case of gifts made after December 31, 1969, it must not 
participate in, or intervene in (including the publishing or 
distributing of statements), any political campaign on behalf of any 
candidate for public office.

[[Page 634]]

    (4) Its net earnings must not inure in whole or in part to the 
benefit of private shareholders or individuals other than as legitimate 
objects of the exempt purposes.

For further limitations see Sec. 25.2522(c)-1, relating to gifts to 
trusts and organizations which have engaged in a prohibited transaction 
described in section 681(b)(2) or section 503(c).
    (c) In order to prove the right to the charitable, etc., deduction 
provided by section 2522 the donor must submit such data as may be 
requested by the Internal Revenue Service. As to the extent the 
deductions provided by this section are allowable, see section 2524.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7012, 34 FR 
7691, May 15, 1969; T.D. 7238, 37 FR 28733, Dec. 29, 1972; T.D. 7318, 39 
FR 25457, July 11, 1974; T.D. 7910, 48 FR 40375, Sept. 7, 1983; T.D. 
8308, 55 FR 35594, Aug. 31, 1990]



Sec. 25.2522(a)-2  Transfers not exclusively for charitable, etc., 
purposes in the case of gifts made before August 1, 1969.

    (a) Remainders and similar interests. If a trust is created or 
property is transferred for both a charitable and a private purpose, 
deduction may be taken of the value of the charitable beneficial 
interest only insofar as that interest is presently ascertainable, and 
hence severable from the noncharitable interest. The present value of a 
remainder or other deferred payment to be made for a charitable purpose 
is to be determined in accordance with the rules stated in Sec. 
25.2512-5. Thus, if money or property is placed in trust to pay the 
income to an individual during his life, or for a term of years, and 
then to pay the principal to a charitable organization, the present 
value of the remainder is deductible. If the interest involved is such 
that its value is to be determined by a special computation, see Sec. 
25.2512-5(d)(4). If the Commissioner does not furnish the factor, the 
claim for deduction must be supported by a full statement of the 
computation of the present value made in accordance with the principles 
set forth in the applicable paragraph of Sec. 25.2512-5.
    (b) Transfers subject to a condition or a power. If, as of the date 
of the gift, a transfer for charitable purposes is dependent upon the 
performance of some act or the happening of a precedent event in order 
that it might become effective, no deduction is allowable unless the 
possibility that the charitable transfer will not become effective is so 
remote as to be negligible. If an estate or interest passes to or is 
vested in charity on the date of the gift and the estate or interest 
would be defeated by the performance of some act or the happening of 
some event, the occurrence of which appeared to have been highly 
improbable on the date of the gift, the deduction is allowable. If the 
donee or trustee is empowered to divert the property or fund, in whole 
or in part, to a use or purpose which would have rendered it, to the 
extent that it is subject to such power, not deductible had it been 
directly so given by the donor, the deduction will be limited to that 
portion of the property or fund which is exempt from the exercise of the 
power. The deduction is not allowed in the case of a transfer in trust 
conveying to charity a present interest in income if by reason of all 
the conditions and circumstances surrounding the transfer it appears 
that the charity may not receive the beneficial enjoyment of the 
interest. For example, assume that assets placed in trust by the donor 
consists of stock in a corporation, the fiscal policies of which are 
controlled by the donor and his family, that the trustees and 
remaindermen are likewise members of the donor's family, and that the 
governing instrument contains no adequate guarantee of the requisite 
income to the charitable organization. Under such circumstances, no 
deduction will be allowed. Similarly, if the trustees are not members of 
the donor's family but have no power to sell or otherwise dispose of 
closely held stock, or otherwise insure the requisite enjoyment of 
income to the charitable organization, no deduction will be allowed.
    (c) Effective date. This section applies only to gifts made before 
August 1, 1969. In the case of gifts made after July 31, 1969, see Sec. 
25.2522(c)-2.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021 Dec. 31, 1960, as 
amended by T.D. 7318, 39 FR 25457, July 11, 1974; T.D. 8540, 59 FR 
30177, June 10, 1994]

[[Page 635]]



Sec. 25.2522(b)-1  Charitable and similar gifts; nonresidents not
citizens.

    (a) The deduction for charitable and similar gifts, in the case of a 
nonresident who was not a citizen of the United States at the time he 
made the gifts, is governed by the same rules as those applying to gifts 
by citizens or residents, subject, however, to the following exceptions:
    (1) If the gifts are made to or for the use of a corporation, the 
corporation must be one created or organized under the laws of the 
United States or of any State or Territory thereof.
    (2) If the gifts are made to or for the use of a trust, community 
chest, fund or foundation, or a fraternal society, order or association 
operating under the lodge system, the gifts must be for use within the 
United States exclusively for religious, charitable, scientific, 
literary or educational purposes, including the encouragement of art and 
the prevention of cruelty to children or animals.
    (b) [Reserved]



Sec. 25.2522(c)-1  Disallowance of charitable, etc., deductions because
of ``prohibited transactions'' in the case of gifts made before 

January 1, 1970.

    (a) Sections 503(e) and 681(b)(5) provide that no deduction which 
would otherwise be allowable under section 2522 for a gift for 
religious, charitable, scientific, literary or educational purposes, 
including the encouragement of art and the prevention of cruelty to 
children or animals, is allowed if--
    (1) The gift is made in trust and, for income tax purposes for the 
taxable year of the trust in which the gift is made, the deduction 
otherwise allowable to the trust under section 642(c) is limited by 
section 681(b)(1) by reason of the trust having engaged in a prohibited 
transaction described in section 681(b)(2); or
    (2) The gift is made to any corporation, community chest, fund or 
foundation which, for its taxable year in which the gift is made is not 
exempt from income tax under section 501(a) by reason of having engaged 
in a prohibited transaction described in section 503(c).
    (b) For purposes of section 503(e) and section 681(b)(5) the term 
``gift'' includes any gift, contribution, or transfer without adequate 
consideration.
    (c) Regulations relating to the income tax contain the rules for the 
determination of the taxable year of the trust for which the deduction 
under section 642(c) is limited by section 681(b), and for the 
determination of the taxable year of the organization for which an 
exemption is denied under section 503(a). Generally, such taxable year 
is a taxable year subsequent to the taxable year during which the trust 
or organization has been notified by the Internal Revenue Service that 
it has engaged in a prohibited transaction. However, if the trust or 
organization during or prior to the taxable year entered into the 
prohibited transaction for the purpose of diverting its corpus or income 
from the charitable or other purposes by reason of which it is entitled 
to a deduction or exemption, and the transaction involves a substantial 
part of such income or corpus, then the deduction of the trust under 
section 642(c) for such taxable year is limited by section 681(b), or 
the exemption of the organization for such taxable year is denied under 
section 503(a), whether or not the organization has previously received 
notification by the Internal Revenue Service that it has engaged in a 
prohibited transaction. In certain cases, the limitation of section 503 
or 681 may be removed or the exemption may be reinstated for certain 
subsequent taxable years under the rules set forth in the income tax 
regulations under sections 503 and 681.
    (d) In cases in which prior notification by the Internal Revenue 
Service is not required in order to limit the deduction of the trust 
under section 681(b), or to deny exemption of the organization under 
section 503, the deduction otherwise allowable under Sec. 25.2522(a)-1 
is not disallowed with respect to gifts made during the same taxable 
year of the trust or organization in which a prohibited transaction 
occurred, or in a prior taxable year, unless the donor or a member of 
his family was a party to the prohibited transaction. For purposes of 
the preceding sentence, the members of the donor's family include only 
his brothers and

[[Page 636]]

sisters (whether by whole or half blood), spouse, ancestors, and lineal 
descendants.
    (e) This section applies only to gifts made before January 1, 1970. 
In the case of gifts made after December 31, 1969, see Sec. 25.2522(c)-
2.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7318, 39 FR 25458, July 11, 1974]



Sec. 25.2522(c)-2  Disallowance of charitable, etc., deductions in the
case of gifts made after December 31, 1969.

    (a) Organizations subject to section 507(c) tax. Section 508(d)(1) 
provides that, in the case of gifts made after December 31, 1969, a 
deduction which would otherwise be allowable under section 2522 for a 
gift to or for the use of an organization upon which the tax provided by 
section 507(c) has been imposed shall not be allowed if the gift is made 
by the donor after notification is made under section 507(a) or if the 
donor is a substantial contributor (as defined in section 507(d)(2)) who 
makes such gift in his taxable year (as defined in section 441) which 
includes the first day on which action is taken by such organization 
that culminates in the imposition of the tax under section 507(c) and 
any subsequent taxable year. This paragraph does not apply if the entire 
amount of the unpaid portion of the tax imposed by section 507(c) is 
abated under section 507(g) by the Commissioner or his delegate.
    (b) Taxable private foundations, section 4947 trusts, etc. Section 
508(d)(2) provides that, in the case of gifts made after December 31, 
1969, a deduction which would otherwise be allowable under section 2522 
shall not be allowed if the gift is made to or for the use of--
    (1) A private foundation or a trust described in section 4947(a)(2) 
in a taxable year of such organization for which such organization fails 
to meet the governing instrument requirements of section 508(e) 
(determined without regard to section 508(e)(2) (B) and (C)), or
    (2) Any organization in a period for which it is not treated as an 
organization described in section 501(c)(3) by reason of its failure to 
give notification under section 508(a) of its status to the 
Commissioner.

For additional rules, see Sec. 1.508-2(b)(1) of this chapter (Income 
Tax Regulations).
    (c) Foreign organizations with substantial support from foreign 
sources. Section 4948(c)(4) provides that, in the case of gifts made 
after December 31, 1969, a deduction which would otherwise be allowable 
under section 2522 for a gift to or for the use of a foreign 
organization which has received substantially all of its support (other 
than gross investment income) from sources without the United States 
shall not be allowed if the gift is made (1) after the date on which the 
Commissioner has published notice that he has notified such organization 
that it has engaged in a prohibited transaction, or (2) in a taxable 
year of such organization for which it is not exempt from taxation under 
section 501(a) because it has engaged in a prohibited transaction after 
December 31, 1969.

[T.D. 7318, 39 FR 25458, July 11, 1974]



Sec. 25.2522(c)-3  Transfers not exclusively for charitable, etc., 
purposes in the case of gifts made after July 31, 1969.

    (a) Remainders and similar interests. If a trust is created or 
property is transferred for both a charitable and a private purpose, 
deduction may be taken of the value of the charitable beneficial 
interest only insofar as that interest is presently ascertainable, and 
hence severable from the noncharitable interest.
    (b) Transfers subject to a condition or a power. (1) If, as of the 
date of the gift, a transfer for charitable purposes is dependent upon 
the performance of some act or of the happening of a precedent event in 
order that it might become effective, no deduction is allowable unless 
the possibility that the charitable transfer will not become effective 
is so remote as to be negligible. If an estate or interest has passed 
to, or is vested in, charity on the date of the gift and the estate or 
interest would be defeated by the performance of some act or the 
happening of some event, the possibility of occurrence of which appeared 
on such date to be so remote as to be negligible, the deduction is 
allowable. If the donee or trustee is empowered to divert the property 
or fund, in whole or in part, to a use or purpose which

[[Page 637]]

would have rendered it, to the extent that it is subject to such power, 
not deductible had it been directly so given by the donor, the deduction 
will be limited to that portion, if any, of the property or fund which 
is exempt from an exercise of the power.
    (2) The application of this paragraph may be illustrated by the 
following examples:

    Example (1). In 1965, A transfers certain property in trust in which 
charity is to receive the income for his life. The assets placed in 
trust by the donor consist of stock in a corporation the fiscal policies 
of which are controlled by the donor and his family. The trustees of the 
trust and the remainderman are members of the donor's family and the 
governing instrument contains no adequate guarantee of the requisite 
income to the charitable organization. Under such circumstances, no 
deduction will be allowed. Similarly, if the trustees are not members of 
the donor's family but have no power to sell or otherwise dispose of the 
closely held stock, or otherwise insure the requisite enjoyment of 
income to the charitable organization, no deduction will be allowed.
    Example (2). C transfers a tract of land to a city government for as 
long as the land is used by the city for a public park. If on the date 
of gift the city does plan to use the land for a public park and the 
possibility that the city will not use the land for a public park is so 
remote as to be negligible, a deduction will be allowed.

    (c) Transfers of partial interest in property--(1) Disallowance of 
deduction--(i) In general. If a donor transfers an interest in property 
after July 31, 1969, for charitable purposes and an interest in the same 
property is retained by the donor, or is transferred or has been 
transferred for private purposes after such date (for less than an 
adequate and full consideration in money or money's worth), no deduction 
is allowed under section 2522 for the value of the interest which is 
transferred or has been transferred for charitable purposes unless the 
interest in property is a deductible interest described in subparagraph 
(2) of this paragraph. The principles that are used in applying section 
2523 and the regulations thereunder shall apply for purposes of 
determining under this paragraph (c)(1)(i) whether an interest in 
property is retained by the donor, or is transferred or has been 
transferred by the donor. If, however, as of the date of the gift, a 
retention of any interest by a donor, or a transfer for a private 
purpose, is dependent upon the performance of some act or the happening 
of a precedent event in order that it may become effective, an interest 
in property will be considered retained by the donor, or transferred for 
a private purpose, unless the possibility of occurrence of such act or 
event is so remote as to be negligible. The application of this 
paragraph (c)(1)(i) may be illustrated by the following examples, in 
each of which it is assumed that the property interest which is 
transferred for private purposes is not transferred for an adequate and 
full consideration in money or money's worth:

    Example (1). In 1973, H creates a trust which is to pay the income 
of the trust to W for her life, the reversionary interest in the trust 
being retained by H. In 1975, H gives the reversionary interest to 
charity, while W is still living. For purposes of this paragraph 
(c)(1)(i), interests in the same property have been transferred by H for 
charitable purposes and for private purposes.
    Example (2). In 1973, H creates a trust which is to pay the income 
of the trust to W for her life and upon termination of the life estate 
to transfer the remainder to S. In 1975, S gives his remainder interest 
to charity, while W is still living. For purposes of this paragraph 
(c)(1)(i), interests in the same property have not been transferred by H 
or S for charitable purposes and for private purposes.
    Example (3). H transfers Blackacre to A by gift, reserving the right 
to the rentals of Blackacre for a term of 20 years. After 4 years H 
transfers the right to the remaining rentals to charity. For purposes of 
this paragraph (c)(1)(i) the term ``property'' refers to Blackacre, and 
the right to rentals from Blackacre consist of an interest in Blackacre. 
An interest in Blackacre has been transferred by H for charitable 
purposes and for private purposes.
    Example (4). H transfers property in trust for the benefit of A and 
a charity. An annuity of $5,000 a year is to be paid to charity for 20 
years. Upon termination of the 20-year term the corpus is to be 
distributed to A if living. However, if A should die during the 20-year 
term, the corpus is to be distributed to charity upon termination of the 
term. An interest in property has been transferred by H for charitable 
purposes. In addition, an interest in the same property has been 
transferred by H for private purposes unless the possibility that A will 
survive the 20-year term is so remote as to be negligible.
    Example (5). H transfers property in trust, under the terms of which 
an annuity of $5,000

[[Page 638]]

a year is to be paid to charity for 20 years. Upon termination of the 
term, the corpus is to pass to such of A's children and their issue as A 
may appoint. However, if A should die during the 20-year term without 
exercising the power of appointment, the corpus is to be distributed to 
charity upon termination of the term. Since the possible appointees 
include private persons, an interest in the corpus of the trust is 
considered to have been transferred by H for private purposes.

    (ii) Works of art and copyright treated as separate properties. For 
purposes of paragraphs (c)(1)(i) and (c)(2) of this section, rules 
similar to the rules in Sec. 20.2055-2(e)(1)(ii) shall apply in the 
case of transfers made after December 31, 1981.
    (2) Deductible interests. A deductible interest for purposes of 
subparagraph (1) of this paragraph is a charitable interest in property 
where--
    (i) Undivided portion of donor's entire interest. The charitable 
interest is an undivided portion, not in trust, of the donor's entire 
interest in property. An undivided portion of a donor's entire interest 
in property must consist of a fraction or percentage of each and every 
substantial interest or right owned by the donor in such property and 
must extend over the entire term of the donor's interest in such 
property and in other property into which such property is converted. 
For example, if the donor gave a life estate in an office building to 
his wife for her life and retained a reversionary interest in the office 
building, the gift by the donor of one-half of that reversionary 
interest to charity while his wife is still alive will not be considered 
the transfer of a deductible interest; because an interest in the same 
property has already passed from the donor for private purposes, the 
reversionary interest will not be considered the donor's entire interest 
in the property. If, on the other hand, the donor had been given a life 
estate in Blackacre for the life of his wife and the donor had no other 
interest in Blackacre on or before the time of gift, the gift by the 
donor of one-half of that life estate to charity would be considered the 
transfer of a deductible interest; because the life estate would be 
considered the donor's entire interest in the property, the gift would 
be of an undivided portion of such entire interest. An undivided portion 
of a donor's entire interest in property includes an interest in 
property whereby the charity is given the right, as a tenant in common 
with the donor, to possession, dominion, and control of the property for 
a portion of each year appropriate to its interest in such property. 
However, except as provided in paragraphs (c)(2)(ii), (iii), and (iv) of 
this section, for purposes of this subdivision a charitable contribution 
of an interest in property not in trust where the decedent transfers 
some specific rights to one party and transfers other substantial rights 
to another party will not be considered a contribution of a undivided 
portion of the decedent's entire interest in property. A gift of an open 
space easement in gross in perpetuity shall be considered a gift of a 
undivided portion of the donor's entire interest in property. A gift to 
charity made on or before December 17, 1980, of an open space easement 
in gross in perpetuity shall be considered the transfer to charity of an 
undivided portion of the donor's entire interest in property.''.
    (ii) Remainder interest in a personal residence. The charitable 
interest is an irrevocable remainder interest, not in trust, in a 
personal residence. Thus, for example, if the donor gives to charity a 
remainder interest in a personal residence and retains an estate in such 
property for life or a term of years the value of such remainder 
interest is deductible under section 2522. For purposes of this 
subdivision, the term ``personal residence'' means any property which is 
used by the donor as his personal residence even though it is not used 
as his principal residence. For example, a donor's vacation home may be 
a personal residence for purposes of this subdivision. The term 
``personal residence'' also includes stock owned by the donor on the 
date of gift as a tenant-stockholder in a cooperative housing 
corporation (as those terms are defined in section 216(b) (1) and (2)) 
if the dwelling which the donor is entitled to occupy as such 
stockholder is used by him as his personal residence.
    (iii) Remainder interest in a farm. The charitable interest is an 
irrevocable remainder interest, not in trust, in a farm. Thus, for 
example, if the donor gives to charity a remainder interest in

[[Page 639]]

a farm and retains an estate in such property for life or a term of 
years, the value of such remainder interest is deductible under section 
2522. For purposes of this subdivision, the term ``farm'' means any land 
used by the donor or his tenant for the production of crops, fruits, or 
other agricultural products or for the sustenance of livestock. The term 
``livestock'' includes cattle, hogs, horses, mules, donkeys, sheep, 
goats, captive fur-bearing animals, chickens, turkeys, pigeons, and 
other poultry. A farm includes the improvements thereon.
    (iv) Qualified conservation contribution. The charitable interest is 
a qualified conservation contribution. For the definition of a qualified 
conservation contribution, see Sec. 1.170A-14.
    (v) Charitable remainder trust and pooled income funds. The 
charitable interest is a remainder interest in a trust which is a 
charitable remainder annuity trust, as defined in section 664(d)(1) and 
Sec. 1.664-2 of this chapter; a charitable remainder unitrust, as 
defined in section 664(d) (2) and (3) and Sec. 1.664-3 of this chapter; 
or a pooled income fund, as defined in section 642(c)(5) and Sec. 
1.642(c)-5 of this chapter. The charitable organization to or for the 
use of which the remainder interest is transferred must meet the 
requirements of both section 2522 (a) or (b) and section 642(c)(5)(A), 
section 664(d)(1)(C), or section 664(d)(2)(C), whichever applies. For 
example, the charitable organization to which the remainder interest in 
a charitable remainder annuity trust is transferred may not be a foreign 
corporation.
    (vi) Guaranteed annuity interest. (a) The charitable interest is a 
guaranteed annuity interest, whether or not such interest is in trust. 
For purposes of this paragraph (c)(2)(vi), the term ``guaranteed annuity 
interest'' means an irrevocable right pursuant to the instrument of 
transfer to receive a guaranteed annuity. A guaranteed annuity is an 
arrangement under which a determinable amount is paid periodically, but 
not less often than annually, for a specified term of years or for the 
life or lives of certain individuals, each of whom must be living at the 
date of the gift and can be ascertained at such date. Only one or more 
of the following individuals may be used as measuring lives: the donor, 
the donor's spouse, and an individual who, with respect to all remainder 
beneficiaries (other than charitable organizations described in section 
170, 2055, or 2522), is either a lineal ancestor or the spouse of a 
lineal ancestor of those beneficiaries. A trust will satisfy the 
requirement that all noncharitable remainder beneficiaries are lineal 
descendants of the individual who is the measuring life, or that 
individual's spouse, if there is less than a 15% probability that 
individuals who are not lineal descendants will receive any trust 
corpus. This probability must be computed, based on the current 
applicable Life Table contained in Sec. 20.2031-7, at the time property 
is transferred to the trust taking into account the interests of all 
primary and contingent remainder beneficiaries who are living at that 
time. An interest payable for a specified term of years can qualify as a 
guaranteed annuity interest even if the governing instrument contains a 
savings clause intended to ensure compliance with a rule against 
perpetuities. The savings clause must utilize a period for vesting of 21 
years after the deaths of measuring lives who are selected to maximize, 
rather than limit, the term of the trust. The rule in this paragraph 
that a charitable interest may be payable for the life or lives of only 
certain specified individuals does not apply in the case of a charitable 
guaranteed annuity interest payable under a charitable remainder trust 
described in section 664. An amount is determinable if the exact amount 
which must be paid under the conditions specified in the instrument of 
transfer can be ascertained as of the date of gift. For example, the 
amount to be paid may be a stated sum for a term of years, or for the 
life of the donor, at the expiration of which it may be changed by a 
specified amount, but it may not be redetermined by reference to a 
fluctuating index such as the cost of living index. In further 
illustration, the amount to be paid may be expressed as a fraction or 
percentage of the cost of living index on the date of gift.
    (b) A charitable interest is a guaranteed annuity interest only if 
it is a guaranteed annuity interest in every

[[Page 640]]

respect. For example, if the charitable interest is the right to receive 
from a trust each year a payment equal to the lesser of a sum certain or 
a fixed percentage of the net fair market value of the trust assets, 
determined annually, such interest is not a guaranteed annuity interest.
    (c) Where a charitable interest in the form of a guaranteed annuity 
interest is not in trust, the interest will be considered a guaranteed 
annuity interest only if it is to be paid by an insurance company or by 
an organization regularly engaged in issuing annuity contracts.
    (d) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust, the governing instrument of the trust may provide 
that income of the trust which is in excess of the amount required to 
pay the guaranteed annuity interest shall be paid to or for the use of a 
charity. Nevertheless, the amount of the deduction under section 2522 
shall be limited to the fair market value of the guaranteed annuity 
interest as determined under paragraph (d)(2)(iv) of this section.
    (e) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust and the present value on the date of gift of all 
income interests for a charitable purpose exceeds 60 percent of the 
aggregate fair market value of all amounts in such trust (after the 
payment of liabilities), the charitable interest will not be considered 
a guaranteed annuity interest unless the governing instrument of the 
trust prohibits both the acquisition and the retention of assets which 
would give rise to a tax under section 4944 if the trustee had acquired 
such assets. The requirement in this (e) for a prohibition in the 
governing instrument against the retention of assets which would give 
rise to a tax under section 4944 if the trustee had acquired the assets 
shall not apply to a gift made on or before May 21, 1972.
    (f) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust, and the gift of such interest is made after May 
21, 1972, the charitable interest generally is not a guaranteed annuity 
interest if any amount may be paid by the trust for a private purpose 
before the expiration of all the charitable annuity interests. There are 
two exceptions to this general rule. First, the charitable interest is a 
guaranteed annuity interest if the amount payable for a private purpose 
is in the form of a guaranteed annuity interest and the trust's 
governing instrument does not provide for any preference or priority in 
the payment of the private annuity as opposed to the charitable annuity. 
Second, the charitable interest is a guaranteed annuity interest if 
under the trust's governing instrument the amount that may be paid for a 
private purpose is payable only from a group of assets that are devoted 
exclusively to private purposes and to which section 4947(a)(2) is 
inapplicable by reason of section 4947(a)(2)(B). For purposes of this 
paragraph (c)(2)(vi)(f), an amount is not paid for a private purpose if 
it is paid for an adequate and full consideration in money or money's 
worth. See Sec. 53.4947-1(c) of this chapter for rules relating to the 
inapplicability of section 4947(a)(2) to segregated amounts in a split-
interest trust.
    (g) For rules relating to certain governing instrument requirements 
and to the imposition of certain excise taxes where the guaranteed 
annuity interest is in trust and for rules governing payment of private 
income interests by a split-interest trust, see section 4947(a)(2) and 
(b)(3)(A), and the regulations thereunder.
    (vii) Unitrust interest. (a) The charitable interest is a unitrust 
interest, whether or not such interest is in trust. For purposes of this 
paragraph (c)(2)(vii), the term ``unitrust interest'' means an 
irrevocable right pursuant to the instrument of transfer to receive 
payment, not less often than annually, of a fixed percentage of the net 
fair market value, determined annually, of the property which funds the 
unitrust interest. In computing the net fair market value of the 
property which funds the unitrust interest, all assets and liabilities 
shall be taken into account without regard to whether particular items 
are taken into account in determining the income from the property. The 
net fair market value of the property which funds the unitrust interest 
may be determined on any one date during the year or by taking the 
average of valuations made on more

[[Page 641]]

than one date during the year, provided that the same valuation date or 
dates and valuation methods are used each year. Where the charitable 
interest is a unitrust interest to be paid by a trust and the governing 
instrument of the trust does not specify the valuation date or dates, 
the trustee shall select such date or dates and shall indicate his 
selection on the first return on Form 1041 which the trust is required 
to file. Payments under a unitrust interest may be paid for a specified 
term of years or for the life or lives of certain individuals, each of 
whom must be living at the date of the gift and can be ascertained at 
such date. Only one or more of the following individuals may be used as 
measuring lives: the donor, the donor's spouse, and an individual who, 
with respect to all remainder beneficiaries (other than charitable 
organizations described in section 170, 2055, or 2522), is either a 
lineal ancestor or the spouse of a lineal ancestor of those 
beneficiaries. A trust will satisfy the requirement that all 
noncharitable remainder beneficiaries are lineal descendants of the 
individual who is the measuring life, or that individual's spouse, if 
there is less than a 15% probability that individuals who are not lineal 
descendants will receive any trust corpus. This probability must be 
computed, based on the current applicable Life Table contained in Sec. 
20.2031-7, at the time property is transferred to the trust taking into 
account the interests of all primary and contingent remainder 
beneficiaries who are living at that time. An interest payable for a 
specified term of years can qualify as a unitrust interest even if the 
governing instrument contains a savings clause intended to ensure 
compliance with a rule against perpetuities. The savings clause must 
utilize a period for vesting of 21 years after the deaths of measuring 
lives who are selected to maximize, rather than limit, the term of the 
trust. The rule in this paragraph that a charitable interest may be 
payable for the life or lives of only certain specified individuals does 
not apply in the case of a charitable unitrust interest payable under a 
charitable remainder trust described in section 664.
    (b) A charitable interest is a unitrust interest only if it is a 
unitrust interest in every respect. For example, if the charitable 
interest is the right to receive from a trust each year a payment equal 
to the lesser of a sum certain or a fixed percentage of the net fair 
market value of the trust assets, determined annually, such interest is 
not a unitrust interest.
    (c) Where a charitable interest in the form of a unitrust interest 
is not in trust, the interest will be considered a unitrust interest 
only if it is to be paid by an insurance company or by an organization 
regularly engaged in issuing interests otherwise meeting the 
requirements of a unitrust interest.
    (d) Where a charitable interest in the form of a unitrust interest 
is in trust, the governing instrument of the trust may provide that 
income of the trust which is in excess of the amount required to pay the 
unitrust interest shall be paid to or for the use of a charity. 
Nevertheless, the amount of the deduction under section 2522 shall be 
limited to the fair market value of the unitrust interest as determined 
under paragraph (d)(2)(v) of this section.
    (e) Where a charitable interest in the form of a unitrust interest 
is in trust, the charitable interest generally is not a unitrust 
interest if any amount may be paid by the trust for a private purpose 
before the expiration of all the charitable unitrust interests. There 
are two exceptions to this general rule. First, the charitable interest 
is a unitrust interest if the amount payable for a private purpose is in 
the form of a unitrust interest and the trust's governing instrument 
does not provide for any preference or priority in the payment of the 
private unitrust interest as opposed to the charitable unitrust 
interest. Second, the charitable interest is a unitrust interest if 
under the trust's governing instrument the amount that may be paid for a 
private purpose is payable only from a group of assets that are devoted 
exclusively to private purposes and to which section 4947(a)(2) is 
inapplicable by reason of section 4947(a)(2)(B). For purposes of this 
paragraph (c)(2)(vii)(e), an amount is not paid for a private purpose if 
it is paid for an adequate and full consideration in money or money's 
worth. See Sec. 53.4947-1(c) of this chapter for rules relating to the 
inapplicability of section

[[Page 642]]

4947(a)(2) to segregated amounts in a split-interest trust.
    (f) For rules relating to certain governing instrument requirements 
and to the imposition of certain excise taxes where the unitrust 
interest is in trust and for rules governing payment of private income 
interests by a split-interest trust, see sections 4947(a)(2) and 
(b)(3)(A), and the regulations thereunder.
    (d) Valuation of charitable interest--(1) In general. The amount of 
the deduction in the case of a contribution of a partial interest in 
property to which this section applies is the fair market value of the 
partial interest on the date of gift. The fair market value of an 
annuity, life estate, term for years, remainder, reversion or unitrust 
interest is its present value.
    (2) Certain transfers after July 31, 1969. In the case of a transfer 
after July 31, 1969, of an interest described in paragraph (c)(2) (v), 
(vi), or (vii) of this section, the present value of such interest is to 
be determined under the following rules:
    (i) The present value of a remainder interest in a charitable 
remainder annuity trust is to be determined under Sec. 1.664-2(c) of 
this chapter (Income Tax Regulations).
    (ii) The present value of a remainder interest in a charitable 
remainder unitrust is to be determined under Sec. 1.664-4 of this 
chapter.
    (iii) The present value of a remainder interest in a pooled income 
fund is to be determined under Sec. 1.642(c)-6 of this chapter.
    (iv) The present value of a guaranteed annuity interest described in 
paragraph (c)(2)(vi) of this section is to be determined under Sec. 
25.2512-5, except that, if the annuity is issued by a company regularly 
engaged in the sale of annuities, the present value is to be determined 
under Sec. 25.2512-6. If by reason of all the conditions and 
circumstances surrounding a transfer of an income interest in property 
in trust it appears that the charity may not receive the beneficial 
enjoyment of the interest, a deduction will be allowed under section 
2522 only for the minimum amount it is evident the charity will receive.

    Example (1). In 1975, B transfers $20,000 in trust with the 
requirement that a designated charity be paid a guaranteed annuity 
interest (as defined in paragraph (c)(2)(vi) of this section) of $4,100 
a year, payable annually at the end of each year for a period of 6 years 
and that the remainder be paid to his children. The fair market value of 
an annuity of $4,100 a year for a period of 6 years is $20,160.93 
($4,100 x 4.9173), as determined under Sec. 25.2512-5A(c). The 
deduction with respect to the guaranteed annuity interest will be 
limited to $20,000, which is the minimum amount it is evident the 
charity will receive.
    Example (2). In 1975, C transfers $40,000 in trust with the 
requirement that D, an individual, and X Charity be paid simultaneously 
guaranteed annuity interests (as defined in paragraph (c)(2)(vi) of this 
section) of $5,000 a year each, payable annually at the end of each 
year, for a period of 5 years and that the remainder be paid to C's 
children. The fair market value of two annuities of $5,000 each a year 
for a period of 5 years is $42,124 ([$5,000 x 4.2124] x 2), as 
determined under Sec. 25.2512-5A(c). The trust instrument provides that 
in the event the trust fund is insufficient to pay both annuities in a 
given year, the trust fund will be evenly divided between the charitable 
and private annuitants. The deduction with respect to the charitable 
annuity will be limited to $20,000, which is the minimum amount it is 
evident the charity will receive.
    Example (3). In 1975, D transfers $65,000 in trust with the 
requirement that a guaranteed annuity interest (as defined in paragraph 
(c)(2)(vi) of this section) of $5,000 a year, payable annually at the 
end of each year, be paid to Y Charity for a period of 10 years and that 
a guaranteed annuity interest (as defined in paragraph (c)(2)(vi) of 
this section) of $5,000 a year, payable annually at the end of each 
year, be paid to W, his wife, aged 62, for 10 years or until her prior 
death. The annuities are to be paid simultaneously, and the remainder is 
to be paid to D's children. The fair market value of the private annuity 
is $33,877 ($5,000 x 6.7754), as determined pursuant to Sec. 25.2512-
5A(c) and by the use of factors involving one life and a term of years 
as published in Publication 723A (12-70). The fair market value of the 
charitable annuity is $36,800.50 ($5,000 x 7.3601), as determined under 
Sec. 25.2512-5A(c). It is not evident from the governing instrument of 
the trust or from local law that the trustee would be required to 
apportion the trust fund between the wife and charity in the event the 
fund were insufficient to pay both annuities in a given year. 
Accordingly, the deduction with respect to the charitable annuity will 
be limited to $31,123 ($65,000 less $33,877 [the value of the private 
annuity]), which is the minimum amount it is evident the charity will 
receive.

    (v) The present value of a unitrust interest described in paragraph 
(c)(2)(vii)

[[Page 643]]

of this section is to be determined by subtracting the present value of 
all interests in the transferred property other than the unitrust 
interest from the fair market value of the transferred property.
    (3) Other transfers. The present value of an interest not described 
in paragraph (d)(2) of this section is to be determined under Sec. 
25.2512-5.
    (4) Special computations. If the interest transferred is such that 
its present value is to be determined by a special computation, a 
request for a special factor, accompanied by a statement of the date of 
birth and sex of each individual the duration of whose life may affect 
the value of the interest, and by copies of the relevant instruments, 
may be submitted by the donor to the Commissioner who may, if conditions 
permit, supply the factor requested. If the Commissioner furnishes the 
factor, a copy of the letter supplying the factor must be attached to 
the tax return in which the deduction is claimed. If the Commissioner 
does not furnish the factor, the claim for deduction must be supported 
by a full statement of the computation of the present value made in 
accordance with the principles set forth in this paragraph.
    (e)
    (e) Effective/applicability date. This section applies only to gifts 
made after July 31, 1969. In addition, the rule in paragraphs 
(c)(2)(vi)(a) and (c)(2)(vii)(a) of this section that guaranteed annuity 
interests or unitrust interests, respectively, may be payable for a 
specified term of years or for the life or lives of only certain 
individuals applies to transfers made on or after April 4, 2000. If a 
transfer is made on or after April 4, 2000, that uses an individual 
other than one permitted in paragraphs (c)(2)(vi)(a) and (c)(2)(vii)(a) 
of this section, the interest may be reformed into a lead interest 
payable for a specified term of years. The term of years is determined 
by taking the factor for valuing the annuity or unitrust interest for 
the named individual measuring life and identifying the term of years 
(rounded up to the next whole year) that corresponds to the equivalent 
term of years factor for an annuity or unitrust interest. For example, 
in the case of an annuity interest payable for the life of an individual 
age 40 at the time of the transfer on or after May 1, 2009 (the 
effective date of Table S), assuming an interest rate of 7.4 percent 
under section 7520, the annuity factor from column 1 of Table S(7.4), 
contained in IRS Publication 1457, Actuarial Valuations Version 3A, for 
the life of an individual age 40 is 12.1519 (1-.10076/.074). Based on 
Table B(7.4), contained in Publication 1457, ``Actuarial Valuations 
Version 3A'', the factor 12.1519 corresponds to a term of years between 
32 and 33 years. Accordingly, the annuity interest must be reformed into 
an interest payable for a term of 33 years. A judicial reformation must 
be commenced prior to October 15th of the year following the year in 
which the transfer is made and must be completed within a reasonable 
time after it is commenced. A non-judicial reformation is permitted if 
effective under state law, provided it is completed by the date on which 
a judicial reformation must be commenced. In the alternative, if a 
court, in a proceeding that is commenced on or before July 5, 2001, 
declares any transfer, made on or after April 4, 2000, and on or before 
March 6, 2001, null and void ab initio, the Internal Revenue Service 
will treat such transfers in a manner similar to that described in 
section 2055(e)(3)(J).

[T.D. 7318, 39 FR 25458, July 11, 1974; 39 FR 26154, July 17, 1974, as 
amended by T.D. 7340, 40 FR 1240, Jan. 7, 1975; T.D. 7955, 49 FR 19998, 
May 11, 1984; T.D. 7957, 49 FR 20812, May 17, 1984; T.D. 8069, 51 FR 
1507, Jan. 14, 1986; 51 FR 5323, Feb. 13, 1986; 51 FR 6319, Feb. 21, 
1986; T.D. 8540, 59 FR 30103, 30177, June 10, 1994; T.D. 8630, 60 FR 
63919, Dec. 13, 1995; T.D. 8923, 66 FR 1043, Jan. 5, 2001; T.D. 9068, 68 
FR 40132, July 7, 2003; T.D. 9448, 74 FR 21515, May 7, 2009; T.D. 9540, 
76 FR 49641, Aug. 10, 2011]



Sec. 25.2522(c)-4  Disallowance of double deduction in the case of 
qualified terminable interest property.

    No deduction is allowed under section 2522 for the transfer of an 
interest in property if a deduction is taken from the total amount of 
gifts with respect to that property by reason of section 2523(f). See 
Sec. 25.2523(h)-1.

[T.D. 8522, 59 FR 9658, Mar. 1, 1994]

[[Page 644]]



Sec. 25.2522(d)-1  Additional cross references.

    (a) See section 14 of the Wild and Scenic Rivers Act (Pub. L. 90-
542, 82 Stat. 918) for provisions relating to the claim and allowance of 
the value of certain easements as a gift under section 2522.
    (b) For treatment of gifts accepted by the Secretary of State or the 
Secretary of Commerce, for the purpose of organizing and holding an 
international conference to negotiate a Patent Corporation Treaty, as 
gifts to or for the use of the United States, see section 3 of Joint 
Resolution of December 24, 1969 (Pub. L. 91-160, 83 Stat. 443).
    (c) For treatment of gifts accepted by the Secretary of the 
Department of Housing and Urban Development, for the purpose of aiding 
or facilitating the work of the Department, as gifts to or for the use 
of the United States, see section 7(k) of the Department of Housing and 
Urban Development Act (42 U.S.C. 3535), as added by section 905 of Pub. 
L. 91-609 (84 Stat. 1809).
    (d) For treatment of certain property accepted by the Chairman of 
the Administrative Conference of the United States, for the purpose of 
aiding and facilitating the work of the Conference, as gifts to the 
United States, see 5 U.S.C. 575(c)(12), as added by section 1(b) of the 
Act of October 21, 1972 (Pub. L. 92-526, 86 Stat. 1048).
    (e) For treatment of the Board for International Broadcasting as a 
corporation described in section 2522(a)(2), see section 7 of the Board 
for International Broadcasting Act of 1973 (Pub. L. 93-129, 87 Stat. 
459).

[T.D. 7318, 39 FR 25461, July 11, 1974]



Sec. 25.2523(a)-1  Gift to spouse; in general.

    (a) In general. In determining the amount of taxable gifts for the 
calendar quarter (with respect to gifts made after December 31, 1970, 
and before January 1, 1982), or calendar year (with respect to gifts 
made before January 1, 1971, or after December 31, 1981), a donor may 
deduct the value of any property interest transferred by gift to a donee 
who at the time of the gift is the donor's spouse, except as limited by 
paragraphs (b) and (c) of this section. See Sec. 25.2502-l(c)(1) for 
the definition of calendar quarter. This deduction is referred to as the 
marital deduction. In the case of gifts made prior to July 14, 1988, no 
marital deduction is allowed with respect to a gift if, at the time of 
the gift, the donor is a nonresident not a citizen of the United States. 
Further, in the case of gifts made on or after July 14, 1988, no marital 
deduction is allowed (regardless of the donor's citizenship or 
residence) for transfers to a spouse who is not a citizen of the United 
States at the time of the transfer. However, for certain special rules 
applicable in the case of estate and gift tax treaties, see section 
7815(d)(14) of Public Law 101-239. The donor must submit any evidence 
necessary to establish the donor's right to the marital deduction.
    (b) ``Deductible interests'' and ``nondeductible interests''--(1) In 
general. The property interests transferred by a donor to his spouse 
consist of either transfers with respect to which the marital deduction 
is authorized (as described in subparagraph (2) of this paragraph) or 
transfers with respect to which the marital deduction is not authorized 
(as described in subparagraph (3) of this paragraph). These transfers 
are referred to in this section and in Sec. Sec. 25.2523(b)-1 through 
25.2523(f)-1 as ``deductible interests'' and ``nondeductible 
interests'', respectively.
    (2) ``Deductible interest''. A property interest transferred by a 
donor to his spouse is a ``deductible interest'' if it does not fall 
within either class of ``nondeductible interests'' described in 
subparagraph (3) of this paragraph.
    (3) ``Nondeductible interests''. (i) A property interest transferred 
by a donor to his spouse which is a ``terminable interest'', as defined 
in Sec. 25.2523(b)-1, is a ``nondeductible interest'' to the extent 
specified in that section.
    (ii) Any property interest transferred by a donor to the donor's 
spouse is a nondeductible interest to the extent it is not required to 
be included in a gift tax return for a calendar quarter (for gifts made 
after December 31, 1970, and before January 1, 1982) or calendar year 
(for gifts made before January 1, 1971, or after December 31, 1981).

[[Page 645]]

    (c) Computation--(1) In general. The amount of the marital deduction 
depends upon when the interspousal gifts are made, whether the gifts are 
terminable interests, whether the limitations of Sec. 25.2523(f)-1A 
(relating to gifts of community property before January 1, 1982) are 
applicable, and whether Sec. 25.2523(f)-1 (relating to the election 
with respect to life estates) is applicable, and (with respect to gifts 
made on or after July 14, 1988) whether the donee spouse is a citizen of 
the United States (see section 2523(i)).
    (2) Gifts prior to January 1, 1977. Generally, with respect to gifts 
made during a calendar quarter prior to January 1, 1977, the marital 
deduction allowable under section 2523 is 50 percent of the aggregate 
value of the deductible interests. See section 2524 for an additional 
limitation on the amount of the allowable deduction.
    (3) Gifts after December 31, 1976, and before January 1, 1982. 
Generally, with respect to gifts made during a calendar quarter 
beginning after December 31, 1976, and ending prior to January 1, 1982, 
the marital deduction allowable under section 2523 is computed as a 
percentage of the deductible interests in those gifts. If the aggregate 
amount of deductions for such gifts is $100,000 or less, a deduction is 
allowed for 100 percent of the deductible interests. No deduction is 
allowed for otherwise deductible interests in an aggregate amount that 
exceeds $100,000 and is equal to or less than $200,000. For deductible 
interests in excess of $200,000, the deduction is limited to 50 percent 
of such deductible interests. If a donor remarries, the computations in 
this paragraph (c)(3) are made on the basis of aggregate gifts to all 
persons who at the time of the gifts are the donor's spouse. See section 
2524 for an additional limitation on the amount of the allowable 
deduction.
    (4) Gifts after December 31, 1981. Generally, with respect to gifts 
made during a calendar year beginning after December 31, 1981 (other 
than gifts made on or after July 14, 1988, to a spouse who is not a 
United States citizen on the date of the transfer), the marital 
deduction allowable under section 2523 is 100 percent of the aggregate 
value of the deductible interests. See section 2524 for an additional 
limitation on the amount of the allowable deduction, and section 2523(i) 
regarding disallowance of the marital deduction for gifts to a spouse 
who is not a United States citizen.
    (d) Examples. The following examples (in which it is assumed that 
the donors have previously utilized any specific exemptions provided by 
section 2521 for gifts prior to January 1, 1977) illustrate the 
application of paragraph (c) of this section and the interrelationship 
of sections 2523 and 2503.

    Example 1. A donor made a transfer by gift of $6,000 cash to his 
spouse on December 25, 1971. The donor made no other transfers during 
1971. The amount of the marital deduction for the fourth calendar 
quarter of 1971 is $3,000 (one-half of $6,000); the amount of the annual 
exclusion under section 2503(b) is $3,000; and the amount of taxable 
gifts is zero ($6,000-$3,000 (annual exclusion)-$3,000 (marital 
deduction)).
    Example 2. A donor made transfers by gift to his spouse of $3,000 
cash on January 1, 1971, and $3,000 cash on May 1, 1971. The donor made 
no other transfers during 1971. For the first calendar quarter of 1971 
the marital deduction is zero because the amount excluded under section 
2503(b) is $3,000, and the amount of taxable gifts is also zero. For the 
second calendar quarter of 1971 the marital deduction is $1,500 (one-
half of $3,000), and the amount of taxable gifts is $1,500 ($3,000-
$1,500 (marital deduction)). Under section 2503(b) no amount of the 
second $3,000 gift may be excluded because the entire $3,000 annual 
exclusion was applied against the gift made in the first calendar 
quarter of 1971.
    Example 3. A donor made a transfer by gift to his spouse of $10,000 
cash on April 1, 1972. The donor made no other transfers during 1972. 
For the second calendar quarter of 1972 the amount of the marital 
deduction is $5,000 (one-half of $10,000); the amount excluded under 
section 2503(b) is $3,000; the amount of taxable gifts is $2,000 
($10,000-$3,000 (annual exclusion)-$5,000 (marital deduction)).
    Example 4. A donor made transfers by gift to his spouse of $2,000 
cash on January 1, 1971, $2,000 cash on April 5, 1971, and $10,000 cash 
on December 1, 1971. The donor made no other transfers during 1971. For 
the first calendar quarter of 1971 the marital deduction is zero because 
the amount excluded under section 2503(b) is $2,000, and the amount of 
taxable gifts is also zero. For the second calendar quarter of 1971 the 
marital deduction is $1,000 (one-half of $2,000) (see section 2524); the 
amount excluded under section 2503(b) is $1,000 because $2,000 of the 
$3,000 annual exclusion was applied against the gift made in

[[Page 646]]

the first calendar quarter of 1971; and the amount of taxable gifts is 
zero ($2,000-$1,000 (annual exclusion) -$1,000 (marital deduction)). For 
the fourth calendar quarter of 1971, the marital deduction is $5,000 
(one-half of $10,000); the amount excluded under section 2503(b) is zero 
because the entire $3,000 annual exclusion was applied against the gifts 
made in the first and second calendar quarters of 1971; and the amount 
of taxable gifts is $5,000 ($10,000-$5,000 (marital deduction)).
    Example 5. A donor made transfers by gift to his spouse of $2,000 
cash on January 10, 1972, $2,000 cash on May 1, 1972, and a remainder 
interest valued at $16,000 on June 1, 1972. The donor made no other 
transfers during 1972. For the first calendar quarter of 1972, the 
marital deduction is zero because $2,000 is excluded under section 
2503(b), and the amount of taxable gifts is also zero. For the second 
calendar quarter of 1972 the marital deduction is $9,000 (one-half of 
$16,000 plus one-half of $2,000); the amount excluded under section 
2503(b) is $1,000 because $2,000 of the $3,000 annual exclusion was 
applied against the gift made in the first calendar quarter of 1971; and 
the amount of taxable gifts is $8,000 ($18,000 -$1,000 (annual 
exclusion) -$9,000 (marital deduction)).
    Example 6. A donor made transfers by gift to his spouse of $2,000 
cash on January 1, 1972, a remainder interest valued at $16,000 on 
January 5, 1972, and $2,000 cash on April 30, 1972. The donor made no 
other transfers during 1972. For the first calendar quarter of 1972, the 
marital deduction is $9,000 (one-half of $16,000 plus one-half of 
$2,000); the amount excluded under section 2503(b) is $2,000; and the 
amount of taxable gifts is $7,000 ($18,000 -$2,000 (annual exclusion) -
$9,000 marital deduction)). For the second calendar quarter of 1972 the 
marital deduction is $1,000 (one-half of $2,000); the amount excluded 
under section 2503(b) is $1,000 because $2,000 of the $3,000 annual 
exclusion was applied against the gift of the present interest in the 
first calendar quarter of 1971; and the amount of taxable gifts is zero 
($2,000 -$1,000 (annual exclusion) -$1,000 (marital deduction)).
    Example 7. A donor made a transfer by gift to his spouse of $12,000 
cash on July 1, 1955. The donor made no other transfers during 1955. For 
the calendar year 1955 the amount of the marital deduction is $6,000 
(one-half of $12,000); the amount excluded under section 2503(b) is 
$3,000; and the amount of taxable gifts is $3,000 ($12,000 -$3,000 
(annual exclusion) -$6,000 (marital deduction)).
    Example 8. A donor made a transfer by gift to the donor's spouse, a 
United States citizen, of $200,000 cash on January 1, 1995. The donor 
made no other transfers during 1995. For calendar year 1995, the amount 
excluded under section 2503(b) is $10,000; the marital deduction is 
$190,000; and the amount of taxable gifts is zero ($200,000--$10,000 
(annual exclusion)--$190,000 (marital deduction)).

    (e) Valuation. If the income from property is made payable to the 
donor or another individual for life or for a term of years, with 
remainder to the donor's spouse or to the estate of the donor's spouse, 
the marital deduction is computed (pursuant to Sec. 25.2523(a)-1(c)) 
with respect to the present value of the remainder, determined under 
section 7520. The present value of the remainder (that is, its value as 
of the date of gift) is to be determined in accordance with the rules 
stated in Sec. 25.2512-5 or, for certain prior periods, Sec. 25.2512-
5A. See the example in paragraph (d) of Sec. 25.2512-5. If the 
remainder is such that its value is to be determined by a special 
computation, a request for a specific factor, accompanied by a statement 
of the dates of birth of each person, the duration of whose life may 
affect the value of the remainder, and by copies of the relevant 
instruments may be submitted by the donor to the Commissioner who, if 
conditions permit, may supply the factor requested. If the Commissioner 
does not furnish the factor, the claim for deduction must be supported 
by a full statement of the computation of the present value, made in 
accordance with the principles set forth in Sec. 25.2512-5(d) or, for 
certain prior periods, Sec. 25.2512-5A.

[T.D. 7238, 37 FR 28733, Dec. 29, 1972, as amended by T.D. 7955, 49 FR 
19998, May 11, 1984, T.D. 8522, 59 FR 9658, Mar. 1, 1994; T.D. 8540, 59 
FR 30103, June 10, 1994; 60 FR 16382, Mar. 30, 1995]



Sec. 25.2523(b)-1  Life estate or other terminable interest.

    (a) In general. (1) The provisions of section 2523(b) generally 
disallow a marital deduction with respect to certain property interests 
(referred to generally as terminable interests and defined in paragraph 
(a)(3) of this section) transferred to the donee spouse under the 
circumstances described in paragraph (a)(2) of this section, unless the 
transfer comes within the purview of one of the exceptions set forth in 
Sec. 25.2523(d)-1 (relating to certain joint interests); Sec. 
25.2523(e)-1 (relating to certain life estates with powers of 
appointment); Sec. 25.2523(f)-1 (relating to certain qualified 
terminable interest

[[Page 647]]

property); or Sec. 25.2523(g)-1 (relating to certain qualified 
charitable remainder trusts).
    (2) If a donor transfers a terminable interest in property to the 
donee spouse, the marital deduction is disallowed with respect to the 
transfer if the donor spouse also--
    (i) Transferred an interest in the same property to another donee 
(see paragraph (b) of this section), or
    (ii) Retained an interest in the same property in himself (see 
paragraph (c) of this section), or
    (iii) Retained a power to appoint an interest in the same property 
(see paragraph (d) of this section).

Notwithstanding the preceding sentence, the marital deduction is 
disallowed under these circumstances only if the other donee, the donor, 
or the possible appointee, may, by reason of the transfer or retention, 
possess or enjoy any part of the property after the termination or 
failure of the interest therein transferred to the donee spouse.
    (3) For purposes of this section, a distinction is to be drawn 
between ``property,'' as such term is used in section 2523, and an 
``interest in property.'' The ``property'' referred to is the underlying 
property in which various interests exist; each such interest is not, 
for this purpose, to be considered as ``property.'' A ``terminable 
interest'' in property is an interest which will terminate or fail on 
the lapse of time or on the occurrence or failure to occur of some 
contingency. Life estates, terms for years, annuities, patents, and 
copyrights are therefore terminable interests. However, a bond, note, or 
similar contractual obligation, the discharge of which would not have 
the effect of an annuity or term for years, is not a terminable 
interest.
    (b) Interest in property which another donee may possess or enjoy. 
(1) Section 2523(b) provides that no marital deduction shall be allowed 
with respect to the transfer to the donee spouse of a ``terminable 
interest'' in property, in case--
    (i) The donor transferred (for less than an adequate and full 
consideration in money or money's worth) an interest in the same 
property to any person other than the donee spouse (or the estate of 
such spouse), and
    (ii) By reason of such transfer, such person (or his heirs or 
assigns) may possess or enjoy any part of such property after the 
termination or failure of the interest therein transferred to the donee 
spouse.
    (2) In determining whether the donor transferred an interest in 
property to any person other than the donee spouse, it is immaterial 
whether the transfer to the person other than the donee spouse was made 
at the same time as the transfer to such spouse, or at any earlier time.
    (3) Except as provided in Sec. 25.2523(e)-1 or 25.2523(f)-1, if at 
the time of the transfer it is impossible to ascertain the particular 
person or persons who may receive a property interest transferred by the 
donor, such interest is considered as transferred to a person other than 
the donee spouse for the purpose of section 2523(b). This rule is 
particularly applicable in the case of the transfer of a property 
interest by the donor subject to a reserved power. See Sec. 25.2511-2. 
Under this rule, any property interest over which the donor reserved a 
power to revest the beneficial title in himself, or over which the donor 
reserved the power to name new beneficiaries or to change the interests 
of the beneficiaries as between themselves, is for the purpose of 
section 2523(b), considered as transferred to a ``person other than the 
donee spouse.'' The following examples, in which it is assumed that the 
donor did not make an election under sections 2523(f)(2)(C) and (f)(4), 
illustrate the application of the provisions of this paragraph (b)(3):

    Example 1. If a donor transferred property in trust naming his wife 
as the irrevocable income beneficiary for 10 years, and providing that, 
upon the expiration of that term, the corpus should be distributed among 
his wife and children in such proportions as the trustee should 
determine, the right to the corpus, for the purpose of the marital 
deduction, is considered as transferred to a ``person other than the 
donee spouse.''
    Example 2. If, in the above example, the donor had provided that, 
upon the expiration of the 10-year term, the corpus was to be paid to 
his wife, but also reserved the power to revest such corpus in himself, 
the right to

[[Page 648]]

corpus, for the purpose of the marital deduction, is considered as 
transferred to a ``person other than the donee spouse.''

    (4) The term ``person other than the donee spouse'' includes the 
possible unascertained takers of a property interest, as, for example, 
the members of a class to be ascertained in the future. As another 
example, assume that the donor created a power of appointment over a 
property interest, which does not come within the purview of Sec. 
25.2523(e)-1. In such a case, the term ``person other than the donee 
spouse'' refers to the possible appointees and takers in default (other 
than the spouse) of such property interest.
    (5) An exercise or release at any time by the donor (either alone or 
in conjunction with any person) of a power to appoint an interest in 
property, even though not otherwise a transfer by him is considered as a 
transfer by him in determining, for the purpose of section 2523(b), 
whether he transferred an interest in such property to a person other 
than the donee spouse.
    (6) The following examples illustrate the application of this 
paragraph. In each example, it is assumed that the donor made no 
election under sections 2523(f)(2)(C) and (f)(4) and that the property 
interest that the donor transferred to a person other than the donee 
spouse is not transferred for adequate and full consideration in money 
or money's worth:

    Example 1. H (the donor) transferred real property to W (his wife) 
for life, with remainder to A and his heirs. No marital deduction may be 
taken with respect to the interest transferred to W, since it will 
terminate upon her death and A (or his heirs or assigns) will thereafter 
possess or enjoy the property.
    Example 2. H transferred property for the benefit of W and A. The 
income was payable to W for life and upon her death the principal was to 
be distributed to A or his issue. However, if A should die without 
issue, leaving W surviving, the principal was then to be distributed to 
W. No marital deduction may be taken with respect to the interest 
transferred to W, since it will terminate in the event of his issue will 
thereafter possess or enjoy the property.
    Example 3. H purchased for $100,000 a life annuity for W. If the 
annuity payments made during the life of W should be less than $100,000, 
further payments were to be made to A. No marital deduction may be taken 
with respect to the interest transferred to W; since A may possess or 
enjoy a part of the property following the termination of W's interest. 
If, however, the contract provided for no continuation of payments, and 
provided for no refund upon the death of W, or provided that any refund 
was to go to the estate of W, then a marital deduction may be taken with 
respect to the gift.
    Example 4. H transferred property to A for life with remainder to W 
provided W survives A, but if W predeceases A, the property is to pass 
to B and his heirs. No marital deduction may be taken with respect to 
the interest transferred to W.
    Example 5. H transferred real property to A, reserving the right to 
the rentals of the property for a term of 20 years. H later transferred 
the right to the remaining rentals to W. No marital deduction may be 
taken with respect to the interest since it will terminate upon the 
expiration of the balance of the 20-year term and A will thereafter 
possess or enjoy the property.
    Example 6. H transferred a patent to W and A as tenants in common. 
In this case, the interest of W will terminate upon the expiration of 
the term of the patent, but possession and enjoyment of the property by 
A must necessarily cease at the same time. Therefore, since A's 
possession or enjoyment cannot outlast the termination of W's interest, 
the provisions of section 2523(b) do not disallow the marital deduction 
with respect to the interest.

    (c) Interest in property which the donor may possess or enjoy. (1) 
Section 2523(b) provides that no marital deduction is allowed with 
respect to the transfer to the donee spouse of a ``terminable interest'' 
in property, if--
    (i) The donor retained in himself an interest in the same property, 
and
    (ii) By reason of such retention, the donor (or his heirs or 
assigns) may possess or enjoy any part of the property after the 
termination or failure of the interest transferred to the donee spouse. 
However, as to a transfer to the donee spouse as sole joint tenant with 
the donor or as tenant by the entirety, see Sec. 25.2523(d)-1.
    (2) In general, the principles illustrated by the examples under 
paragraph (b) of this section are applicable in determining whether the 
marital deduction may be taken with respect to a property interest 
transferred to the donee spouse subject to the retention by the donor of 
an interest in the same property. The application of this paragraph may 
be further illustrated by the

[[Page 649]]

following example, in which it is assumed that the donor made no 
election under sections 2523(f)(2)(C) and (f)(4).

    Example. The donor purchased three annuity contracts for the benefit 
of his wife and himself. The first contract provided for payments to the 
wife for life, with refund to the donor in case the aggregate payments 
made to the wife were less than the cost of the contract. The second 
contract provided for payments to the donor for life, and then to the 
wife for life if she survived the donor. The third contract provided for 
payments to the donor and his wife for their joint lives and then to the 
survivor of them for life. No marital deduction may be taken with 
respect to the gifts resulting from the purchases of the contracts 
since, in the case of each contract, the donor may possess or enjoy a 
part of the property after the termination or failure of the interest 
transferred to the wife.

    (d) Interest in property over which the donor retained a power to 
appoint. (1) Section 2523(b) provides that no marital deduction is 
allowed with respect to the transfer to the donee spouse of a terminable 
interest'' in property if--
    (i) The donor had, immediately after the transfer, a power to 
appoint an interest in the same property, and
    (ii) The donor's power was exercisable (either alone or in 
conjunction with any person) in such manner that the appointee may 
possess or enjoy any part of the property after the termination or 
failure of the interest transferred to the donee spouse.
    (2) For the purposes of section 2523(b), the donor is to be 
considered as having, immediately after the transfer to the donee 
spouse, such a power to appoint even though the power cannot be 
exercised until after the lapse of time, upon the occurrence of an event 
or contingency, or upon the failure of an event or contingency to occur. 
It is immaterial whether the power retained by the donor was a taxable 
power of appointment under section 2514.
    (3) The principles illustrated by the examples under paragraph (b) 
of this section are generally applicable in determining whether the 
marital deduction may be taken with respect to a property interest 
transferred to the donee spouse subject to retention by the donor of a 
power to appoint an interest in the same property. The application of 
this paragraph may be further illustrated by the following example:

    Example. The donor, having a power of appointment over certain 
property, appointed a life estate to his spouse. No marital deduction 
may be taken with respect to such transfer, since, if the retained power 
to appoint the remainder interest is exercised, the appointee thereunder 
may possess or enjoy the property after the termination or failure of 
the interest taken by the donee spouse.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8522, 59 FR 9659, Mar. 1, 1994]



Sec. 25.2523(c)-1  Interest in unidentified assets.

    (a) Section 2523(c) provides that if an interest passing to a donee 
spouse may be satisfied out of a group of assets (or their proceeds) 
which include a particular asset that would be a nondeductible interest 
if it passed from the donor to his spouse, the value of the interest 
passing to the spouse is reduced, for the purpose of the marital 
deduction, by the value of the particular asset.
    (b) In order for this section to apply, two circumstances must 
coexist, as follows:
    (1) The property interest transferred to the donee spouse must be 
payable out of a group of assets. An example of a property interest 
payable out of a group of assets is a right to a share of the corpus of 
a trust upon its termination.
    (2) The group of assets out of which the property interest is 
payable must include one or more particular assets which, if transferred 
by the donor to the donee spouse, would not qualify for the marital 
deduction. Therefore, section 2523 (c) is not applicable merely because 
a group of assets includes a terminable interest, but would only be 
applicable if the terminable interest were nondeductible under the 
provisions of Sec. 25.2523(b)-1.
    (c) If both of the circumstances set forth in paragraph (b) of this 
section exist, only a portion of the property interest passing to the 
spouse is a deductible interest. The portion qualifying as a deductible 
interest is an amount equal to the excess, if any, of the value of the 
property interest passing to the spouse over the aggregate value of the 
asset (or assets) that if

[[Page 650]]

transferred to the spouse would not qualify for the marital deduction. 
See paragraph (c) of Sec. 25.2523(a)-l to determine the percentage of 
the deductible interest allowable as a marital deduction. The 
application of this section may be illustrated by the following example:

    Example. H was absolute owner of a rental property and on July 1, 
1950, transferred it to A by gift, reserving the income for a period of 
20 years. On July 1, 1955, he created a trust to last for a period of 10 
years. H was to receive the income from the trust and at the termination 
of the trust the trustee is to turn over to H's wife, W, property having 
a value of $100,000. The trustee has absolute discretion in deciding 
which properties in the corpus he shall turn over to W in satisfaction 
of the gift to her. The trustee received two items of property from H. 
Item (1) consisted of shares of corporate stock. Item (2) consisted of 
the right to receive the income from the rental property during the 
unexpired portion of the 20-year term. Assume that at the termination of 
the trust on July 1, 1965, the value of the right to the rental income 
for the then unexpired term of 5 years (item (2)) will be $30,000. Since 
item (2) is a nondeductible interest and the trustee can turn it over to 
W in partial satisfaction of her gift, only $70,000 of the $100,000 
receivable by her on July 1, 1965, will be considered as property with 
respect to which a marital deduction is allowable. The present value on 
July 1, 1955, of the right to receive $70,000 at the end of 10 years is 
$49,624.33 as determined under Sec. 25.2512-5A(c). The value of the 
property qualifying for the marital deduction, therefore, is $49,624.33 
and a marital deduction is allowed for one-half of that amount, or 
$24,812.17.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 8522, 59 FR 9659, Mar. 1, 1994; T.D. 8540, 59 FR 30103, 
June 10, 1994]



Sec. 25.2523(d)-1  Joint interests.

    Section 2523(d) provides that if a property interest is transferred 
to the donee spouse as sole joint tenant with the donor or as a tenant 
by the entirety, the interest of the donor in the property which exists 
solely by reason of the possibility that the donor may survive the donee 
spouse, or that there may occur a severance of the tenancy, is not for 
the purposes of section 2523(b), to be considered as an interest 
retained by the donor in himself. Under this provision, the fact that 
the donor may, as surviving tenant, possess or enjoy the property after 
the termination of the interest transferred to the donee spouse does not 
preclude the allowance of the marital deduction with respect to the 
latter interest. Thus, if the donor purchased real property in the name 
of the donor and the donor's spouse as tenants by the entirety or as 
joint tenants with rights of survivorship, a marital deduction is 
allowable with respect to the value of the interest of the donee spouse 
in the property (subject to the limitations set forth in Sec. 
25.2523(a)-1). See paragraph (c) of Sec. 25.2523(b)-1, and section 
2524.

[T.D. 7238, 37 FR 28734, Dec. 29, 1972, as amended by T.D. 8522, 59 FR 
9659, Mar. 1, 1994]



Sec. 25.2523(e)-1  Marital deduction; life estate with power of 
appointment in donee spouse.

    (a) In general. Section 2523(e) provides that if an interest in 
property is transferred by a donor to his spouse (whether or not in 
trust) and the spouse is entitled for life to all the income from a 
specific portion of the entire interest, with a power in her to appoint 
the entire interest of all the income from interest or the specific 
portion, the interest transferred to her is a deductible interest, to 
the extent that it satisfies all five of the conditions set forth below 
(see paragraph (b) of this section if one or more of the conditions is 
satisfied as to only a portion of the interest):
    (1) The donee spouse must be entitled for life to all of the income 
from the entire interest or a specific portion of the entire interest, 
or to a specific portion of all the income from the entire interest.
    (2) The income payable to the donee spouse must be payable annually 
or at more frequent intervals.
    (3) The donee spouse must have the power to appoint the entire 
interest of the specific portion to either herself or her estate.
    (4) The power in the donee spouse must be exercisable by her alone 
and (whether exercisable by will or during life) must be exercisable in 
all events.
    (5) The entire interest or the specific portion must not be subject 
to a power in any other person to appoint any part

[[Page 651]]

to any person other than the donee spouse.
    (b) Specific portion; deductible amount. If either the right to 
income or the power of appointment given to the donee spouse pertains 
only to a specific portion of a property interest, the portion of the 
interest which qualifies as a deductible interest is limited to the 
extent that the rights in the donee spouse meet all of the five 
conditions described in paragraph (a) of this section. While the rights 
over the income and the power must coexist as to the same interest in 
property, it is not necessary that the rights over the income or the 
power as to such interest be in the same proportion. However, if the 
rights over income meeting the required conditions set forth in 
paragraph (a) (1) and (2) of this section extend over a smaller share of 
the property interest than the share with respect to which the power of 
appointment requirements set forth in paragraph (a) (3) through (5) of 
this section are satisfied, the deductible interest is limited to the 
smaller share. Conversely, if a power of appointment meeting all the 
requirements extends to a smaller portion of the property interest than 
the portion over which the income rights pertain, the deductible 
interest cannot exceed the value of the portion to which such power of 
appointment applies. Thus, if the donor gives to the donee spouse the 
right to receive annually all of the income from a particular property 
interest and a power of appointment meeting the specifications 
prescribed in paragraph (a) (3) through (5) of this section as to only 
one-half of the property interest, then only one-half of the property 
interest is treated as a deductible interest. Correspondingly, if the 
income interest of the spouse satisfying the requirements extends to 
only one-fourth of the property interest and a testamentary power of 
appointment satisfying the requirements extends to all of the property 
interest, then only one-fourth of the interest in the spouse qualifies 
as a deductible interest. Further, if the donee spouse has no right to 
income from a specific portion of a property interest but a testamentary 
power of appointment which meets the necessary conditions over the 
entire interest, then none of the interest qualifies for the deduction. 
In addition, if, from the time of the transfer, the donee spouse has a 
power of appointment meeting all of the required conditions over three-
fourths of the entire property interest and the prescribed income rights 
over the entire interest, but with a power in another person to appoint 
one-half of the entire interest, the value of the interest in the donee 
spouse over only one-half of the property interest will qualify as a 
deductible interest.
    (c) Meaning of specific portion--(1) In general. Except as provided 
in paragraphs (c)(2) and (c)(3) of this section, a partial interest in 
property is not treated as a specific portion of the entire interest. In 
addition, any specific portion of an entire interest in property is 
nondeductible to the extent the specific portion is subject to invasion 
for the benefit of any person other than the donee spouse, except in the 
case of a deduction allowable under section 2523(e), relating to the 
exercise of a general power of appointment by the donee spouse.
    (2) Fraction or percentage share. Under section 2523(e), a partial 
interest in property is treated as a specific portion of the entire 
interest if the rights of the donee spouse in income, and the required 
rights as to the power described in Sec. 25.2523(e)-1(a), constitute a 
fractional or percentage share of the entire property interest, so that 
the donee spouse's interest reflects its proportionate share of the 
increase or decrease in the value of the entire property interest to 
which the income rights and the power relate. Thus, if the spouse's 
right to income and the spouse's power extend to a specified fraction or 
percentage of the property, or its equivalent, the interest is in a 
specific portion of the property. In accordance with paragraph (b) of 
this section, if the spouse has the right to receive the income from a 
specific portion of the trust property (after applying paragraph (c)(3) 
of this section) but has a power of appointment over a different 
specific portion of the property (after applying paragraph (c)(3) of 
this section), the marital deduction is limited to the lesser specific 
portion.

[[Page 652]]

    (3) Special rule in the case of gifts made on or before October 24, 
1992. In the case of gifts within the purview of the effective date rule 
contained in paragraph (c)(3)(iii) of this section:
    (i) A specific sum payable annually, or at more frequent intervals, 
out of the property and its income that is not limited by the income of 
the property is treated as the right to receive the income from a 
specific portion of the property. The specific portion, for purposes of 
paragraph (c)(2) of this section, is the portion of the property that, 
assuming the interest rate generally applicable for the valuation of 
annuities at the time of the donor's gift, would produce income equal to 
such payments. However, a pecuniary amount payable annually to a donee 
spouse is not treated as a right to the income from a specific portion 
of trust property for purposes of this paragraph (c)(3)(i) if any person 
other than the donee spouse may receive, during the donee spouse's 
lifetime, any distribution of the property. To determine the applicable 
interest rate for valuing annuities, see sections 2512 and 7520 and the 
regulations under those sections.
    (ii) The right to appoint a pecuniary amount out of a larger fund 
(or trust corpus) is considered the right to appoint a specific portion 
of such fund or trust in an amount equal to such pecuniary amount.
    (iii) The rules contained in paragraphs (c)(3) (i) and (ii) of this 
section apply with respect to gifts made on or before October 24, 1992.
    (4) Local law. A partial interest in property is treated as a 
specific portion of the entire interest if it is shown that the donee 
spouse has rights under local law that are identical to those the donee 
spouse would have acquired had the partial interest been expressed in 
terms satisfying the requirements of paragraph (c)(2) of this section 
(or paragraph (c)(3) of this section if applicable).
    (5) Examples. The following examples illustrate the application of 
paragraphs (b) and (c) of this section, where D, the donor, transfers 
property to D's spouse, S:

    Example 1. Spouse entitled to the lesser of an annuity or a fraction 
of trust income. Prior to October 24, 1992, D transferred in trust 500 
identical shares of X Company stock, valued for gift tax purposes at 
$500,000. The trust provided that during the lifetime of D's spouse, S, 
the trustee is to pay annually to S the lesser of one-half of the trust 
income or $20,000. Any trust income not paid to S is to be accumulated 
in the trust and may not be distributed during S's lifetime. S has a 
testamentary general power of appointment over the entire trust 
principal. The applicable interest rate for valuing annuities as of the 
date of D's gift under section 7520 is 10 percent. For purposes of 
paragraphs (a) through (c) of this section, S is treated as receiving 
all of the income from the lesser of one-half of the stock ($250,000), 
or $200,000, the specific portion of the stock which, as determined in 
accordance with Sec. 25.2523(e)-1(c)(3)(i) of this chapter, would 
produce annual income of $20,000 (20,000/.10). Accordingly, the marital 
deduction is limited to $200,000 (200,000/500,000 or \2/5\ of the value 
of the trust.)
    Example 2. Spouse possesses power and income interest over different 
specific portions of trust. The facts are the same as in Example 1 
except that S's testamentary general power of appointment is exercisable 
over only \1/4\ of the trust principal. Consequently, under section 
2523(e), the marital deduction is allowable only for the value of \1/4\ 
of the trust ($125,000); i.e., the lesser of the value of the portion 
with respect to which S is deemed to be entitled to all of the income 
(\2/5\ of the trust or $200,000), or the value of the portion with 
respect to which S possesses the requisite power of appointment (\1/4\ 
of the trust or $125,000).
    Example 3. Power of appointment over shares of stock constitutes a 
power over a specific portion. D transferred 250 identical shares of Y 
company stock to a trust under the terms of which trust income is to be 
paid annually to S, during S's lifetime. S was given a testamentary 
general power of appointment over 100 shares of stock. The trust 
provides that if the trustee sells the Y company stock, S's general 
power of appointment is exercisable with respect to the sale proceeds or 
the property in which the proceeds are reinvested. Because the amount of 
property represented by a single share of stock would be altered if the 
corporation split its stock, issued stock dividends, made a distribution 
of capital, etc., a power to appoint 100 shares at the time of S's death 
is not necessarily a power to appoint the entire interest that the 100 
shares represented on the date of D's gift. If it is shown that, under 
local law, S has a general power to appoint not only the 100 shares 
designated by D but also 100/250 of any distributions by the corporation 
that are included in trust principal, the requirements of paragraph 
(c)(2) of this section are satisfied and S is treated as having a 
general power to appoint 100/250 of the entire interest in the

[[Page 653]]

250 shares. In that case, the marital deduction is limited to 40 percent 
of the trust principal. If local law does not give S that power, the 100 
shares would not constitute a specific portion under Sec. 25.2523(e)-
1(c) (including Sec. 25.2523(e)-1(c)(3)(ii)). The nature of the asset 
is such that a change in the capitalization of the corporation could 
cause an alteration in the original value represented by the shares at 
the time of the transfer and is thus not a specific portion of the 
trust.

    (d) Definition of ``entire interest''. Since a marital deduction is 
allowed for each qualifying separate interest in property transferred by 
the donor to the donee spouse, for purposes of paragraphs (a) and (b) of 
this section, each property interest with respect to which the donee 
spouse received some rights is considered separately in determining 
whether her rights extend to the entire interest or to a specific 
portion of the entire interest. A property interest which consists of 
several identical units of property (such as a block of 250 shares of 
stock, whether the ownership is evidenced by one or several 
certificates) is considered one property interest, unless certain of the 
units are to be segregated and accorded different treatment, in which 
case each segregated group of items is considered a separate property 
interest. The bequest of a specified sum of money constitutes the 
bequest of a separate property interest if immediately following the 
transfer and thenceforth it, and the investments made with it, must be 
so segregated or accounted for as to permit its identification as a 
separate item of property. The application of this paragraph may be 
illustrated by the following examples:

    Example (1). The donor transferred to a trustee three adjoining 
farms, Blackacre, Whiteacre, and Greenacre. The trust instrument 
provided that during the lifetime of the donee spouse the trustee should 
pay her all of the income from the trust. Upon her death, all of 
Blackacre, a one-half interest in Whiteacre, and a one-third interest in 
Greenacre were to be distributed to the person or persons appointed by 
her in her will. The donee spouse is considered as being entitled to all 
of the income from the entire interest in Blackacre, all of the income 
from the entire interest in Whiteacre, and all of the income from the 
entire interest in Greenacre. She also is considered as having a power 
of appointment over the entire interest in Blackacre, over one-half of 
the entire interest in Whiteacre, and over one-third of the entire 
interest in Greenacre.
    Example (2). The donor transferred $250,000 to C, as trustee. C is 
to invest the money and pay all of the income from the investments to W, 
the donor's spouse, annually. W was given a general power, exercisable 
by will, to appoint one-half of the corpus of the trust. Here, 
immediately following establishment of the trust, the $250,000 will be 
sufficiently segregated to permit its identification as a separate item, 
and the $250,000 will constitute an entire property interest. Therefore, 
W has a right to income and a power of appointment such that one-half of 
the entire interest is a deductible interest.
    Example (3). The donor transferred 100 shares of Z Corporation stock 
to D, as trustee. W, the donor's spouse, is to receive all of the income 
of the trust annually and is given a general power, exercisable by will, 
to appoint out of the trust corpus the sum of $25,000. In this case the 
$25,000 is not, immediately following establishment of the trust, 
sufficiently segregated to permit its identification as a separate item 
of property in which the donee spouse has the entire interest. 
Therefore, the $25,000 does not constitute the entire interest in a 
property for the purpose of paragraphs (a) and (b) of this section.

    (e) Application of local law. In determining whether or not the 
conditions set forth in paragraphs (a) (1) through (5) of this section 
are satisfied by the instrument of transfer, regard is to be had to the 
applicable provisions of the law of the jurisdiction under which the 
interest passes and, if the transfer is in trust, the applicable 
provisions of the law governing the administration of the trust. For 
example, silence of a trust instrument as to the frequency of payment 
will not be regarded as a failure to satisfy the condition set forth in 
paragraph (a)(2) of this section that income must be payable to the 
donee spouse annually or more frequently unless the applicable law 
permits payment to be made less frequently than annually. The principles 
outlined in this paragraph and paragraphs (f) and (g) of this section 
which are applied in determining whether transfers in trust meet such 
conditions are equally applicable in ascertaining whether, in the case 
of interests not in trust, the donee spouse has the equivalent in rights 
over income and over the property.
    (f) Right to income. (1) If an interest is transferred in trust, the 
donee spouse is ``entitled for life to all of the income from the entire 
interest or a specific

[[Page 654]]

portion of the entire interest,'' for the purpose of the condition set 
forth in paragraph (a)(1) of this section, if the effect of the trust is 
to give her substantially that degree of beneficial enjoyment of the 
trust property during her life which the principles of the law of trust 
accord to a person who is unqualifiedly designated as the life 
beneficiary of a trust. Such degree of enjoyment is given only if it was 
the donor's intention, as manifested by the terms of the trust 
instrument and the surrounding circumstances, that the trust should 
produce for the donee spouse during her life such an income, or that the 
spouse should have such use of the trust property as is consistent with 
the value of the trust corpus and with its preservation. The designation 
of the spouse as sole income beneficiary for life of the entire interest 
or a specific portion of the entire interest will be sufficient to 
qualify the trust unless the terms of the trust and the surrounding 
circumstances considered as a whole evidence an intention to deprive the 
spouse of the requisite degree of enjoyment. In determining whether a 
trust evidences that intention, the treatment required or permitted with 
respect to individual items must be considered in relation to the entire 
system provided for the administration of the trust. In addition, the 
spouse's interest shall meet the condition set forth in paragraph (a)(1) 
of this section if the spouse is entitled to income as defined or 
determined by applicable local law that provides for a reasonable 
apportionment between the income and remainder beneficiaries of the 
total return of the trust and that meets the requirements of Sec. 
1.643(b)-1 of this chapter.
    (2) If the over-all effect of a trust is to give to the donee spouse 
such enforceable rights as will preserve to her the requisite degree of 
enjoyment, it is immaterial whether that result is effected by rules 
specifically stated in the trust instrument, or, in their absence, by 
the rules for the management of the trust property and the allocation of 
receipts and expenditures supplied by the State law. For example, a 
provision in the trust instrument for amortization of bond premium by 
appropriate periodic charges to interest will not disqualify the 
interest transferred in trust even though there is no State law 
specifically authorizing amortization or there is a State law denying 
amortization which is applicable only in the absence of such a provision 
in the trust instrument.
    (3) In the case of a trust, the rules to be applied by the trustee 
in allocation of receipts and expenses between income and corpus must be 
considered in relation to the nature and expected productivity of the 
assets transferred in trust, the nature and frequency of occurrence of 
the expected receipts, and any provisions as to change in the form of 
investments. If it is evident from the nature of the trust assets and 
the rules provided for management of the trust that the allocation to 
income of such receipts as rents, ordinary cash dividends and interest 
will give to the spouse the substantial enjoyment during life required 
by the statute, provisions that such receipts as stock dividends and 
proceeds from the conversion of trust assets shall be treated as corpus 
will not disqualify the interest transferred in trust. Similarly, 
provision for a depletion charge against income in the case of trust 
assets which are subject to depletion will not disqualify the interest 
transferred in trust, unless the effect is to deprive the spouse of the 
requisite beneficial enjoyment. The same principle is applicable in the 
case of depreciation, trustees' commissions, and other charges.
    (4) Provisions granting administrative powers to the trustees will 
not have the effect of disqualifying an interest transferred in trust 
unless the grant of powers evidences the intention to deprive the donee 
spouse of the beneficial enjoyment required by the statute. Such an 
intention will not be considered to exist if the entire terms of the 
instrument are such that the local courts will impose reasonable 
limitations upon the exercise of the powers. Among the powers which if 
subject to reasonable limitations will not disqualify the interest 
transferred in trust are the power to determine the allocation or 
apportionment of receipts and disbursements between income and corpus, 
the power to apply the income or corpus for the benefit of the spouse, 
and the power to retain the assets

[[Page 655]]

transferred to the trust. For example, a power to retain trust assets 
which consist substantially of unproductive property will not disqualify 
the interest if the applicable rules for the administration of the trust 
require, or permit the spouse to require, that the trustee either make 
the property productive or convert it within a reasonable time. Nor will 
such a power disqualify the interest if the applicable rules for 
administration of the trust require the trustee to use the degree of 
judgment and care in the exercise of the power which a prudent man would 
use if he were owner of the trust assets. Further, a power to retain a 
residence for the spouse or other property for the personal use of the 
spouse will not disqualify the interest transferred in trust.
    (5) An interest transferred in trust will not satisfy the condition 
set forth in paragraph (a)(1) of this section that the donee spouse be 
entitled to all the income if the primary purpose of the trust is to 
safeguard property without providing the spouse with the required 
beneficial enjoyment. Such trusts include not only trusts which 
expressly provide for the accumulation of the income but also trusts 
which indirectly accomplish a similar purpose. For example, assume that 
the corpus of a trust consists substantially of property which is not 
likely to be income producing during the life of the donee spouse and 
that the spouse cannot compel the trustee to convert or otherwise deal 
with the property as described in subparagraph (4) of this paragraph. An 
interest transferred to such a trust will not qualify unless the 
applicable rules for the administration require, or permit the spouse to 
require, that the trustee provide the required beneficial enjoyment, 
such as by payments to the spouse out of other assets of the trust.
    (6) If a trust may be terminated during the life of the donee 
spouse, under her exercise of a power of appointment or by distribution 
of the corpus to her, the interest transferred in trust satisfies the 
condition set forth in paragraph (a)(1) of this section (that the spouse 
be entitled to all the income) if she (i) is entitled to the income 
until the trust terminates, or (ii) has the right, exercisable in all 
events, to have the corpus distributed to her at any time during her 
life.
    (7) An interest transferred in trust fails to satisfy the condition 
set forth in paragraph (a)(1) of this section, that the spouse be 
entitled to all the income, to the extent that the income is required to 
be accumulated in whole or in part or may be accumulated in the 
discretion of any person other than the donee spouse; to the extent that 
the consent of any person other than the donee spouse is required as a 
condition precedent to distribution of the income; or to the extent that 
any person other than the donee spouse has the power to alter the terms 
of the trust so as to deprive her of her right to the income. An 
interest transferred in trust will not fail to satisfy the condition 
that the spouse be entitled to all the income merely because its terms 
provide that the right of the donee spouse to the income shall not be 
subject to assignment, alienation, pledge, attachment or claims of 
creditors.
    (8) In the case of an interest transferred in trust, the terms 
``entitled for life'' and ``payable annually or at more frequent 
intervals'', as used in the conditions set forth in paragraph (a) (1) 
and (2) of this section, require that under the terms of the trust the 
income referred to must be currently (at least annually; see paragraph 
(e) of this section) distributable to the spouse or that she must have 
such command over the income that it is virtually hers. Thus, the 
conditions in paragraph (a) (1) and (2) of this section are satisfied in 
this respect if, under the terms of the trust instrument, the donee 
spouse has the right exercisable annually (or more frequently) to 
require distribution to herself of the trust income, and otherwise the 
trust income is to be accumulated and added to corpus. Similarly, as 
respects the income for the period between the last distribution date 
and the date of the spouse's death, it is sufficient if that income is 
subject to the spouse's power to appoint. Thus, if the trust instrument 
provides that income accrued or undistributed on the date of the 
spouse's death is to be disposed of as if it had been received after her 
death, and if the spouse has a power of appointment over the trust

[[Page 656]]

corpus, the power necessarily extends to the undistributed income.
    (g) Power of appointment in donee spouse. (1) The conditions set 
forth in paragraphs (a) (3) and (4) of this section, that is, that the 
donee spouse must have a power of appointment exercisable in favor of 
herself or her estate and exercisable alone and in all events, are not 
met unless the power of the donee spouse to appoint the entire interest 
or a specific portion of it falls within one of the following 
categories:
    (i) A power so to appoint fully exercisable in her own favor at any 
time during her life (as, for example, an unlimited power to invade); or
    (ii) A power so to appoint exercisable in favor of her estate. Such 
a power, if exercisable during life, must be fully exercisable at any 
time during life, or if exercisable by will, must be fully exercisable 
irrespective of the time of her death; or
    (iii) A combination of the powers described under subdivisions (i) 
and (ii) of this subparagraph. For example, the donee spouse may, until 
she attains the age of 50 years, have a power to appoint to herself and 
thereafter have a power to appoint to her estate. However, the condition 
that the spouse's power must be exercisable in all events is not 
satisfied unless irrespective of when the donee spouse may die the 
entire interest or a specific portion of it will at the time of her 
death be subject to one power or the other.
    (2) The power of the donee spouse must be a power to appoint the 
entire interest or a specific portion of it as unqualified owner (and 
free of the trust if a trust is involved, or free of the joint tenancy 
if a joint tenancy is involved) or to appoint the entire interest or a 
specific portion of it as a part of her estate (and free of the trust if 
a trust is involved), that is, in effect, to dispose of it to whomsoever 
she pleases. Thus, if the donor transferred property to a son and the 
donee spouse as joint tenants with right of survivorship and under local 
law the donee spouse has a power of severance exercisable without 
consent of the other joint tenant, and by exercising this power could 
acquire a one-half interest in the property as a tenant in common, her 
power of severance will satisfy the condition set forth in paragraph 
(a)(3) of this section that she have a power of appointment in favor of 
herself or her estate. However, if the donee spouse entered into a 
binding agreement with the donor to exercise the power only in favor of 
their issue, that condition is not met. An interest transferred in trust 
will not be regarded as failing to satisfy the condition merely because 
takers in default of the donee spouse's exercise of the power are 
designated by the donor. The donor may provide that, in default of 
exercise of the power, the trust shall continue for an additional 
period.
    (3) A power is not considered to be a power exercisable by a donee 
spouse alone and in all events as required by paragraph (a)(4) of this 
section if the exercise of the power in the donee spouse to appoint the 
entire interest or a specific portion of it to herself or to her estate 
requires the joinder or consent of any other person. The power is not 
``exercisable in all events'', if it can be terminated during the life 
of the donee spouse by any event other than her complete exercise or 
release of it. Further, a power is not ``exercisable in all events'' if 
it may be exercised for a limited purpose only. For example, a power 
which is not exercisable in the event of the spouse's remarriage is not 
exercisable in all events. Likewise, if there are any restrictions, 
either by the terms of the instrument or under applicable local law, on 
the exercise of a power to consume property (whether or not held in 
trust) for the benefit of the spouse, the power is not exercisable in 
all events. Thus, if a power of invasion is exercisable only for the 
spouse's support, or only for her limited use, the power is not 
exercisable in all events. In order for a power of invasion to be 
exercisable in all events, the donee spouse must have the unrestricted 
power exercisable at any time during her life to use all or any part of 
the property subject to the power, and to dispose of it in any manner, 
including the power to dispose of it by gift (whether or not she has 
power to dispose of it by will).
    (4) If the power is in existence at all times following the transfer 
of the interest, limitations of a formal nature

[[Page 657]]

will not disqualify the interest. Examples of formal limitations on a 
power exercisable during life are requirements that an exercise must be 
in a particular form, that it must be filed with a trustee during the 
spouse's life, that reasonable notice must be given, or that reasonable 
intervals must elapse between successive partial exercises. Examples of 
formal limitations on a power exercisable by will are that it must be 
exercised by a will executed by the donee spouse after the making of the 
gift or that exercise must be by specific reference to the power.
    (5) If the donee spouse has the requisite power to appoint to 
herself or her estate, it is immaterial that she also has one or more 
lesser powers. Thus, if she has a testamentary power to appoint to her 
estate, she may also have a limited power of withdrawal or of 
appointment during her life. Similarly, if she has an unlimited power of 
withdrawal, she may have a limited testamentary power.
    (h) Existence of a power in another. Paragraph (a)(5) of this 
section provides that a transfer described in paragraph (a) is 
nondeductible to the extent that the donor created a power in the 
trustee or in any other person to appoint a part of the interest to any 
person other than the donee spouse. However, only powers in other 
persons which are in opposition to that of the donee spouse will cause a 
portion of the interest to fail to satisfy the condition set forth in 
paragraph (a)(5) of this section. Thus, a power in a trustee to 
distribute corpus to or for the benefit of the donee spouse will not 
disqualify the trust. Similarly, a power to distribute corpus to the 
spouse for the support of minor children will not disqualify the trust 
if she is legally obligated to support such children. The application of 
this paragraph may be illustrated by the following examples:

    Example (1). Assume that a donor created a trust, designating his 
spouse as income beneficiary for life with an unrestricted power in the 
spouse to appoint the corpus during her life. The donor further provided 
that in the event the donee spouse should die without having exercised 
the power, the trust should continue for the life of his son with a 
power in the son to appoint the corpus. Since the power in the son could 
become exercisable only after the death of the donee spouse, the 
interest is not regarded as failing to satisfy the condition set forth 
in paragraph (a)(5) of this section.
    Example (2). Assume that the donor created a trust, designating his 
spouse as income beneficiary for life and as donee of a power to appoint 
by will the entire corpus. The donor further provided that the trustee 
could distribute 30 percent of the corpus to the donor's son when he 
reached the age of 35 years. Since the trustee has a power to appoint 30 
percent of the entire interest for the benefit of a person other than 
the donee spouse, only 70 percent of the interest placed in trust 
satisfied the condition set forth in paragraph (a)(5) of this section. 
If, in this case, the donee spouse had a power, exercisable by her will, 
to appoint only one-half of the corpus as it was constituted at the time 
of her death, it should be noted that only 35 percent of the interest 
placed in the trust would satisfy the condition set forth in paragraph 
(a)(3) of this section.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 6542, 26 FR 
552, Jan. 20, 1961, as amended by T.D. 8522, 59 FR 9659, Mar. 1, 1994; 
T.D. 9102, 69 FR 21, Jan. 2, 2004]



Sec. 25.2523(f)-1  Election with respect to life estate transferred 
to donee spouse.

    (a) In general. (1) With respect to gifts made after December 31, 
1981, subject to section 2523(i), a marital deduction is allowed under 
section 2523(a) for transfers of qualified terminable interest property. 
Qualified terminable interest property is terminable interest property 
described in section 2523(b)(1) that satisfies the requirements of 
section 2523(f)(2) and this section. Terminable interests that are 
described in section 2523(b)(2) cannot qualify as qualified terminable 
interest property. Thus, if the donor retains a power described in 
section 2523(b)(2) to appoint an interest in qualified terminable 
interest property, no deduction is allowable under section 2523(a) for 
the property.
    (2) All of the property for which a deduction is allowed under this 
paragraph (a) is treated as passing to the donee spouse (for purposes of 
Sec. 25.2523(a)-1), and no part of the property is treated as retained 
by the donor or as passing to any person other than the donee spouse 
(for purposes of Sec. 25.2523(b)-1(b)).
    (b) Qualified terminable interest property--(1) Definition. Section 
2523(f)(2) provides the definition of qualified terminable interest 
property.

[[Page 658]]

    (2) Meaning of property. For purposes of section 2523(f)(2), the 
term property generally means an entire interest in property (within the 
meaning of Sec. 25.2523(e)-l(d)) or a specific portion of the entire 
interest (within the meaning of Sec. 25.2523(e)-l(c)).
    (3) Property for which the election may be made--(i) In general. The 
election may relate to all or any part of property that meets the 
requirements of section 2523(f)(2) (A) and (B), provided that any 
partial election must be made with respect to a fractional or percentage 
share of the property so that the elective portion reflects its 
proportionate share of the increase or decrease in the entire property 
for purposes of applying sections 2044 or 2519. Thus, if the interest of 
the donee spouse in a trust (or other property in which the spouse has a 
qualifying income interest) meets the requirements of this section, the 
election may be made under section 2523(f)(2)(C) with respect to a part 
of the trust (or other property) only if the election relates to a 
defined fraction or percentage of the entire trust (or other property) 
or specific portion thereof within the meaning of Sec. 25.2523(e)-1(c). 
The fraction or percentage may be defined by formula.
    (ii) Division of trusts. If the interest of the donee spouse in a 
trust meets the requirements of this section, the trust may be divided 
into separate trusts to reflect a partial election that has been made, 
if authorized under the terms of the governing instrument or otherwise 
permissible under local law. A trust may be divided only if the 
fiduciary is required, either by applicable local law or by the express 
or implied provisions of the governing instrument, to divide the trust 
according to the fair market value of the assets of the trust at the 
time of the division. The division of the trusts must be done on a 
fractional or percentage basis to reflect the partial election. However, 
the separate trusts do not have to be funded with a pro rata portion of 
each asset held by the undivided trust.
    (4) Manner and time of making election. (i) An election under 
section 2523(f)(2)(C) (other than a deemed election with respect to a 
joint and survivor annuity as described in section 2523(f)(6)), is made 
on a gift tax return for the calendar year in which the interest is 
transferred. The return must be filed within the time prescribed by 
section 6075(b) (determined without regard to section 6019(a)(2)), 
including any extensions authorized under section 6075(b)(2) (relating 
to an automatic extension of time for filing a gift tax return where the 
donor is granted an extension of time to file the income tax return).
    (ii) If the election is made on a return for the calendar year that 
includes the date of death of the donor, the return (as prescribed by 
section 6075(b)(3)) must be filed no later than the time (including 
extensions) for filing the estate tax return. The election, once made, 
is irrevocable.
    (c) Qualifying income interest for life--(1) In general. For 
purposes of this section, the term qualifying income interest for life 
is defined as provided in section 2056(b)(7)(B)(ii) and Sec. 
20.2056(b)-7(d)(1).
    (i) Entitled for life to all the income. The principles outlined in 
Sec. 25.2523(e)-1(f) (relating to whether the spouse is entitled for 
life to all of the income from the entire interest or a specific portion 
of the entire interest) apply in determining whether the donee spouse is 
entitled for life to all the income from the property, regardless of 
whether the interest passing to the donee spouse is in trust. An income 
interest granted for a term of years, or a life estate subject to 
termination upon the occurrence of a specified event (e.g., divorce) is 
not a qualifying income interest for life.
    (ii) Income between last distribution date and date of spouse's 
death. An income interest does not fail to constitute a qualifying 
income interest for life solely because income for the period between 
the last distribution date and the date of the donee spouse's death is 
not required to be distributed to the estate of the donee spouse. See 
Sec. 20.2044-1 of this chapter relating to the inclusion of such 
undistributed income in the gross estate of the donee spouse.
    (iii) Pooled income funds. An income interest in a pooled income 
fund described in section 642(c)(5) constitutes a qualifying income 
interest for life for purposes of this section.

[[Page 659]]

    (iv) Distribution of principal for the benefit of the donee spouse. 
An income interest does not fail to constitute a qualifying income 
interest for life solely because the trustee has a power to distribute 
principal to or for the benefit of the donee spouse. The fact that 
property distributed to a donee spouse may be transferred by the spouse 
to another person does not result in a failure to satisfy the 
requirement of section 2056(b)(7)(B)(ii)(II). However, if the governing 
instrument requires the donee spouse to transfer the distributed 
property to another person without full and adequate consideration in 
money or money's worth, the requirement of section 2056(b)(7)(B)(ii)(II) 
is not satisfied.
    (2) Immediate right to income. In order to constitute a qualifying 
income interest for life, the donee spouse must be granted the immediate 
right to receive the income from the property. Thus, an income interest 
does not constitute a qualifying income interest for life if the donee 
spouse receives the right to trust income commencing at some time in the 
future, e.g., on the termination of a preceding life income interest of 
the donor spouse.
    (3) Annuities payable from trusts in the case of gifts made on or 
before October 24, 1992. (i) In the case of gifts made on or before 
October 24, 1992, a donee spouse's lifetime annuity interest payable 
from a trust or other group of assets passing from the donor is treated 
as a qualifying income interest for life for purposes of section 
2523(f)(2)(B). The deductible interest, for purposes of Sec. 
25.2523(a)-1(b), is the specific portion of the property that, assuming 
the applicable interest rate for valuing annuities at the time the 
annuity interest is transferred, would produce income equal to the 
minimum amount payable annually to the donee spouse. If, based on the 
applicable interest rate, the entire property from which the annuity may 
be satisfied is insufficient to produce income equal to the minimum 
annual payment, the value of the deductible interest is the entire value 
of the property. The value of the deductible interest may not exceed the 
value of the property from which the annuity is payable. If the annual 
payment may increase, the increased amount is not taken into account in 
valuing the deductible interest.
    (ii) An annuity interest is not treated as a qualifying income 
interest for life for purposes of section 2523(f)(2)(B) if any person 
other than the donee spouse may receive during the donee spouse's 
lifetime, any distribution of the property or its income from which the 
annuity is payable.
    (iii) To determine the applicable interest rate for valuing 
annuities, see sections 2512 and 7520 and the regulations under those 
sections.
    (4) Joint and survivor annuities. [Reserved]
    (d) Treatment of interest retained by the donor spouse--(1) In 
general. Under section 2523(f)(5)(A), if a donor spouse retains an 
interest in qualified terminable interest property, any subsequent 
transfer by the donor spouse of the retained interest in the property is 
not treated as a transfer for gift tax purposes. Further, the retention 
of the interest until the donor spouse's death does not cause the 
property subject to the retained interest to be includable in the gross 
estate of the donor spouse.
    (2) Exception. Under section 2523(f)(5)(B), the rule contained in 
paragraph (d)(1) of this section does not apply to any property after 
the donee spouse is treated as having transferred the property under 
section 2519, or after the property is includable in the gross estate of 
the donee spouse under section 2044.
    (e) Application of local law. The provisions of local law are taken 
into account in determining whether or not the conditions of section 
2523(f)(2) (A) and (B), and the conditions of paragraph (c) of this 
section, are satisfied. For example, silence of a trust instrument on 
the frequency of payment is not regarded as a failure to satisfy the 
requirement that the income must be payable to the donee spouse annually 
or more frequently unless applicable local law permits payments less 
frequently to the donee spouse.
    (f) Examples. The following examples illustrate the application of 
this section, where D, the donor, transfers property to D's spouse, S. 
Unless stated otherwise, it is assumed that S is not the trustee of any 
trust established for S's benefit:

[[Page 660]]

    Example 1. Life estate in residence. D transfers by gift a personal 
residence valued at $250,000 on the date of the gift to S and D's 
children, giving S the exclusive and unrestricted right to use the 
property (including the right to continue to occupy the property as a 
personal residence or rent the property and receive the income for her 
lifetime). After S's death, the property is to pass to D's children. 
Under applicable local law, S's consent is required for any sale of the 
property. If D elects to treat all of the transferred property as 
qualified terminable interest property, the deductible interest is 
$250,000, the value of the property for gift tax purposes.
    Example 2. Power to make property productive. D transfers assets 
having a fair market value of $500,000 to a trust pursuant to which S is 
given the right exercisable annually to require distribution of all the 
trust income to S. No trust property may be distributed during S's 
lifetime to any person other than S. The assets used to fund the trust 
include both income producing assets and nonproductive assets. 
Applicable local law permits S to require that the trustee either make 
the trust property productive or sell the property and reinvest the 
proceeds in productive property within a reasonable time after the 
transfer. If D elects to treat the entire trust as qualified terminable 
interest property, the deductible interest is $500,000. If D elects to 
treat only 20 percent of the trust as qualified terminable interest 
property, the deductible interest is $100,000; i.e., 20 percent of 
$500,000.
    Example 3. Power of distribution over fraction of trust income. The 
facts are the same as in Example 2 except that S is given the power 
exercisable annually to require distribution to S of only 50 percent of 
the trust income for life. The remaining trust income may be accumulated 
or distributed among D's children and S in the trustee's discretion. The 
maximum amount that D may elect to treat as qualified terminable 
interest property is $250,000; i.e., the value of the trust for gift tax 
purposes ($500,000) multiplied by the percentage of the trust in which S 
has a qualifying income interest for life (50 percent). If D elects to 
treat only 20 percent of the portion of the trust in which S has a 
qualifying income interest as qualified terminable interest property, 
the deductible interest is $50,000; i.e, 20 percent of $250,000.
    Example 4. Power to distribute trust corpus to other beneficiaries. 
D transfers $500,000 to a trust providing that all the trust income is 
to be paid to D's spouse, S, during S's lifetime. The trustee is given 
the power to use annually $5,000 from the trust for the maintenance and 
support of S's minor child, C. Any such distribution does not 
necessarily relieve S of S's obligation to support and maintain C. S 
does not have a qualifying income interest for life in any portion of 
the trust because the gift fails to satisfy the condition in sections 
2523(f)(3) and 2056(b)(7)(B)(ii)(II) that no person have a power, other 
than a power the exercise of which takes effect only at or after S's 
death, to appoint any part of the property to any person other than S. 
The trust would also be nondeductible under section 2523(f) if S, rather 
than the trustee, were given the power to appoint a portion of the 
principal to C. However, in the latter case, if S made a qualified 
disclaimer (within the meaning of section 2518) of the power to appoint 
to C, the trust could qualify for the marital deduction pursuant to 
section 2523(f), assuming that the power was personal to S and S's 
disclaimer terminates the power. Similarly, if C made a qualified 
disclaimer of the right to receive distributions from the trust, the 
trust would qualify under section 2523(f) assuming that C's disclaimer 
effectively negates the trustee's power under local law.
    Example 5. Spouse's interest terminable on divorce. The facts are 
the same as in Example 3 except that if S and D divorce, S's interest in 
the trust will pass to C. S's income interest is not a qualifying income 
interest for life because it is terminable upon S's divorce. Therefore, 
no portion of the trust is deductible under section 2523(f).
    Example 6. Spouse's interest in trust in the form of an annuity. 
Prior to October 24, 1992, D established a trust funded with income 
producing property valued for gift tax purposes at $800,000. The trustee 
is required by the trust instrument to pay $40,000 a year to S for life. 
Any income in excess of the annuity amount is to be accumulated in the 
trust and may not be distributed during S's lifetime. S's lifetime 
annuity interest is treated as a qualifying income interest for life. If 
D elects to treat the entire portion of the trust in which S has a 
qualifying income interest as qualified terminable interest property, 
the value of the deductible interest is $400,000, because that amount 
would yield an income to S of $40,000 a year (assuming a 10 percent 
interest rate applies in valuing annuities at the time of the transfer).
    Example 7. Value of spouse's annuity exceeds value of trust corpus. 
The facts are the same as in Example 6, except that the trustee is 
required to pay S $100,000 a year for S's life. If D elects to treat the 
entire portion of the trust in which S has a qualifying income interest 
for life as qualified terminable interest property, the value of the 
deductible interest is $800,000, which is the lesser of the entire value 
of the property ($800,000) or the amount of property that (assuming a 10 
percent interest rate) would yield an income to S of $100,000 a year 
($1,000,000).
    Example 8. Transfer to pooled income fund. D transfers $200,000 on 
June 1, 1994, to a pooled income fund (described in section 642(c)(5)) 
designating S as the only life income beneficiary. If D elects to treat 
the entire $200,000

[[Page 661]]

as qualified terminable interest property, the deductible interest is 
$200,000.
    Example 9. Retention by donor spouse of income interest in property. 
On October 1, 1994, D transfers property to an irrevocable trust under 
the terms of which trust income is to be paid to D for life, then to S 
for life and, on S's death, the trust corpus is to be paid to D's 
children. Because S does not possess an immediate right to receive trust 
income, S's interest does not qualify as a qualifying income interest 
for life under section 2523(f)(2). Further, under section 2702(a)(2) and 
Sec. 25.2702-2(b), D is treated for gift tax purposes as making a gift 
with a value equal to the entire value of the property. If D dies in 
1996 survived by S, the trust corpus will be includible in D's gross 
estate under section 2036. However, in computing D's estate tax 
liability, D's adjusted taxable gifts under section 2001(b)(1)(B) are 
adjusted to reflect the inclusion of the gifted property in D's gross 
estate. In addition, if S survives D, the trust property is eligible for 
treatment as qualified terminable interest property under section 
2056(b)(7) in D's estate.
    Example 10. Retention by donor spouse of income interest in 
property. On October 1, 1994, D transfers property to an irrevocable 
trust under the terms of which trust income is to be paid to S for life, 
then to D for life and, on D's death, the trust corpus is to be paid to 
D's children. D elects under section 2523(f) to treat the property as 
qualified terminable interest property. D dies in 1996, survived by S. S 
subsequently dies in 1998. Under Sec. 2523(f)-1(d)(1), because D 
elected to treat the transfer as qualified terminable interest property, 
no part of the trust corpus is includible in D's gross estate because of 
D's retained interest in the trust corpus. On S's subsequent death in 
1998, the trust corpus is includible in S's gross estate under section 
2044.
    Example 11. Retention by donor spouse of income interest in 
property. The facts are the same as in Example 10, except that S dies in 
1996 survived by D, who subsequently dies in 1998. Because D made an 
election under section 2523(f) with respect to the trust, on S's death 
the trust corpus is includible in S's gross estate under section 2044. 
Accordingly, under section 2044(c), S is treated as the transferor of 
the property for estate and gift tax purposes. Upon D's subsequent death 
in 1998, because the property was subject to inclusion in S's gross 
estate under section 2044, the exclusion rule in Sec. 25.2523(f)-
1(d)(1) does not apply under Sec. 25.2523(f)-1(d)(2). However, because 
S is treated as the transferor of the property, the property is not 
subject to inclusion in D's gross estate under section 2036 or section 
2038. If the executor of S's estate made a section 2056(b)(7) election 
with respect to the trust, the trust is includible in D's gross estate 
under section 2044 upon D's later death.

[T.D. 8522, 59 FR 9660, Mar. 1, 1994]



Sec. 25.2523(g)-1  Special rule for charitable remainder trusts.

    (a) In general. (1) With respect to gifts made after December 31, 
1981, subject to section 2523(i), if the donor's spouse is the only 
noncharitable beneficiary (other than the donor) of a charitable 
remainder annuity trust or charitable remainder unitrust described in 
section 664 (qualified charitable remainder trust), section 2523(b) does 
not apply to the interest in the trust transferred to the donee spouse. 
Thus, the value of the annuity or unitrust interest passing to the 
spouse qualifies for a marital deduction under section 2523(g) and the 
value of the remainder interest qualifies for a charitable deduction 
under section 2522.
    (2) A marital deduction for the value of the donee spouse's annuity 
or unitrust interest in a qualified charitable remainder trust to which 
section 2523(g) applies is allowable only under section 2523(g). 
Therefore, if an interest in property qualifies for a marital deduction 
under section 2523(g), no election may be made with respect to the 
property under section 2523(f).
    (3) The donee spouse's interest need not be an interest for life to 
qualify for a marital deduction under section 2523(g). However, for 
purposes of section 664, an annuity or unitrust interest payable to the 
spouse for a term of years cannot be payable for a term that exceeds 20 
years or the trust does not qualify under section 2523(g).
    (4) A deduction is allowed under section 2523(g) even if the 
transfer to the donee spouse is conditioned on the donee spouse's 
payment of state death taxes, if any, attributable to the qualified 
charitable remainder trust.
    (5) For purposes of this section, the term noncharitable beneficiary 
means any beneficiary of the qualified charitable remainder trust other 
than an organization described in section 170(c).
    (b) Charitable remainder trusts where the donee spouse and the donor 
are not the only noncharitable beneficiaries. In the case of a 
charitable remainder trust where the donor and the donor's spouse are 
not the only noncharitable

[[Page 662]]

beneficiaries (for example, where the noncharitable interest is payable 
to the donor's spouse for life and then to another individual (other 
than the donor) for life), the qualification of the interest as 
qualified terminable interest property is determined solely under 
section 2523(f) and not under section 2523(g). Accordingly, if the 
transfer to the trust is made prior to October 24, 1992, the spousal 
annuity or unitrust interest may qualify under Sec. 25.2523(f)-
(1)(c)(3) as a qualifying income interest for life.

[T.D. 8522, 59 FR 9663, Mar. 1, 1994]



Sec. 25.2523(h)-1  Denial of double deduction.

    The value of an interest in property may not be deducted for Federal 
gift tax purposes more than once with respect to the same donor. For 
example, assume that D, a donor, transferred a life estate in a farm to 
D's spouse, S, with a remainder to charity and that D elects to treat 
the property as qualified terminable interest property. The entire value 
of the property is deductible under section 2523(f). No part of the 
value of the property qualifies for a charitable deduction under section 
2522 for gift tax purposes.

[T.D. 8522, 59 FR 9663, Mar. 1, 1994]



Sec. 25.2523(h)-2  Effective dates.

    Except as specifically provided, in Sec. Sec. 25.2523(e)-1(c)(3), 
25.2523(f)-1(c)(3), and 25.2523(g)-1(b), the provisions of Sec. Sec. 
25.2523(e)-1(c), 25.2523(f)-1, 25.2523(g)-1, and 25.2523(h)-1 are 
effective with respect to gifts made after March 1, 1994. With respect 
to gifts made on or before such date, donors may rely on any reasonable 
interpretation of the statutory provisions. For these purposes, the 
provisions of Sec. Sec. 25.2523(e)-1(c), 25.2523(f)-1, 25.2523(g)-1, 
and 25.2523(h)-1, (as well as project LR-211-76, 1984-1 C.B., page 598, 
see Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a 
reasonable interpretation of the statutory provisions. In addition, the 
rule in the last sentence of Sec. 25.2523(e)-1(f)(1) regarding the 
determination of income under applicable local law applies to trusts for 
taxable years ending after January 2, 2004.

[T.D. 8522, 59 FR 9663, Mar. 1, 1994, as amended by T.D. 9102, 69 FR 21, 
Jan. 2, 2004]



Sec. 25.2523(i)-1  Disallowance of marital deduction when spouse is 
not a United States citizen.

    (a) In general. Subject to Sec. 20.2056A-1(c) of this chapter, 
section 2523(i)(1) disallows the marital deduction if the spouse of the 
donor is not a citizen of the United States at the time of the gift. If 
the spouse of the donor is a citizen of the United States at the time of 
the gift, the gift tax marital deduction under section 2523(a) is 
allowed regardless of whether the donor is a citizen or resident of the 
United States at the time of the gift, subject to the otherwise 
applicable rules of section 2523.
    (b) Exception for certain joint and survivor annuities. Paragraph 
(a) does not apply to disallow the marital deduction with respect to any 
transfer resulting in the acquisition of rights by a noncitizen spouse 
under a joint and survivor annuity described in section 2523(f)(6).
    (c) Increased annual exclusion--(1) In general. In the case of gifts 
made from a donor to the donor's spouse for which a marital deduction is 
not allowable under this section, if the gift otherwise qualifies for 
the gift tax annual exclusion under section 2503(b), the amount of the 
annual exclusion under section 2503(b) is $100,000 in lieu of $10,000. 
However, in the case of gifts made after June 29, 1989, in order for the 
increased annual exclusion to apply, the gift in excess of the otherwise 
applicable annual exclusion under section 2503(b) must be in a form that 
qualifies for the marital deduction but for the disallowance provision 
of section 2523(i)(1). See paragraph (d), Example 4, of this section.
    (2) Status of donor. The $100,000 annual exclusion for gifts to a 
noncitizen spouse is available regardless of the status of the donor. 
Accordingly, it is immaterial whether the donor is a citizen, resident 
or a nonresident not a citizen of the United States, as long as the 
spouse of the donor is not a citizen of the United States at the time of 
the gift and the conditions for allowance of the increased annual 
exclusion have been satisfied. See Sec. 25.2503-2(f).
    (d) Examples. The principles outlined in this section are 
illustrated in the following examples. Assume in each of the examples 
that the donee, S, is D's

[[Page 663]]

spouse and is not a United States citizen at the time of the gift.
    Example 1. Outright transfer of present interest. In 1995, D, a 
United States citizen, transfers to S, outright, 100 shares of X 
corporation stock valued for federal gift tax purposes at $130,000. The 
transfer is a gift of a present interest in property under section 
2503(b). Additionally, the gift qualifies for the gift tax marital 
deduction except for the disallowance provision of section 2523(i)(1). 
Accordingly, $100,000 of the $130,000 gift is excluded from the total 
amount of gifts made during the calendar year by D for gift tax 
purposes.
    Example 2. Transfer of survivor benefits. In 1995, D, a United 
States citizen, retires from employment in the United States and elects 
to receive a reduced retirement annuity in order to provide S with a 
survivor annuity upon D's death. The transfer of rights to S in the 
joint and survivor annuity is a gift by D for gift tax purposes. 
However, under paragraph (b) of this section, the gift qualifies for the 
gift tax marital deduction even though S is not a United States citizen.
    Example 3. Transfer of present interest in trust property. In 1995, 
D, a resident alien, transfers property valued at $500,000 in trust to 
S, who is also a resident alien. The trust instrument provides that the 
trust income is payable to S at least quarterly and S has a testamentary 
general power to appoint the trust corpus. The transfer to S qualifies 
for the marital deduction under section 2523 but for the provisions of 
section 2523(i)(1). Because S has a life income interest in the trust, S 
has a present interest in a portion of the trust. Accordingly, D may 
exclude the present value of S's income interest (up to $100,000) from 
D's total 1995 calendar year gifts.
    Example 4. Transfer of present interest in trust property. The facts 
are the same as in Example 3, except that S does not have a testamentary 
general power to appoint the trust corpus. Instead, D's child, C, has a 
remainder interest in the trust. If S were a United States citizen, the 
transfer would qualify for the gift tax marital deduction if a qualified 
terminable interest property election was made under section 2523(f)(4). 
However, because S is not a U.S. citizen, D may not make a qualified 
terminable interest property election. Accordingly, the gift does not 
qualify for the gift tax marital deduction but for the disallowance 
provision of section 2523(i)(1). The $100,000 annual exclusion under 
section 2523(i)(2) is not available with respect to D's transfer in 
trust and D may not exclude the present value of S's income interest in 
excess of $10,000 from D's total 1995 calendar year gifts.
    Example 5. Spouse becomes citizen after transfer. D, a United States 
citizen, transfers a residence valued at $350,000 on December 20, 1995, 
to D's spouse, S, a resident alien. On January 31, 1996, S becomes a 
naturalized United States citizen. On D's federal gift tax return for 
1995, D must include $250,000 as a gift ($350,000 transfer less $100,000 
exclusion). Although S becomes a citizen in January, 1996, S is not a 
citizen of the United States at the time the transfer is made. 
Therefore, no gift tax marital deduction is allowable. However, the 
transfer does qualify for the $100,000 annual exclusion.

[T.D. 8612, 60 FR 43552, Aug. 22, 1995]



Sec. 25.2523(i)-2  Treatment of spousal joint tenancy property where
one spouse is not a United States citizen.

    (a) In general. In the case of a joint tenancy with right of 
survivorship between spouses, or a tenancy by the entirety, where the 
donee spouse is not a United States citizen, the gift tax treatment of 
the creation and termination of the tenancy (regardless of whether the 
donor is a citizen, resident or nonresident not a citizen of the United 
States at such time), is governed by the principles of sections 2515 and 
2515A (as such sections were in effect before their repeal by the 
Economic Recovery Tax Act of 1981). However, in applying these 
principles, the donor spouse may not elect to treat the creation of a 
tenancy in real property as a gift, as provided in section 2515(c) 
(prior to its repeal by the Economic Recovery Tax Act of 1981, Pub. L. 
97-34, 95 Stat. 172).
    (b) Tenancies by the entirety and joint tenancies in real property--
(1) Creation of the tenancy on or after July 14, 1988. Under the 
principles of section 2515 (without regard to section 2515(c)), the 
creation of a tenancy by the entirety (or joint tenancy) in real 
property (either by one spouse alone or by both spouses), and any 
additions to the value of the tenancy in the form of improvements, 
reductions in indebtedness thereon, or otherwise, is not deemed to be a 
transfer of property for purposes of the gift tax, regardless of the 
proportion of the consideration furnished by each spouse, but only if 
the creation of the tenancy would otherwise be a gift to the donee 
spouse who is not a citizen of the United States at the time of the 
gift.

[[Page 664]]

    (2) Termination--(i) Tenancies created after December 31, 1954 and 
before January 1, 1982 not subject to an election under section 2515(c), 
and tenancies created on or after July 14, 1988. When a tenancy to which 
this paragraph (b) applies is terminated on or after July 14, 1988, 
other than by reason of the death of a spouse, then, under the 
principles of section 2515, a spouse is deemed to have made a gift to 
the extent that the proportion of the total consideration furnished by 
the spouse, multiplied by the proceeds of the termination (whether in 
the form of cash, property, or interests in property), exceeds the value 
of the proceeds of termination received by the spouse. See section 
2523(i), and Sec. 25.2523(i)-1 and Sec. 25.2503-2(f) as to certain of 
the tax consequences that may result upon termination of the tenancy. 
This paragraph (b)(2)(i) applies to tenancies created after December 31, 
1954, and before January 1, 1982, not subject to an election under 
section 2515(c), and to tenancies created on or after July 14, 1988.
    (ii) Tenancies created after December 31, 1954 and before January 1, 
1982 subject to an election under section 2515(c) and tenancies created 
after December 31, 1981 and before July 14, 1988. When a tenancy to 
which this paragraph (b) applies is terminated on or after July 14, 
1988, other than by reason of the death of a spouse, then, under the 
principles of section 2515, a spouse is deemed to have made a gift to 
the extent that the proportion of the total consideration furnished by 
the spouse, multiplied by the proceeds of the termination (whether in 
the form of cash, property, or interests in property), exceeds the value 
of the proceeds of termination received by the spouse. See section 
2523(i), and Sec. Sec. 25.2523(i)-1 and 25.2503-2(f) as to certain of 
the tax consequences that may result upon termination of the tenancy. In 
the case of tenancies to which this paragraph applies, if the creation 
of the tenancy was treated as a gift to the noncitizen donee spouse 
under section 2515(c) (in the case of tenancies created prior to 1982) 
or section 2511 (in the case of tenancies created after December 31, 
1981 and before July 14, 1988), then, upon termination of the tenancy, 
for purposes of applying the principles of section 2515 and the 
regulations thereunder, the amount treated as a gift on creation of the 
tenancy is treated as consideration originally belonging to the 
noncitizen spouse and never acquired by the noncitizen spouse from the 
donor spouse. This paragraph (b)(2)(ii) applies to tenancies created 
after December 31, 1954, and before January 1, 1982, subject to an 
election under section 2515(c), and to tenancies created after December 
31, 1981, and before July 14, 1988.
    (3) Miscellaneous provisions--(i) Tenancy by the entirety. For 
purposes of this section, tenancy by the entirety includes a joint 
tenancy between husband and wife with right of survivorship.
    (ii) No election to treat as gift. The regulations under section 
2515 that relate to the election to treat the creation of a tenancy by 
the entirety as constituting a gift and the consequences of such an 
election upon termination of the tenancy (Sec. Sec. 25.2515-2 and 
25.2515-4) do not apply for purposes of section 2523(i)(3).
    (4) Examples. The application of this section may be illustrated by 
the following examples:

    Example 1. In 1992, A, a United States citizen, furnished $200,000 
and A's spouse B, a resident alien, furnished $50,000 for the purchase 
and subsequent improvement of real property held by them as tenants by 
the entirety. The property is sold in 1998 for $300,000. A receives 
$225,000 and B receives $75,000 of the sales proceeds. The termination 
results in a gift of $15,000 by A to B, computed as follows:
[GRAPHIC] [TIFF OMITTED] TC16OC91.018


[[Page 665]]


$240,000-$225,000 (proceeds received by A)=$15,000 gift by A to B.
    Example 2. In 1986, A purchased real property for $300,000 and took 
title in the names of A and B, A's spouse, as joint tenants. Under 
section 2511 and Sec. 25.2511-1(h)(1) of the regulations, A was treated 
as making a gift of one-half of the value of the property ($150,000) to 
B. In 1995, the real property is sold for $400,000 and B receives the 
entire proceeds of sale. For purposes of determining the amount of the 
gift on termination of the tenancy under the principles of section 2515 
and the regulations thereunder, the amount treated as a gift to B on 
creation of the tenancy under section 2511 is treated as B's 
contribution towards the purchase of the property. Accordingly, the 
termination of the tenancy results in a gift of $200,000 from A to B 
determined as follows:
[GRAPHIC] [TIFF OMITTED] TC16OC91.019

$200,000-0 (proceeds received by A)=$200,000 gift by A to B.

    (c) Tenancies by the entirety in personal property where one spouse 
is not a United States citizen--(1) In general. In the case of the 
creation (either by one spouse alone or by both spouses where at least 
one of the spouses is not a United States citizen) of a joint interest 
in personal property with right of survivorship, or additions to the 
value thereof in the form of improvements, reductions in the 
indebtedness thereof, or otherwise, the retained interest of each 
spouse, solely for purposes of determining whether there has been a gift 
by the donor to the spouse who is not a citizen of the United States at 
the time of the gift, is treated as one-half of the value of the joint 
interest. See section 2523(i) and Sec. Sec. 25.2523(i)-1 and 25.2503-
2(f) as to certain of the tax consequences that may result upon creation 
and termination of the tenancy.
    (2) Exception. The rule provided in paragraph (c)(1) of this section 
does not apply with respect to any joint interest in property if the 
fair market value of the interest in property (determined as if each 
spouse had a right to sever) cannot reasonably be ascertained except by 
reference to the life expectancy of one or both spouses. In these cases, 
actuarial principles may need to be resorted to in determining the gift 
tax consequences of the transaction.

[T.D. 8612, 60 FR 43553, Aug. 22, 1995]



Sec. 25.2523(i)-3  Effective date.

    The provisions of Sec. Sec. 25.2523(i)-1 and 25.2523(i)-2 are 
effective in the case of gifts made after August 22, 1995.

[T.D. 8612, 60 FR 43554, Aug. 22, 1995]



Sec. 25.2524-1  Extent of deductions.

    Under the provisions of section 2524, the charitable deduction 
provided for in section 2522 and the marital deduction provided for in 
section 2523 are allowable only to the extent that the gifts, with 
respect to which those deductions are authorized, are included in the 
``total amount of gifts'' made during the ``calendar period'' (as 
defined in Sec. 25.2502-1(c)(1)), computed as provided in section 2503 
and Sec. 25.2503-1 (i.e., the total gifts less exclusions). The 
following examples (in both of which it is assumed that the donor has 
previously utilized his entire $30,000 specific exemption provided by 
section 2521, which was in effect at the time) illustrate the 
application of the provisions of this section:

    Example (1). A donor made transfers by gift to his spouse of $5,000 
cash on January 1, 1971, and $1,000 cash on April 5, 1971. The donor 
made no other transfers during 1971. The first $3,000 of such gifts for 
the calendar year is excluded under the provisions of section 2503(b) in 
determining the ``total amount of gifts'' made during the first calendar 
quarter of 1971. The marital deduction for the first calendar quarter of 
$2,500 (one-half of $5,000) otherwise allowable is limited by section 
2524 to $2,000. The amount of taxable gifts is zero ($5,000-$3,000 
(annual exclusion) -$2,000 (marital deduction)). For the second calendar 
quarter of 1971, the marital

[[Page 666]]

deduction is $500 (one-half of $1,000); the amount excluded under 
section 2503(b) is zero because the entire $3,000 annual exclusion was 
applied against the gift in the first calendar quarter of 1971; and the 
amount of taxable gifts is $500 ($1,000-$500 (marital deduction)).
    Example (2). The only gifts made by a donor to his spouse during 
calendar year 1969 were a gift of $2,400 in May and a gift of $3,000 in 
August. The first $3,000 of such gifts is excluded under the provisions 
of section 2503(b) in determining the ``total amount of gifts'' made 
during the calendar year. The marital deduction for 1969 of $2,700 (one-
half of $2,400 plus one-half $3,000) otherwise allowable is limited by 
section 2524 to $2,400. The amount of taxable gifts is zero ($5,400-
$3,000 (annual exclusion) -$2,400 (marital deduction)).

[T.D. 7238, 37 FR 28734, Dec. 29, 1972, as amended by T.D. 7910, 48 FR 
40375, Sept. 7, 1983]

                        Deductions Prior to 1982



Sec. 25.2523(f)-1A  Special rule applicable to community property 
transferred prior to January 1, 1982.

    (a) In general. With respect to gifts made prior to January 1, 1982, 
the marital deduction is allowable with respect to any transfer by a 
donor to the donor's spouse only to the extent that the transfer is 
shown to represent a gift of property that was not, at the time of the 
gift, held as community property, as defined in paragraph (b) of this 
section. The burden of establishing the extent to which a transfer 
represents a gift of property not so held rests upon the donor.
    (b) Definition of ``community property.'' (1) For the purpose of 
paragraph (a) of this section, the term ``community property'' is 
considered to include--
    (i) Any property held by the donor and his spouse as community 
property under the law of any State, Territory, or possession of the 
United States, or of any foreign country, except property in which the 
donee spouse had at the time of the gift merely an expectant interest. 
The donee spouse is regarded as having, at any particular time, merely 
an expectant interest in property held at that time by the donor and 
herself as community property under the law of any State, Territory, or 
possession of the United States, or of any foreign country, if, in case 
such property were transferred by gift into the separate property of the 
donee spouse, the entire value of such property (and not merely one-half 
of it), would be treated as the amount of the gift.
    (ii) Separate property acquired by the donor as a result of a 
``conversion'', after December 31, 1941, of property held by him and the 
donee spouse as community property under the law of any State, 
Territory, or possession of the United States, or of any foreign country 
(except such property in which the donee spouse had at the time of the 
``conversion'' merely an expectant interest), into their separate 
property, subject to the limitation with respect to value contained in 
subparagraph (5) of this paragraph.
    (iii) Property acquired by the donor in exchange (by one exchange or 
a series of exchanges) for separate property resulting from such 
``conversion.''
    (2) The characteristics of property which acquired a noncommunity 
instead of a community status by reason of an agreement (whether 
antenuptial or post-nuptial) are such that section 2523(f) classifies 
the property as community property of the donor and his spouse in the 
computation of the marital deduction. In distinguishing property which 
thus acquired a noncommunity status from property which acquired such a 
status solely by operation of the community property law, section 
2523(f) refers to the former category of property as ``separate 
property'' acquired as a result of a ``conversion'' of ``property held 
as such community property.'' As used in section 2523(f) the phrase 
``property held as such community property'' is used to denote the body 
of property comprehended within the community property system; the 
expression ``separate property'' includes any noncommunity property, 
whether held in joint tenancy, tenancy by the entirety, tenancy in 
common, or otherwise; and the term ``conversion'' includes any 
transaction or agreement which transforms property from a community 
status into a noncommunity status.
    (3) The separate property which section 2523(f) classifies as 
community property is not limited to that which was in existence at the 
time of the conversion. The following are illustrative of the scope of 
section 2523(f):

[[Page 667]]

    (i) A partition of community property between husband and wife, 
whereby a portion of the property became the separate property of each, 
is a conversion of community property.
    (ii) A transfer of community property into some other form of 
coownership, such as a joint tenancy, is a conversion of the property.
    (iii) An agreement (whether made before or after marriage) that 
future earnings and gains which would otherwise be community property 
shall be shared by the spouses as separate property effects a conversion 
of such earnings and gains.
    (iv) A change in the form of ownership of property which causes 
future rentals, which would otherwise have been acquired as community 
property, to be acquired as separate property effects a conversion of 
the rentals.
    (4) The rules of section 2523(f) are applicable, however, only if 
the conversion took place after December 31, 1941, and only to the 
extent stated in this section.
    (5) If the value of the separate property acquired by the donor as a 
result of a conversion did not exceed the value of the separate property 
thus acquired by the donee spouse, the entire separate property thus 
acquired by the donor is to be considered, for the purposes of this 
section, as held by him and the donee spouse as community property. If 
the value (at the time of conversion) of the separate property so 
acquired by the donor exceeded the value (at that time) of the separate 
property so acquired by the donee spouse, only a part of the separate 
property so acquired by the donor (and only the same fractional part of 
property acquired by him in exchange for such separate property) is to 
be considered, for purposes of this section, as held by him and the 
donee spouse as community property. The part of such separate property 
(or property acquired in exchange for it) which is considered as so held 
is the same proportion of it which the value (at the time of the 
conversion) of the separate property so acquired by the donee spouse is 
of the value (at that time) of the separate property so acquired by the 
donor. The following example illustrates the application of the 
provisions of this paragraph:

    Example. During 1942 the donor and his spouse partitioned certain 
real property held by them under community property laws. The real 
property then had a value of $224,000. A portion of the property, then 
having a value of $160,000, was converted into the donor's separate 
property, and the remaining portion, then having a value of $64,000, was 
converted into his spouse's separate property. In 1955 the donor made a 
gift to his spouse of the property acquired by him as a result of the 
partition, which property then had a value of $200,000. The portion of 
the property transferred by gift which is considered as community 
property is

$64,000 (value of property acquired by donee spouse)/$160,000 (value of 
          property acquired by donor spouse) x $200,000 = $80,000.


The marital deduction with respect to the gift is, therefore, limited to 
one-half of $120,000 (the difference between $200,000, the value of the 
gift, and $80,000, the portion of the gift considered to have been of 
``community property''). The marital deduction with respect to the gift 
is, therefore, $60,000.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960. 
Redesignated and amended by T.D. 8522, 59 FR 9660, Mar. 1, 1994]

                         Special Valuation Rules



Sec. 25.2701-0  Table of contents.

    This section lists the major paragraphs contained in Sec. Sec. 
25.2701-1 through 25.2701-8.

Sec. 25.2701-1 Special valuation rules in the case of transfers of 
certain interests in corporations and partnerships.
    (a) In general.
    (1) Scope of section 2701.
    (2) Effect of section 2701.
    (3) Example.
    (b) Transfers and other triggering events.
    (1) Completed transfers.
    (2) Transactions treated as transfers.
    (3) Excluded transactions.
    (c) Circumstances in which section 2701 does not apply.
    (1) Marketable transferred interests.
    (2) Marketable retained interests.
    (3) Interests of the same class.
    (4) Proportionate transfers.
    (d) Family definitions.
    (1) Member of the family.
    (2) Applicable family member.
    (3) Relationship by adoption.
    (e) Examples.
Sec. 25.2701-2 Special valuation rules for applicable retained 
interests.
    (a) In general.

[[Page 668]]

    (1) Valuing an extraordinary payment right.
    (2) Valuing a distribution right.
    (3) Special rule for valuing a qualified payment right held in 
conjunction with an extraordinary payment right.
    (4) Valuing other rights.
    (5) Example.
    (b) Definitions.
    (1) Applicable retained interest.
    (2) Extraordinary payment right.
    (3) Distribution right.
    (4) Rights that are not extraordinary payment rights or distribution 
rights.
    (5) Controlled entity.
    (6) Qualified payment right.
    (c) Qualified payment elections.
    (1) Election to treat a qualified payment right as other than a 
qualified payment right.
    (2) Election to treat other distribution rights as qualified payment 
rights.
    (3) Elections irrevocable.
    (4) Treatment of certain payments to applicable family members.
    (5) Time and manner of elections.
    (d) Examples.
Sec. 25.2701-3 Determination of amount of gift.
    (a) Overview.
    (1) In general.
    (2) Definitions.
    (b) Valuation methodology.
    (1) Step 1--Valuation of family-held interests.
    (2) Step 2--Subtract the value of senior equity interests.
    (3) Step 3--Allocate the remaining value among the transferred 
interests and other family-held subordinate equity interests.
    (4) Step 4--Determine the amount of the gift.
    (5) Adjustment in Step 2.
    (c) Minimum value rule.
    (1) In general.
    (2) Junior equity interest.
    (3) Indebtedness.
    (d) Examples.
Sec. 25.2701-4 Accumulated qualified payments.
    (a) In general.
    (b) Taxable event.
    (1) In general.
    (2) Exception.
    (3) Individual treated as interest holder.
    (c) Amount of increase.
    (1) In general.
    (2) Due date of qualified payments.
    (3) Appropriate discount rate.
    (4) Application of payments.
    (5) Payment.
    (6) Limitation.
    (d) Taxpayer election.
    (1) In general.
    (2) Limitation not applicable.
    (3) Time and manner of election.
    (4) Example.
Sec. 25.2701-5 Adjustments to mitigate double taxation.
    (a) Reduction of transfer tax base.
    (1) In general.
    (2) Federal gift tax modification.
    (3) Federal estate tax modification.
    (4) Section 2701 interest.
    (b) Amount of reduction.
    (c) Duplicated amount.
    (1) In general.
    (2) Transfer tax value--in general.
    (3) Special transfer tax value rules.
    (d) Examples.
    (e) Computation of reduction if initial transfer is split under 
section 2513.
    (1) In general.
    (2) Transfers during joint lives.
    (3) Transfers at or after death of either spouse.
    (f) Examples.
    (g) Double taxation otherwise avoided.
    (h) Effective date.
Sec. 25.2701-6 Indirect holding of interests.
    (a) In general.
    (1) Attribution to individuals.
    (2) Corporations.
    (3) Partnerships.
    (4) Estates, trusts, and other entities.
    (5) Multiple attribution.
    (b) Examples.
Sec. 25.2701-7 Separate interests.
Sec. 25.2701-8 Effective dates.

[T.D. 8395, 57 FR 4255, Feb. 4, 1992, as amended by T.D. 8536, 59 FR 
23154, May 5, 1994]



Sec. 25.2701-1  Special valuation rules in the case of transfers of 
certain interests in corporations and partnerships.

    (a) In general--(1) Scope of section 2701. Section 2701 provides 
special valuation rules to determine the amount of the gift when an 
individual transfers an equity interest in a corporation or partnership 
to a member of the individual's family. For section 2701 to apply, the 
transferor or an applicable family member (as defined in paragraph 
(d)(2) of this section) must, immediately after the transfer, hold an 
applicable retained interest (a type of equity interest defined in Sec. 
25.2701-2(b)(1)). If certain subsequent payments with respect to the 
applicable retained interest do not conform to the assumptions used in 
valuing the interest at the time of the initial transfer, Sec. 25.2701-
4 provides a special rule to increase the individual's later taxable 
gifts or taxable estate. Section 25.2701-5 provides an adjustment to 
mitigate the effects of double taxation when an applicable retained 
interest is subsequently transferred.
    (2) Effect of section 2701. If section 2701 applies to a transfer, 
the amount of the

[[Page 669]]

transferor's gift, if any, is determined using a subtraction method of 
valuation (described in Sec. 25.2701-3). Under this method, the amount 
of the gift is determined by subtracting the value of any family-held 
applicable retained interests and other non-transferred equity interests 
from the aggregate value of family-held interests in the corporation or 
partnership (the ``entity''). Generally, in determining the value of any 
applicable retained interest held by the transferor or an applicable 
family member--
    (i) Any put, call, or conversion right, any right to compel 
liquidation, or any similar right is valued at zero if the right is an 
``extraordinary payment right'' (as defined in Sec. 25.2701-2(b)(2));
    (ii) Any distribution right in a controlled entity (e.g., a right to 
receive dividends) is valued at zero unless the right is a ``qualified 
payment right'' (as defined in Sec. 25.2701-2(b)(6)); and
    (iii) Any other right (including a qualified payment right) is 
valued as if any right valued at zero did not exist but otherwise 
without regard to section 2701.
    (3) Example. The following example illustrates rules of this 
paragraph (a).

    Example. A, an individual, holds all the outstanding stock of S 
Corporation. A exchanges A's shares in S for 100 shares of 10-percent 
cumulative preferred stock and 100 shares of voting common stock. A 
transfers the common stock to A's child. Section 2701 applies to the 
transfer because A has transferred an equity interest (the common stock) 
to a member of A's family, and immediately thereafter holds an 
applicable retained interest (the preferred stock). A's preferred stock 
is valued under the rules of section 2701. A's gift is determined under 
the subtraction method by subtracting the value of A's preferred stock 
from the value of A's interest in S immediately prior to the transfer.

    (b) Transfers and other triggering events--(1) Completed transfers. 
Section 2701 applies to determine the existence and amount of any gift, 
whether or not the transfer would otherwise be a taxable gift under 
chapter 12 of the Internal Revenue Code. For example, section 2701 
applies to a transfer that would not otherwise be a gift under chapter 
12 because it was a transfer for full and adequate consideration.
    (2) Transactions treated as transfers--(i) In general. Except as 
provided in paragraph (b)(3) of this section, for purposes of section 
2701, transfer includes the following transactions:
    (A) A contribution to the capital of a new or existing entity;
    (B) A redemption, recapitalization, or other change in the capital 
structure of an entity (a ``capital structure transaction''), if--
    (1) The transferor or an applicable family member receives an 
applicable retained interest in the capital structure transaction;
    (2) The transferor or an applicable family member holding an 
applicable retained interest before the capital structure transaction 
surrenders an equity interest that is junior to the applicable retained 
interest (a ``subordinate interest'') and receives property other than 
an applicable retained interest; or
    (3) The transferor or an applicable family member holding an 
applicable retained interest before the capital structure transaction 
surrenders an equity interest in the entity (other than a subordinate 
interest) and the fair market value of the applicable retained interest 
is increased; or
    (C) The termination of an indirect holding in an entity (as defined 
in Sec. 25.2701-6) (or a contribution to capital by an entity to the 
extent an individual indirectly holds an interest in the entity), if--
    (1) The property is held in a trust as to which the indirect holder 
is treated as the owner under subchapter J of chapter 1 of the Internal 
Revenue Code; or
    (2) If the termination (or contribution) is not treated as a 
transfer under paragraph (b)(2)(i)(C)(1) of this section, to the extent 
the value of the indirectly-held interest would have been included in 
the value of the indirect holder's gross estate for Federal estate tax 
purposes if the indirect holder died immediately prior to the 
termination.
    (ii) Multiple attribution. For purposes of paragraph (b)(2)(i)(C) of 
this section, if the transfer of an indirect holding in property is 
treated as a transfer with respect to more than one indirect holder, the 
transfer is attributed in the following order:

[[Page 670]]

    (A) First, to the indirect holder(s) who transferred the interest to 
the entity (without regard to section 2513);
    (B) Second, to the indirect holder(s) possessing a presently 
exercisable power to designate the person who shall possess or enjoy the 
property;
    (C) Third, to the indirect holder(s) presently entitled to receive 
the income from the interest;
    (D) Fourth, to the indirect holder(s) specifically entitled to 
receive the interest at a future date; and
    (E) Last, to any other indirect holder(s) proportionally.
    (3) Excluded transactions. For purposes of section 2701, a transfer 
does not include the following transactions:
    (i) A capital structure transaction, if the transferor, each 
applicable family member, and each member of the transferor's family 
holds substantially the same interest after the transaction as that 
individual held before the transaction. For this purpose, common stock 
with non-lapsing voting rights and nonvoting common stock are interests 
that are substantially the same;
    (ii) A shift of rights occurring upon the execution of a qualified 
disclaimer described in section 2518; and
    (iii) A shift of rights occurring upon the release, exercise, or 
lapse of a power of appointment other than a general power of 
appointment described in section 2514, except to the extent the release, 
exercise, or lapse would otherwise be a transfer under chapter 12.
    (c) Circumstances in which section 2701 does not apply. To the 
extent provided, section 2701 does not apply in the following cases:
    (1) Marketable transferred interests. Section 2701 does not apply if 
there are readily available market quotations on an established 
securities market for the value of the transferred interests.
    (2) Marketable retained interests. Section 25.2701-2 does not apply 
to any applicable retained interest if there are readily available 
market quotations on an established securities market for the value of 
the applicable retained interests.
    (3) Interests of the same class. Section 2701 does not apply if the 
retained interest is of the same class of equity as the transferred 
interest or if the retained interest is of a class that is proportional 
to the class of the transferred interest. A class is the same class as 
(or is proportional to the class of) the transferred interest if the 
rights are identical (or proportional) to the rights of the transferred 
interest, except for non-lapsing differences in voting rights (or, for a 
partnership, non-lapsing differences with respect to management and 
limitations on liability). For purposes of this section, non-lapsing 
provisions necessary to comply with partnership allocation requirements 
of the Internal Revenue Code (e.g., section 704(b)) are non-lapsing 
differences with respect to limitations on liability. A right that 
lapses by reason of Federal or State law is treated as a non-lapsing 
right unless the Secretary determines, by regulation or by published 
revenue ruling, that it is necessary to treat such a right as a lapsing 
right to accomplish the purposes of section 2701. An interest in a 
partnership is not an interest in the same class as the transferred 
interest if the transferor or applicable family members have the right 
to alter the liability of the transferee.
    (4) Proportionate transfers. Section 2701 does not apply to a 
transfer by an individual to a member of the individual's family of 
equity interests to the extent the transfer by that individual results 
in a proportionate reduction of each class of equity interest held by 
the individual and all applicable family members in the aggregate 
immediately before the transfer. Thus, for example, section 2701 does 
not apply if P owns 50 percent of each class of equity interest in a 
corporation and transfers a portion of each class to P's child in a 
manner that reduces each interest held by P and any applicable family 
members, in the aggregate, by 10 percent even if the transfer does not 
proportionately reduce P's interest in each class. See Sec. 25.2701-6 
regarding indirect holding of interests.
    (d) Family definitions--(1) Member of the family. A member of the 
family is, with respect to any transferor--
    (i) The transferor's spouse;
    (ii) Any lineal descendant of the transferor or the transferor's 
spouse; and
    (iii) The spouse of any such lineal descendant.

[[Page 671]]

    (2) Applicable family member. An applicable family member is, with 
respect to any transferor--
    (i) The transferor's spouse;
    (ii) Any ancestor of the transferor or the transferor's spouse; and
    (iii) The spouse of any such ancestor.
    (3) Relationship by adoption. For purposes of section 2701, any 
relationship by legal adoption is the same as a relationship by blood.
    (e) Examples. The following examples illustrate provisions of this 
section:

    Example 1. P, an individual, holds all the outstanding stock of X 
Corporation. Assume the fair market value of P's interest in X 
immediately prior to the transfer is $1.5 million. X is recapitalized so 
that P holds 1,000 shares of $1,000 par value preferred stock bearing an 
annual cumulative dividend of $100 per share (the aggregate fair market 
value of which is assumed to be $1 million) and 1,000 shares of voting 
common stock. P transfers the common stock to P's child. Section 2701 
applies to the transfer because P has transferred an equity interest 
(the common stock) to a member of P's family and immediately thereafter 
holds an applicable retained interest (the preferred stock). P's right 
to receive annual cumulative dividends is a qualified payment right and 
is valued for purposes of section 2701 at its fair market value of 
$1,000,000. The amount of P's gift, determined using the subtraction 
method of Sec. 25.2701-3, is $500,000 ($1,500,000 minus $1,000,000).
    Example 2. The facts are the same as in Example 1, except that the 
preferred dividend right is noncumulative. Under Sec. 25.2701-2, P's 
preferred dividend right is valued at zero because it is a distribution 
right in a controlled entity, but is not a qualified payment right. All 
of P's other rights in the preferred stock are valued as if P's dividend 
right does not exist but otherwise without regard to section 2701. The 
amount of P's gift, determined using the subtraction method, is 
$1,500,000 ($1,500,000 minus $0). P may elect, however, to treat the 
dividend right as a qualified payment right as provided in Sec. 
25.2701-2(c)(2).

[T.D. 8395, 57 FR 4255, Feb. 4, 1992; 57 FR 11264, Apr. 2, 1992, as 
amended by T.D. 8536, 59 FR 23154, May 5, 1994]



Sec. 25.2701-2  Special valuation rules for applicable retained 
interests.

    (a) In general. In determining the amount of a gift under Sec. 
25.2701-3, the value of any applicable retained interest (as defined in 
paragraph (b)(1) of this section) held by the transferor or by an 
applicable family member is determined using the rules of chapter 12, 
with the modifications prescribed by this section. See Sec. 25.2701-6 
regarding the indirect holding of interests.
    (1) Valuing an extraordinary payment right. Any extraordinary 
payment right (as defined in paragraph (b)(2) of this section) is valued 
at zero.
    (2) Valuing a distribution right. Any distribution right (as defined 
in paragraph (b)(3) of this section) in a controlled entity is valued at 
zero, unless it is a qualified payment right (as defined in paragraph 
(b)(6) of this section). Controlled entity is defined in paragraph 
(b)(5) of this section.
    (3) Special rule for valuing a qualified payment right held in 
conjunction with an extraordinary payment right. If an applicable 
retained interest confers a qualified payment right and one or more 
extraordinary payment rights, the value of all these rights is 
determined by assuming that each extraordinary payment right is 
exercised in a manner that results in the lowest total value being 
determined for all the rights, using a consistent set of assumptions and 
giving due regard to the entity's net worth, prospective earning power, 
and other relevant factors (the ``lower of'' valuation rule). See 
Sec. Sec. 20.2031-2(f) and 20.2031-3 for rules relating to the 
valuation of business interests generally.
    (4) Valuing other rights. Any other right (including a qualified 
payment right not subject to the prior paragraph) is valued as if any 
right valued at zero does not exist and as if any right valued under the 
lower of rule is exercised in a manner consistent with the assumptions 
of that rule but otherwise without regard to section 2701. Thus, if an 
applicable retained interest carries no rights that are valued at zero 
or under the lower of rule, the value of the interest for purposes of 
section 2701 is its fair market value.
    (5) Example. The following example illustrates rules of this 
paragraph (a).

    Example. P, an individual, holds all 1,000 shares of X Corporation's 
$1,000 par va1ue preferred stock bearing an annual cumulative dividend 
of $100 per share and holds all 1,000 shares of X's voting common stock. 
P has the right to put all the preferred stock to X at any time for 
$900,000. P transfers the common stock to P's child and immediately 
thereafter holds the preferred stock. Assume

[[Page 672]]

that at the time of the transfer, the fair market value of X is 
$1,500,000, and the fair market value of P's annual cumulative dividend 
right is $1,000,000. Because the preferred stock confers both an 
extraordinary payment right (the put right) and a qualified payment 
right (i.e., the right to receive cumulative dividends), the lower of 
rule applies and the value of these rights is determined as if the put 
right will be exercised in a manner that results in the lowest total 
value being determined for the rights (in this case, by assuming that 
the put will be exercised immediately). The value of P's preferred stock 
is $900,000 (the lower of $1,000,000 or $900,000). The amount of the 
gift is $600,000 ($1,500,000 minus $900,000).

    (b) Definitions--(1) Applicable retained interest. An applicable 
retained interest is any equity interest in a corporation or partnership 
with respect to which there is either--
    (i) An extraordinary payment right (as defined in paragraph (b)(2) 
of this section), or
    (ii) In the case of a controlled entity (as defined in paragraph 
(b)(5) of this section), a distribution right (as defined in paragraph 
(b)(3) of this section).
    (2) Extraordinary payment right. Except as provided in paragraph 
(b)(4) of this section, an extraordinary payment right is any put, call, 
or conversion right, any right to compel liquidation, or any similar 
right, the exercise or nonexercise of which affects the value of the 
transferred interest. A call right includes any warrant, option, or 
other right to acquire one or more equity interests.
    (3) Distribution right. A distribution right is the right to receive 
distributions with respect to an equity interest. A distribution right 
does not include--
    (i) Any right to receive distributions with respect to an interest 
that is of the same class as, or a class that is subordinate to, the 
transferred interest;
    (ii) Any extraordinary payment right; or
    (iii) Any right described in paragraph (b)(4) of this section.
    (4) Rights that are not extraordinary payment rights or distribution 
rights. Mandatory payment rights, liquidation participation rights, 
rights to guaranteed payments of a fixed amount under section 707(c), 
and non-lapsing conversion rights are neither extraordinary payment 
rights nor distribution rights.
    (i) Mandatory payment right. A mandatory payment right is a right to 
receive a payment required to be made at a specific time for a specific 
amount. For example, a mandatory redemption right in preferred stock 
requiring that the stock be redeemed at its fixed par value on a date 
certain is a mandatory payment right and therefore not an extraordinary 
payment right or a distribution right. A right to receive a specific 
amount on the death of the holder is a mandatory payment right.
    (ii) Liquidation participation rights. A liquidation participation 
right is a right to participate in a liquidating distribution. If the 
transferor, members of the transferor's family, or applicable family 
members have the ability to compel liquidation, the liquidation 
participation right is valued as if the ability to compel liquidation--
    (A) Did not exist, or
    (B) If the lower of rule applies, is exercised in a manner that is 
consistent with that rule.
    (iii) Right to a guaranteed payment of a fixed amount under section 
707(c). The right to a guaranteed payment of a fixed amount under 
section 707(c) is the right to a guaranteed payment (within the meaning 
of section 707(c)) the amount of which is determined at a fixed rate 
(including a rate that bears a fixed relationship to a specified market 
interest rate). A payment that is contingent as to time or amount is not 
a guaranteed payment of a fixed amount.
    (iv) Non-lapsing conversion right--(A) Corporations. A non-lapsing 
conversion right, in the case of a corporation, is a non-lapsing right 
to convert an equity interest in a corporation into a fixed number or a 
fixed percentage of shares of the same class as the transferred interest 
(or into an interest that would be of the same class but for non-lapsing 
differences in voting rights), that is subject to proportionate 
adjustments for changes in the equity ownership of the corporation and 
to adjustments similar to those provided in section 2701(d) for unpaid 
payments.
    (B) Partnerships. A non-lapsing conversion right, in the case of a 
partnership, is a non-lapsing right to convert an equity interest in a 
partnership into

[[Page 673]]

a specified interest (other than an interest represented by a fixed 
dollar amount) of the same class as the transferred interest (or into an 
interest that would be of the same class but for non-lapsing differences 
in management rights or limitations on liability) that is subject to 
proportionate adjustments for changes in the equity ownership of the 
partnership and to adjustments similar to those provided in section 
2701(d) for unpaid payments.
    (C) Proportionate adjustments in equity ownership. For purposes of 
this paragraph (b)(4), an equity interest is subject to proportionate 
adjustments for changes in equity ownership if, in the case of a 
corporation, proportionate adjustments are required to be made for 
splits, combinations, reclassifications, and similar changes in capital 
stock, or, in the case of a partnership, the equity interest is 
protected from dilution resulting from changes in the partnership 
structure.
    (D) Adjustments for unpaid payments. For purposes of this paragraph 
(b)(4), an equity interest is subject to adjustments similar to those 
provided in section 2701(d) if it provides for--
    (1) Cumulative payments;
    (2) Compounding of any unpaid payments at the rate specified in 
Sec. 25.2701-4(c)(2); and
    (3) Adjustment of the number or percentage of shares or the size of 
the interest into which it is convertible to take account of accumulated 
but unpaid payments.
    (5) Controlled entity--(i) In general. For purposes of section 2701, 
a controlled entity is a corporation or partnership controlled, 
immediately before a transfer, by the transferor, applicable family 
members, and any lineal descendants of the parents of the transferor or 
the transferor's spouse. See Sec. 25.2701-6 regarding indirect holding 
of interests.
    (ii) Corporations--(A) In general. In the case of a corporation, 
control means the holding of at least 50 percent of the total voting 
power or total fair market value of the equity interests in the 
corporation.
    (B) Voting rights. Equity interests that carry no right to vote 
other than on liquidation, merger, or a similar event are not considered 
to have voting rights for purposes of this paragraph (b)(5)(ii). 
Generally, a voting right is considered held by an individual to the 
extent that the individual, either alone or in conjunction with any 
other person, is entitled to exercise (or direct the exercise of) the 
right. However, if an equity interest carrying voting rights is held in 
a fiduciary capacity, the voting rights are not considered held by the 
fiduciary, but instead are considered held by each beneficial owner of 
the interest and by each individual who is a permissible recipient of 
the income from the interest. A voting right does not include a right to 
vote that is subject to a contingency that has not occurred, other than 
a contingency that is within the control of the individual holding the 
right.
    (iii) Partnerships. In the case of any partnership, control means 
the holding of at least 50 percent of either the capital interest or the 
profits interest in the partnership. Any right to a guaranteed payment 
under section 707(c) of a fixed amount is disregarded in making this 
determination. In addition, in the case of a limited partnership, 
control means the holding of any equity interest as a general partner. 
See Sec. 25.2701-2(b)(4)(iii) for the definition of a right to a 
guaranteed payment of a fixed amount under section 707(c).
    (6) Qualified payment right--(i) In general. A qualified payment 
right is a right to receive qualified payments. A qualified payment is a 
distribution that is--
    (A) A dividend payable on a periodic basis (at least annually) under 
any cumulative preferred stock, to the extent such dividend is 
determined at a fixed rate;
    (B) Any other cumulative distribution payable on a periodic basis 
(at least annually) with respect to an equity interest, to the extent 
determined at a fixed rate or as a fixed amount; or
    (C) Any distribution right for which an election has been made 
pursuant to paragraph (c)(2) of this section.
    (ii) Fixed rate. For purposes of this section, a payment rate that 
bears a fixed relationship to a specified market interest rate is a 
payment determined at a fixed rate.
    (c) Qualified payment elections--(1) Election to treat a qualified 
payment right

[[Page 674]]

as other than a qualified payment right. Any transferor holding a 
qualified payment right may elect to treat all rights held by the 
transferor of the same class as rights that are not qualified payment 
rights. An election may be a partial election, in which case the 
election must be exercised with respect to a consistent portion of each 
payment right in the class as to which the election has been made.
    (2) Election to treat other distribution rights as qualified payment 
rights. Any individual may elect to treat a distribution right held by 
that individual in a controlled entity as a qualified payment right. An 
election may be a partial election, in which case the election must be 
exercised with respect to a consistent portion of each payment right in 
the class as to which the election has been made. An election under this 
paragraph (c)(2) will not cause the value of the applicable retained 
interest conferring the distribution right to exceed the fair market 
value of the applicable retained interest (determined without regard to 
section 2701). The election is effective only to the extent--
    (i) Specified in the election, and
    (ii) That the payments elected are permissible under the legal 
instrument giving rise to the right and are consistent with the legal 
right of the entity to make the payment.
    (3) Elections irrevocable. Any election under paragraph (c)(1) or 
(c)(2) of this section is revocable only with the consent of the 
Commissioner.
    (4) Treatment of certain payments to applicable family members. Any 
payment right described in paragraph (b)(6) of this section held by an 
applicable family member is treated as a payment right that is not a 
qualified payment right unless the applicable family member elects 
(pursuant to paragraph (c)(2) of this section) to treat the payment 
right as a qualified payment right. An election may be a partial 
election, in which case the election must be exercised with respect to a 
consistent portion of each payment right in the class as to which the 
election has been made.
    (5) Time and manner of elections. Any election under paragraph 
(c)(1) or (c)(2) of this section is made by attaching a statement to the 
Form 709, Federal Gift Tax Return, filed by the transferor on which the 
transfer is reported. An election filed after the time of the filing of 
the Form 709 reporting the transfer is not a valid election. An election 
filed as of April 6, 1992, for transfers made prior to its publication 
is effective. The statement must--
    (i) Set forth the name, address, and taxpayer identification number 
of the electing individual and of the transferor, if different;
    (ii) If the electing individual is not the transferor filing the 
return, state the relationship between the individual and the 
transferor;
    (iii) Specifically identify the transfer disclosed on the return to 
which the election applies;
    (iv) Describe in detail the distribution right to which the election 
applies;
    (v) State the provision of the regulation under which the election 
is being made; and
    (vi) If the election is being made under paragraph (c)(2) of this 
section--
    (A) State the amounts that the election assumes will be paid, and 
the times that the election assumes the payments will be made;
    (B) Contain a statement, signed by the electing individual, in which 
the electing individual agrees that--
    (1) If payments are not made as provided in the election, the 
individual's subsequent taxable gifts or taxable estate will, upon the 
occurrence of a taxable event (as defined in Sec. 25.2701-4(b)), be 
increased by an amount determined under Sec. 25.2701-4(c), and
    (2) The individual will be personally liable for any increase in tax 
attributable thereto.
    (d) Examples. The following examples illustrate provisions of this 
section:

    Example 1. On March 30, 1991, P transfers non-voting common stock of 
X Corporation to P's child, while retaining $100 par value voting 
preferred stock bearing a cumulative annual dividend of $10. Immediately 
before the transfer, P held 100 percent of the stock. Because X is a 
controlled entity (within the meaning of paragraph (b)(5) of this 
section), P's dividend right is a distribution right that is subject to 
section 2701. See Sec. 25.2701-2(b)(3). Because the distribution right 
is an annual cumulative dividend, it is a qualified payment right. See 
Sec. 25.2701-2(b)(6).

[[Page 675]]

    Example 2. The facts are the same as in Example 1, except that the 
dividend right is non-cumulative. P's dividend right is a distribution 
right in a controlled entity, but is not a qualified payment right 
because the dividend is non-cumulative. Therefore, the non-cumulative 
dividend right is valued at zero under Sec. 25.2701-2(a)(2). If the 
corporation were not a controlled entity, P's dividend right would be 
valued without regard to section 2701.
    Example 3. The facts are the same as in Example 1. Because P holds 
sufficient voting power to compel liquidation of X, P's right to 
participate in liquidation is an extraordinary payment right under 
paragraph (b)(2) of this section. Because P holds an extraordinary 
payment right in conjunction with a qualified payment right (the right 
to receive cumulative dividends), the lower of rule applies.
    Example 4. The facts are the same as in Example 1, except that 
immediately before the transfer, P, applicable family members of P, and 
members of P's family, hold 60 percent of the voting rights in X. Assume 
that 80 percent of the vote is required to compel liquidation of any 
interest in X. P's right to participate in liquidation is not an 
extraordinary payment right under paragraph (b)(2) of this section, 
because P and P's family cannot compel liquidation of X. P's preferred 
stock is an applicable retained interest that carries no rights that are 
valued under the special valuation rules of section 2701. Thus, in 
applying the valuation method of Sec. 25.2701-3, the value of P's 
preferred stock is its fair market value determined without regard to 
section 2701.
    Example 5. L holds 10-percent non-cumulative preferred stock and 
common stock in a corporation that is a controlled entity. L transfers 
the common stock to L's child. L holds no extraordinary payment rights 
with respect to the preferred stock. L elects under paragraph (c)(2) of 
this section to treat the noncumulative dividend right as a qualified 
payment right consisting of the right to receive a cumulative annual 
dividend of 5 percent. Under Sec. 25.2701-2(c)(2), the value of the 
distribution right pursuant to the election is the lesser of--
    (A) The fair market value of the right to receive a cumulative 5-
percent dividend from the corporation, giving due regard to the 
corporation's net worth, prospective earning power, and dividend-paying 
capacity; or
    (B) The value of the distribution right determined without regard to 
section 2701 and without regard to the terms of the qualified payment 
election.

[T.D. 8395, 57 FR 4257, Feb. 4, 1992]



Sec. 25.2701-3  Determination of amount of gift.

    (a) Overview--(1) In general. The amount of the gift resulting from 
any transfer to which section 2701 applies is determined by a 
subtraction method of valuation. Under this method, the amount of the 
transfer is determined by subtracting the values of all family-held 
senior equity interests from the fair market value of all family-held 
interests in the entity determined immediately before the transfer. The 
values of the senior equity interests held by the transferor and 
applicable family members generally are determined under section 2701. 
Other family-held senior equity interests are valued at their fair 
market value. The balance is then appropriately allocated among the 
transferred interests and other family-held subordinate equity 
interests. Finally, certain discounts and other appropriate reductions 
are provided, but only to the extent permitted by this section.
    (2) Definitions. The following definitions apply for purposes of 
this section.
    (i) Family-held. Family-held means held (directly or indirectly) by 
an individual described in Sec. 25.2701-2(b)(5)(i).
    (ii) Senior equity interest. Senior equity interest means an equity 
interest in the entity that carries a right to distributions of income 
or capital that is preferred as to the rights of the transferred 
interest.
    (iii) Subordinate equity interest. Subordinate equity interest means 
an equity interest in the entity as to which an applicable retained 
interest is a senior equity interest.
    (b) Valuation methodology. The following methodology is used to 
determine the amount of the gift when section 2701 applies.
    (1) Step 1--Valuation of family-held interest--(i) In general. 
Except as provided in paragraph (b)(1)(ii) of this section determine the 
fair market value of all family-held equity interests in the entity 
immediately after the transfer. The fair market value is determined by 
assuming that the interests are held by one individual, using a 
consistent set of assumptions.
    (ii) Special rule for contributions to capital. In the case of a 
contribution to

[[Page 676]]

capital, determine the fair market value of the contribution.
    (2) Step 2--Subtract the value of senior equity interests--(i) In 
general. If the amount determined in Step 1 of paragraph (b)(1) of this 
section is not determined under the special rule for contributions to 
capital, from that value subtract the following amounts:
    (A) An amount equal to the sum of the fair market value of all 
family-held senior equity interests, (other than applicable retained 
interests held by the transferor or applicable family members) and the 
fair market value of any family-held equity interests of the same class 
or a subordinate class to the transferred interests held by persons 
other than the transferor, members of the transferor's family, and 
applicable family members of the transferor. The fair market value of an 
interest is its pro rata share of the fair market value of all family-
held senior equity interests of the same class (determined, immediately 
after the transfer, as is all family-held senior equity interests were 
held by one individual); and
    (B) The value of all applicable retained interests held by the 
transferor or applicable family members (other than an interest received 
as consideration for the transfer) determined under Sec. 25.2701-2, 
taking into account the adjustment described in paragraph (b)(5) of this 
section.
    (ii) Special rule for contributions to capital. If the value 
determined in Step 1 of paragraph (b)(1) of this section is determined 
under the special rule for contributions to capital, subtract the value 
of any applicable retained interest received in exchange for the 
contribution to capital determined under Sec. 25.2701-2.
    (2) Step 2--Subtract the value of senior equity interests. From the 
value determined in Step 1, subtract the following amounts:
    (i) An amount equal to the fair market value of all family-held 
senior equity interests, other than applicable retained interests held 
by the transferor or applicable family members. The fair market value of 
an interest is its pro rata share of the fair market value of all 
family-held senior equity interests of the same class (determined as if 
all family-held senior equity interests were held by one individual); 
and
    (ii) The value of all applicable retained interests held by the 
transferor or applicable family members determined under Sec. 25.2701-
2, taking into account the adjustment described in paragraph (b)(5) of 
this section.
    (3) Step 3--Allocate the remaining value among the transferred 
interests and other family-held subordinate equity interests. The value 
remaining after Step 2 is allocated among the transferred interests and 
other subordinate equity interests held by the transferor, applicable 
family members, and members of the transferor's family. If more than one 
class of family-held subordinate equity interest exists, the value 
remaining after Step 2 is allocated, beginning with the most senior 
class of subordinate equity interest, in the manner that would most 
fairly approximate their value if all rights valued under section 2701 
at zero did not exist (or would be exercised in a manner consistent with 
the assumptions of the rule of Sec. 25.2702-2(a)(4), if applicable). If 
there is no clearly appropriate method of allocating the remaining value 
pursuant to the preceding sentence, the remaining value (or the portion 
remaining after any partial allocation pursuant to the preceding 
sentence) is allocated to the interests in proportion to their fair 
market values determined without regard to section 2701.
    (4) Step 4--Determine the amount of the gift--(i) In general. The 
amount allocated to the transferred interests in Step 3 is reduced by 
the amounts determined under this paragraph (b)(4).
    (ii) Reduction for minority or similar discounts. Except as provided 
in Sec. 25.2701-3(c), if the value of the transferred interest 
(determined without regard to section 2701) would be determined after 
application of a minority or similar discount with respect to the 
transferred interest, the amount of the gift determined under section 
2701 is reduced by the excess, if any, of--
    (A) A pro rata portion of the fair market value of the family-held 
interests of the same class (determined as if all voting rights 
conferred by family-held equity interests were held by one person who 
had no interest in the entity other than the family-held interests

[[Page 677]]

of the same class, but otherwise without regard to section 2701), over
    (B) The value of the transferred interest (without regard to section 
2701).
    (iii) Adjustment for transfers with a retained interest. If the 
value of the transferor's gift (determined without regard to section 
2701) would be reduced under section 2702 to reflect the value of a 
retained interest, the value determined under section 2701 is reduced by 
the same amount.
    (iv) Reduction for consideration. The amount of the transfer 
(determined under section 2701) is reduced by the amount of 
consideration in money or money's worth received by the transferor, but 
not in excess of the amount of the gift (determined without regard to 
section 2701). The value of consideration received by the transferor in 
the form of an applicable retained interest in the entity is determined 
under section 2701 except that, in the case of a contribution to 
capital, the Step 4 value of such an interest is zero.
    (5) Adjustment in Step 2--(i) In general. For purposes of paragraph 
(b)(2) of this section, if the percentage of any class of applicable 
retained interest held by the transferor and by applicable family 
members (including any interest received as consideration for the 
transfer) exceeds the family interest percentage, the excess is treated 
as a family-held interest that is not held by the transferor or an 
applicable family member.
    (ii) Family interest percentage. The family interest percentage is 
the highest ownership percentage (determined on the basis of relative 
fair market values) of family-held interests in--
    (A) Any class of subordinate equity interest; or
    (B) All subordinate equity interests, valued in the aggregate.
    (c) Minimum value rule--(1) In general. If section 2701 applies to 
the transfer of an interest in an entity, the value of a junior equity 
interest is not less than its pro-rata portion of 10 percent of the sum 
of--
    (i) The total value of all equity interests in the entity, and
    (ii) The total amount of any indebtedness of the entity owed to the 
transferor and applicable family members.
    (2) Junior equity interest. For purposes of paragraph (c)(1) of this 
section, junior equity interest means common stock or, in the case of a 
partnership, any partnership interest under which the rights to income 
and capital are junior to the rights of all other classes of partnership 
interests. Common stock means the class or classes of stock that, under 
the facts and circumstances, are entitled to share in the reasonably 
anticipated residual growth in the entity.
    (3) Indebtedness--(i) In general. For purposes of paragraph (c)(1) 
of this section, indebtedness owed to the transferor (or an applicable 
family member) does not include--
    (A) Short-term indebtedness incurred with respect to the current 
conduct of the entity's trade or business (such as amounts payable for 
current services);
    (B) Indebtedness owed to a third party solely because it is 
guaranteed by the transferor or an applicable family member; or
    (C) Amounts permanently set aside in a qualified deferred 
compensation arrangement, to the extent the amounts are unavailable for 
use by the entity.
    (ii) Leases. A lease of property is not indebtedness, without regard 
to the length of the lease term, if the lease payments represent full 
and adequate consideration for use of the property. Lease payments are 
considered full and adequate consideration if a good faith effort is 
made to determine the fair rental value under the lease and the terms of 
the lease conform to the value so determined. Arrearages with respect to 
a lease are indebtedness.
    (d) Examples. The application of the subtraction method described in 
this section is illustrated by the following Examples:

    Example 1. Corporation X has outstanding 1,000 shares of $1,000 par 
value voting preferred stock, each share of which carries a cumulative 
annual dividend of 8 percent and a right to put the stock to X for its 
par value at any time. In addition, there are outstanding 1,000 shares 
of non-voting common stock. A holds 600 shares of the preferred stock 
and 750 shares of the common stock. The balance of the preferred and 
common stock is held by B, a person unrelated to A. Because the 
preferred stock confers both a

[[Page 678]]

qualified payment right and an extraordinary payment right, A's rights 
are valued under the ``lower of'' rule of Sec. 25.2701-2(a)(3). Assume 
that A's rights in the preferred stock are valued at $800 per share 
under the ``lower of'' rule (taking account of A's voting rights). A 
transfers all of A's common stock to A's child. The method for 
determining the amount of A's gift is as follows--
    Step l: Assume the fair market value of all the family-held 
interests in X, taking account of A's control of the corporation, is 
determined to be $1 million.
    Step 2: From the amount determined under Step l, subtract $480,000 
(600 shares x $800 (the section 2701 value of A's preferred stock, 
computed under the ``lower of'' rule of Sec. 25.2701-2(a)(3))).
    Step 3: The result of Step 2 is a balance of $520,000. This amount 
is fully allocated to the 750 shares of family-held common stock.
    3Step 4: Because no consideration was furnished for the transfer, 
the adjustment under Step 4 is limited to the amount of any appropriate 
minority or similar discount. Before the application of Step 4 the 
amount of A's gift is $520,000.
    Example 2. The facts are the same as in Example 1, except that prior 
to the transfer A holds only 50 percent of the common stock and B holds 
the remaining 50 percent. Assume that the fair market value of A's 600 
shares of preferred stock is $600,000.
    Step 1: Assume that the result of this step (determining the value 
of the family-held interest) is $980,000.
    Step 2: From the amount determined under Step 1, subtract $500,000 
($400,000, the value of 500 shares of A's preferred stock determined 
without regard to section 2701 pursuant to the valuation adjustment 
determined under paragraph (b)(5) of this section). The adjustment in 
step 2 applies in this example because A's percentage ownership of the 
preferred stock (60 percent) exceeds the family interest percentage of 
the common stock (50 percent). Therefore, 100 shares of A's preferred 
stock are valued at fair market value, or $100,000 (100 x $1,000). The 
balance of A's preferred stock is valued under section 2701 at $400,000 
(500 shares x $800). The value of A's preferred stock for purposes of 
section 2701 equals $500,000 ($100,000 plus $400,000).
    Step 3: The result of Step 2 is $480,000 ($980,000 minus $500,000) 
which is allocated to the family-held common stock. Because A 
transferred all of the family-held subordinate equity interests, all of 
the value determined under Step 2 is allocated to the transferred 
shares. Step 4: The adjustment under Step 4 is the same as in Example 
1.Thus, the amount of the gift is $480,000.
    Example 3. Corporation X has outstanding 1,000 shares of $1,000 par 
value non-voting preferred stock, each share of which carries a 
cumulative annual dividend of 8 percent and a right to put the stock to 
X for its par value at any time. In addition, there are outstanding 
1,000 shares of voting common stock. A holds 600 shares of the preferred 
stock and 750 shares of the common stock. The balance of the preferred 
and common stock is held by B, a person unrelated to A. Assume further 
that steps one through three, as in Example 1, result in $520,000 being 
allocated to the family-held common stock and that A transfers only 75 
shares of A's common stock. The transfer fragments A's voting interest. 
Under Step 4, an adjustment is appropriate to reflect the fragmentation 
of A's voting rights. The amount of the adjustment is the difference 
between 10 percent (75/750) of the fair market value of A's common 
shares and the fair market value of the transferred shares, each 
determined as if the holder thereof had no other interest in the 
corporation.
    Example 4. On December 31, 1990, the capital structure of Y 
corporation consists of 1,000 shares of voting common stock held three-
fourths by A and one-fourth by A's child, B. On January 15, 1991, A 
transfers 250 shares of common stock to Y in exchange for 300 shares of 
nonvoting, noncumulative 8% preferred stock with a section 2701 value of 
zero. Assume that the fair market value of Y is $1,000,000 at the time 
of the exchange and that the exchange by A is for full and adequate 
consideration in moneys' worth. However, for purposes of section 2701, 
if a subordinate equity interest is transferred in exchange for an 
applicable retained interest, consideration in the exchange is 
determined with reference to the section 2701 value of the senior 
interest. Thus, A is treated as transferring the common stock to the 
corporation for no consideration. Immediately after the transfer, B is 
treated as holding one-third (250/750) of the common stock and A is 
treated as holding two-thirds (500/750). The amount of the gift is 
determined as follows:
    Step 1. Because Y is held exclusively by A and B, the Step 1 value 
is $1,000,000.
    Step 2. The result of Step 2 is $1,000,000 ($1,000,000 - 0).
    Step 3. The amount allocated to the transferred common stock is 
$250,000 (250/1,000 x $1,000,000). That amount is further allocated in 
proportion to the respective holdings of A and B in the common stock 
($166,667 and $83,333, respectively).
    Step 4. There is no Step 4 adjustment because the section 2701 value 
of the consideration received by A was zero and no minority discount 
would have been involved in the exchange. Thus, the amount of the gift 
is $83,333. If the section 2701 value of the applicable retained 
interested were $100,000, the Step 4 adjustment would have been a 
$33,333 reduction for consideration received ((250/750)x$100,000).
    Example 5. The facts are the same as in Example 4, except that on 
January 6, 1992, when

[[Page 679]]

the fair market value of Y is still $1,000,000, A transfers A's 
remaining 500 shares of common stock to Y in exchange for 2500 shares of 
preferred stock. The second transfer is also for full and adequate 
consideration in money or money's worth. The result of Step 2 is the 
same--$1,000,000.
    Step 3. The amount allocated to the transferred common stock is 
$666,667 (500/750 x $1,000,000). Since A holds no common stock 
immediately after the transfer, A is treated as transferring the entire 
interest to the other shareholder (B). Thus, $666,667 is fully allocated 
to the shares held by B.
    Step 4. There is no Step 4 adjustment because the section 2701 value 
of the consideration received by A was zero and no minority discount 
would have been involved in the exchange. Thus, the amount of the gift 
is $666,667.

[T.D. 8395, 57 FR 4259, Feb. 4, 1992; T.D. 8395, 57 FR 11264, Apr. 2, 
1992]



Sec. 25.2701-4  Accumulated qualified payments.

    (a) In general. If a taxable event occurs with respect to any 
applicable retained interest conferring a distribution right that was 
previously valued as a qualified payment right (a ``qualified payment 
interest''), the taxable estate or taxable gifts of the individual 
holding the interest are increased by the amount determined under 
paragraph (c) of this section.
    (b) Taxable event--(1) In general. Except as otherwise provided in 
this section, taxable event means the transfer of a qualified payment 
interest, either during life or at death, by the individual in whose 
hands the interest was originally valued under section 2701 (the 
``interest holder'') or by any individual treated pursuant to paragraph 
(b)(3) of this section in the same manner as the interest holder. Except 
as provided in paragraph (a)(2) of this section, any termination of an 
individual's rights with respect to a qualified payment interest is a 
taxable event. Thus, for example, if an individual is treated as 
indirectly holding a qualified payment interest held by a trust, a 
taxable event occurs on the earlier of--
    (i) The termination of the individual's interest in the trust 
(whether by death or otherwise), or
    (ii) The termination of the trust's interest in the qualified 
payment interest (whether by disposition or otherwise).
    (2) Exception. If, at the time of a termination of an individual's 
rights with respect to a qualified payment interest, the value of the 
property would be includible in the individual's gross estate for 
Federal estate tax purposes if the individual died immediately after the 
termination, a taxable transfer does not occur until the earlier of--
    (i) The time the property would no longer be includible in the 
individual's gross estate (other than by reason of section 2035), or
    (ii) The death of the individual.
    (3) Individual treated as interest holder--(i) In general. If a 
taxable event involves the transfer of a qualified payment interest by 
the interest holder (or an individual treated as the interest holder) to 
an applicable family member of the individual who made the transfer to 
which section 2701 applied (other than the spouse of the individual 
transferring the qualified payment interest), the transferee applicable 
family member is treated in the same manner as the interest holder with 
respect to late or unpaid qualified payments first due after the taxable 
event. Thus, for example, if an interest holder transfers during life a 
qualified payment interest to an applicable family member, that transfer 
is a taxable event with respect to the interest holder whose taxable 
gifts are increased for the year of the transfer as provided in 
paragraph (c) of this section. The transferee is treated thereafter in 
the same manner as the interest holder with respect to late or unpaid 
qualified payments first due after the taxable event.
    (ii) Transfers to spouse--(A) In general. If an interest holder (or 
an individual treated as the interest holder) transfers a qualified 
payment interest, the transfer is not a taxable event to the extent a 
marital deduction is allowed with respect to the transfer under sections 
2056, 2106(a)(3), or 2523 or, in the case of a transfer during the 
individual's lifetime, to the extent the spouse furnishes consideration 
for the transfer. If this exception applies, the transferee spouse is 
treated as if he or she were the holder of the interest from the date 
the transferor spouse acquired the interest. If the deduction for a 
transfer to a spouse is allowable under section 2056(b)(8) or 2523(g) 
(relating to

[[Page 680]]

charitable remainder trusts), the transferee spouse is treated as the 
holder of the entire interest passing to the trust.
    (B) Marital bequests. If the selection of property with which a 
marital bequest is funded is discretionary, a transfer of a qualified 
payment interest will not be considered a transfer to the surviving 
spouse unless--
    (1) The marital bequest is funded with the qualified payment 
interest before the due date for filing the decedent's Federal estate 
tax return (including extensions actually granted) (the ``due date''), 
or
    (2) The executor--
    (i) Files a statement with the return indicating the extent to which 
the marital bequest will be funded with the qualified payment interest, 
and
    (ii) Before the date that is one year prior to the expiration of the 
period of limitations on assessment of the Federal estate tax, notifies 
the District Director having jurisdiction over the return of the extent 
to which the bequest was funded with the qualified payment interest (or 
the extent to which the qualified payment interest has been permanently 
set aside for that purpose).
    (C) Purchase by the surviving spouse. For purposes of this section, 
the purchase (before the date prescribed for filing the decedent's 
estate tax return, including extensions actually granted) by the 
surviving spouse (or a trust described in section 2056(b)(7)) of a 
qualified payment interest held (directly or indirectly) by the decedent 
immediately before death is considered a transfer with respect to which 
a deduction is allowable under section 2056 or section 2106(a)(3), but 
only to the extent that the deduction is allowed to the estate. For 
example, assume that A bequeaths $50,000 to A's surviving spouse, B, in 
a manner that qualifies for deduction under section 2056, and that 
subsequent to A's death B purchases a qualified payment interest from 
A's estate for $200,000, its fair market value. The economic effect of 
the transaction is the equivalent of a bequest by A to B of the 
qualified payment interest, one-fourth of which qualifies for the 
marital deduction. Therefore, for purposes of this section, one-fourth 
of the qualified payment interest purchased by B ($50,000 / $200,000) is 
considered a transfer of an interest with respect to which a deduction 
is allowed under 2056. If the purchase by the surviving spouse is not 
made before the due date of the decedent's return, the purchase of the 
qualified payment interest will not be considered a bequest for which a 
marital deduction is allowed unless the executor--
    (1) Files a statement with the return indicating the qualified 
payment interests to be purchased by the surviving spouse (or a trust 
described in section 2056(b)(7)), and
    (2) Before the date that is one year prior to the expiration of the 
period of limitations on assessment of the Federal estate tax, notifies 
the District Director having jurisdiction over the return that the 
purchase of the qualified payment interest has been made (or that the 
funds necessary to purchase the qualified payment interest have been 
permanently set aside for that purpose).
    (c) Amount of increase--(1) In general. Except as limited by 
paragraph (c)(6) of this section, the amount of the increase to an 
individual's taxable estate or taxable gifts is the excess, if any, of--
    (i) The sum of--
    (A) The amount of qualified payments payable during the period 
beginning on the date of the transfer to which section 2701 applied (or, 
in the case of an individual treated as the interest holder, on the date 
the interest of the prior interest holder terminated) and ending on the 
date of the taxable event; and
    (B) The earnings on those payments, determined hypothetically as if 
each payment were paid on its due date and reinvested as of that date at 
a yield equal to the appropriate discount rate (as defined below); over
    (ii) The sum of--
    (A) The amount of the qualified payments actually paid during the 
same period;
    (B) The earnings on those payments, determined hypothetically as if 
each payment were reinvested as of the date actually paid at a yield 
equal to the appropriate discount rate; and

[[Page 681]]

    (C) To the extent required to prevent double inclusion, by an amount 
equal to the sum of--
    (1) The portion of the fair market value of the qualified payment 
interest solely attributable to any right to receive unpaid qualified 
payments determined as of the date of the taxable event;
    (2) The fair market value of any equity interest in the entity 
received by the individual in lieu of qualified payments and held by the 
individual at the taxable event, and
    (3) The amount by which the individual's aggregate taxable gifts 
were increased by reason of the failure of the individual to enforce the 
right to receive qualified payments.
    (2) Due date of qualified payments. With respect to any qualified 
payment, the ``due date'' is that date specified in the governing 
instrument as the date on which payment is to be made. If no date is 
specified in the governing instrument, the due date is the last day of 
each calendar year.
    (3) Appropriate discount rate. The appropriate discount rate is the 
discount rate that was applied in determining the value of the qualified 
payment right at the time of the transfer to which section 2701 applied.
    (4) Application of payments. For purposes of this section, any 
payment of an unpaid qualified payment is applied in satisfaction of 
unpaid qualified payments beginning with the earliest unpaid qualified 
payment. Any payment in excess of the total of all unpaid qualified 
payments is treated as a prepayment of future qualified payments.
    (5) Payment. For purposes of this paragraph (c), the transfer of a 
debt obligation bearing compound interest from the due date of the 
payment at a rate not less than the appropriate discount rate is a 
qualified payment if the term of the obligation (including extensions) 
does not exceed four years from the date issued. A payment in the form 
of an equity interest in the entity is not a qualified payment. Any 
payment of a qualified payment made (or treated as made) either before 
or during the four-year period beginning on the due date of the payment 
but before the date of the taxable event is treated as having been made 
on the due date.
    (6) Limitation--(i) In general. The amount of the increase to an 
individual's taxable estate or taxable gifts is limited to the 
applicable percentage of the excess, if any, of--
    (A) The sum of--
    (1) The fair market value of all outstanding equity interests in the 
entity that are subordinate to the applicable retained interest, 
determined as of the date of the taxable event without regard to any 
accrued liability attributable to unpaid qualified payments; and
    (2) Any amounts expended by the entity to redeem or otherwise 
acquire any such subordinate interest during the period beginning on the 
date of the transfer to which section 2701 applied (or, in the case of 
an individual treated as an interest holder, on the date the interest of 
the prior interest holder terminated) and ending on the date of the 
taxable event (reduced by any amounts received on the resale or issuance 
of any such subordinate interest during the same period); over
    (B) The fair market value of all outstanding equity interests in the 
entity that are subordinate to the applicable retained interest, 
determined as of the date of the transfer to which section 2701 applied 
(or, in the case of an individual treated as an interest holder, on the 
date the interest of the prior interest holder terminated).
    (ii) Computation of limitation. For purposes of computing the 
limitation applicable under this paragraph (c)(6), the aggregate fair 
market value of the subordinate interests in the entity are determined 
without regard to Sec. 25.2701-3(c).
    (iii) Applicable percentage. The applicable percentage is determined 
by dividing the number of shares or units of the applicable retained 
interest held by the interest holder (or an individual treated as the 
interest holder) on the date of the taxable event by the total number of 
such shares or units outstanding on the same date. If an individual 
holds applicable retained interests in two or more classes of interests, 
the applicable percentage is equal to the largest applicable percentage 
determined with respect to any class. For example, if T retains 40 
percent of the class A preferred and 60 percent of the

[[Page 682]]

class B preferred in a corporation, the applicable percentage with 
respect to T's holdings is 60 percent.
    (d) Taxpayer election--(1) In general. An interest holder (or 
individual treated as an interest holder) may elect to treat as a 
taxable event the payment of an unpaid qualified payment occurring more 
than four years after its due date. Under this election, the increase 
under paragraph (c) of this section is determined only with respect to 
that payment and all previous payments for which an election was 
available but not made. Payments for which an election applies are 
treated as having been paid on their due dates for purposes of 
subsequent taxable events. The election is revocable only with the 
consent of the Commissioner.
    (2) Limitation not applicable. If a taxable event occurs by reason 
of an election described in paragraph (d)(1) of this section, the 
limitation described in paragraph (c)(6) of this section does not apply.
    (3) Time and manner of election--(i) Timely-filed returns. The 
election may be made by attaching a statement to a Form 709, Federal 
Gift Tax Return, filed by the recipient of the qualified payment on a 
timely basis for the year in which the qualified payment is received. In 
that case, the taxable event is deemed to occur on the date the 
qualified payment is received.
    (ii) Election on late returns. The election may be made by attaching 
a statement to a Form 709, Federal Gift Tax Return, filed by the 
recipient of the qualified payment other than on a timely basis for the 
year in which the qualified payment is received. In that case, the 
taxable event is deemed to occur on the first day of the month 
immediately preceding the month in which the return is filed. If an 
election, other than an election on a timely return, is made after the 
death of the interest holder, the taxable event with respect to the 
decedent is deemed to occur on the later of--
    (A) The date of the recipient's death, or
    (B) The first day of the month immediately preceding the month in 
which the return is filed.
    (iii) Requirements of statement. The statement must--
    (A) Provide the name, address, and taxpayer identification number of 
the electing individual and the interest holder, if different;
    (B) Indicate that a taxable event election is being made under 
paragraph (d) of this section;
    (C) Disclose the nature of the qualified payment right to which the 
election applies, including the due dates of the payments, the dates the 
payments were made, and the amounts of the payments;
    (D) State the name of the transferor, the date of the transfer to 
which section 2701 applied, and the discount rate used in valuing the 
qualified payment right; and
    (E) State the resulting amount of increase in taxable gifts.
    (4) Example. The following example illustrates the rules of this 
paragraph (d).

    Example. A holds cumulative preferred stock that A retained in a 
transfer to which section 2701 applied. No dividends were paid in years 
1 through 5 following the transfer. In year 6, A received a qualified 
payment that, pursuant to paragraph (c)(3) of this section, is 
considered to be in satisfaction of the unpaid qualified payment for 
year 1. No election was made to treat that payment as a taxable event. 
In year 7, A receives a qualified payment that, pursuant to paragraph 
(c)(4) of this section, is considered to be in satisfaction of the 
unpaid qualified payment for year 2. A elects to treat the payment in 
year 7 as a taxable event. The election increases A's taxable gifts in 
year 7 by the amount computed under paragraph (c) of this section with 
respect to the payments due in both year l and year 2. For purposes of 
any future taxable events, the payments with respect to years 1 and 2 
are treated as having been made on their due dates.

[T.D. 8395, 57 FR 4261, Feb. 4, 1992]



Sec. 25.2701-5  Adjustments to mitigate double taxation.

    (a) Reduction of transfer tax base--(1) In general. This section 
provides rules under which an individual (the initial transferor) making 
a transfer subject to section 2701 (the initial transfer) is entitled to 
reduce his or her taxable gifts or adjusted taxable gifts (the 
reduction). The amount of the reduction is determined under paragraph 
(b) of this section. See paragraph (e) of this section if section 2513 
(split gifts) applied to the initial transfer.

[[Page 683]]

    (2) Federal gift tax modification. If, during the lifetime of the 
initial transferor, the holder of a section 2701 interest (as defined in 
paragraph (a)(4) of this section) transfers the interest to or for the 
benefit of an individual other than the initial transferor or an 
applicable family member of the initial transferor in a transfer subject 
to Federal estate or gift tax, the initial transferor may reduce the 
amount on which the initial transferor's tentative tax is computed under 
section 2502(a). The reduction is first applied on any gift tax return 
required to be filed for the calendar year in which the section 2701 
interest is transferred; any excess reduction is carried forward and 
applied in each succeeding calendar year until the reduction is 
exhausted. The amount of the reduction that is used in a calendar year 
is the amount of the initial transferor's taxable gifts for that year. 
Any excess reduction remaining at the death of the initial transferor 
may be applied by the executor of the initial transferor's estate as 
provided under paragraph (a)(3) of this section. See paragraph (a)(4) of 
this section for the definition of a section 2701 interest. See Sec. 
25.2701-6 for rules relating to indirect ownership of equity interests 
transferred to trusts and other entities.
    (3) Federal estate tax modification. Except as otherwise provided in 
this paragraph (a)(3), in determining the Federal estate tax with 
respect to an initial transferor, the executor of the initial 
transferor's estate may reduce the amount on which the decedent's 
tentative tax is computed under section 2001(b) (or section 2101(b)) by 
the amount of the reduction (including any excess reduction carried 
forward under paragraph (a)(2) of this section). The amount of the 
reduction under this paragraph (a)(3) is limited to the amount that 
results in zero Federal estate tax with respect to the estate of the 
initial transferor.
    (4) Section 2701 interest. A section 2701 interest is an applicable 
retained interest that was valued using the special valuation rules of 
section 2701 at the time of the initial transfer. However, an interest 
is a section 2701 interest only to the extent the transfer of that 
interest effectively reduces the aggregate ownership of such class of 
interest by the initial transferor and applicable family members of the 
initial transferor below that held by such persons at the time of the 
initial transfer (or the remaining portion thereof).
    (b) Amount of reduction. Except as otherwise provided in paragraphs 
(c)(3)(iv) (pertaining to transfers of partial interests) and (e) 
(pertaining to initial split gifts) of this section, the amount of the 
reduction is the lesser of--
    (1) The amount by which the initial transferor's taxable gifts were 
increased as a result of the application of section 2701 to the initial 
transfer; or
    (2) The amount (determined under paragraph (c) of this section) 
duplicated in the transfer tax base at the time of the transfer of the 
section 2701 interest (the duplicated amount).
    (c) Duplicated amount--(1) In general. The duplicated amount is the 
amount by which the transfer tax value of the section 2701 interest at 
the time of the subsequent transfer exceeds the value of that interest 
determined under section 2701 at the time of the initial transfer. If, 
at the time of the initial transfer, the amount allocated to the 
transferred interest under Sec. 25.2701-3(b)(3) (Step 3 of the 
valuation methodology) is less than the entire amount available for 
allocation at that time, the duplicated amount is a fraction of the 
amount described in the preceding sentence. The numerator of the 
fraction is the amount allocated to the transferred interest at the time 
of the initial transfer (pursuant to Sec. 25.2701-3(b)(3)) and the 
denominator of the fraction is the amount available for allocation at 
the time of the initial transfer (determined after application of Sec. 
25.2701-3(b)(2)).
    (2) Transfer tax value--in general. Except as provided in paragraph 
(c)(3) of this section, for purposes of paragraph (c)(1) of this section 
the transfer tax value of a section 2701 interest is the value of that 
interest as finally determined for Federal transfer tax purposes under 
chapter 11 or chapter 12, as the case may be (including the right to 
receive any distributions thereon (other than qualified payments)), 
reduced by the amount of any deduction allowed with respect to the 
section 2701 interest to the extent that the deduction

[[Page 684]]

would not have been allowed if the section 2701 interest were not 
included in the transferor's total amount of gifts for the calendar year 
or the transferor's gross estate, as the case may be. Rules similar to 
the rules of section 691(c)(2)(C) are applicable to determine the extent 
that a deduction would not be allowed if the section 2701 interest were 
not so included.
    (3) Special transfer tax value rules--(i) Transfers for 
consideration. Except as provided in paragraph (c)(3)(iii) of this 
section, if, during the life of the initial transferor, a section 2701 
interest is transferred to or for the benefit of an individual other 
than the initial transferor or an applicable family member of the 
initial transferor for consideration in money or money's worth, or in a 
transfer that is treated as a transfer for consideration in money or 
money's worth, the transfer of the section 2701 interest is deemed to 
occur at the death of the initial transferor. In this case, the estate 
of the initial transferor is entitled to a reduction in the same manner 
as if the initial transferor's gross estate included a section 2701 
interest having a chapter 11 value equal to the amount of consideration 
in money or money's worth received in the exchange (determined as of the 
time of the exchange).
    (ii) Interests held by applicable family members at date of initial 
transferor's death. If a section 2701 interest in existence on the date 
of the initial transferor's death is held by an applicable family member 
and, therefore, is not included in the gross estate of the initial 
transferor, the section 2701 interest is deemed to be transferred at the 
death of the initial transferor to or for the benefit of an individual 
other than the initial transferor or an applicable family member of the 
initial transferor. In this case, the transfer tax value of that 
interest is the value that the executor of the initial transferor's 
estate can demonstrate would be determined under chapter 12 if the 
interest were transferred immediately prior to the death of the initial 
transferor.
    (iii) Nonrecognition transactions. If an individual exchanges a 
section 2701 interest in a nonrecognition transaction (within the 
meaning of section 7701(a)(45)), the exchange is not treated as a 
transfer of a section 2701 interest and the transfer tax value of that 
interest is determined as if the interest received in exchange is the 
section 2701 interest.
    (iv) Transfer of less than the entire section 2701 interest. If a 
transfer is a transfer of less than the entire section 2701 interest, 
the amount of the reduction under paragraph (a)(2) or (a)(3) of this 
section is reduced proportionately.
    (v) Multiple classes of section 2701 interest. For purposes of 
paragraph (b) of this section, if more than one class of section 2701 
interest exists, the amount of the reduction is determined separately 
with respect to each such class.
    (vi) Multiple initial transfers. If an initial transferor has made 
more than one initial transfer, the amount of the reduction with respect 
to any section 2701 interest is the sum of the reductions computed under 
paragraph (b) of this section with respect to each such initial 
transfer.
    (d) Examples. The following examples illustrate the provisions of 
paragraphs (a) through (c) of this section.

    Facts--(1) In general. (i) P, an individual, holds 1,500 shares of 
$1,000 par value preferred stock of X corporation (bearing an annual 
noncumulative dividend of $100 per share that may be put to X at any 
time for par value) and 1,000 shares of voting common stock of X. There 
is no other outstanding common stock of X.
    (ii) On January 15, 1991, when the aggregate fair market value of 
the preferred stock is $1,500,000 and the aggregate fair market value of 
the common stock is $500,000, P transfers common stock to P's child. The 
fair market value of P's interest in X (common and preferred) 
immediately prior to the transfer is $2,000,000, and the section 2701 
value of the preferred stock (the section 2701 interest) is zero. 
Neither P nor P's spouse, S, made gifts prior to 1991.
    (2) Additional facts applicable to Examples 1 through 3. P's 
transfer consists of all 1,000 shares of P's common stock. With respect 
to the initial transfer, the amount remaining after Step 2 of the 
subtraction method of Sec. 25.2701-3 is $2,000,000 ($2,000,000 minus 
zero), all of which is allocated to the transferred stock. P's aggregate 
taxable gifts for 1991 (including the section 2701 transfer) equal 
$2,500,000.
    (3) Additional facts applicable to Examples 4 and 5. P's initial 
transfer consists of one-half of P's common stock. With respect to the 
initial transfer in this case, only $1,000,000 (one-half of the amount 
remaining after Step 2 of the subtraction method of Sec. 25.2701-3) is

[[Page 685]]

allocated to the transferred stock. P's aggregate taxable gifts for 1991 
(the section 2701 transfer and P's other transfers) equal $2,500,000.
    Example 1. Inter vivos transfer of entire section 2701 interest. (i) 
On October 1, 1994, at a time when the value of P's preferred stock is 
$1,400,000, P transfers all of the preferred stock to P's child. In 
computing P's 1994 gift tax, P, as the initial transferor, is entitled 
to reduce the amount on which P's tentative tax is computed under 
section 2502(a) by $1,400,000.
    (ii) The amount of the reduction computed under paragraph (b) of 
this section is the lesser of $1,500,000 (the amount by which the 
initial transferor's taxable gifts were increased as a result of the 
application of section 2701 to the initial transfer) or $1,400,000 (the 
duplicated amount). The duplicated amount is 100 percent (the portion of 
the section 2701 interest subsequently transferred) times $1,400,000 
(the amount by which the gift tax value of the preferred stock 
($1,400,000 at the time of the subsequent transfer) exceeds zero (the 
section 2701 value of the preferred stock at the time of the initial 
transfer)).
    (iii) The result would be the same if the preferred stock had been 
held by P's parent, GM, and GM had, on October 1, 1994, transferred the 
preferred stock to or for the benefit of an individual other than P or 
an applicable family member of P. In that case, in computing the tax on 
P's 1994 and subsequent transfers, P would be entitled to reduce the 
amount on which P's tentative tax is computed under section 2502(a) by 
$1,400,000. If the value of P's 1994 gifts is less than $1,400,000, P is 
entitled to claim the excess adjustment in computing the tax with 
respect to P's subsequent transfers.
    Example 2. Transfer of section 2701 interest at death of initial 
transferor. (i) P continues to hold the preferred stock until P's death. 
The chapter 11 value of the preferred stock at the date of P's death is 
the same as the fair market value of the preferred stock at the time of 
the initial transfer. In computing the Federal estate tax with respect 
to P's estate, P's executor is entitled to a reduction of $1,500,000 
under paragraph (a)(3) of this section.
    (ii) The result would be the same if P had sold the preferred stock 
to any individual other than an applicable family member at a time when 
the value of the preferred stock was $1,500,000. In that case, the 
amount of the reduction is computed as if the preferred stock were 
included in P's gross estate at a fair market value equal to the sales 
price. If the value of P's taxable estate is less than $1,500,000, the 
amount of the adjustment available to P's executor is limited to the 
actual value of P's taxable estate.
    (iii) The result would also be the same if the preferred stock had 
been held by P's parent, GM, and at the time of P's death, GM had not 
transferred the preferred stock.
    Example 3. Transfer of after-acquired preferred stock. On September 
1, 1992, P purchases 100 shares of X preferred stock from an unrelated 
party. On October 1, 1994, P transfers 100 shares of X preferred stock 
to P's child. In computing P's 1994 gift tax, P is not entitled to 
reduce the amount on which P's tentative tax is computed under section 
2502(a) because the 1994 transfer does not reduce P's preferred stock 
holding below that held at the time of the initial transfer. See 
paragraph (a)(4) of this section.
    Example 4. Inter vivos transfer of entire section 2701 interest. (i) 
On October 1, 1994, at a time when the value of P's preferred stock is 
$1,400,000, P transfers all of the preferred stock to P's child. In 
computing P's 1994 gift tax, P, as the initial transferor, is entitled 
to reduce the amount on which P's tentative tax is computed under 
section 2502(a) by $700,000.
    (ii) The amount of the reduction computed under paragraph (b) of 
this section is the lesser of $750,000 (($1,500,000 x .5 ($1,000,000 
over $2,000,000)) the amount by which the initial transferor's taxable 
gifts were increased as a result of the application of section 2701 to 
the initial transfer) or $700,000 (($1,400,000 x .5) the duplicated 
amount). The duplicated amount is 100 percent (the portion of the 
section 2701 interest subsequently transferred) times $700,000; e.g., 
one-half (the fraction representing the portion of the common stock 
transferred in the initial transfer ($1,000,000/$2,000,000)) of the 
amount by which the gift tax value of the preferred stock at the time of 
the subsequent transfer ($1,400,000) exceeds zero (the section 2701 
value of the preferred stock at the time of the initial transfer).
    Example 5. Subsequent transfer of less than the entire section 2701 
interest. On October 1, 1994, at a time when the value of P's preferred 
stock is $1,400,000, P transfers only 250 of P's 1,000 shares of 
preferred stock to P's child. In this case, the amount of the reduction 
computed under paragraph (b) is $175,000 (one-fourth (250/1,000) of the 
amount of the reduction available if P had transferred all 1,000 shares 
of preferred stock).

    (e) Computation of reduction if initial transfer is split under 
section 2513--(1) In general. If section 2513 applies to the initial 
transfer (a split initial transfer), the special rules of this paragraph 
(e) apply.
    (2) Transfers during joint lives. If there is a split initial 
transfer and the corresponding section 2701 interest is transferred 
during the joint lives of the donor and the consenting spouse, for 
purposes of determining the reduction under paragraph (a)(2) of this 
section

[[Page 686]]

each spouse is treated as if the spouse was the initial transferor of 
one-half of the split initial transfer.
    (3) Transfers at or after death of either spouse--(i) In general. If 
there is a split initial transfer and the corresponding section 2701 
interest is transferred at or after the death of the first spouse to 
die, the reduction under paragraph (a)(2) or (a)(3) of this section is 
determined as if the donor spouse was the initial transferor of the 
entire initial transfer.
    (ii) Death of donor spouse. Except as provided in paragraph 
(e)(3)(iv) of this section, the executor of the estate of the donor 
spouse in a split initial transfer is entitled to compute the reduction 
as if the donor spouse was the initial transferor of the section 2701 
interest otherwise attributable to the consenting spouse. In this case, 
if the consenting spouse survives the donor spouse--
    (A) The consenting spouse's aggregate sum of taxable gifts used in 
computing each tentative tax under section 2502(a) (and, therefore, 
adjusted taxable gifts under section 2001(b)(1)(B) (or section 
2101(b)(1)(B)) and the tax payable on the consenting spouse's prior 
taxable gifts under section 2001(b)(2) (or section 2101(b)(2))) is 
reduced to eliminate the remaining effect of the section 2701 interest; 
and
    (B) Except with respect to any excess reduction carried forward 
under paragraph (a)(2) of this section, the consenting spouse ceases to 
be treated as the initial transferor of the section 2701 interest.
    (iii) Death of consenting spouse. If the consenting spouse 
predeceases the donor spouse, except for any excess reduction carried 
forward under paragraph (a)(2) of this section, the reduction with 
respect to any section 2701 interest in the split initial transfer is 
not available to the estate of the consenting spouse (regardless of 
whether the interest is included in the consenting spouse's gross 
estate). Similarly, if the consenting spouse predeceases the donor 
spouse, no reduction is available to the consenting spouse's adjusted 
taxable gifts under section 2001(b)(1)(B) (or section 2101(b)(1)(B)) or 
to the consenting spouse's gift tax payable under section 2001(b)(2) (or 
section 2101(b)(2)). See paragraph (a)(2) of this section for rules 
involving transfers by an applicable family member during the life of 
the initial transferor.
    (iv) Additional limitation on reduction. If the donor spouse (or the 
estate of the donor spouse) is treated under this paragraph (e) as the 
initial transferor of the section 2701 interest otherwise attributable 
to the consenting spouse, the amount of additional reduction determined 
under paragraph (b) of this section is the amount determined under that 
paragraph with respect to the consenting spouse. If a reduction was 
previously available to the consenting spouse under this paragraph (e), 
the amount determined under this paragraph (e)(3)(iv) with respect to 
the consenting spouse is determined as if the consenting spouse's 
taxable gifts in the split initial transfer had been increased only by 
that portion of the increase that corresponds to the remaining portion 
of the section 2701 interest. The amount of the additional reduction 
(i.e., the amount determined with respect to the consenting spouse) is 
limited to the amount that results in a reduction in the donor spouse's 
Federal transfer tax no greater than the amount of the increase in the 
consenting spouse's gift tax incurred by reason of the section 2701 
interest (or the remaining portion thereof).
    (f) Examples. The following examples illustrate the provisions of 
paragraph (e) of this section. The examples assume the facts set out in 
this paragraph (f).

    Facts. (1) In each example assume that P, an individual, holds 1,500 
shares of $1,000 par value preferred stock of X corporation (bearing an 
annual noncumulative dividend of $100 per share that may be put to X at 
any time for par value) and 1,000 shares of voting common stock of X. 
There is no other outstanding stock of X. The annual exclusion under 
section 2503 is not allowable with respect to any gift.
    (2) On January 15, 1991, when the aggregate fair market value of the 
preferred stock is $1,500,000 and the aggregate fair market value of the 
common stock is $500,000, P transfers all 1,000 shares of the common 
stock to P's child. Section 2701 applies to the initial transfer because 
P transferred an equity interest (the common stock) to a member of P's 
family and immediately thereafter

[[Page 687]]

held an applicable retained interest (the preferred stock). The fair 
market value of P's interest in X immediately prior to the transfer is 
$2,000,000 and the section 2701 value of the preferred stock (the 
section 2701 interest) is zero. With respect to the initial transfer, 
the amount remaining after Step 2 of the subtraction method of Sec. 
25.2701-3 was $2,000,000 ($2,000,000 minus zero), all of which is 
allocated to the transferred stock. P had made no gifts prior to 1991. 
The sum of P's aggregate taxable gifts for the calendar year 1991 
(including the section 2701 transfer) is $2,500,000. P's spouse, S, made 
no gifts prior to 1991.
    (3) P and S elected pursuant to section 2513 to treat one- half of 
their 1991 gifts as having been made by each spouse. Without the 
application of section 2701, P and S's aggregate gifts would have been 
$500,000 and each spouse would have paid no gift tax because of the 
application of the unified credit under section 2505. However, because 
of the application of section 2701, both P and S are each treated as the 
initial transferor of aggregate taxable gifts in the amount of 
$1,250,000 and, after the application of the unified credit under 
section 2505, each paid $255,500 in gift tax with respect to their 1991 
transfers. On October 1, 1994, at a time when the value of the preferred 
stock is the same as at the time of the initial transfer, P transfers 
the preferred stock (the section 2701 interest) to P's child.
    Example 1. Inter vivos transfer of entire section 2701 interest. P 
transfers all of the preferred stock to P's child. P and S are each 
entitled to a reduction of $750,000 in computing their 1994 gift tax. P 
is entitled to the reduction because P subsequently transferred the one-
half share of the section 2701 interest as to which P was the initial 
transferor to an individual who was not an applicable family member of 
P. S is entitled to the reduction because P, an applicable family member 
with respect to S, transferred the one-half share of the section 2701 
interest as to which S was the initial transferor to an individual other 
than S or an applicable family member of S. S may claim the reduction 
against S's 1994 gifts. If S's 1994 taxable gifts are less than 
$750,000, S may claim the remaining amount of the reduction against S's 
next succeeding lifetime transfers.
    Example 2. Inter vivos transfer of portion of section 2701 interest. 
P transfers one-fourth of the preferred stock to P's child. In this 
case, P and S are each entitled to a reduction of $187,500, the 
corresponding portion of the reduction otherwise available to each 
spouse (one-fourth of $750,000).
    Example 3. Transfer at death of donor spouse. P, the donor spouse in 
the section 2513 election, dies on October 1, 1994, while holding all of 
the preferred stock. The executor of P's estate is entitled to a 
reduction in the computation of the tentative tax under section 2001(b). 
Since no reduction had been previously available with respect to the 
section 2701 interest, P's estate is entitled to a full reduction of 
$750,000 with respect to the one-half share of the preferred stock as to 
which P was the initial transferor. In addition, P's estate is entitled 
to an additional reduction of up to $750,000 for the remaining section 
2701 interest as to which S was the initial transferor. The reduction 
for the consenting spouse's remaining section 2701 interest is limited 
to that amount that will produce a tax saving in P's Federal estate tax 
of $255,500, the amount of gift tax incurred by S by reason of the 
application of section 2701 to the split initial transfer.
    Example 4. Transfer after death of donor spouse. The facts are the 
same as in Example 3, except that S acquires the preferred stock from 
P's estate and subsequently transfers the preferred stock to S's child. 
S is not entitled to a reduction because S ceased to be an initial 
transferor upon P's death (and S's prior taxable gifts were 
automatically adjusted at that time to the level that would have existed 
had the split initial transfer not been subject to section 2701).
    Example 5. Death of donor spouse after inter vivos transfer. (i) P 
transfers one-fourth of the preferred stock to P's child. In this case, 
P and S are each entitled to a reduction of $187,500, the corresponding 
portion of the reduction otherwise available to each spouse (one-fourth 
of $750,000). S may claim the reduction against S's 1994 or subsequent 
transfers. P dies on November 1, 1994.
    (ii) P's executor is entitled to include, in computing the reduction 
available to P's estate, the remaining reduction to which P is entitled 
and an additional amount of up to $562,500 ($750,000 minus $187,500, the 
amount of the remaining reduction attributable to the consenting spouse 
determined immediately prior to P's death). The amount of additional 
reduction available to P's estate cannot exceed the amount that will 
reduce P's estate tax by $178,625, the amount that S's 1991 gift tax 
would have been increased if the application of section 2701 had 
increased S's taxable gifts by only $562,500 ($750,000 - $187,500).

    (g) Double taxation otherwise avoided. No reduction is available 
under this section if--
    (1) Double taxation is otherwise avoided in the computation of the 
estate tax under section 2001 (or section 2101); or
    (2) A reduction was previously taken under the provisions of section 
2701(e)(6) with respect to the same section 2701 interest and the same 
initial transfer.

[[Page 688]]

    (h) Effective date. This section is effective for transfers of 
section 2701 interests after May 4, 1994. If the transfer of a section 
2701 interest occurred on or before May 4, 1994, the initial transferor 
may rely on either this section, project PS-30-91 (1991-2 C.B. 1118, and 
1992-1 C.B. 1239 (see Sec. 601.601(d)(2)(ii)(b) of this chapter)) or 
any other reasonable interpretation of the statute.

[T.D. 8536, 59 FR 23154, May 5, 1994]



Sec. 25.2701-6  Indirect holding of interests.

    (a) In general--(1) Attribution to individuals. For purposes of 
section 2701, an individual is treated as holding an equity interest to 
the extent the interest is held indirectly through a corporation, 
partnership, estate, trust, or other entity. If an equity interest is 
treated as held by a particular individual in more than one capacity, 
the interest is treated as held by the individual in the manner that 
attributes the largest total ownership of the equity interest. An equity 
interest held by a lower-tier entity is attributed to higher-tier 
entities in accordance with the rules of this section. For example, if 
an individual is a 50-percent beneficiary of a trust that holds 50 
percent of the preferred stock of a corporation, 25 percent of the 
preferred stock is considered held by the individual under these rules.
    (2) Corporations. A person is considered to hold an equity interest 
held by or for a corporation in the proportion that the fair market 
value of the stock the person holds bears to the fair market value of 
all the stock in the corporation (determined as if each class of stock 
were held separately by one individual). This paragraph applies to any 
entity classified as a corporation or as an association taxable as a 
corporation for federal income tax purposes.
    (3) Partnerships. A person is considered to hold an equity interest 
held by or for a partnership in the proportion that the fair market 
value of the larger of the person's profits interest or capital interest 
in the partnership bears to the total fair market value of the 
corresponding profits interests or capital interests in the partnership, 
as the case may be (determined as if each class were held by one 
individual). This paragraph applies to any entity classified as a 
partnership for federal income tax purposes.
    (4) Estates, trusts and other entities--(i) In general. A person is 
considered to hold an equity interest held by or for an estate or trust 
to the extent the person's beneficial interest therein may be satisfied 
by the equity interest held by the estate or trust, or the income or 
proceeds thereof, assuming the maximum exercise of discretion in favor 
of the person. A beneficiary of an estate or trust who cannot receive 
any distribution with respect to an equity interest held by the estate 
or trust, including the income therefrom or the proceeds from the 
disposition thereof, is not considered the holder of the equity 
interest. Thus, if stock held by a decedent's estate has been 
specifically bequeathed to one beneficiary and the residue of the estate 
has been bequeathed to other beneficiaries, the stock is considered held 
only by the beneficiary to whom it was specifically bequeathed. However, 
any person who may receive distributions from a trust is considered to 
hold an equity interest held by the trust if the distributions may be 
made from current or accumulated income from or the proceeds from the 
disposition of the equity interest, even though under the terms of the 
trust the interest can never be distributed to that person. This 
paragraph applies to any entity that is not classified as a corporation, 
an association taxable as a corporation, or a partnership for federal 
income tax purposes.
    (ii) Special rules--(A) Property is held by a decedent's estate if 
the property is subject to claims against the estate and expenses of 
administration.
    (B) A person holds a beneficial interest in a trust or an estate so 
long as the person may receive distributions from the trust or the 
estate other than payments for full and adequate consideration.
    (C) An individual holds an equity interest held by or for a trust if 
the individual is considered an owner of the trust (a ``grantor trust'') 
under subpart E, part 1, subchapter J of the Internal Revenue Code 
(relating to grantors and others treated as substantial owners). 
However, if an individual is treated as the owner of only a fractional 
share of

[[Page 689]]

a grantor trust because there are multiple grantors, the individual 
holds each equity interest held by the trust, except to the extent that 
the fair market value of the interest exceeds the fair market value of 
the fractional share.
    (5) Multiple attribution--(i) Applicable retained interests. If this 
section attributes an applicable retained interest to more than one 
individual in a class consisting of the transferor and one or more 
applicable family members, the interest is attributed within that class 
in the following order--
    (A) If the interest is held in a grantor trust, to the individual 
treated as the holder thereof;
    (B) To the transferor;
    (C) To the transferor's spouse; or
    (D) To each applicable family member on a pro rata basis.
    (ii) Subordinate equity interests. If this section attributes a 
subordinate equity interest to more than one individual in a class 
consisting of the transferor, applicable family members, and members of 
the transferor's family, the interest is attributed within that class in 
the following order--
    (A) To the transferee;
    (B) To each member of the transferor's family on a pro rata basis;
    (C) If the interest is held in a grantor trust, to the individual 
treated as the holder thereof;
    (D) To the transferor;
    (E) To the transferor's spouse; or
    (F) To each applicable family member on a pro rata basis.
    (b) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. A, an individual, holds 25 percent by value of each class 
of stock of Y Corporation. Persons unrelated to A hold the remaining 
stock. Y holds 50 percent of the stock of Corporation X. Under paragraph 
(a)(2) of this section, Y's interests in X are attributed 
proportionately to the shareholders of Y. Accordingly, A is considered 
to hold a 12.5 percent (25 percent x 50 percent) interest in X.
    Example 2. Z Bank's authorized capital consists of 100 shares of 
common stock and 100 shares of preferred stock. A holds 60 shares of 
each (common and preferred) and A's child, B, holds 40 shares of common 
stock. Z holds the balance of its own preferred stock, 30 shares as part 
of a common trust fund it maintains and 10 shares permanently set aside 
to satisfy a deferred obligation. For purposes of section 2701, A holds 
60 shares of common stock and 66 shares of preferred stock in Z, 60 
shares of each class directly and 6 shares of preferred stock indirectly 
(60 percent of the 10 shares set aside to fund the deferred obligation).
    Example 3. An irrevocable trust holds a 10-percent general 
partnership interest in Partnership Q. One-half of the trust income is 
required to be distributed to O Charity. The other one-half of the 
income is to be distributed to D during D's life and thereafter to E for 
such time as E survives D. D holds one-half of the trust's interest in Q 
by reason of D's present right to receive one-half of the trust's 
income, and E holds one-half of the trust's interest in Q by reason of 
E's future right to receive one-half of the trust's income. 
Nevertheless, no family member is treated as holding more than one-half 
of the trust's interest in Q because at no time will either D or E 
actually hold, in the aggregate, any right with respect to income or 
corpus greater than one-half.
    Example 4. An irrevocable trust holds a 10-percent general 
partnership interest in partnership M. One-half of the trust income is 
to be paid to D for D's life. The remaining income may, in the trustee's 
discretion, be accumulated or paid to or for the benefit of a class that 
includes D's child F, in such amounts as the trustee determines. On the 
death of the survivor of D and F, the trust corpus is required to be 
distributed to O Charity. The trust's interest in M is held by the 
trust's beneficiaries to the extent that present and future income or 
corpus may be distributed to them. Accordingly, D holds one-half of the 
trust's interest in M because D is entitled to receive one-half of the 
trust income currently. F holds the entire value of the interest because 
F is a member of the class eligible to receive the entire trust income 
for such time as F survives D. See paragraph (a)(5) of this section for 
rules applicable in the case of multiple attribution.
    Example 5. The facts are the same as in Example 4, except that all 
the income is required to be paid to O Charity for the trust's initial 
year. The result is the same as in Example 4.

[T.D. 8395, 57 FR 4263, Feb. 4, 1992]



Sec. 25.2701-7  Separate interests.

    The Secretary may, by regulation, revenue ruling, notice, or other 
document of general application, prescribe rules under which an 
applicable retained interest is treated as two or more separate 
interests for purposes of section 2701. In addition, the Commissioner 
may, by ruling issued to a taxpayer upon request, treat any applicable 
retained interest as two or more

[[Page 690]]

separate interests as may be necessary and appropriate to carry out the 
purposes of section 2701.

[T.D. 8395, 57 FR 4264, Feb. 4, 1992]



Sec. 25.2701-8  Effective dates.

    Sections 25.2701-1 through 25.2701-4 and Sec. Sec. 25.2701-6 and 
25.2701-7 are effective as of January 28, 1992. For transfers made prior 
to January 28, 1992, taxpayers may rely on any reasonable interpretation 
of the statutory provisions. For these purposes, the provisions of the 
proposed regulations and the final regulations are considered a 
reasonable interpretation of the statutory provisions.

[T.D. 8395, 57 FR 4264, Feb. 4, 1992]



Sec. 25.2702-0  Table of contents.

    This section lists the major paragraphs contained in Sec. Sec. 
25.2702-1 through 25.2702-7.

Sec. 25.2702-1 Special valuation rules in the case of transfers of 
interests in trust.
    (a) Scope of section 2702.
    (b) Effect of section 2702.
    (c) Exceptions to section 2702.
    (1) Incomplete gift.
    (2) Personal residence trust.
    (3) Charitable remainder trust.
    (4) Pooled income fund.
    (5) Charitable lead trust.
    (6) Certain assignments of remainder interests.
    (7) Certain property settlements.
Sec. 25.2702-2 Definitions and valuation rules.
    (a) Definitions.
    (1) Member of the family.
    (2) Transfer in trust.
    (3) Retained.
    (4) Interest.
    (5) Holder.
    (6) Qualified interest.
    (7) Qualified annuity interest.
    (8) Qualified unitrust interest.
    (9) Qualified remainder interest.
    (10) Governing instrument.
    (b) Valuation of retained interests.
    (1) In general.
    (2) Qualified interest.
    (c) Valuation of a term interest in certain tangible property.
    (1) In general.
    (2) Tangible property subject to rule.
    (3) Evidence of value of property.
    (4) Conversion of property.
    (5) Additions or improvements to property.
    (d) Examples.
Sec. 25.2702-3 Qualified interests.
    (a) In general.
    (b) Special rules for qualified annuity interests.
    (1) Payment of annuity amount.
    (2) Incorrect valuations of trust property.
    (3) Computation of annuity amount in certain circumstances.
    (4) Additional contributions prohibited.
    (c) Special rules for qualified unitrust interests.
    (1) Payment of unitrust amount.
    (2) Incorrect valuations of trust property.
    (3) Computation of unitrust amount in certain circumstances.
    (d) Requirements applicable to qualified annuity interests and 
qualified unitrust interests.
    (1) In general.
    (2) Contingencies.
    (3) Amounts payable to other persons.
    (4) Term of the annuity or unitrust interest.
    (5) Commutation.
    (6) Use of debt obligations to satisfy the annuity or unitrust 
payment obligation.
    (e) Examples.
    (f) Qualified remainder interest.
    (1) Requirements.
    (2) Remainder interest.
    (3) Examples.
Sec. 25.2702-4 Certain property treated as held in trust.
    (a) In general.
    (b) Leases.
    (c) Joint purchases.
    (d) Examples.
Sec. 25.2702-5 Personal residence trusts.
    (a) In general.
    (b) Personal residence trust.
    (1) In general.
    (2) Personal residence.
    (3) Qualified proceeds.
    (c) Qualified personal residence trust.
    (1) In genera1.
    (2) Personal residence.
    (3) Income of the trust.
    (4) Distributions from the trust to other persons.
    (5) Assets of the trust.
    (6) Commutation.
    (7) Cessation of use as a personal residence.
    (8) Disposition of trust assets on cessation as qualified personal 
residence trust.
    (d) Examples.
Sec. 25.2702-6 Reduction in taxable gifts.
    (a) Transfers of retained interests in trust.
    (1) Inter vivos transfers.
    (2) Testamentary transfers.
    (3) Gift splitting.
    (b) Amount of reduction.
    (1) In general.
    (2) Treatment of annual exclusion.
    (3) Overlap with section 2001.
    (c) Examples.
Sec. 25.2702-7 Effective dates.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 9181, 70 FR 9223, Feb. 25, 2005]

[[Page 691]]



Sec. 25.2702-1  Special valuation rules in the case of transfers of
interests in trust.

    (a) Scope of section 2702. Section 2702 provides special rules to 
determine the amount of the gift when an individual makes a transfer in 
trust to (or for the benefit of) a member of the individual's family and 
the individual or an applicable family member retains an interest in the 
trust. Section 25.2702-4 treats certain transfers of property as 
transfers in trust. Certain transfers, including transfers to a personal 
residence trust, are not subject to section 2702. See paragraph (c) of 
this section. Member of the family is defined in Sec. 25.2702-2(a)(1). 
Applicable family member is defined in Sec. 25.2701-1(d)(2).
    (b) Effect of section 2702. If section 2702 applies to a transfer, 
the value of any interest in the trust retained by the transferor or any 
applicable family member is determined under Sec. 25.2702-2(b). The 
amount of the gift, if any, is then determined by subtracting the value 
of the interests retained by the transferor or any applicable family 
member from the value of the transferred property. If the retained 
interest is not a qualified interest (as defined in Sec. 25.2702-3), 
the retained interest is generally valued at zero, and the amount of the 
gift is the entire value of the property.
    (c) Exceptions to section 2702. Section 2702 does not apply to the 
following transfers.
    (1) Incomplete gift. A transfer no portion of which would be treated 
as a completed gift without regard to any consideration received by the 
transferor. If a transfer is wholly incomplete as to an undivided 
fractional share of the property transferred (without regard to any 
consideration received by the transferor), for purposes of this 
paragraph the transfer is treated as incomplete as to that share.
    (2) Personal residence trust. A transfer in trust that meets the 
requirements of Sec. 25.2702-5.
    (3) Charitable remainder trust. (i) For transfers made on or after 
May 19, 1997, a transfer to a pooled income fund described in section 
642(c)(5); a transfer to a charitable remainder annuity trust described 
in section 664(d)(1); a transfer to a charitable remainder unitrust 
described in section 664(d)(2) if under the terms of the governing 
instrument the unitrust amount can be computed only under section 
664(d)(2)(A); and a transfer to a charitable remainder unitrust if under 
the terms of the governing instrument the unitrust amount can be 
computed under section 664(d)(2) and (3) and either there are only two 
consecutive noncharitable beneficial interests and the transferor holds 
the second of the two interests, or the only permissible recipients of 
the unitrust amount are the transferor, the transferor's U.S. citizen 
spouse, or both the transferor and the transferor's U.S. citizen spouse.
    (ii) For transfers made before May 19, 1997, a transfer in trust if 
the remainder interest in the trust qualifies for a deduction under 
section 2522.
    (4) Pooled income fund. A transfer of property to a pooled income 
fund (as defined in section 642(c)(5)).
    (5) Charitable lead trust. A transfer in trust if the only interest 
in the trust, other than the remainder interest or a qualified annuity 
or unitrust interest, is an interest that qualifies for deduction under 
section 2522.
    (6) Certain assignments of remainder interests. The assignment of a 
remainder interest if the only retained interest of the transferor or an 
applicable family member is as the permissible recipient of 
distributions of income in the sole discretion of an independent trustee 
(as defined in section 674(c)).
    (7) Certain property settlements. A transfer in trust if the 
transfer of an interest to a spouse is deemed to be for full and 
adequate consideration by reason of section 2516 (relating to certain 
property settlements) and the remaining interests in the trust are 
retained by the other spouse.
    (8) Transfer or assignment to a Qualified Domestic Trust. A transfer 
or assignment (as described in section 2056(d)(2)(B)) by a noncitizen 
surviving spouse of property to a Qualified Domestic Trust under the 
circumstances described in Sec. 20.2056A-4(b) of this chapter, where 
the surviving spouse retains an interest in the transferred property 
that is not a qualified interest and the

[[Page 692]]

transfer is not described in sections 2702(a)(3)(A)(ii) or 2702(c)(4).

[T.D. 8395, 57 FR 4265, Feb. 4, 1992, as amended by T.D. 8612, 60 FR 
43554, Aug. 22, 1995; T.D. 8791, 63 FR 68194, Dec. 10, 1998]



Sec. 25.2702-2  Definitions and valuation rules.

    (a) Definitions. The following definitions apply for purposes of 
section 2702 and the regulations thereunder.
    (1) Member of the family. With respect to any individual, member of 
the family means the individual's spouse, any ancestor or lineal 
descendant of the individual or the individual's spouse, any brother or 
sister of the individual, and any spouse of the foregoing.
    (2) Transfer in trust. A transfer in trust includes a transfer to a 
new or existing trust and an assignment of an interest in an existing 
trust. Transfer in trust does not include--
    (i) The exercise, release or lapse of a power of appointment over 
trust property that is not a transfer under chapter 12; or
    (ii) The execution of a qualified disclaimer (as defined in section 
2518).
    (3) Retained. Retained means held by the same individual both before 
and after the transfer in trust. In the case of the creation of a term 
interest, any interest in the property held by the transferor 
immediately after the transfer is treated as held both before and after 
the transfer.
    (4) Interest. An interest in trust includes a power with respect to 
a trust if the existence of the power would cause any portion of a 
transfer to be treated as an incomplete gift under chapter 12.
    (5) Holder. The holder is the person to whom the annuity or unitrust 
interest is payable during the fixed term of that interest. References 
to holder shall also include the estate of that person.
    (6) Qualified interest. Qualified interest means a qualified annuity 
interest, a qualified unitrust interest, or a qualified remainder 
interest. If a transferor retains a power to revoke a qualified annuity 
interest or qualified unitrust interest of the transferor's spouse, then 
the revocable qualified annuity or unitrust interest of the transferor's 
spouse is treated as a retained qualified interest of the transferor. In 
order for the transferor to be treated as having retained a qualified 
interest under the preceding sentence, the interest of the transferor's 
spouse (the successor holder) must be an interest that meets the 
requirements of a qualified annuity interest in accordance with Sec. 
25.2702-3(b) and (d), or a qualified unitrust interest in accordance 
with Sec. 25.2702-3(c) and (d), but for the transferor's retained power 
to revoke the interest.
    (7) Qualified annuity interest. Qualified annuity interest means an 
interest that meets all the requirements of Sec. 25.2702-3(b) and (d).
    (8) Qualified unitrust interest. Qualified unitrust interest means 
an interest that meets all the requirements of Sec. 25.2702-3(c) and 
(d).
    (9) Qualified remainder interest. Qualified remainder interest means 
an interest that meets all the requirements of Sec. 25.2702-3(f).
    (10) Governing instrument. Governing instrument means the instrument 
or instruments creating and governing the operation of the trust 
arrangement.
    (b) Valuation of retained interests--(1) In general. Except as 
provided in paragraphs (b)(2) and (c) of this section, the value of any 
interest retained by the transferor or an applicable family member is 
zero.
    (2) Qualified interest. The value of a qualified annuity interest 
and a qualified remainder interest following a qualified annuity 
interest are determined under section 7520. The value of a qualified 
unitrust interest and a qualified remainder interest following a 
qualified unitrust interest are determined as if they were interests 
described in section 664.
    (c) Valuation of a term interest in certain tangible property--(1) 
In general. If section 2702 applies to a transfer in trust of tangible 
property described in paragraph (c)(2) of this section (``tangible 
property''), the value of a retained term interest (other than a 
qualified interest) is not determined under section 7520 but is the 
amount the transferor establishes as the amount a willing buyer would 
pay a willing seller for the interest, each having reasonable knowledge 
of the relevant facts and neither being under any compulsion to buy or 
sell. If the

[[Page 693]]

transferor cannot reasonably establish the value of the term interest 
pursuant to this paragraph (c)(1), the interest is valued at zero.
    (2) Tangible property subject to rule--(i) In general. Except as 
provided in paragraph (c)(2)(ii) of this section, paragraph (c)(1) of 
this section applies only to tangible property--
    (A) For which no deduction for depreciation or depletion would be 
allowable if the property were used in a trade or business or held for 
the production of income; and
    (B) As to which the failure to exercise any rights under the term 
interest would not increase the value of the property passing at the end 
of the term interest.
    (ii) Exception for de minimis amounts of depreciable property. In 
determining whether property meets the requirements of this paragraph 
(c)(2) at the time of the transfer in trust, improvements that would 
otherwise cause the property not to qualify are ignored if the fair 
market value of the improvements, in the aggregate, do not exceed 5 
percent of the fair market value of the entire property.
    (3) Evidence of value of property. The best evidence of the value of 
any term interest to which this paragraph (c) applies is actual sales or 
rentals that are comparable both as to the nature and character of the 
property and the duration of the term interest. Little weight is 
accorded appraisals in the absence of such evidence. Amounts determined 
under section 7520 are not evidence of what a willing buyer would pay a 
willing seller for the interest.
    (4) Conversion of property--(i) In general. Except as provided in 
paragraph (c)(4)(iii) of this section, if a term interest in property is 
valued under paragraph (c)(1) of this section, and during the term the 
property is converted into property a term interest in which would not 
qualify for valuation under paragraph (c)(1) of this section, the 
conversion is treated as a transfer for no consideration for purposes of 
chapter 12 of the value of the unexpired portion of the term interest.
    (ii) Value of unexpired portion of term interest. For purposes of 
paragraph (c)(4)(i) of this section, the value of the unexpired portion 
of a term interest is the amount that bears the same relation to the 
value of the term interest as of the date of conversion (determined 
under section 7520 using the rate in effect under section 7520 on the 
date of the original transfer and the fair market value of the property 
as of the date of the original transfer) as the value of the term 
interest as of the date of the original transfer (determined under 
paragraph (c)(1) of this section) bears to the value of the term 
interest as of the date of the original transfer (determined under 
section 7520).
    (iii) Conversion to qualified annuity interest. The conversion of 
tangible property previously valued under paragraph (c)(1) of this 
section into property a term interest in which would not qualify for 
valuation under paragraph (c)(1) of this section is not a transfer of 
the value of the unexpired portion of the term interest if the interest 
thereafter meets the requirements of a qualified annuity interest. The 
rules of Sec. 25.2702-5(d)(8) (including governing instrument 
requirements) apply for purposes of determining the amount of the 
annuity payment required to be made and the determination of whether the 
interest meets the requirements of a qualified annuity interest.
    (5) Additions or improvements to property--(i) Additions or 
improvements substantially affecting nature of property. If an addition 
or improvement is made to property a term interest in which was valued 
under paragraph (c)(1) of this section, and the addition or improvement 
affects the nature of the property to such an extent that the property 
would not be treated as property meeting the requirements of paragraph 
(c)(2) of this section if the property had included the addition or 
improvement at the time it was transferred, the entire property is 
deemed, for purposes of paragraph (c)(4) of this section, to convert 
(effective as of the date the addition or improvement is commenced) into 
property a term interest in which would not qualify for valuation under 
paragraph (c)(1) of this section.
    (ii) Other additions or improvements. If an addition or improvement 
is made to property, a term interest in which was valued under paragraph 
(c)(1) of this

[[Page 694]]

section, and the addition or improvement does not affect the nature of 
the property to such an extent that the property would not be treated as 
property meeting the requirements of paragraph (c)(2) of this section if 
the property had included the addition or improvement at the time it was 
transferred, the addition or improvement is treated as an additional 
transfer (effective as of the date the addition or improvement is 
commenced) subject to Sec. 25.2702-2(b)(1).
    (d) Examples. (1) The following examples illustrate the rules of 
Sec. 25.2702-1 and Sec. 25.2702-2. Each example assumes that all 
applicable requirements of those sections not specifically described in 
the example are met.

    Example 1. A transfers property to an irrevocable trust, retaining 
the right to receive the income of the trust for 10 years. On the 
expiration of the 10-year term, the trust is to terminate and the trust 
corpus is to be paid to A's child. However, if A dies during the 10-year 
term, the entire trust corpus is to be paid to A's estate. Each retained 
interest is valued at zero because it is not a qualified interest. Thus, 
the amount of A's gift is the fair market value of the property 
transferred to the trust.
    Example 2. A transfers property to an irrevocable trust, retaining a 
10-year annuity interest that meets the requirements set forth in Sec. 
25.2702-3 for a qualified annuity interest. Upon expiration of the 10-
year term, the trust is to terminate and the trust corpus is to be paid 
to A's child. The amount of A's gift is the fair market value of the 
property transferred to the trust less the value of the retained 
qualified annuity interest determined under section 7520.
    Example 3. D transfers property to an irrevocable trust under which 
the income is payable to D's spouse for life. Upon the death of D's 
spouse, the trust is to terminate and the trust corpus is to be paid to 
D's child. D retains no interest in the trust. Although the spouse is an 
applicable family member of D under section 2702, the spouse has not 
retained an interest in the trust because the spouse did not hold the 
interest both before and after the transfer. Section 2702 does not apply 
because neither the transferor nor an applicable family member has 
retained an interest in the trust. The result is the same whether or not 
D elects to treat the transfer as a transfer of qualified terminable 
interest property under section 2056(b)(7).
    Example 4. A transfers property to an irrevocable trust, under which 
the income is to be paid to A for life. Upon termination of the trust, 
the trust corpus is to be distributed to A's child. A also retains 
certain powers over principal that cause the transfer to be wholly 
incomplete for federal gift tax purposes. Section 2702 does not apply 
because no portion of the transfer would be treated as a completed gift.
    Example 5. The facts are the same as in Example 4, except that the 
trust is divided into separate fractional shares and A's retained powers 
apply to only one of the shares. Section 2702 applies except with 
respect to the share of the trust as to which A's retained powers cause 
the transfer to be an incomplete gift.

    (2) The following facts apply for Examples 6 through 8 (examples 
illustrating Sec. 25.2702-2(c)--tangible property exception):

    Facts. A transfers a painting having a fair market value of 
$2,000,000 to A's child, B, retaining the use of the painting for 10 
years. The painting does not possess an ascertainable useful life. 
Assume that the painting would not be depreciable if it were used in a 
trade or business or held for the production of income. Assume that the 
value of A's term interest, determined under section 7520, is 
$1,220,000, and that A establishes that a willing buyer of A's interest 
would pay $500,000 for the interest.
    Example 6. A's term interest is not a qualified interest under Sec. 
25.2702-3. However, because of the nature of the property, A's failure 
to exercise A's rights with regard to the painting would not be expected 
to cause the value of the painting to be higher than it would otherwise 
be at the time it passes to B. Accordingly, A's interest is valued under 
Sec. 25.2702-2(c)(1) at $500,000. The amount of A's gift is $1,500,000, 
the difference between the fair market value of the painting and the 
amount determined under Sec. 25.2702-2(c)(1).
    Example 7. Assume that the only evidence produced by A to establish 
the value of A's 10-year term interest is the amount paid by a museum 
for the right to use a comparable painting for 1 year. A asserts that 
the value of the 10-year term is 10 times the value of the 1-year term. 
A has not established the value of the 10-year term interest because a 
series of short-term rentals the aggregate duration of which equals the 
duration of the actual term interest does not establish what a willing 
buyer would pay a willing seller for the 10-year term interest. However, 
the value of the 10-year term interest is not less than the value of the 
1-year term because it can be assumed that a willing buyer would pay no 
less for a 10-year term interest than a 1-year term interest.
    Example 8. Assume that after 24 months A and B sell the painting for 
$2,000,000 and invest the proceeds in a portfolio of securities. A 
continues to hold an income interest in the securities for the duration 
of the 10-year term. Under Sec. 25.2702-2(c)(4) the conversion of

[[Page 695]]

the painting into a type of property a term interest in which would not 
qualify for valuation under Sec. 25.2702-2(c)(1) is treated as a 
transfer by A of the value of the unexpired portion of A's original term 
interest, unless the property is thereafter held in a trust meeting the 
requirements of a qualified annuity interest. Assume that the value of 
A's remaining term interest in $2,000,000 (determined under section 7520 
using the section 7520 rate in effect on the date of the original 
transfer) is $1,060,000. The value of the unexpired portion of A's 
interest is $434,426, the amount that bears the same relation to 
$1,060,000 as $500,000 (the value of A's interest as of the date of the 
original transfer determined under paragraph (c)(1) of this section) 
bears to $1,220,000 (the value of A's interest as of the date of the 
original transfer determined under section 7520).

[T.D. 8395, 57 FR 4265, Feb. 4, 1992, as amended by T.D. 9181, 70 FR 
9223, Feb. 25, 2005]



Sec. 25.2702-3  Qualified interests.

    (a) In general. This section provides rules for determining if an 
interest is a qualified annuity interest, a qualified unitrust interest, 
or a qualified remainder interest.
    (b) Special rules for qualified annuity interests. An interest is a 
qualified annuity interest only if it meets the requirements of this 
paragraph and paragraph (d) of this section.
    (1) Payment of annuity amount--(i) In general. A qualified annuity 
interest is an irrevocable right to receive a fixed amount. The annuity 
amount must be payable to (or for the benefit of) the holder of the 
annuity interest at least annually. A right of withdrawal, whether or 
not cumulative, is not a qualified annuity interest. Issuance of a note, 
other debt instrument, option, or other similar financial arrangement, 
directly or indirectly, in satisfaction of the annuity amount does not 
constitute payment of the annuity amount.
    (ii) Fixed amount. A fixed amount means--
    (A) A stated dollar amount payable periodically, but not less 
frequently than annually, but only to the extent the amount does not 
exceed 120 percent of the stated dollar amount payable in the preceding 
year; or
    (B) A fixed fraction or percentage of the initial fair market value 
of the property transferred to the trust, as finally determined for 
federal tax purposes, payable periodically but not less frequently than 
annually, but only to the extent the fraction or percentage does not 
exceed 120 percent of the fixed fraction or percentage payable in the 
preceding year.
    (iii) Income in excess of the annuity amount. An annuity interest 
does not fail to be a qualified annuity interest merely because the 
trust permits income in excess of the amount required to pay the annuity 
amount to be paid to or for the benefit of the holder of the qualified 
annuity interest. Nevertheless, the right to receive the excess income 
is not a qualified interest and is not taken into account in valuing the 
qualified annuity interest.
    (2) Incorrect valuations of trust property. If the annuity is stated 
in terms of a fraction or percentage of the initial fair market value of 
the trust property, the governing instrument must contain provisions 
meeting the requirements of Sec. 1.664-2(a)(1)(iii) of this chapter 
(relating to adjustments for any incorrect determination of the fair 
market value of the property in the trust).
    (3) Period for payment of annuity amount. The annuity amount may be 
payable based on either the anniversary date of the creation of the 
trust or the taxable year of the trust. In either situation, the annuity 
amount may be paid annually or more frequently, such as semi-annually, 
quarterly, or monthly. If the payment is made based on the anniversary 
date, proration of the annuity amount is required only if the last 
period during which the annuity is payable to the grantor is a period of 
less than 12 months. If the payment is made based on the taxable year, 
proration of the annuity amount is required for each short taxable year 
of the trust during the grantor's term. The prorated amount is the 
annual annuity amount multiplied by a fraction, the numerator of which 
is the number of days in the short period and the denominator of which 
is 365 (366 if February 29 is a day included in the numerator).
    (4) Payment of the annuity amount in certain circumstances. An 
annuity amount payable based on the anniversary date of the creation of 
the trust must be paid no later than 105 days

[[Page 696]]

after the anniversary date. An annuity amount payable based on the 
taxable year of the trust may be paid after the close of the taxable 
year, provided the payment is made no later than the date by which the 
trustee is required to file the Federal income tax return of the trust 
for the taxable year (without regard to extensions). If the trustee 
reports for the taxable year pursuant to Sec. 1.671-4(b) of this 
chapter, the annuity payment must be made no later than the date by 
which the trustee would have been required to file the Federal income 
tax return of the trust for the taxable year (without regard to 
extensions) had the trustee reported pursuant to Sec. 1.671-4(a) of 
this chapter.
    (5) Additional contributions prohibited. The governing instrument 
must prohibit additional contributions to the trust.
    (c) Special rules for qualified unitrust interests. An interest is a 
qualified unitrust interest only if it meets the requirements of this 
paragraph and paragraph (d) of this section.
    (1) Payment of unitrust amount--(i) In general. A qualified unitrust 
interest is an irrevocable right to receive payment periodically, but 
not less frequently than annually, of a fixed percentage of the net fair 
market value of the trust assets, determined annually. For rules 
relating to computation of the net fair market value of the trust assets 
see Sec. 25.2522(c)-3(c)(2)(vii). The unitrust amount must be payable 
to (or for the benefit of) the holder of the unitrust interest at least 
annually. A right of withdrawal, whether or not cumulative, is not a 
qualified unitrust interest. Issuance of a note, other debt instrument, 
option, or other similar financial arrangement, directly or indirectly, 
in satisfaction of the unitrust amount does not constitute payment of 
the unitrust amount.
    (ii) Fixed percentage. A fixed percentage is a fraction or 
percentage of the net fair market value of the trust assets, determined 
annually, payable periodically but not less frequently than annually, 
but only to the extent the fraction or percentage does not exceed 120 
percent of the fixed fraction or percentage payable in the preceding 
year.
    (iii) Income in excess of unitrust amount. A unitrust interest does 
not fail to be a qualified unitrust interest merely because the trust 
permits income in excess of the amount required to pay the unitrust 
amount to be paid to or for the benefit of the holder of the qualified 
unitrust interest. Nevertheless, the right to receive the excess income 
is not a qualified interest and is not taken into account in valuing the 
qualified unitrust interest.
    (2) Incorrect valuations of trust property. The governing instrument 
must contain provisions meeting the requirements of Sec. 1.664-
3(a)(1)(iii) of this chapter (relating to the incorrect determination of 
the fair market value of the property in the trust).
    (3) Period for payment of unitrust amount. The unitrust amount may 
be payable based on either the anniversary date of the creation of the 
trust or the taxable year of the trust. In either situation, the 
unitrust amount may be paid annually or more frequently, such as semi-
annually, quarterly, or monthly. If the payment is made based on the 
anniversary date, proration of the unitrust amount is required only if 
the last period during which the annuity is payable to the grantor is a 
period of less than 12 months. If the payment is made based on the 
taxable year, proration of the unitrust amount is required for each 
short taxable year of the trust during the grantor's term. The prorated 
amount is the annual unitrust amount multiplied by a fraction, the 
numerator of which is the number of days in the short period and the 
denominator of which is 365 (366 if February 29 is a day included in the 
numerator).
    (4) Payment of the unitrust amount in certain circumstances. A 
unitrust amount payable based on the anniversary date of the creation of 
the trust must be paid no later than 105 days after the anniversary 
date. A unitrust amount payable based on the taxable year of the trust 
may be paid after the close of the taxable year, provided the payment is 
made no later than the date by which the trustee is required to file the 
Federal income tax return of the trust for the taxable year (without 
regard to extensions). If the trustee reports for the taxable year 
pursuant to Sec. 1.671-4(b) of this chapter, the unitrust payment must 
be made no later than

[[Page 697]]

the date by which the trustee would have been required to file the 
Federal income tax return of the trust for the taxable year (without 
regard to extensions) had the trustee reported pursuant to Sec. 1.671-
4(a) of this chapter.
    (d) Requirements applicable to qualified annuity interests and 
qualified unitrust interests--(1) In general. To be a qualified annuity 
or unitrust interest, an interest must be a qualified annuity interest 
in every respect or a qualified unitrust interest in every respect. For 
example, if the interest consists of the right to receive each year a 
payment equal to the lesser of a fixed amount of the initial trust 
assets or a fixed percentage of the annual value of the trust assets, 
the interest is not a qualified interest. If, however, the interest 
consists of the right to receive each year a payment equal to the 
greater of a stated dollar amount or a fixed percentage of the initial 
trust assets or a fixed percentage of the annual value of the trust 
assets, the interest is a qualified interest that is valued at the 
greater of the two values. To be a qualified interest, the interest must 
meet the definition of and function exclusively as a qualified interest 
from the creation of the trust.
    (2) Contingencies. A holder's qualified interest must be payable in 
any event to or for the benefit of the holder for the fixed term of that 
interest. Thus, payment of the interest cannot be subject to any 
contingency other than either the survival of the holder until the 
commencement, or throughout the term, of that holder's interest, or, in 
the case of a revocable interest described in Sec. 25.2702-2(a)(6), the 
transferor's right to revoke the qualified interest of that transferor's 
spouse.
    (3) Amounts payable to other persons. The governing instrument must 
prohibit distributions from the trust to or for the benefit of any 
person other than the holder of the qualified annuity or unitrust 
interest during the term of the qualified interest.
    (4) Term of the annuity or unitrust interest. The governing 
instrument must fix the term of the annuity or unitrust and the term of 
the interest must be fixed and ascertainable at the creation of the 
trust. The term must be for the life of the holder, for a specified term 
of years, or for the shorter (but not the longer) of those periods. 
Successive term interests for the benefit of the same individual are 
treated as the same term interest.
    (5) Commutation. The governing instrument must prohibit commutation 
(prepayment) of the interest of the holder.
    (6) Use of debt obligations to satisfy the annuity or unitrust 
payment obligation--(i) In general. In the case of a trust created on or 
after September 20, 1999, the trust instrument must prohibit the trustee 
from issuing a note, other debt instrument, option, or other similar 
financial arrangement in satisfaction of the annuity or unitrust payment 
obligation.
    (ii) Special rule in the case of a trust created prior to September 
20, 1999. In the case of a trust created prior to September 20, 1999, 
the interest will be treated as a qualified interest under section 
2702(b) if--
    (A) Notes, other debt instruments, options, or similar financial 
arrangements are not issued after September 20, 1999, to satisfy the 
annuity or unitrust payment obligation; and
    (B) Any notes or any other debt instruments that were issued to 
satisfy the annual payment obligation on or prior to September 20, 1999, 
are paid in full by December 31, 1999, and any option or similar 
financial arrangement issued to satisfy the annual payment obligation is 
terminated by December 31, 1999, such that the grantor receives cash or 
other trust assets in satisfaction of the payment obligation. For 
purposes of the preceding sentence, an option will be considered 
terminated only if the grantor receives cash or other trust assets equal 
in value to the greater of the required annuity or unitrust payment plus 
interest computed under section 7520 of the Internal Revenue Code, or 
the fair market value of the option.
    (e) Examples. The following examples illustrate the rules of 
paragraphs (b), (c), and (d) of this section. Each example assumes that 
all applicable requirements for a qualified interest are met unless 
otherwise specifically stated.

    Example 1. A transfers property to an irrevocable trust, retaining 
the right to receive the greater of $10,000 or the trust income in

[[Page 698]]

each year for a term of 10-years. Upon expiration of the 10-year term, 
the trust is to terminate and the entire trust corpus is to be paid to 
A's child, provided that if A dies within the 10-year term the trust 
corpus is to be paid to A's estate. A's annual payment right is a 
qualified annuity interest to the extent of the right to receive $10,000 
per year for 10 years or until A's prior death, and is valued under 
section 7520 without regard to the right to receive any income in excess 
of $10,000 per year. The contingent reversion is valued at zero. The 
amount of A's gift is the fair market value of the property transferred 
to the trust less the value of the qualified annuity interest.
    Example 2. U transfers property to an irrevocable trust, retaining 
the right to receive $10,000 in each of years 1 through 3, $12,000 in 
each of years 4 through 6, and $15,000 in each of years 7 through 10. 
The interest is a qualified annuity interest to the extent of U's right 
to receive $10,000 per year in years 1 through 3, $12,000 in years 4 
through 6, $14,400 in year 7, and $15,000 in years 8 through 10, because 
those amounts represent the lower of the amount actually payable each 
year or an amount that does not exceed 120 percent of the stated dollar 
amount for the preceding year.
    Example 3. S transfers property to an irrevocable trust, retaining 
the right to receive $50,000 in each of years 1 through 3 and $10,000 in 
each of years 4 through 10. S's entire retained interest is a qualified 
annuity interest.
    Example 4. R transfers property to an irrevocable trust retaining 
the right to receive annually an amount equal to the lesser of 8 percent 
of the initial fair market value of the trust property or the trust 
income for the year. R's annual payment right is not a qualified annuity 
interest to any extent because R does not have the irrevocable right to 
receive a fixed amount for each year of the term.
    Example 5. A transfers property to an irrevocable trust, retaining 
the right to receive 5 percent of the net fair market value of the trust 
property, valued annually, for 10 years. The interest of A (and A's 
estate) to receive the unitrust amount for the specified term of 10 
years in all events is a qualified unitrust interest for a term of 10 
years.
    Example 6. The facts are the same as in Example 5, except that if A 
dies within the 10-year term the unitrust amount will be paid to A's 
estate for an additional 35 years. As in Example 5, the interest of A 
(and A's estate) to receive the unitrust amount for a specified term of 
10 years in all events is a qualified unitrust interest for a term of 10 
years. However, the right of A's estate to continue to receive the 
unitrust amount after the expiration of the 10-year term if A dies 
within that 10-year period is not fixed and ascertainable at the 
creation of the interest and is not a qualified unitrust interest.
    Example 7. B transfers property to an irrevocable trust retaining 
the right to receive annually an amount equal to 8 percent of the 
initial fair market value of the trust property for 10 years. Upon 
expiration of the 10-year term, the trust is to terminate and the entire 
trust corpus is to be paid to B's child. The governing instrument 
provides that income in excess of the annuity amount may be paid to B's 
child in the trustee's discretion. B's interest is not a qualified 
annuity interest to any extent because a person other than the 
individual holding the term interest may receive distributions from the 
trust during the term.
    Example 8. A transfers property to an irrevocable trust, retaining 
the right to receive an annuity equal to 6 percent of the initial net 
fair market value of the trust property for 10 years, or until A's prior 
death. At the expiration of the 10-year term, or on A's death prior to 
the expiration of the 10-year term, the annuity is to be paid to B, A's 
spouse, if then living, for 10 years or until B's prior death. A retains 
an inter vivos and testamentary power to revoke B's interest during the 
initial 10-year term. If not exercised by A during the initial 10-year 
term (whether during A's life or on A's death), A's right to revoke B's 
interest will lapse upon either A's death during the 10-year term, or 
the expiration of A's 10-year term (assuming A survives the term). Upon 
expiration of B's interest (or on the expiration of A's interest if A 
revokes B's interest or if B predeceases A), the trust terminates and 
the trust corpus is payable to A's child. Because A has made a completed 
gift of the remainder interest, the transfer of property to the trust is 
not incomplete as to all interests in the property and section 2702 
applies. A's annuity interest (A's right to receive the annuity for 10 
years, or until A's prior death) is a retained interest that is a 
qualified annuity interest under paragraphs (b) and (d) of this section. 
In addition, because A has retained the power to revoke B's interest, 
B's interest is treated as an interest retained by A for purposes of 
section 2702. B's successive annuity interest otherwise satisfies the 
requirements for a qualified interest contained in paragraph (d) of this 
section, but for A's power to revoke. The term of B's interest is 
specified in the governing instrument and is fixed and ascertainable at 
the creation of the trust, and B's right to receive the annuity is 
contingent only on B's survival, and A's power to revoke. Following the 
expiration of A's interest, the annuity is to be paid for a 10-year term 
or for B's (the successor holder's) life, whichever is shorter. 
Accordingly, A is treated as retaining B's revocable qualified annuity 
interest pursuant to Sec. 25.2702-2(a)(6). Because both A's interest 
and B's interest are treated as qualified interests retained by A,

[[Page 699]]

the value of the gift is the value of the property transferred to the 
trust less the value of both A's qualified interest and B's qualified 
interest (subject to A's power to revoke), each valued as a single-life 
annuity. If A survives the 10-year term without having revoked B's 
interest, then A's power to revoke lapses and A will make a completed 
gift to B at that time. Further, if A revokes B's interest prior to the 
commencement of that interest, A is treated as making an additional 
completed gift at that time to A's child. In either case, the amount of 
the gift would be the present value of B's interest determined under 
section 7520 and the applicable regulations, as of the date the 
revocation power lapses or the interest is revoked. See Sec. 25.2511-
2(f).
    Example 9. (i) A transfers property to an irrevocable trust, 
retaining the right to receive 6 percent of the initial net fair market 
value of the trust property for 10 years, or until A's prior death. If A 
survives the 10-year term, the trust terminates and the trust corpus is 
payable to A's child. If A dies prior to the expiration of the 10-year 
term, the annuity is payable to B, A's spouse, if then living, for the 
balance of the 10-year term, or until B's prior death. A retains the 
right to revoke B's interest. Upon expiration of B's interest (or upon 
A's death if A revokes B's interest or if B predeceases A), the trust 
terminates and the trust corpus is payable to A's child. As is the case 
in Example 8, A's retained annuity interest (A's right to receive the 
annuity for 10 years, or until A's prior death) is a qualified annuity 
interest under paragraphs (b) and (d) of this section. However, B's 
interest does not meet the requirements of paragraph (d) of this 
section. The term of B's annuity is not fixed and ascertainable at the 
creation of the trust, because it is not payable for the life of B, a 
specified term of years, or for the shorter of those periods. Rather, 
B's annuity is payable for an unspecified period that will depend upon 
the number of years left in the original term after A's death. Further, 
B's annuity is payable only if A dies prior to the expiration of the 10-
year term. Thus, payment of B's annuity is not dependent solely on B's 
survival, but rather is dependent on A's failure to survive.
    (ii) Accordingly, the amount of the gift is the fair market value of 
the property transferred to the trust reduced by the value of A's 
qualified interest (A's right to receive the stated annuity for 10 years 
or until A's prior death). B's interest is not a qualified interest and 
is thus valued at zero under section 2702.

    (f) Qualified remainder interest--(1) Requirements. An interest is a 
qualified remainder interest only if it meets all of the following 
requirements:
    (i) It is a qualified remainder interest in every respect.
    (ii) It meets the definition of and functions exclusively as a 
qualified interest from the creation of the interest.
    (iii) It is non-contingent. For this purpose, an interest is non-
contingent only if it is payable to the beneficiary or the beneficiary's 
estate in all events.
    (iv) All interests in the trust, other than non-contingent remainder 
interests, are qualified annuity interests or qualified unitrust 
interests. Thus, an interest is a qualified remainder interest only if 
the governing instrument does not permit payment of income in excess of 
the annuity or unitrust amount to the holder of the qualified annuity or 
unitrust interest.
    (2) Remainder interest. Remainder interest is the right to receive 
all or a fractional share of the trust property on termination of all or 
a fractional share of the trust. Remainder interest includes a 
reversion. A transferor's right to receive an amount that is a stated or 
pecuniary amount is not a remainder interest. Thus, the right to receive 
the original value of the trust corpus (or a fractional share) is not a 
remainder interest.
    (3) Examples. The following examples illustrate rules of this 
paragraph (f). Each example assumes that all applicable requirements of 
a qualified interest are met unless otherwise specifically stated.

    Example 1. A transfers property to an irrevocable trust. The income 
of the trust is payable to A's child for life. On the death of A's 
child, the trust is to terminate and the trust corpus is to be paid to 
A. A's remainder interest is not a qualified remainder interest because 
the interest of A's child is neither a qualified annuity interest nor a 
qualified unitrust interest.
    Example 2. The facts are the same as in Example 1, except that A's 
child has the right to receive the greater of the income of the trust or 
$10,000 per year. A's remainder interest is not a qualified remainder 
interest because the right of A's child to receive income in excess of 
the annuity amount is not a qualified interest.
    Example 3. A transfers property to an irrevocable trust. The trust 
provides a qualified annuity interest to A's child for 12 years. An 
amount equal to the initial value of the trust corpus is to be paid to A 
at the end of

[[Page 700]]

that period and the balance is to be paid to A's grandchild. A's 
interest is not a qualified remainder interest because the amount A is 
to receive is not a fractional share of the trust property.
    Example 4. U transfers property to an irrevocable trust. The trust 
provides a qualified unitrust interest to U's child for 15 years, at 
which time the trust terminates and the trust corpus is paid to U or, if 
U is not then living, to U's child. Because U's remainder interest is 
contingent, it is not a qualified remainder interest.

[T.D. 8395, 57 FR 4267, Feb. 4, 1992, as amended by T.D. 8536, 59 FR 
23157, May 5, 1994; T.D. 8633, 60 FR 66090, Dec. 21, 1995; T.D. 8899, 65 
FR 53588, Sept. 5, 2000; 65 FR 70792, Nov. 28, 2000; T.D. 9181, 70 FR 
9224, Feb. 25, 2005]



Sec. 25.2702-4  Certain property treated as held in trust.

    (a) In general. For purposes of section 2702, a transfer of an 
interest in property with respect to which there are one or more term 
interests is treated as a transfer in trust. A term interest is one of a 
series of successive (as contrasted with concurrent) interests. Thus, a 
life interest in property or an interest in property for a term of years 
is a term interest. However, a term interest does not include a fee 
interest in property merely because it is held as a tenant in common, a 
tenant by the entireties, or a joint tenant with right of survivorship.
    (b) Leases. A leasehold interest in property is not a term interest 
to the extent the lease is for full and adequate consideration (without 
regard to section 2702). A lease will be considered for full and 
adequate consideration if, under all the facts and circumstances as of 
the time the lease is entered into or extended, a good faith effort is 
made to determine the fair rental value of the property and the terms of 
the lease conform to the value so determined.
    (c) Joint purchases. Solely for purposes of section 2702, if an 
individual acquires a term interest in property and, in the same 
transaction or series of transactions, one or more members of the 
individual's family acquire an interest in the same property, the 
individual acquiring the term interest is treated as acquiring the 
entire property so acquired, and transferring to each of those family 
members the interests acquired by that family member in exchange for any 
consideration paid by that family member. For purposes of this paragraph 
(c), the amount of the individual's gift will not exceed the amount of 
consideration furnished by that individual for all interests in the 
property.
    (d) Examples. The following examples illustrate rules of this 
section:

    Example 1. A purchases a 20-year term interest in an apartment 
building and A's child purchases the remainder interest in the property. 
A and A's child each provide the portion of the purchase price equal to 
the value of their respective interests in the property determined under 
section 7520. Solely for purposes of section 2702, A is treated as 
acquiring the entire property and transferring the remainder interest to 
A's child in exchange for the portion of the purchase price provided by 
A's child. In determining the amount of A's gift, A's retained interest 
is valued at zero because it is not a qualified interest.
    Example 2. K holds rental real estate valued at $100,000. K sells a 
remainder interest in the property to K's child, retaining the right to 
receive the income from the property for 20 years. Assume the purchase 
price paid by K's child for the remainder interest is equal to the value 
of the interest determined under section 7520. K's retained interest is 
not a qualified interest and is therefore valued at zero. K has made a 
gift in the amount of $100,000 less the consideration received from K's 
child.
    Example 3. G and G's child each acquire a 50 percent undivided 
interest as tenants in common in an office building. The interests of G 
and G's child are not term interests to which section 2702 applies.
    Example 4. B purchases a life estate in property from R, B's 
grandparent, for $100 and B's child purchases the remainder interest for 
$50. Assume that the value of the property is $300, the value of the 
life estate determined under section 7520 is $250 and the value of the 
remainder interest is $50. B is treated as acquiring the entire property 
and transferring the remainder interest to B's child. However, the 
amount of B's gift is $100, the amount of consideration ($100) furnished 
by B for B's interest.
    Example 5. H and W enter into a written agreement relative to their 
marital and property rights that requires W to transfer property to an 
irrevocable trust, the terms of which provide that the income of the 
trust will be paid to H for 10 years. On the expiration of the 10-year 
term, the trust is to terminate and the trust corpus is to be paid to W. 
H and W divorce within two years after the agreement is entered into. 
Pursuant to section 2516, the transfer to H would otherwise be deemed to 
be for full and adequate consideration. Section 2702 does not apply to

[[Page 701]]

the acquisition of the term interest by H because no member of H's 
family acquired an interest in the property in the same transaction or 
series of transactions. The result would not be the same if, on the 
termination of H's interest in the trust, the trust corpus were 
distributable to the children of H and W rather than W.

[T.D. 8395, 57 FR 4269, Feb. 4, 1992]



Sec. 25.2702-5  Personal residence trusts.

    (a)(1) In general. Section 2702 does not apply to a transfer in 
trust meeting the requirements of this section. A transfer in trust 
meets the requirements of this section only if the trust is a personal 
residence trust (as defined in paragraph (b) of this section). A trust 
meeting the requirements of a qualified personal residence trust (as 
defined in paragraph (c) of this section) is treated as a personal 
residence trust. A trust of which the term holder is the grantor that 
otherwise meets the requirements of a personal residence trust (or a 
qualified personal residence trust) is not a personal residence trust 
(or a qualified personal residence trust) if, at the time of transfer, 
the term holder of the trust already holds term interests in two trusts 
that are personal residence trusts (or qualified personal residence 
trusts) of which the term holder was the grantor. For this purpose, 
trusts holding fractional interests in the same residence are treated as 
one trust.
    (2) Modification of trust. A trust that does not comply with one or 
more of the regulatory requirements under paragraph (b) or (c) of this 
section will, nonetheless, be treated as satisfying these requirements 
if the trust is modified, by judicial reformation (or nonjudicial 
reformation if effective under state law), to comply with the 
requirements. In the case of a trust created after December 31, 1996, 
the reformation must be commenced within 90 days after the due date 
(including extensions) for the filing of the gift tax return reporting 
the transfer of the residence under section 6075 and must be completed 
within a reasonable time after commencement. If the reformation is not 
completed by the due date (including extensions) for filing the gift tax 
return, the grantor or grantor's spouse must attach a statement to the 
gift tax return stating that the reformation has been commenced or will 
be commenced within the 90-day period. In the case of a trust created 
before January 1, 1997, the reformation must be commenced within 90 days 
after December 23, 1997 and must be completed within a reasonable time 
after commencement.
    (b) Personal residence trust--(1) In general. A personal residence 
trust is a trust the governing instrument of which prohibits the trust 
from holding, for the original duration of the term interest, any asset 
other than one residence to be used or held for use as a personal 
residence of the term holder and qualified proceeds (as defined in 
paragraph (b)(3) of this section). A residence is held for use as a 
personal residence of the term holder so long as the residence is not 
occupied by any other person (other than the spouse or a dependent of 
the term holder) and is available at all times for use by the term 
holder as a personal residence. A trust does not meet the requirements 
of this section if, during the original duration of the term interest, 
the residence may be sold or otherwise transferred by the trust or may 
be used for a purpose other than as a personal residence of the term 
holder. In addition, the trust does not meet the requirements of this 
section unless the governing instrument prohibits the trust from selling 
or transferring the residence, directly or indirectly, to the grantor, 
the grantor's spouse, or an entity controlled by the grantor or the 
grantor's spouse, at any time after the original duration of the term 
interest during which the trust is a grantor trust. For purposes of the 
preceding sentence, a sale or transfer to another grantor trust of the 
grantor or the grantor's spouse is considered a sale or transfer to the 
grantor or the grantor's spouse; however, a distribution (for no 
consideration) upon or after the expiration of the original duration of 
the term interest to another grantor trust of the grantor or the 
grantor's spouse pursuant to the express terms of the trust will not be 
considered a sale or transfer to the grantor or the grantor's spouse if 
such other grantor trust prohibits the sale or transfer of the property 
to the grantor, the grantor's spouse, or an entity controlled by the

[[Page 702]]

grantor or the grantor's spouse. In the event the grantor dies prior to 
the expiration of the original duration of the term interest, this 
paragraph (b)(1) does not apply to the distribution (for no 
consideration) of the residence to any person (including the grantor's 
estate) pursuant to the express terms of the trust or pursuant to the 
exercise of a power retained by the grantor under the terms of the 
trust. Further, this paragraph (b)(1) does not apply to any outright 
distribution (for no consideration) of the residence to the grantor's 
spouse after the expiration of the original duration of the term 
interest pursuant to the express terms of the trust. For purposes of 
this paragraph (b)(1), a grantor trust is a trust treated as owned in 
whole or in part by the grantor or the grantor's spouse pursuant to 
sections 671 through 678, and control is defined in Sec. 25.2701-
2(b)(5)(ii) and (iii). Expenses of the trust whether or not attributable 
to trust principal may be paid directly by the term holder of the trust.
    (2) Personal residence--(i) In general. For purposes of this 
paragraph (b), a personal residence of a term holder is either--
    (A) The principal residence of the term holder (within the meaning 
of section 1034);
    (B) One other residence of the term holder (within the meaning of 
section 280A(d)(1) but without regard to section 280A(d)(2)); or
    (C) An undivided fractional interest in either.
    (ii) Additional property. A personal residence may include 
appurtenant structures used by the term holder for residential purposes 
and adjacent land not in excess of that which is reasonably appropriate 
for residential purposes (taking into account the residence's size and 
location). The fact that a residence is subject to a mortgage does not 
affect its status as a personal residence. The term personal residence 
does not include any personal property (e.g., household furnishings).
    (iii) Use of residence. A residence is a personal residence only if 
its primary use is as a residence of the term holder when occupied by 
the term holder. The principal residence of the term holder will not 
fail to meet the requirements of the preceding sentence merely because a 
portion of the residence is used in an activity meeting the requirements 
of section 280A(c) (1) or (4) (relating to deductibility of expenses 
related to certain uses), provided that such use is secondary to use of 
the residence as a residence. A residence is not used primarily as a 
residence if it is used to provide transient lodging and substantial 
services are provided in connection with the provision of lodging (e.g. 
a hotel or a bed and breakfast). A residence is not a personal residence 
if, during any period not occupied by the term holder, its primary use 
is other than as a residence.
    (iv) Interests of spouses in the same residence. If spouses hold 
interests in the same residence (including community property 
interests), the spouses may transfer their interests in the residence 
(or a fractional portion of their interests in the residence) to the 
same personal residence trust, provided that the governing instrument 
prohibits any person other than one of the spouses from holding a term 
interest in the trust concurrently with the other spouse.
    (3) Qualified proceeds. Qualified proceeds means the proceeds 
payable as a result of damage to, or destruction or involuntary 
conversion (within the meaning of section 1033) of, the residence held 
by a personal residence trust, provided that the governing instrument 
requires that the proceeds (including any income thereon) be reinvested 
in a personal residence within two years from the date on which the 
proceeds are received.
    (c) Qualified personal residence trust--(1) In general. A qualified 
personal residence trust is a trust meeting all the requirements of this 
paragraph (c). These requirements must be met by provisions in the 
governing instrument, and these governing instrument provisions must by 
their terms continue in effect during the existence of any term interest 
in the trust.
    (2) Personal residence--(i) In general. For purposes of this 
paragraph (c), a personal residence of a term holder is either--
    (A) The principal residence of the term holder (within the meaning 
of section 1034);

[[Page 703]]

    (B) One other residence of the term holder (within the meaning of 
section 280A(d)(1) but without regard to section 280A(d)(2)); or
    (C) An undivided fractional interest in either.
    (ii) Additional property. A personal residence may include 
appurtenant structures used by the term holder for residential purposes 
and adjacent land not in excess of that which is reasonably appropriate 
for residential purposes (taking into account the residence's size and 
location). The fact that a residence is subject to a mortgage does not 
affect its status as a personal residence. The term personal residence 
does not include any personal property (e.g., household furnishings).
    (iii) Use of residence. A residence is a personal residence only if 
its primary use is as a residence of the term holder when occupied by 
the term holder. The principal residence of the term holder will not 
fail to meet the requirements of the preceding sentence merely because a 
portion of the residence is used in an activity meeting the requirements 
of section 280A(c) (1) or (4) (relating to deductibility of expenses 
related to certain uses), provided that such use is secondary to use of 
the residence as a residence. A residence is not used primarily as a 
residence if it is used to provide transient lodging and substantial 
services are provided in connection with the provision of lodging (e.g., 
a hotel or a bed and breakfast). A residence is not a personal residence 
if, during any period not occupied by the term holder, its primary use 
is other than as a residence. A residence is not a personal residence 
if, during any period not occupied by the term holder, its primary use 
is other than as a residence.
    (iv) Interests of spouses in the same residence. If spouses hold 
interests in the same residence (including community property 
interests), the spouses may transfer their interests in the residence 
(or a fractional portion of their interests in the residence) to the 
same qualified personal residence trust, provided that the governing 
instrument prohibits any person other than one of the spouses from 
holding a term interest in the trust concurrently with the other spouse.
    (3) Income of the trust. The governing instrument must require that 
any income of the trust be distributed to the term holder not less 
frequently than annually.
    (4) Distributions from the trust to other persons. The governing 
instrument must prohibit distributions of corpus to any beneficiary 
other than the transferor prior to the expiration of the retained term 
interest.
    (5) Assets of the trust--(i) In general. Except as otherwise 
provided in paragraphs (c)(5)(ii) and (c)(8) of this section, the 
governing instrument must prohibit the trust from holding, for the 
entire term of the trust, any asset other than one residence to be used 
or held for use (within the meaning of paragraph (c)(7)(i) of this 
section) as a personal residence of the term holder (the ``residence'').
    (ii) Assets other than personal residence. Except as otherwise 
provided, the governing instrument may permit a qualified personal 
residence trust to hold the following assets (in addition to the 
residence) in the amounts and in the manner described in this paragraph 
(c)(5)(ii):
    (A) Additions of cash for payment of expenses, etc.--(1) Additions. 
The governing instrument may permit additions of cash to the trust, and 
may permit the trust to hold additions of cash in a separate account, in 
an amount which, when added to the cash already held in the account for 
such purposes, does not exceed the amount required:
    (i) For payment of trust expenses (including mortgage payments) 
already incurred or reasonably expected to be paid by the trust within 
six months from the date the addition is made;
    (ii) For improvements to the residence to be paid by the trust 
within six months from the date the addition is made; and
    (iii) For purchase by the trust of the initial residence, within 
three months of the date the trust is created, provided that no addition 
may be made for this purpose, and the trust may not hold any such 
addition, unless the trustee has previously entered into a contract to 
purchase that residence; and
    (iv) For purchase by the trust of a residence to replace another 
residence,

[[Page 704]]

within three months of the date the addition is made, provided that no 
addition may be made for this purpose, and the trust may not hold any 
such addition, unless the trustee has previously entered into a contract 
to purchase that residence.
    (2) Distributions of excess cash. If the governing instrument 
permits additions of cash to the trust pursuant to paragraph 
(c)(5)(ii)(A)(1) of this section, the governing instrument must require 
that the trustee determine, not less frequently than quarterly, the 
amounts held by the trust for payment of expenses in excess of the 
amounts permitted by that paragraph and must require that those amounts 
be distributed immediately thereafter to the term holder. In addition, 
the governing instrument must require, upon termination of the term 
holder's interest in the trust, any amounts held by the trust for the 
purposes permitted by paragraph (c)(5)(ii)(A)(1) of this section that 
are not used to pay trust expenses due and payable on the date of 
termination (including expenses directly related to termination) be 
distributed outright to the term holder within 30 days of termination.
    (B) Improvements. The governing instrument may permit improvements 
to the residence to be added to the trust and may permit the trust to 
hold such improvements, provided that the residence, as improved, meets 
the requirements of a personal residence.
    (C) Sale proceeds. The governing instrument may permit the sale of 
the residence (except as set forth in paragraph (c)(9) of this section) 
and may permit the trust to hold proceeds from the sale of the 
residence, in a separate account.
    (D) Insurance and insurance proceeds. The governing instrument may 
permit the trust to hold one or more policies of insurance on the 
residence. In addition, the governing instrument may permit the trust to 
hold, in a separate account, proceeds of insurance payable to the trust 
as a result of damage to or destruction of the residence. For purposes 
of this paragraph, amounts (other than insurance proceeds payable to the 
trust as a result of damage to or destruction of the residence) received 
as a result of the involuntary conversion (within the meaning of section 
1033) of the residence are treated as proceeds of insurance.
    (6) Commutation. The governing instrument must prohibit commutation 
(prepayment) of the term holder's interest.
    (7) Cessation of use as a personal residence--(i) In general. The 
governing instrument must provide that a trust ceases to be a qualified 
personal residence trust if the residence ceases to be used or held for 
use as a personal residence of the term holder. A residence is held for 
use as a personal residence of the term holder so long as the residence 
is not occupied by any other person (other than the spouse or a 
dependent of the term holder) and is available at all times for use by 
the term holder as a personal residence. See Sec. 25.2702-5(c)(8) for 
rules governing disposition of assets of a trust as to which the trust 
has ceased to be a qualified personal residence trust.
    (ii) Sale of personal residence. The governing instrument must 
provide that the trust ceases to be a qualified personal residence trust 
upon sale of the residence if the governing instrument does not permit 
the trust to hold proceeds of sale of the residence pursuant to 
paragraph (c)(5)(ii)(C) of this section. If the governing instrument 
permits the trust to hold proceeds of sale pursuant to that paragraph, 
the governing instrument must provide that the trust ceases to be a 
qualified personal residence trust with respect to all proceeds of sale 
held by the trust not later than the earlier of--
    (A) The date that is two years after the date of sale;
    (B) The termination of the term holder's interest in the trust; or
    (C) The date on which a new residence is acquired by the trust.
    (iii) Damage to or destruction of personal residence--(A) In 
general. The governing instrument must provide that, if damage or 
destruction renders the residence unusable as a residence, the trust 
ceases to be a qualified personal residence trust on the date that is 
two years after the date of damage or destruction (or the date of 
termination of the term holder's interest in the trust, if earlier) 
unless, prior to such date--

[[Page 705]]

    (1) Replacement of or repairs to the residence are completed; or
    (2) A new residence is acquired by the trust.
    (B) Insurance proceeds. For purposes of this paragraph (C)(7)(iii), 
if the governing instrument permits the trust to hold proceeds of 
insurance received as a result of damage to or destruction of the 
residence pursuant to paragraph (c)(5)(ii)(D) of this section, the 
governing instrument must contain provisions similar to those required 
by paragraph (c)(7)(ii) of this section.
    (8) Disposition of trust assets on cessation as personal residence 
trust--(i) In general. The governing instrument must provide that, 
within 30 days after the date on which the trust has ceased to be a 
qualified personal residence trust with respect to certain assets, 
either--
    (A) The assets be distributed outright to the term holder;
    (B) The assets be converted to and held for the balance of the term 
holder's term in a separate share of the trust meeting the requirements 
of a qualified annuity interest; or
    (C) In the trustee's sole discretion, the trustee may elect to 
comply with either paragraph (c)(8)(i) (A) or (B) of this section 
pursuant to their terms.
    (ii) Requirements for conversion to a qualified annuity interest--
(A) Governing instrument requirements. For assets subject to this 
paragraph (c)(8) to be converted to and held as a qualified annuity 
interest, the governing instrument must contain all provisions required 
by Sec. 25.2702-3 with respect to a qualified annuity interest.
    (B) Effective date of annuity. The governing instrument must provide 
that the right of the term holder to receive the annuity amount begins 
on the date of sale of the residence, the date of damage to or 
destruction of the residence, or the date on which the residence ceases 
to be used or held for use as a personal residence, as the case may be 
(``the cessation date''). Notwithstanding the preceding sentence, the 
governing instrument may provide that the trustee may defer payment of 
any annuity amount otherwise payable after the cessation date until the 
date that is 30 days after the assets are converted to a qualified 
annuity interest under paragraph (c)(8)(i)(B) of this section (``the 
conversion date''); provided that any deferred payment must bear 
interest from the cessation date at a rate not less than the section 
7520 rate in effect on the cessation date. The governing instrument may 
permit the trustee to reduce aggregate deferred annuity payments by the 
amount of income actually distributed by the trust to the term holder 
during the deferral period.
    (C) Determination of annuity amount--(1) In general. The governing 
instrument must require that the annuity amount be no less than the 
amount determined under this paragraph (C).
    (2) Entire trust ceases to be a qualified personal residence trust. 
If, on the conversion date, the assets of the trust do not include a 
residence used or held for use as a personal residence, the annuity may 
not be less than an amount determined by dividing the lesser of the 
value of all interests retained by the term holder (as of the date of 
the original transfer or transfers) or the value of all the trust assets 
(as of the conversion date) by an annuity factor determined--
    (i) For the original term of the term holder's interest; and
    (ii) At the rate used in valuing the retained interest at the time 
of the original transfer.
    (3) Portion of trust continues as qualified personal residence 
trust. If, on the conversion date, the assets of the trust include a 
residence used or held for use as a personal residence, the annuity must 
not be less than the amount determined under paragraph (c)(8)(ii)(C)(2) 
of this section multiplied by a fraction. The numerator of the fraction 
is the excess of the fair market value of the trust assets on the 
conversion date over the fair market value of the assets as to which the 
trust continues as a qualified personal residence trust, and the 
denominator of the fraction is the fair market value of the trust assets 
on the conversion date.
    (9) Sale of residence to grantor, grantor's spouse, or entity 
controlled by grantor or grantor's spouse. The governing instrument must 
prohibit the trust from selling or transferring the residence, directly 
or indirectly, to the

[[Page 706]]

grantor, the grantor's spouse, or an entity controlled by the grantor or 
the grantor's spouse during the retained term interest of the trust, or 
at any time after the retained term interest that the trust is a grantor 
trust. For purposes of the preceding sentence, a sale or transfer to 
another grantor trust of the grantor or the grantor's spouse is 
considered a sale or transfer to the grantor or the grantor's spouse; 
however, a distribution (for no consideration) upon or after the 
expiration of the retained term interest to another grantor trust of the 
grantor or the grantor's spouse pursuant to the express terms of the 
trust will not be considered a sale or transfer to the grantor or the 
grantor's spouse if such other grantor trust prohibits the sale or 
transfer of the property to the grantor, the grantor's spouse, or an 
entity controlled by the grantor or the grantor's spouse. In the event 
the grantor dies prior to the expiration of the retained term interest, 
this paragraph (c)(9) does not apply to the distribution (for no 
consideration) of the residence to any person (including the grantor's 
estate) pursuant to the express terms of the trust or pursuant to the 
exercise of a power retained by the grantor under the terms of the 
trust. Further, this paragraph (c)(9) does not apply to an outright 
distribution (for no consideration) of the residence to the grantor's 
spouse after the expiration of the retained trust term pursuant to the 
express terms of the trust. For purposes of this paragraph (c)(9), a 
grantor trust is a trust treated as owned in whole or in part by the 
grantor or the grantor's spouse pursuant to sections 671 through 678, 
and control is defined in Sec. 25.2701-2(b)(5)(ii) and (iii).
    (d) Examples. The following examples illustrate rules of this 
section. Each example assumes that all applicable requirements of a 
personal residence trust (or qualified personal residence trust) are met 
unless otherwise stated.

    Example 1. C maintains C's principal place of business in one room 
of C's principal residence. The room meets the requirements of section 
280A(c)(1) for deductibility of expenses related to such use. The 
residence is a personal residence.
    Example 2. L owns a vacation condominium that L rents out for six 
months of the year, but which is treated as L's residence under section 
280A(d)(1) because L occupies it for at least 18 days per year. L 
provides no substantial services in connection with the rental of the 
condominium. L transfers the condominium to an irrevocable trust, the 
terms of which meet the requirements of a qualified personal residence 
trust. L retains the right to use the condominium during L's lifetime. 
The trust is a qualified personal residence trust.
    Example 3. W owns a 200-acre farm. The farm includes a house, barns, 
equipment buildings, a silo, and enclosures for confinement of farm 
animals. W transfers the farm to an irrevocable trust, retaining the use 
of the farm for 20 years, with the remainder to W's child. The trust is 
not a personal residence trust because the farm includes assets not 
meeting the requirements of a personal residence.
    Example 4. A transfers A's principal residence to an irrevocable 
trust, retaining the right to use the residence for a 20-year term. The 
governing instrument of the trust does not prohibit the trust from 
holding personal property. The trust is not a qualified personal 
residence trust.
    Example 5. T transfers a personal residence to a trust that meets 
the requirements of a qualified personal residence trust, retaining a 
term interest in the trust for 10 years. During the period of T's 
retained term interest, T is forced for health reasons to move to a 
nursing home. T's spouse continues to occupy the residence. If the 
residence is available at all times for T's use as a residence during 
the term (without regard to T's ability to actually use the residence), 
the residence continues to be held for T's use and the trust does not 
cease to be a qualified personal residence trust. The residence would 
cease to be held for use as a personal residence of T if the trustee 
rented the residence to an unrelated party, because the residence would 
no longer be available for T's use at all times.
    Example 6. T transfers T's personal residence to a trust that meets 
the requirements of a qualified personal residence trust, retaining the 
right to use the residence for 12 years. On the date the residence is 
transferred to the trust, the fair market value of the residence is 
$100,000. After 6 years, the trustee sells the residence, receiving net 
proceeds of $250,000, and invests the proceeds of sale in common stock. 
After an additional eighteen months, the common stock has paid $15,000 
in dividends and has a fair market value of $260,000. On that date, the 
trustee purchases a new residence for $200,000. On the purchase of the 
new residence, the trust ceases to be a qualified personal residence 
trust with respect to any amount not reinvested in the new residence. 
The governing instrument of the trust provides that the trustee, in the 
trustee's sole discretion, may elect either to distribute the excess 
proceeds

[[Page 707]]

or to convert the proceeds into a qualified annuity interest. The 
trustee elects the latter option. The amount of the annuity is the 
amount of the annuity that would be payable if no portion of the sale 
proceeds had been reinvested in a personal residence multiplied by a 
fraction. The numerator of the fraction is $60,000 (the amount remaining 
after reinvestment) and the denominator of the fraction is $260,000 (the 
fair market value of the trust assets on the conversion date). The 
obligation to pay the annuity commences on the date of sale, but payment 
of the annuity that otherwise would have been payable during the period 
between the date of sale and the date on which the trust ceased to be a 
qualified personal residence trust with respect to the excess proceeds 
may be deferred until 30 days after the date on which the new residence 
is purchased. Any amount deferred must bear compound interest from the 
date the annuity is payable at the section 7520 rate in effect on the 
date of sale. The $15,000 of income distributed to the term holder 
during that period may be used to reduce the annuity amount payable with 
respect to that period if the governing instrument so provides and thus 
reduce the amount on which compound interest is computed.

[T.D. 8395, 57 FR 4269, Feb. 4, 1992; T.D. 8395, 57 FR 11265, Apr. 2, 
1992, as amended by T.D. 8743, 62 FR 66988, Dec. 23, 1997]



Sec. 25.2702-6  Reduction in taxable gifts.

    (a) Transfers of retained interests in trust--(1) Inter vivos 
transfers. If an individual subsequently transfers by gift an interest 
in trust previously valued (when held by that individual) under Sec. 
25.2702-2 (b)(1) or (c), the individual is entitled to a reduction in 
aggregate taxable gifts. The amount of the reduction is determined under 
paragraph (b) of this section. Thus, for example, if an individual 
transferred property to an irrevocable trust, retaining an interest in 
the trust that was valued at zero under Sec. 25.2702-2(b)(1), and the 
individual later transfers the retained interest by gift, the individual 
is entitled to a reduction in aggregate taxable gifts on the subsequent 
transfer. For purposes of this section, aggregate taxable gifts means 
the aggregate sum of the individual's taxable gifts for the calendar 
year determined under section 2502(a)(1).
    (2) Testamentary transfers. If either--
    (i) A term interest in trust is included in an individual's gross 
estate solely by reason of section 2033, or
    (ii) A remainder interest in trust is included in an individual's 
gross estate,

and the interest was previously valued (when held by that individual) 
under Sec. 25.2702-2(b)(1) or (c), the individual's estate is entitled 
to a reduction in the individual's adjusted taxable gifts in computing 
the Federal estate tax payable under section 2001. The amount of the 
reduction is determined under paragraph (b) of this section.
    (3) Gift splitting on subsequent transfer. If an individual who is 
entitled to a reduction in aggregate taxable gifts (or adjusted taxable 
gifts) subsequently transfers the interest in a transfer treated as made 
one-half by the individual's spouse under section 2513, the individual 
may assign one-half of the amount of the reduction to the consenting 
spouse. The assignment must be attached to the Form 709 on which the 
consenting spouse reports the split gift.
    (b) Amount of reduction--(1) In general. The amount of the reduction 
in aggregate taxable gifts (or adjusted taxable gifts) is the lesser 
of--
    (i) The increase in the individual's taxable gifts resulting from 
the interest being valued at the time of the initial transfer under 
Sec. 25.2702-2(b)(1) or (c); or
    (ii) The increase in the individual's taxable gifts (or gross 
estate) resulting from the subsequent transfer of the interest.
    (2) Treatment of annual exclusion. For purposes of determining the 
amount under paragraph (b)(1)(ii) of this section, the exclusion under 
section 2503(b) applies first to transfers in that year other than the 
transfer of the interest previously valued under Sec. 25.2702-2(b)(1) 
or (c).
    (3) Overlap with section 2001. Notwithstanding paragraph (b)(1) of 
this section, the amount of the reduction is reduced to the extent 
section 2001 would apply to reduce the amount of an individual's 
adjusted taxable gifts with respect to the same interest to which 
paragraph (b)(1) of this section would otherwise apply.
    (c) Examples. The rules of this section are illustrated by the 
following examples. The following facts apply for Examples 1-4:


[[Page 708]]


    Facts. In 1992, X transferred property to an irrevocable trust 
retaining the right to receive the trust income for life. On the death 
of X, the trust is to terminate and the trust corpus is to be paid to 
X's child, C. X's income interest had a value under section 7520 of 
$40,000 at the time of the transfer; however, because X's retained 
interest was not a qualified interest, it was valued at zero under Sec. 
25.2702-2(b)(1) for purposes of determining the amount of X's gift. X's 
taxable gifts in 1992 were therefore increased by $40,000. In 1993, X 
transfers the income interest to C for no consideration.
    Example 1. Assume that the value under section 7520 of the income 
interest on the subsequent transfer to C is $30,000. If X makes no other 
gifts to C in 1993, X is entitled to a reduction in aggregate taxable 
gifts of $20,000, the lesser of the amount by which X's taxable gifts 
were increased as a result of the income interest being valued at zero 
on the initial transfer ($40,000) or the amount by which X's taxable 
gifts are increased as a result of the subsequent transfer of the income 
interest ($30,000 minus $10,000 annual exclusion).
    Example 2. Assume that in 1993, 4 months after X transferred the 
income interest to C, X transferred $5,000 cash to C. In determining the 
increase in taxable gifts occurring on the subsequent transfer, the 
annual exclusion under section 2503(b) is first applied to the cash 
gift. X is entitled to a reduction in aggregate taxable gifts of 
$25,000, the lesser of the amount by which X's taxable gifts were 
increased as a result of the income interest being valued at zero on the 
initial transfer ($40,000) or the amount by which X's taxable gifts are 
increased as a result of the subsequent transfer of the income interest 
($25,000 (($30,000+$5,000)-$10,000 annual exclusion).
    Example 3. Assume that the value under section 7520 of the income 
interest on the subsequent transfer to C is $55,000. X is entitled to 
reduce aggregate taxable gifts by $40,000, the lesser of the amount by 
which X's taxable gifts were increased as a result of the income 
interest being valued at zero on the initial transfer ($40,000) or the 
amount by which X's taxable gifts are increased as a result of the 
subsequent transfer of the income interest ($55,000 minus $10,000 annual 
exclusion = $45,000).
    Example 4. Assume that X and X's spouse, S, split the subsequent 
gift to C. X is entitled to assign one-half the reduction to S. If the 
assignment is made, each is entitled to reduce aggregate taxable gifts 
by $17,500, the lesser of their portion of the increase in taxable gifts 
on the initial transfer by reason of the application of section 2702 
($20,000) and their portion of the increase in taxable gifts on the 
subsequent transfer of the retained interest ($27,500-$10,000 annual 
exclusion).
    Example 5. In 1992, A transfers property to an irrevocable trust, 
retaining the right to receive the trust income for 10 years. On the 
expiration of the 10-year term, the trust is to terminate and the trust 
corpus is to be paid to A's child, B. Assume that A's term interest has 
a value under section 7520 of $20,000 at the time of the transfer; 
however, because A's retained interest was not a qualified interest, it 
was valued at zero under Sec. 25.2702-2(b)(1) for purposes of 
determining the amount of A's gift. Assume also that A and A's spouse, 
S, split the gift of the remainder interest under section 2513. In 1993, 
A transfers A's term interest to D, A's other child, for no 
consideration. A is entitled to reduce A's aggregate taxable gifts on 
the transfer. Assume that A and S also split the subsequent gift to D, 
and that A dies one month after making the subsequent transfer of the 
term interest and S dies six months later. The gift of the term interest 
is included in A's gross estate under section 2035(d)(2). To the extent 
S's taxable gifts are reduced pursuant to section 2001(e), S is entitled 
to no reduction in aggregate or adjusted taxable gifts under this 
section.
    Example 6. T transfers property to an irrevocable trust retaining 
the power to direct the distribution of trust income for 10 years among 
T's descendants in whatever shares T deems appropriate. On the 
expiration of the 10-year period, the trust corpus is to be paid in 
equal shares to T's children. T's transfer of the remainder interest is 
a completed gift. Because T's retained interest is not a qualified 
interest, it is valued at zero under Sec. 25.2702-2(b)(1) and the 
amount of T's gift is the fair market value of the property transferred 
to the trust. The distribution of income each year is not a transfer of 
a retained interest in trust. Therefore, T is not entitled to reduce 
aggregate taxable gifts as a result of the distributions of income from 
the trust.
    Example 7. The facts are the same as in Example 6, except that after 
3 years T exercises the right to direct the distribution of trust income 
by assigning the right to the income for the balance of the term to T's 
child, C. The exercise is a transfer of a retained interest in trust for 
purposes of this section. T is entitled to reduce aggregate taxable 
gifts by the lesser of the increase in taxable gifts resulting from the 
application of section 2702 to the initial transfer or the increase in 
taxable gifts resulting from the transfer of the retained interest in 
trust.
    Example 8. In 1992, V purchases an income interest for 10 years in 
property in the same transaction or series of transactions in which G, 
V's child, purchases the remainder interest in the same property. V dies 
in 1997 still holding the term interest, the value of which is 
includible in V's gross estate under section 2033. V's estate would be 
entitled to a reduction in adjusted taxable gifts in the

[[Page 709]]

amount determined under paragraph (b) of this section.

[T.D. 8395, 57 FR 4272, Feb. 4, 1992]



Sec. 25.2702-7  Effective dates.

    Except as provided in this section, Sec. Sec. 25.2702-1 through 
25.2702-6 apply as of January 28, 1992. With respect to transfers to 
which section 2702 applied made prior to January 28, 1992, taxpayers may 
rely on any reasonable interpretation of the statutory provisions. For 
these purposes, the provisions of the proposed regulations and the final 
regulations are considered a reasonable interpretation of the statutory 
provisions. The fourth through eighth sentences of Sec. 25.2702-5(b)(1) 
and Sec. 25.2702-5(c)(9) apply with respect to trusts created after May 
16, 1996. Section 25.2702-2(a)(5), the second and third sentences of 
Sec. 25.2702-2(a)(6), Sec. 25.2702-3(d)(2), the first two sentences of 
Sec. 25.2702-3(d)(4), the last sentence of Sec. 25.2702-3(e), Example 
5, the last two sentences of Sec. 25.2702-3(e), Example 6, and Sec. 
25.2702-3(e), Examples 8 and 9, apply for trusts created on or after 
July 26, 2004. However, the Internal Revenue Service will not challenge 
any prior application of the changes to Examples 5 and 6 in Sec. 
25.2702-3(e).

[T.D. 8395, 57 FR 4273, Feb. 4, 1992, as amended by T.D. 8743, 62 FR 
66989, Dec. 23, 1997; T.D. 9181, 70 FR 9224, Feb. 25, 2005]



Sec. 25.2703-1  Property subject to restrictive arrangements.

    (a) Disregard of rights or restrictions--(1) In general. For 
purposes of subtitle B (relating to estate, gift, and generation-
skipping transfer taxes), the value of any property is determined 
without regard to any right or restriction relating to the property.
    (2) Right or restriction. For purposes of this section, right or 
restriction means--
    (i) Any option, agreement, or other right to acquire or use the 
property at a price less than fair market value (determined without 
regard to the option, agreement, or right); or
    (ii) Any restriction on the right to sell or use the property.
    (3) Agreements, etc. containing rights or restrictions. A right or 
restriction may be contained in a partnership agreement, articles of 
incorporation, corporate bylaws, a shareholders' agreement, or any other 
agreement. A right or restriction may be implicit in the capital 
structure of an entity.
    (4) Qualified easements. A perpetual restriction on the use of real 
property that qualified for a charitable deduction under either section 
2522(d) or section 2055(f) of the Internal Revenue Code is not treated 
as a right or restriction.
    (b) Exceptions--(1) In general. This section does not apply to any 
right or restriction satisfying the following three requirements--
    (i) The right or restriction is a bona fide business arrangement;
    (ii) The right or restriction is not a device to transfer property 
to the natural objects of the transferor's bounty for less than full and 
adequate consideration in money or money's worth; and
    (iii) At the time the right or restriction is created, the terms of 
the right or restriction are comparable to similar arrangements entered 
into by persons in an arm's length transaction.
    (2) Separate requirements. Each of the three requirements described 
in paragraph (b)(1) of this section must be independently satisfied for 
a right or restriction to meet this exception. Thus, for example, the 
mere showing that a right or restriction is a bona fide business 
arrangement is not sufficient to establish that the right or restriction 
is not a device to transfer property for less than full and adequate 
consideration.
    (3) Exception for certain rights or restrictions. A right or 
restriction is considered to meet each of the three requirements 
described in paragraph (b)(1) of this section if more than 50 percent by 
value of the property subject to the right or restriction is owned 
directly or indirectly (within the meaning of Sec. 25.2701-6) by 
individuals who are not members of the transferor's family. In order to 
meet this exception, the property owned by those individuals must be 
subject to the right or restriction to the same extent as the property 
owned by the transferor. For purposes of this section, members of the 
transferor's family include the persons described in Sec. 25.2701-
2(b)(5) and any other individual who is

[[Page 710]]

a natural object of the transferor's bounty. Any property held by a 
member of the transferor's family under the rules of Sec. 25.2701-6 
(without regard to Sec. 25.2701-6(a)(5)) is treated as held only by a 
member of the transferor's family.
    (4) Similar arrangement--(i) In general. A right or restriction is 
treated as comparable to similar arrangements entered into by persons in 
an arm's length transaction if the right or restriction is one that 
could have been obtained in a fair bargain among unrelated parties in 
the same business dealing with each other at arm's length. A right or 
restriction is considered a fair bargain among unrelated parties in the 
same business if it conforms with the general practice of unrelated 
parties under negotiated agreements in the same business. This 
determination generally will entail consideration of such factors as the 
expected term of the agreement, the current fair market value of the 
property, anticipated changes in value during the term of the 
arrangement, and the adequacy of any consideration given in exchange for 
the rights granted.
    (ii) Evidence of general business practice. Evidence of general 
business practice is not met by showing isolated comparables. If more 
than one valuation method is commonly used in a business, a right or 
restriction does not fail to evidence general business practice merely 
because it uses only one of the recognized methods. It is not necessary 
that the terms of a right or restriction parallel the terms of any 
particular agreement. If comparables are difficult to find because the 
business is unique, comparables from similar businesses may be used.
    (5) Multiple rights or restrictions. If property is subject to more 
than one right or restriction described in paragraph (a)(2) of this 
section, the failure of a right or restriction to satisfy the 
requirements of paragraph (b)(1) of this section does not cause any 
other right or restriction to fail to satisfy those requirements if the 
right or restriction otherwise meets those requirements. Whether 
separate provisions are separate rights or restrictions, or are integral 
parts of a single right or restriction, depends on all the facts and 
circumstances.
    (c) Substantial modification of a right or restriction--(1) In 
general. A right or restriction that is substantially modified is 
treated as a right or restriction created on the date of the 
modification. Any discretionary modification of a right or restriction, 
whether or not authorized by the terms of the agreement, that results in 
other than a de minimis change to the quality, value, or timing of the 
rights of any party with respect to property that is subject to the 
right or restriction is a substantial modification. If the terms of the 
right or restriction require periodic updating, the failure to update is 
presumed to substantially modify the right or restriction unless it can 
be shown that updating would not have resulted in a substantial 
modification. The addition of any family member as a party to a right or 
restriction (including by reason of a transfer of property that subjects 
the transferee family member to a right or restriction with respect to 
the transferred property) is considered a substantial modification 
unless the addition is mandatory under the terms of the right or 
restriction or the added family member is assigned to a generation 
(determined under the rules of section 2651 of the Internal Revenue 
Code) no lower than the lowest generation occupied by individuals 
already party to the right or restriction).
    (2) Exceptions. A substantial modification does not include--
    (i) A modification required by the terms of a right or restriction;
    (ii) A discretionary modification of an agreement conferring a right 
or restriction if the modification does not change the right or 
restriction;
    (iii) A modification of a capitalization rate used with respect to a 
right or restriction if the rate is modified in a manner that bears a 
fixed relationship to a specified market interest rate; and
    (iv) A modification that results in an option price that more 
closely approximates fair market value.
    (d) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. T dies in 1992 owning title to Blackacre. In 1991, T and 
T's child entered into a lease with respect to Blackacre. At the time 
the lease was entered into, the

[[Page 711]]

terms of the lease were not comparable to leases of similar property 
entered into among unrelated parties. The lease is a restriction on the 
use of the property that is disregarded in valuing the property for 
Federal estate tax purposes.
    Example 2. T and T's child, C, each own 50 percent of the 
outstanding stock of X corporation. T and C enter into an agreement in 
1987 providing for the disposition of stock held by the first to die at 
the time of death. The agreement also provides certain restrictions with 
respect to lifetime transfers. In 1992, as permitted (but not required) 
under the agreement, T transfers one-half of T's stock to T's spouse, S. 
S becomes a party to the agreement between T and C by reason of the 
transfer. The transfer is the addition of a family member to the right 
or restriction. However, it is not a substantial modification of the 
right or restriction because the added family member would be assigned 
to a generation under section 2651 of the Internal Revenue Code no lower 
than the generation occupied by C.
    Example 3. The facts are the same as in Example 2. In 1993, the 
agreement is amended to reflect a change in the company's name and a 
change of address for the company's registered agent. These changes are 
not a substantial modification of the agreement conferring the right or 
restriction because the right or restriction has not changed.

[T.D. 8395, 57 FR 4273, Feb. 4, 1992]



Sec. 25.2703-2  Effective date.

    Section 25.2703-1 applies to any right or restriction created or 
substantially modified after October 8, 1990, and is effective as of 
January 28, 1992. With respect to transfers occurring prior to January 
28, 1992, and for purposes of determining whether an event occurring 
prior to January 28, 1992 constitutes a substantial modification, 
taxpayers may rely on any reasonable interpretation of the statutory 
provisions. For these purposes, the provisions of the proposed 
regulations and the final regulations are considered a reasonable 
interpretation of the statutory provisions.

[T.D. 8395, 57 FR 4274, Feb. 4, 1992]



Sec. 25.2704-1  Lapse of certain rights.

    (a) Lapse treated as transfer--(1) In general. The lapse of a voting 
right or a liquidation right in a corporation or partnership (an 
``entity'') is a transfer by the individual directly or indirectly 
holding the right immediately prior to its lapse (the ``holder'') to the 
extent provided in paragraphs (b) and (c) of this section. This section 
applies only if the entity is controlled by the holder and members of 
the holder's family immediately before and after the lapse. The amount 
of the transfer is determined under paragraph (d) of this section. If 
the lapse of a voting right or a liquidation right occurs during the 
holder's lifetime, the lapse is a transfer by gift. If the lapse occurs 
at the holder's death, the lapse is a transfer includible in the 
holder's gross estate.
    (2) Definitions. The following definitions apply for purposes of 
this section.
    (i) Control. Control has the meaning given it in Sec. 25.2701-
2(b)(5).
    (ii) Member of the family. Member of the family has the meaning 
given it in Sec. 25.2702-2(a)(1).
    (iii) Directly or indirectly held. An interest is directly or 
indirectly held only to the extent the value of the interest would have 
been includible in the gross estate of the individual if the individual 
had died immediately prior to the lapse.
    (iv) Voting right. Voting right means a right to vote with respect 
to any matter of the entity. In the case of a partnership, the right of 
a general partner to participate in partnership management is a voting 
right. The right to compel the entity to acquire all or a portion of the 
holder's equity interest in the entity by reason of aggregate voting 
power is treated as a liquidation right and is not treated as a voting 
right.
    (v) Liquidation right. Liquidation right means a right or ability to 
compel the entity to acquire all or a portion of the holder's equity 
interest in the entity, including by reason of aggregate voting power, 
whether or not its exercise would result in the complete liquidation of 
the entity.
    (vi) Subordinate. Subordinate has the meaning given it in Sec. 
25.2701-3(a)(2)(iii).
    (3) Certain temporary lapses. If a lapsed right may be restored only 
upon the occurrence of a future event not within the control of the 
holder or members of the holder's family, the lapse is deemed to occur 
at the time the lapse becomes permanent with respect to the holder, i.e. 
either by a transfer of the interest or otherwise.

[[Page 712]]

    (4) Source of right or lapse. A voting right or a liquidation right 
may be conferred by and may lapse by reason of a State law, the 
corporate charter or bylaws, an agreement, or other means.
    (b) Lapse of voting right. A lapse of a voting right occurs at the 
time a presently exercisable voting right is restricted or eliminated.
    (c) Lapse of liquidation right--(1) In general. A lapse of a 
liquidation right occurs at the time a presently exercisable liquidation 
right is restricted or eliminated. Except as otherwise provided, a 
transfer of an interest that results in the lapse of a liquidation right 
is not subject to this section if the rights with respect to the 
transferred interest are not restricted or eliminated. However, a 
transfer that results in the elimination of the transferor's right or 
ability to compel the entity to acquire an interest retained by the 
transferor that is subordinate to the transferred interest is a lapse of 
a liquidation right with respect to the subordinate interest.
    (2) Exceptions. Section 2704(a) does not apply to the lapse of a 
liquidation right under the following circumstances.
    (i) Family cannot obtain liquidation value--(A) In general. Section 
2704(a) does not apply to the lapse of a liquidation right to the extent 
the holder (or the holder's estate) and members of the holder's family 
cannot immediately after the lapse liquidate an interest that the holder 
held directly or indirectly and could have liquidated prior to the 
lapse.
    (B) Ability to liquidate. Whether an interest can be liquidated 
immediately after the lapse is determined under the State law generally 
applicable to the entity, as modified by the governing instruments of 
the entity, but without regard to any restriction described in section 
2704(b). Thus, if, after any restriction described in section 2704(b) is 
disregarded, the remaining requirements for liquidation under the 
governing instruments are less restrictive than the State law that would 
apply in the absence of the governing instruments, the ability to 
liquidate is determined by reference to the governing instruments.
    (ii) Rights valued under section 2701. Section 2704(a) does not 
apply to the lapse of a liquidation right previously valued under 
section 2701 to the extent necessary to prevent double taxation (taking 
into account any adjustment available under Sec. 25.2701-5).
    (iii) Certain changes in State law. Section 2704(a) does not apply 
to the lapse of a liquidation right that occurs solely by reason of a 
change in State law. For purposes of this paragraph, a change in the 
governing instrument of an entity is not a change in State law.
    (d) Amount of transfer. The amount of the transfer is the excess, if 
any, of--
    (1) The value of all interests in the entity owned by the holder 
immediately before the lapse (determined immediately after the lapse as 
if the lapsed right was nonlapsing); over
    (2) The value of the interests described in the preceding paragraph 
immediately after the lapse (determined as if all such interests were 
held by one individual).
    (e) Application to similar rights. [Reserved]
    (f) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Prior to D's death, D owned all the preferred stock of 
Corporation Y and D's children owned all the common stock. At that time, 
the preferred stock had 60 percent of the total voting power and the 
common stock had 40 percent. Under the corporate by-laws, the voting 
rights of the preferred stock terminated on D's death. The value of D's 
interest immediately prior to D's death (determined as if the voting 
rights were nonlapsing) was $100X. The value of that interest 
immediately after death would have been $90X if the voting rights had 
been nonlapsing. The decrease in value reflects the loss in value 
resulting from the death of D (whose involvement in Y was a key factor 
in Y's profitability). Section 2704(a) applies to the lapse of voting 
rights on D's death. D's gross estate includes an amount equal to the 
excess, if any, of $90X over the fair market value of the preferred 
stock determined after the lapse of the voting rights.
    Example 2. Prior to D's death, D owned all the preferred stock of 
Corporation Y. The preferred stock and the common stock each carried 50 
percent of the total voting power of Y. D's children owned 40 percent of 
the common stock and unrelated parties own the remaining 60 percent. 
Under the corporate by-laws, the voting rights of the preferred stock 
terminate on D's death. Section 2704(a)

[[Page 713]]

does not apply to the lapse of D's voting rights because members of D's 
family do not control Y after the lapse.
    Example 3. The by-laws of Corporation Y provide that the voting 
rights of any transferred shares of the single outstanding class of 
stock are reduced to \1/2\ vote per share after the transfer but are 
fully restored to the transferred shares after 5 years. D owned 60 
percent of the shares prior to death and members of D's family owned the 
balance. On D's death, D's shares pass to D's children and the voting 
rights are reduced pursuant to the by-laws. Section 2704(a) applies to 
the lapse of D's voting rights. D's gross estate includes an amount 
equal to the excess, if any, of the fair market value of D's stock 
(determined immediately after D's death as though the voting rights had 
not been reduced and would not be reduced) over the stock's fair market 
value immediately after D's death.
    Example 4. D owns 84 percent of the single outstanding class of 
stock of Corporation Y. The by-laws require at least 70 percent of the 
vote to liquidate Y. D gives one-half of D's stock in equal shares to 
D's three children (14 percent to each). Section 2704(a) does not apply 
to the loss of D's ability to liquidate Y, because the voting rights 
with respect to the corporation are not restricted or eliminated by 
reason of the transfer.
    Example 5. D and D's two children, A and B, are partners in 
Partnership X. Each has a 3\1/3\ percent general partnership interest 
and a 30 percent limited partnership interest. Under State law, a 
general partner has the right to participate in partnership management. 
The partnership agreement provides that when a general partner withdraws 
or dies, X must redeem the general partnership interest for its 
liquidation value. Also, under the agreement any general partner can 
liquidate the partnership. A limited partner cannot liquidate the 
partnership and a limited partner's capital interest will be returned 
only when the partnership is liquidated. A deceased limited partner's 
interest continues as a limited partnership interest. D dies, leaving 
his limited partnership interest to D's spouse. Because of a general 
partner's right to dissolve the partnership, a limited partnership 
interest has a greater fair market value when held in conjunction with a 
general partnership interest than when held alone. Section 2704(a) 
applies to the lapse of D's liquidation right because after the lapse, 
members of D's family could liquidate D's limited partnership interest. 
D's gross estate includes an amount equal to the excess of the value of 
all D's interests in X immediately before D's death (determined 
immediately after D's death but as though the liquidation right had not 
lapsed and would not lapse) over the fair market value of all D's 
interests in X immediately after D's death.
    Example 6. The facts are the same as in Example 5, except that under 
the partnership agreement D is the only general partner who holds a 
unilateral liquidation right. Assume further that the partnership 
agreement contains a restriction described in section 2704(b) that 
prevents D's family members from liquidating D's limited partnership 
interest immediately after D's death. Under State law, in the absence of 
the restriction in the partnership agreement, D's family members could 
liquidate the partnership. The restriction on the family's ability to 
liquidate is disregarded and the amount of D's gross estate is increased 
by reason of the lapse of D's liquidation right.
    Example 7. D owns all the stock of Corporation X, consisting of 100 
shares of non-voting preferred stock and 100 shares of voting common 
stock. Under the by-laws, X can only be liquidated with the consent of 
at least 80 percent of the voting shares. D transfers 30 shares of 
common stock to D's child. The transfer is not a lapse of a liquidation 
right with respect to the common stock because the voting rights that 
enabled D to liquidate prior to the transfer are not restricted or 
eliminated. The transfer is not a lapse of a liquidation right with 
respect to the retained preferred stock because the preferred stock is 
not subordinate to the transferred common stock.
    Example 8. D owns all of the single class of stock of Corporation Y. 
D recapitalizes Y, exchanging D's common stock for voting common stock 
and non-voting, non-cumulative preferred stock. The preferred stock 
carries a right to put the stock for its par value at any time during 
the next 10 years. D transfers the common stock to D's grandchild in a 
transfer subject to section 2701. In determining the amount of D's gift 
under section 2701, D's retained put right is valued at zero. D's child, 
C, owns the preferred stock when the put right lapses. Section 2704(a) 
applies to the lapse, without regard to the application of section 2701, 
because the put right was not valued under section 2701 in the hands of 
C.
    Example 9. A and A's two children are equal general and limited 
partners in Partnership Y. Under the partnership agreement, each general 
partner has a right to liquidate the partnership at any time. Under 
State law that would apply in the absence of contrary provisions in the 
partnership agreement, the death or incompetency of a general partner 
terminates the partnership. However, the partnership agreement provides 
that the partnership does not terminate on the incompetence or death of 
a general partner, but that an incompetent partner cannot exercise 
rights as a general partner during any period of incompetency. A 
partner's full rights as general partner are restored if the partner 
regains competency. A becomes incompetent. The lapse of A's voting right 
on becoming incompetent is not subject to section 2704(a) because it may 
be restored to A

[[Page 714]]

in the future. However, if A dies while incompetent, a lapse subject to 
section 2704(a) is deemed to occur at that time because the lapsed right 
cannot thereafter be restored to A.

[T.D. 8395, 57 FR 4274, Feb. 4, 1992]



Sec. 25.2704-2  Transfers subject to applicable restrictions.

    (a) In general. If an interest in a corporation or partnership (an 
``entity'') is transferred to or for the benefit of a member of the 
transferor's family, any applicable restriction is disregarded in 
valuing the transferred interest. This section applies only if the 
transferor and members of the transferor's family control the entity 
immediately before the transfer. For the definition of control, see 
Sec. 25.2701-2(b)(5). For the definition of member of the family, see 
Sec. 25.2702-2(a)(1).
    (b) Applicable restriction defined. An applicable restriction is a 
limitation on the ability to liquidate the entity (in whole or in part) 
that is more restrictive than the limitations that would apply under the 
State law generally applicable to the entity in the absence of the 
restriction. A restriction is an applicable restriction only to the 
extent that either the restriction by its terms will lapse at any time 
after the transfer, or the transferor (or the transferor's estate) and 
any members of the transferor's family can remove the restriction 
immediately after the transfer. Ability to remove the restriction is 
determined by reference to the State law that would apply but for a more 
restrictive rule in the governing instruments of the entity. See Sec. 
25.2704-1(c)(1)(B) for a discussion of the term ``State law.'' An 
applicable restriction does not include a commercially reasonable 
restriction on liquidation imposed by an unrelated person providing 
capital to the entity for the entity's trade or business operations 
whether in the form of debt or equity. An unrelated person is any person 
whose relationship to the transferor, the transferee, or any member of 
the family of either is not described in section 267(b) of the Internal 
Revenue Code, provided that for purposes of this section the term 
``fiduciary of a trust'' as used in section 267(b) does not include a 
bank as defined in section 581 of the Internal Revenue Code. A 
restriction imposed or required to be imposed by Federal or State law is 
not an applicable restriction. An option, right to use property, or 
agreement that is subject to section 2703 is not an applicable 
restriction.
    (c) Effect of disregarding an applicable restriction. If an 
applicable restriction is disregarded under this section, the 
transferred interest is valued as if the restriction does not exist and 
as if the rights of the transferor are determined under the State law 
that would apply but for the restriction. For example, an applicable 
restriction with respect to preferred stock will be disregarded in 
determining the amount of a transfer of common stock under section 2701.
    (d) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. D owns a 76 percent interest and each of D's children, A 
and B, owns a 12 percent interest in General Partnership X. The 
partnership agreement requires the consent of all the partners to 
liquidate the partnership. Under the State law that would apply in the 
absence of the restriction in the partnership agreement, the consent of 
partners owning 70 percent of the total partnership interests would be 
required to liquidate X. On D's death, D's partnership interest passes 
to D's child, C. The requirement that all the partners consent to 
liquidation is an applicable restriction. Because A, B and C (all 
members of D's family), acting together after the transfer, can remove 
the restriction on liquidation, D's interest is valued without regard to 
the restriction; i.e., as though D's interest is sufficient to liquidate 
the partnership.
    Example 2. D owns all the preferred stock in Corporation X. The 
preferred stock carries a right to liquidate X that cannot be exercised 
until 1999. D's children, A and B, own all the common stock of X. The 
common stock is the only voting stock. In 1994, D transfers the 
preferred stock to D's child, A. The restriction on D's right to 
liquidate is an applicable restriction that is disregarded. Therefore, 
the preferred stock is valued as though the right to liquidate were 
presently exercisable.
    Example 3. D owns 60 percent of the stock of Corporation X. The 
corporate by-laws provide that the corporation cannot be liquidated for 
10 years after which time liquidation requires approval by 60 percent of 
the voting interests. In the absence of the provision in the by-laws, 
State law would require approval by 80 percent of the voting interests 
to liquidate X. D transfers the stock to a

[[Page 715]]

trust for the benefit of D's child, A, during the 10-year period. The 
10-year restriction is an applicable restriction and is disregarded. 
Therefore, the value of the stock is determined as if the transferred 
block could currently liquidate X.
    Example 4. D and D's children, A and B, are partners in Limited 
Partnership Y. Each has a 3.33 percent general partnership interest and 
a 30 percent limited partnership interest. Any general partner has the 
right to liquidate the partnership at any time. As part of a loan 
agreement with a lender who is related to D, each of the partners agree 
that the partnership may not be liquidated without the lender's consent 
while any portion of the loan remains outstanding. During the term of 
the loan agreement, D transfers one-half of both D's partnership 
interests to each of A and B. Because the lender is a related party, the 
requirement that the lender consent to liquidation is an applicable 
restriction and the transfers of D's interests are valued as if such 
consent were not required.
    Example 5. D owns 60 percent of the preferred and 70 percent of the 
common stock in Corporation X. The remaining stock is owned by 
individuals unrelated to D. The preferred stock carries a put right that 
cannot be exercised until 1999. In 1995, D transfers the common stock to 
D's child in a transfer that is subject to section 2701. The restriction 
on D's right to liquidate is an applicable restriction that is 
disregarded in determining the amount of the gift under section 2701.

[T.D. 8395, 57 FR 4276, Feb. 4, 1992; T.D. 8395, 57 FR 11265, Apr. 2, 
1992]



Sec. 25.2704-3  Effective date.

    Section 25.2704-1 applies to lapses occurring after January 28, 
1992, of rights created after October 8, 1990. Section 25.2704-2 applies 
to transfers occurring after January 28, 1992, of property subject to 
applicable restrictions created after October 8, 1990. In determining 
whether a voting right or a liquidation right has lapsed prior to that 
date, and for purposes of determining whether the lapse is subject to 
section 2704(a), taxpayers may rely on any reasonable interpretation of 
the statutory provisions. For transfers of interests occurring before 
January 28, 1992, taxpayers may rely on any reasonable interpretation of 
the statutory provisions in detemining whether a restriction is an 
applicable restriction that must be disregarded in determining the value 
of the transferred interest. For these purposes, the provisions of the 
proposed regulations and the final regulations are considered a 
reasonable interpretation of the statutory provisions.

[T.D. 8395, 57 FR 4277, Feb. 4, 1992; T.D. 8395, 57 FR 11265, Apr. 2, 
1992]

                      Procedure and Administration



Sec. 25.6001-1  Records required to be kept.

    (a) In general. Every person subject to taxation under Chapter 12 of 
the Internal Revenue Code of 1954 shall for the purpose of determining 
the total amount of his gifts, keep such permanent books of account or 
records as are necessary to establish the amount of his total gifts 
(limited as provided by section 2503(b)), together with the deductions 
allowable in determining the amount of his taxable gifts, and the other 
information required to be shown in a gift tax return. All documents and 
vouchers used in preparing the gift tax return (see Sec. 25.6019-1) 
shall be retained by the donor so as to be available for inspection 
whenever required.
    (b) Supplemental data. In order that the Internal Revenue Service 
may determine the correct tax the donor shall furnish such supplemental 
data as may be deemed necessary by the Internal Revenue Service. It is, 
therefore, the duty of the donor to furnish, upon request, copies of all 
documents relating to his gift or gifts, appraisal lists of any items 
included in the total amount of gifts, copies of balance sheets or other 
financial statements obtainable by him relating to the value of stock 
constituting the gift, and any other information obtainable by him that 
may be necessary in the determination of the tax. See section 2512 and 
the regulations issued thereunder. For every policy of life insurance 
listed on the return, the donor must procure a statement from the 
insurance company on Form 712 and file it with the internal revenue 
officer with whom the return is filed. If specifically requested by an 
internal revenue officer, the insurance company shall file this 
statement direct with the internal revenue officer.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7012, 34 FR 
7691, May 15, 1969; T.D. 7517, 42 FR 58935, Nov. 14, 1977]

[[Page 716]]



Sec. 25.6011-1  General requirement of return, statement, or list.

    (a) General rule. Every person made liable for any tax imposed by 
Chapter 12 of the Code shall make such returns or statements as are 
required by the regulations in this part. The return or statement shall 
include therein the information required by the applicable regulations 
or forms.
    (b) Use of prescribed forms. Copies of the forms prescribed by 
paragraph (b) of Sec. 25.6001-1 and Sec. 25.6019-1 may be obtained 
from district directors and directors of service centers. The fact that 
a person required to file a form has not been furnished with copies of a 
form will not excuse him from the making of a gift tax return, or from 
the furnishing of the evidence for which the forms are to be used. 
Application for a form should be made to the district director or 
director of a service center in ample time to enable the person whose 
duty it is to file the form to have the form prepared, verified, and 
filed on or before the date prescribed for the filing thereof.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7012, 34 FR 
7691, May 15, 1969]



Sec. 25.6011-4  Requirement of statement disclosing participation in 
certain transactions by taxpayers.

    (a) In general. If a transaction is identified as a listed 
transaction or a transaction of interest as defined in Sec. 1.6011-4 of 
this chapter by the Commissioner in published guidance (see Sec. 
601.601(d)(2)(ii)(b) of this chapter), and the listed transaction or 
transaction of interest involves a gift tax under chapter 12 of subtitle 
B of the Internal Revenue Code, the transaction must be disclosed in the 
manner stated in such published guidance.
    (b) Effective/applicability date. This section applies to listed 
transactions entered into on or after January 1, 2003. This section 
applies to transactions of interest entered into on or after November 2, 
2006.

[T.D. 9350, 72 FR 43153, Aug. 3, 2007]



Sec. 25.6019-1  Persons required to file returns.

    (a) Gifts made after December 31, 1981. Subject to section 
2523(i)(2), an individual citizen or resident of the United States who 
in any calendar year beginning after December 31, 1981, makes any 
transfer by gift other than a transfer that, under section 2503 (b) or 
(e) (relating, respectively, to certain gifts of $10,000 per donee and 
the exclusion for payment of certain educational and medical expenses), 
is not included in the total amount of gifts for that year, or a 
transfer of an interest with respect to which a marital deduction is 
allowed for the value of the entire interest under section 2523 (other 
than a marital deduction allowed by reason of section 2523(f), regarding 
qualified terminable interest property for which a return must be filed 
in order to make the election under that section), must file a gift tax 
return on Form 709 for that calendar year.
    (b) Gifts made after December 31, 1976, and before January 1, 1982. 
An individual citizen or resident of the United States who makes a 
transfer by gift within any calendar year beginning after December 31, 
1976, and before January 1, 1982, must file a gift tax return on Form 
709 for any calendar quarter in which the sum of the taxable gifts made 
during that calendar quarter, plus all other taxable gifts made during 
the year (for which a return has not yet been required to be filed), 
exceeds $25,000. If the aggregate transfers made in a calendar year 
after 1976 and before 1982 that must be reported do not exceed $25,000, 
only one return must be filed for the calendar year and it must be filed 
by the due date for a fourth quarter gift tax return (April 15).
    (c) Gifts made after December 31, 1970, and before January 1, 1977. 
An individual citizen or resident of the United States who makes a 
transfer by gift within any calendar year beginning after December 31, 
1970, and before January 1, 1977, must file a gift tax return on Form 
709 for the calendar quarter in which any portion of the value of the 
gift, or any portion of the sum of the values of the gifts to such donee 
during that calendar year, is not excluded from the total amount of 
taxable gifts for that year, and must also make a return for any 
subsequent quarter within the same taxable year in which any additional 
gift is made to the same donee.

[[Page 717]]

    (d) Gifts by nonresident alien donors. The rules contained in 
paragraphs (a) through (c) of this section also apply to a nonresident 
not a citizen of the United States provided that, under section 
2501(a)(1) and Sec. 25.2511-3, the transfer is subject to the gift tax.
    (e) Miscellaneous provisions. Only individuals are required to file 
returns and not trusts, estates, partnerships, or corporations. 
Duplicate copies of the return are not required to be filed. See 
Sec. Sec. 25.6075-1 and 25.6091-1 for the time and place for filing the 
gift tax return. For delinquency penalties for failure to file or pay 
the tax, see section 6651 and Sec. 301.6651-1 of this chapter 
(Procedure and Administration Regulations). For criminal penalties for 
failure to file a return and filing a false or fraudulent return, see 
sections 7203, 7206, and 7207.
    (f) Return required even if no tax due. The return is required even 
though, because of the deduction authorized by section 2522 (charitable 
deduction) or the unified credit under section 2505, no tax may be 
payable on the transfer.
    (g) Deceased donor. If the donor dies before filing his return, the 
executor or administrator of his estate shall file the return. If the 
donor becomes legally incompetent before filing his return, his guardian 
or committee shall file the return.
    (h) Ratification of return. The return shall not be made by an agent 
unless by reason of illness, absence, or nonresidence, the person liable 
for the return is unable to make it within the time prescribed. Mere 
convenience is not sufficient reason for authorizing an agent to make 
the return. If by reason of illness, absence or nonresidence, a return 
is made by an agent, the return must be ratified by the donor or other 
person liable for its filing within a reasonable time after such person 
becomes able to do so. If the return filed by the agent is not so 
ratified, it will not be considered the return required by the statute. 
Supplemental data may be submitted at the time of ratification. The 
ratification may be in the form of a statement, executed under the 
penalties of perjury and filed with the internal revenue officer with 
whom the return was filed, showing specifically that the return made by 
the agent has been carefully examined and that the person signing 
ratifies the return as the donor's. If a return is signed by an agent, a 
statement fully explaining the inability of the donor must accompany the 
return.

[T.D. 7238, 37 FR 28735, Dec. 29, 1972, as amended by T.D. 8522, 59 FR 
9663, Mar. 1, 1994]



Sec. 25.6019-2  Returns required in case of consent under section 2513.

    Except as otherwise provided in this section, the provisions of 
Sec. 25.6019-1 (other than paragraph (d) of Sec. 25.6019-1) apply with 
respect to the filing of a gift tax return or returns in the case of a 
husband and wife who consent (see Sec. 25.2513-1) to the application of 
section 2513. If both spouses are (without regard to the provisions of 
section 2513) required under the provisions of Sec. 25.6019-1 to file 
returns, returns must be filed by both spouses. If only one of the 
consenting spouses is (without regard to the provisions of section 2513) 
required under Sec. 25.6019-1 to file a return, a return must be filed 
by that spouse. In the latter case if, after giving effect to the 
provisions of section 2513, the other spouse is considered to have made 
a gift not excluded from the total amount of such other spouse's gifts 
for the taxable year by reason of section 2503 (b) or (e) (relating, 
respectively, to certain gifts of $10,000 per donee and the exclusion 
for certain educational or medical expenses), a return must also be 
filed by such other spouse. Thus, if during a calendar year beginning 
after December 31, 1981, the first spouse made a gift of $18,000 to a 
child (the gift not being either a future interest in property or an 
amount excluded under section 2503(e)) and the other spouse made no 
gifts, only the first spouse is required to file a return for that 
calendar year. However, if the other spouse had made a gift in excess of 
$2,000 to the same child during the same calendar year or if the gift 
made by the first spouse had amounted to $21,000, each spouse would be 
required to file a return if the consent is signified as provided in 
section 2513.

[T.D. 8522, 59 FR 9664, Mar. 1, 1994]

[[Page 718]]



Sec. 25.6019-3  Contents of return.

    (a) In general. The return must set forth each gift made during the 
calendar year (or calendar quarter with respect to gifts made after 
December 31, 1970, and before January 1, 1982) that under sections 2511 
through 2515 is to be included in computing taxable gifts; the 
deductions claimed and allowable under sections 2521 through 2524; and 
the taxable gifts made for each of the preceding reporting periods. (See 
Sec. 25.2504-1.) In addition the return shall set forth the fair market 
value of all gifts not made in money, including gifts resulting from 
sales and exchanges of property made for less than full and adequate 
consideration in money or money's worth, giving, as of the date of the 
sale or exchange, both the fair market value of the property sold or 
exchanged and the fair market value of the consideration received by the 
donor. If a donor contends that his retained power over property renders 
the gift incomplete (see Sec. 25.2511-2) and hence not subject to tax 
as of the calendar quarter or calendar year of the initial transfer, the 
transaction should be disclosed in the return for the calendar quarter 
or calendar year of the initial transfer and evidence showing all 
relevant facts, including a copy of the instrument of transfer, shall be 
submitted with the return. The instructions printed on the return should 
be carefully followed. A certified or verified copy of each document 
required by the instructions printed on the return form shall be filed 
with the return. Any additional documents the donor may desire to submit 
may be submitted with the return.
    (b) Disclosure of transfers coming within provisions of section 
2516. Section 2516 provides that certain transfers of property pursuant 
to written property settlements between husband and wife are deemed to 
be transfers for full and adequate consideration in money or money's 
worth if divorce occurs within 2 years. In any case where a husband and 
wife enter into a written agreement of the type contemplated by section 
2516 and the final decree of divorce is not granted on or before the due 
date for the filing of a gift tax return for the calendar year (or 
calendar quarter with respect to periods beginning after December 31, 
1970, and ending before January 1, 1982) in which the agreement became 
effective (see Sec. 25.6075-1), then, except to the extent Sec. 
25.6019-1 provides otherwise, the transfer must be disclosed by the 
transferor upon a gift tax return filed for the calendar year (or 
calendar quarter) in which the agreement becomes effective, and a copy 
of the agreement must be attached to the return. In addition, a 
certified copy of the final divorce decree shall be furnished the 
internal revenue officer with whom the return was filed not later than 
60 days after the divorce is granted. Pending receipt of evidence that 
the final decree of divorce has been granted (but in no event for a 
period of more than 2 years from the effective date of the agreement), 
the transfer will tentatively be treated as made for a full and adequate 
consideration in money or money's worth.

[T.D. 7238, 37 FR 28736, Dec. 29, 1972, as amended by T.D. 8522, 59 FR 
9664, Mar. 1, 1994]



Sec. 25.6019-4  Description of property listed on return.

    The properties comprising the gifts made during the calendar year 
(or calendar quarter with respect to gifts made after December 31, 1970, 
and before January 1, 1982) must be listed on the return and described 
in a manner that they may be readily identified. Thus, there should be 
given for each parcel of real estate a legal description, its area, a 
short statement of the character of any improvements, and, if located in 
a city, the name of the street and number. Description of bonds shall 
include the number transferred, principal amount, name of obligor, date 
of maturity, rate of interest, date or dates on which interest is 
payable, series number where there is more than one issue, and the 
principal exchange upon which listed, or the principal business office 
of the obligor, if unlisted. Description of stocks shall include number 
of shares, whether common or preferred, and, if preferred, what issue 
thereof, par value, quotation at which returned, exact name of 
corporation, and, if the stock is unlisted, the location of the 
principal business office, the State in

[[Page 719]]

which incorporated and the date of incorporation, or if the stock is 
listed, the principal exchange upon which sold. Description of notes 
shall include name of maker, date on which given, date of maturity, 
amount of principal, amount of principal unpaid, rate of interest and 
whether simple or compound, and date to which interest has been paid. If 
the gift of property includes accrued income thereon to the date of the 
gift, the amount of such accrued income shall be separately set forth. 
Description of the seller's interest in land contracts transferred shall 
include name of buyer, date of contract, description of property, sale 
price, initial payment, amounts of installment payments, unpaid balance 
of principal, interest rate and date prior to gift to which interest has 
been paid. Description of life insurance policies shall show the name of 
the insurer and the number of the policy. In describing an annuity, the 
name and address of the issuing company shall be given, or, if payable 
out of a trust or other fund, such a description as will fully identify 
the trust or fund. If the annuity is payable for a term of years, the 
duration of the term and the date on which it began shall be given, and 
if payable for the life of any person, the date of birth of that person 
shall be stated. Judgments shall be described by giving the title of the 
cause and the name of the court in which rendered, date of judgment, 
name and address of judgment debtor, amount of judgment, rate of 
interest to which subject, and by stating whether any payments have been 
made thereon, and, if so, when and in what amounts.

[T.D. 7238, 37 FR 28736, Dec. 29, 1972, as amended by T.D. 8522, 59 FR 
9664, Mar. 1, 1994]



Sec. 25.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs one or more tax return 
preparers to prepare a return or claim for refund of gift tax under 
chapter 12 of subtitle B of the Internal Revenue Code, other than for 
the person, at any time during a return period, shall satisfy the record 
keeping and inspection requirements in the manner stated in Sec. 
1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 25.6061-1  Signing of returns and other documents.

    Any return, statement, or other document required to be made under 
any provision of Chapter 12 or Subtitle F of the Code or regulations 
prescribed thereunder with respect to any tax imposed by Chapter 12 of 
the Code shall be signed by the donor or other person required or duly 
authorized to sign in accordance with the regulations, forms, or 
instructions prescribed with respect to such return, statement, or other 
document. The person required or duly authorized to make the return may 
incur liability for the penalties provided for erroneous, false, or 
fraudulent returns. For criminal penalties see sections 7201, 7203, 
7206, 7207, and 7269.

[T.D. 6600, 27 FR 4987, May 29, 1962]



Sec. 25.6065-1  Verification of returns.

    (a) Penalties of perjury. If a return, statement, or other document 
made under the provisions of Chapter 12 or Subtitle F of the Code or the 
regulations thereunder with respect to any tax imposed by Chapter 12 of 
the Code, or the form and instructions issued with respect to such 
return, statement, or other document, requires that it shall contain or 
be verified by a written declaration that it is made under the penalties 
of perjury, it must be so verified by the person or persons required to 
sign such return, statement, or other document. In addition, any other 
statement or document submitted under any provision of Chapter 12 or 
Subtitle F of the Code or regulations thereunder with respect to any tax 
imposed by Chapter 12 of the Code may be required to contain or be 
verified by a written declaration that it is made under the penalties of 
perjury.
    (b) Oath. Any return, statement, or other document required to be 
submitted under Chapter 12 or Subtitle F of the Code or regulations 
prescribed

[[Page 720]]

thereunder with respect to any tax imposed by Chapter 12 of the Code may 
be required to be verified by an oath.

[T.D. 6600, 27 FR 4987, May 29, 1962]



Sec. 25.6075-1  Returns, time for filing gift tax returns for gifts made
after December 31, 1981.

    (a) In general. Except as provided in paragraphs (b) (1) and (2) of 
this section, a return required to be filed under section 6019 for gifts 
made after December 31, 1981, must be filed on or before the 15th day of 
April following the close of the calendar year in which the gift was 
made.
    (b) Special rules--(1) Extensions. Except as provided in paragraph 
(b)(2) of this section, if a taxpayer files an income tax return on the 
calendar year basis and the taxpayer is granted an extension of time for 
filing the return of income tax imposed by Subtitle A of the Internal 
Revenue Code, then such taxpayer shall also be deemed to have been 
granted an extension of time for filing the gift tax return under 
section 6019 for such calendar year equal to the extension of time 
granted for filing the income tax return. See section 6081 and the 
regulations thereunder for rules relating to extension of time for 
filing returns.
    (2) Death of donor. Where a gift is made during the calendar year in 
which the donor dies, the time for filing the return made under section 
6019 shall not be later than the time (including extensions) for filing 
the return made under section 6018 (relating to estate tax returns) with 
respect to such donor. In addition, should the time for filing the 
estate tax return fall later than the 15th day of April following the 
close of the calendar year, the time for filing the gift tax return 
shall be on or before the 15th day of April following the close of the 
calendar year, unless an extension (not extending beyond the time for 
filing the estate tax return) was granted for filing the gift tax 
return. If no estate tax return is required to be filed, the time for 
filing the gift tax return shall be on or before the 15th day of April 
following the close of the calendar year, unless an extension was 
granted for filing the gift tax return.
    (c) Paragraphs (a) and (b) may be illustrated by the following 
examples.

    Example (1). Donor makes a taxable gift on April 1, 1982, for which 
a return must be made under section 6019. Donor files the income tax 
return on the calendar year basis. The donor was granted a 4-month 
extension from April 15, 1983 to August 15, 1983, in which to file the 
1982 income tax return. Under these circumstances, the donor is not 
required to file the gift tax return prior to August 15, 1983. See 
paragraph (b)(1) of this section.
    Example (2). Donor makes a taxable gift on April 1, 1982, for which 
a return must be made under section 6019. The donor dies on May 1, 1982. 
Under these circumstances, since the due date for filing the estate tax 
return, February 1, 1983 (assuming an estate tax return under section 
6018 was required to be filed), falls prior to the due date for the gift 
tax return (as specified in section 6075(b)(1)), the last day for filing 
the gift tax return is February 1, 1983. See paragraph (b)(2) of this 
section.
    Example (3). The facts are the same as in example (2), except the 
donor dies on November 30, 1982. Although the estate tax return is due 
on or before August 30, 1983, the last day for filing the gift tax 
return is April 15, 1983. See paragraph (b) of this section.
    Example (4). The facts are the same as in example (3), except that 
the executor receives a 4-month extension for filing the decedent's 
income tax return. Under these circumstances, the last day for filing 
the gift tax return is August 15, 1983. See paragraphs (b) (1) and (2) 
of this section.
    Example (5). The facts are the same as in example (3), except that 
the donor-decedent receives an extension of 6 months for filing the gift 
tax return. See section 6081 and Sec. 25.6081-1. Since section 
6075(b)(3) and Sec. 25.6075-2(b) provide that the time for filing the 
gift tax return made under section 6019 shall not be later than the time 
(including extensions) for filing the estate tax return made under 
section 6018, the last day for filing the gift tax return is August 30, 
1983.

    (d) See section 7503 and Sec. 301.7503-1 concerning the timely 
filing of a return that falls due on a Saturday, Sunday or legal 
holiday. As to additions to the tax for failure to file the return 
within the prescribed time, see section 6651 and Sec. 301.6651-1.

[T.D. 7910, 48 FR 40375, Sept. 7, 1983]

[[Page 721]]



Sec. 25.6075-2  Returns; time for filing gift tax returns for gifts made
after December 31, 1976, and before January 1, 1982.

    (a) Due date for filing quarterly gift tax returns. (1) Except as 
provided in paragraph (b) of this section, a return required to be filed 
under section 6019 for the first, second, or third calendar quarter of 
any calendar year must be filed on or before the 15th day of the second 
month following the close of the calendar quarter in which the taxable 
gift was made.
    (2) If a return is required to be filed under section 6019 for the 
fourth calendar quarter, then--
    (i) For gifts made after December 31, 1976 and before January 1, 
1979, the return must be filed on or before February 15th following the 
close of the fourth calendar quarter, or
    (ii) For gifts made after December 31, 1978, and before January 1, 
1982, the return must be filed on or before April 15th following the 
close of the fourth calendar quarter.
    (b) Special rule. (1) If the total amount of taxable gifts 
(determined after the application of paragraph (c)(1) of this section, 
relating to split gifts) made by a person during a calendar quarter is 
$25,000 or less, the return required under section 6019 for that quarter 
must be filed on or before the date prescribed in paragraph (a)(1) of 
this section for filing the return for gifts made in the first 
subsequent calendar quarter (unless the first subsequent calendar 
quarter is the fourth calendar quarter in which case see paragraph 
(b)(2) of this section) in the calendar year in which the sum of--
    (i) The taxable gifts made during such subsequent calendar quarter, 
plus
    (ii) All other taxable gifts made in prior quarters of the calendar 
year for which no return has yet been required to be filed,

exceeds $25,000. The return must include transfers by gift (as required 
by section 6019 and the regulations under that section) made during such 
subsequent and prior quarters of the calendar year for which no return 
has yet been required to be filed and identify in which quarter such 
transfers were made. The return must meet all the requirements for a 
separate return as if a separate return had been made for each quarter 
in which a transfer by gift was made. This return will be treated as a 
separate return for each of the quarters identified on the return.
    (2) If a return is not required to be filed under paragraph (b)(1) 
of this section, then--
    (i) For gifts made after December 31, 1976 and before January 1, 
1979, the return must be filed on or before February 15th following the 
close of the fourth calendar quarter, or
    (ii) For gifts made after December 31, 1978, and before January 1, 
1982, the return must be filed on or before April 15th following the 
close of the fourth calendar quarter.

The return must include all transfers by gift (as required under section 
6019 and the regulations under that section) made during the calendar 
year for which no return has yet been required to be filed and identify 
in which quarter such transfers were made. The return must meet all the 
requirements for a separate return as if a separate return had been made 
for each quarter in which a transfer by gift was made. This return will 
be treated as a separate return for each of the quarters identified on 
the return.
    (3) Under section 6075(b)(3), any extension of time granted a 
taxpayer for filing the return of income taxes imposed by Subtitle A for 
any taxable year which is a calendar year shall be treated as an 
extension of time granted the taxpayer for filing any return under 
section 6019 which is due (under paragraphs (a)(2)(ii) and (b)(2)(ii) of 
this section) on or before April 15th following the close of the fourth 
calendar quarter. See also section 6081 and Sec. 25.6081-1 for other 
rules relating to extensions of time for filing returns.
    (4) See section 7503 and Sec. 301.7503-1 for the due date of a 
return that falls on a Saturday, Sunday, or a legal holiday. As to 
additions to the tax for failure to file the return within the 
prescribed time, see section 6651 and Sec. 301.6651-1.
    (c) Effect of section 2513. (1) In determining whether taxable gifts 
made during any calendar quarter exceed $25,000, and in determining 
whether taxable gifts made in the current calendar quarter and the 
preceding calendar quarters of the calendar year for which

[[Page 722]]

no return has yet been required to be filed exceed $25,000, the effect 
of section 2513 is not taken into account for any gifts made in the 
current or previous quarters for which a return is now being filed 
unless an irrevocable consent was made by either spouse on a return that 
was required to be filed prior to the due date of the current return. 
See Sec. 25.2513-3 for the rules relating to when a consent becomes 
irrevocable.
    (2) Paragraph (c)(1) of this section may be illustrated by the 
following examples:

    Example (1). During the first quarter of 1980 A made taxable gifts 
of $17,000 ($20,000-$3,000 annual exclusion under section 2503(b)) to D. 
During the second quarter A made another taxable gift of $10,000 to D. 
A's taxable gifts for the first two quarters are $27,000. Therefore, A 
is required to file a return for the first and second quarters on or 
before August 15, 1980. On that return A's wife, B, consented to the 
application of section 2513 (relating to split gifts) for the second 
quarter. Even though A split the second quarter gift with his wife, A's 
return is nevertheless required to be filed on or before August 15, 1980 
because in determining whether taxable gifts exceed $25,000, the effect 
of section 2513 is only taken into account for the quarter in which an 
irrevocable consent was made on a return required to be filed before 
August 15, 1980.
    Example (2). Assume the same facts as in Example (1). In addition, 
during the third quarter A made another taxable gift of $20,000 to D, 
and B made a taxable gift of $24,000 to D. B is required to file a 
return reporting the taxable gifts made during the second and third 
quarters on or before November 15, 1980 because B's total taxable gifts 
exceed $25,000 (second quarter gifts after taking section 2513 into 
account=\1/2\ ($10,000)-$3,000 (annual exclusion under section 
2503(b))=$2,000 plus a $24,000 gift in the third quarter). Even if A and 
B had consented to the application of section 2513 for the third 
quarter, B's return would nevertheless be due on or before November 15, 
1980, because an irrevocable consent was not made on a return that was 
required to be filed prior to November 15, 1980. However, the effect of 
section 2513 is taken into account for the second quarter because an 
irrevocable consent was made on a return that was required to be filed 
prior to November 15, 1980.
    Example (3). During the first quarter of 1980 A made taxable gifts 
of $27,000 to F ($30,000-$3,000 annual exclusion under section 2503(b)). 
A is required to file a return on or before May 15, 1980. A fails to 
file a return until August 1, 1980. On that return B, A's spouse, 
consented to the application of section 2513. The consent on that return 
is irrevocable under Sec. 25.2513-3. During the second quarter B made 
taxable gifts of $14,000 to F. A and B made no other gifts during 1980. 
B has made total taxable gifts of $26,000 ($12,000 for the first quarter 
and $14,000 for the second quarter). Therefore, B is required to file a 
return on or before August 15, 1980. Even if A and B had consented to 
the application of section 2513 for the second quarter, B's return is 
nevertheless due on or before August 15, 1980. Assuming no other gifts 
were made during the year, A's return reporting the second quarter split 
gift would be due on or before April 15, 1981.
    Example (4). During the first quarter of 1980 A made taxable gifts 
of $20,000 to G. B, A's spouse, files a gift tax return on June 15, 1980 
reporting that gift and both A and B signify their consent to the 
application of section 2513 on that return. In determining whether 
either spouse has exceeded the $25,000 amount for the remainder of 1980, 
the effect of section 2513 will be taken into account for the transfer 
by gift made in the first quarter.

    (d) Nonresident not citizens of the United States. In the case of a 
donor who is a nonresident not a citizen of the United States, 
paragraphs (a) and (b) of this section shall be applied by substituting 
``$12,500'' for ``$25,000'' each place it appears. For rules relating to 
whether certain residents of possessions are considered nonresidents not 
citizens of the United States, see section 2501(c) and Sec. 25.2501-
1(d).
    (e) Effective date. This section is effective for gifts made after 
December 31, 1976, and before January 1, 1982.

[T.D. 7757, 46 FR 6929, Jan. 22, 1981. Redesignated and amended by T.D. 
7910, 48 FR 40375, Sept. 7, 1983]



Sec. 25.6081-1  Automatic extension of time for filing gift tax returns.

    (a) In general. Under section 6075(b)(2), an automatic six-month 
extension of time granted to a donor to file the donor's return of 
income under Sec. 1.6081-4 of this chapter shall be deemed also to be a 
six-month extension of time granted to file a return on Form 709, 
``United States Gift (and Generation-Skipping Transfer) Tax Return.'' If 
a donor does not obtain an extension of time to file the donor's return 
of income under Sec. 1.6081-4 of this chapter, the donor will be 
allowed an automatic 6-month extension of time

[[Page 723]]

to file Form 709 after the date prescribed for filing if the donor files 
an application under this section in accordance with paragraph (b) of 
this section. In the case of an individual described in Sec. 1.6081-
5(a)(5) or (6) of this chapter, the automatic 6-month extension of time 
to file Form 709 will run concurrently with the extension of time to 
file granted pursuant to Sec. 1.6081-5 of this chapter.
    (b) Requirements. To satisfy this paragraph (b), a donor must--
    (1) Submit a complete application on Form 8892, ``Payment of Gift/
GST Tax and/or Application for Extension of Time To File Form 709,'' or 
in any other manner prescribed by the Commissioner;
    (2) File the application on or before the later of--
    (i) The date prescribed for filing the return; or
    (ii) The expiration of any extension of time to file granted 
pursuant to Sec. 1.6081-5 of this chapter; and
    (3) File the application with the Internal Revenue Service office 
designated in the application's instructions.
    (c) No extension of time for the payment of tax. An automatic 
extension of time for filing a return granted under paragraph (a) of 
this section will not extend the time for payment of any tax due on such 
return.
    (d) Termination of automatic extension. The Commissioner may 
terminate an extension at any time by mailing to the donor a notice of 
termination at least 10 days prior to the termination date designated in 
such notice. The Commissioner must mail the notice of termination to the 
address shown on the Form 8892, or to the donor's last known address. 
For further guidance regarding the definition of last known address, see 
Sec. 301.6212-2 of this chapter.
    (e) Penalties. See section 6651 for failure to file a gift tax 
return or failure to pay the amount shown as tax on the return.
    (f) Effective/applicability dates. This section is applicable for 
applications for an extension of time to file Form 709 filed after July 
1, 2008.

[T.D. 9407, 73 FR 37368, July 1, 2008]



Sec. 25.6091-1  Place for filing returns and other documents.

    (a) In general. If the donor is a resident of the United States, the 
gift tax return required by section 6019 shall be filed with any person 
assigned the responsibility to receive returns in the local Internal 
Revenue Service office that serves the legal residence or principal 
place of business of the donor. If the donor is a nonresident (whether 
or not a citizen), and his principal place of business is served by a 
local Internal Revenue Service office, the gift tax return shall be 
filed with any person assigned the responsibility to receive returns in 
that office.
    (b) Returns filed with service centers. Notwithstanding paragraph 
(a) of this section, unless a return is filed by hand carrying, whenever 
instructions applicable to gift tax returns provide that the returns be 
filed with a service center, the returns must be so filed in accordance 
with the instructions. Returns which are filed by hand carrying shall be 
filed with any person assigned the responsibility to receive hand-
carried returns in the local Internal Revenue Service office in 
accordance with paragraph (a) of this section.
    (c) Returns of certain nonresidents. If the donor is a nonresident 
(whether or not a citizen), and he does not have a principal place of 
business in the United States, the gift tax return required by section 
6019, whether or not such return is made by hand carrying, shall be 
filed with the Internal Revenue Service Center, Philadelphia, 
Pennsylvania, or as designated on the return form or in the instructions 
issued with respect to such form.

(Secs. 6091, 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 
26 U.S.C. 7805))

[T.D. 7012, 34 FR 7692, May 15, 1969, as amended by T.D. 7238, 37 FR 
28737, Dec. 29, 1972; 39 FR 797, Jan. 3, 1974; T.D. 7495, 42 FR 33726, 
July 1, 1977; T.D. 9156, 69 FR 55745, Sept. 16, 2004]

[[Page 724]]



Sec. 25.6091-2  Exceptional cases.

    Notwithstanding the provisions of Sec. 25.6091-1 the Commissioner 
may permit the filing of the gift tax return required by section 6019 in 
any local Internal Revenue Service office.

[T.D. 6600, 27 FR 4987, May 29, 1962, as amended by T.D. 9156, 69 FR 
55745, Sept. 16, 2004]



Sec. 25.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of any 
return or claim for refund of gift tax under chapter 12 of subtitle B of 
the Internal Revenue Code shall furnish a completed copy of the return 
or claim for refund to the taxpayer, and retain a completed copy or 
record in the manner stated in Sec. 1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 25.6109-1  Tax return preparers furnishing identifying numbers
for returns or claims for refund.

    (a) In general. Each gift tax return or claim for refund prepared by 
one or more signing tax return preparers must include the identifying 
number of the preparer required by Sec. 1.6695-1(b) of this chapter to 
sign the return or claim for refund in the manner stated in Sec. 
1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after December 31, 
2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 25.6151-1  Time and place for paying tax shown on return.

    The tax shown on the gift tax return is to be paid by the donor at 
the time and place fixed for filing the return (determined without 
regard to any extension of time for filing the return), unless the time 
for paying the tax is extended in accordance with the provisions of 
section 6161. However, for provisions relating to certain cases in which 
the time for paying the gift tax is postponed by reason of an individual 
serving in, or in support of, the Armed Forces of the United States in a 
combat zone, see section 7508. For provisions relating to the time and 
place for filing the return, see Sec. Sec. 25.6075-1 and 25.6091-1.



Sec. 25.6161-1  Extension of time for paying tax or deficiency.

    (a) In general--(1) Tax shown on return. A reasonable extension of 
time to pay the amount of tax shown on the return may be granted by the 
district director at the request of the donor. The period of such 
extension shall not be in excess of six months from the date fixed for 
the payment of the tax, except that if the taxpayer is abroad the period 
of extension may be in excess of six months.
    (2) Deficiency. The time for payment of any amount determined as a 
deficiency in respect of tax imposed by Chapter 12 of the Code, or for 
payment of any part thereof may be extended by the district director at 
the request of the donor for a period not to exceed 18 months from the 
date fixed for the payment of the deficiency, as shown on the notice and 
demand from the district director, and, in exceptional cases, for a 
further period not in excess of 12 months. No extension of time for the 
payment of a deficiency shall be granted if the deficiency is due to 
negligence, to intentional disregard of rules and regulations, or to 
fraud with intent to evade tax.
    (3) Extension of time for filing distinguished. The granting of an 
extension of time for filing a return does not operate to extend the 
time for the payment of the tax or any part thereof, unless so specified 
in the extension.
    (b) Undue hardship required for extension. An extension of the time 
for payment shall be granted only upon a satisfactory showing that 
payment on the due date of the amount with respect to which the 
extension is desired will result in an undue hardship. The extension 
will not be granted upon a general statement of hardship. The term 
``undue hardship'' means more than an inconvenience to the taxpayer. It 
must appear that substantial financial loss, for example, loss due to 
the sale of property at a sacrifice price, will result to the donor from 
making payment on

[[Page 725]]

the due date of the amount with respect to which the extension is 
desired. If a market exists, the sale of the property at the current 
market price is not ordinarily considered as resulting in an undue 
hardship.
    (c) Application for extension. An application for an extension of 
the time for payment of the tax shown on the return, or for the payment 
of any amount determined as a deficiency, shall be in writing and shall 
be accompanied by evidence showing the undue hardship that would result 
to the donor if the extension were refused. The application shall also 
be accompanied by a statement of the assets and liabilities of the donor 
and an itemized statement showing all receipts and disbursements for 
each of the 3 months immediately preceding the due date of the amount to 
which the application relates. The application, with supporting 
documents, must be filed with the applicable district director referred 
to in paragraph (a) of Sec. 25.6091-1 regardless of whether the return 
is to be filed with, or the tax is to be paid to, such district director 
on or before the date prescribed for payment of the amount with respect 
to which the extension is desired. The application will be examined by 
the district director, and within 30 days, if possible, will be denied, 
granted, or tentatively granted subject to certain conditions of which 
the donor will be notified. If an additional extension is desired, the 
request therefor must be made to the district director on or before the 
expiration of the period for which the prior extension is granted.
    (d) Payment pursuant to extension. If an extension of time for 
payment is granted, the amount the time for payment of which is so 
extended shall be paid on or before the expiration of the period of the 
extension without the necessity of notice and demand from the district 
director. The granting of an extension of the time for payment of the 
tax or deficiency does not relieve the donor from liability for the 
payment of interest thereon during the period of the extension. See 
section 6601 and Sec. 301.6601-1 of this chapter (Regulations on 
Procedure and Administration).

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7012, 34 FR 
7692, May 15, 1969]



Sec. 25.6165-1  Bonds where time to pay tax or deficiency has been
extended.

    If an extension of time for payment of tax or deficiency is granted 
under section 6161, the district director may, if he deems it necessary, 
require a bond for the payment of the amount in respect of which the 
extension is granted in accordance with the terms of the extension. 
However, such bond shall not exceed double the amount with respect to 
which the extension is granted. For provisions relating to form of 
bonds, see the regulations under section 7101 contained in part 301 of 
this chapter (Regulations on Procedure and Administration).

[T.D. 6600, 27 FR 4987, May 29, 1962]



Sec. 25.6302-1  Voluntary payments of gift taxes by electronic funds
transfer.

    Any person may voluntarily remit by electronic funds transfer any 
payment of tax to which this part 25 applies. Such payment must be made 
in accordance with procedures prescribed by the Commissioner.

[T.D. 8828, 64 FR 37676, July 13, 1999]



Sec. 25.6321-1  Lien for taxes.

    For regulations concerning the lien for taxes, see Sec. 301.6321-1 
of this chapter (Regulations on Procedure and Administration).



Sec. 25.6323-1  Validity and priority against certain persons.

    For regulations concerning the validity of the lien imposed by 
section 6321 against certain persons, see Sec. Sec. 301.6323(a)-1 
through 301.6323(i)-1 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 7429, 41 FR 35498, Aug. 23, 1976]



Sec. 25.6324-1  Special lien for gift tax.

    For regulations concerning the special lien for the gift tax, see 
Sec. 301.6324-1 of this chapter (Regulations on Procedure and 
Administration).



Sec. 25.6601-1  Interest on underpayment, nonpayment, or extensions 
of time for payment, of tax.

    For regulations concerning interest on underpayment, nonpayment, or 
extensions of time for payment of tax,

[[Page 726]]

see Sec. 301.6601-1 of this chapter (Regulations on Procedure and 
Administration).



Sec. 25.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of gift tax returns or claims for 
refund, see Sec. 1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after December 31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008, as amended at 74 FR 5105, Jan. 
29, 2009]



Sec. 25.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of gift tax under chapter 12 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under section 
6694(a) of the Code in the manner stated in Sec. 1.6694-2 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78451, Dec. 22, 2008]



Sec. 25.6694-3  Penalty for understatement due to willful, reckless,
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of gift tax under chapter 12 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under section 
6694(b) of the Code in the manner stated in Sec. 1.6694-3 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



Sec. 25.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's

liability and certain other procedural matters.

    (a) In general. For rules for the extension of period of collection 
when a tax return preparer who prepared a return or claim for refund for 
gift tax under chapter 12 of subtitle B of the Internal Revenue Code 
pays 15 percent of a penalty for understatement of taxpayer's liability, 
and procedural matters relating to the investigation, assessment and 
collection of the penalties under section 6694(a) and (b), the rules 
under Sec. 1.6694-4 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



Sec. 25.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of gift tax under chapter 12 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties for failure 
to furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure to 
furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec. 1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



Sec. 25.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for gift tax 
under chapter 12 of subtitle B of the Internal Revenue Code, or by an 
appraiser that prepared

[[Page 727]]

an appraisal in connection with such a return or claim for refund under 
section 6695A, the rules under Sec. 1.6696-1 of this chapter will 
apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



Sec. 25.6905-1  Discharge of executor from personal liability for
decedent's income and gift taxes.

    For regulations concerning the discharge of an executor from 
personal liability for a decedent's income and gift taxes, see Sec. 
301.6905-1 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 7238, 37 FR 28738, Dec. 29, 1972]



Sec. 25.7101-1  Form of bonds.

    For provisions relating to form of bonds, see the regulations under 
section 7101 contained in part 301 of this chapter (Regulations on 
Procedure and Administration).

[T.D. 6600, 27 FR 4987, May 29, 1962]

                      General Actuarial Valuations

    Source: Sections 25.7520-1 through 25.7520-4 appear at T.D. 8540, 59 
FR 30177, June 10, 1994, unless otherwise noted.



Sec. 25.7520-1  Valuation of annuities, unitrust interests, interests
for life or terms of years, and remainder or reversionary interests.

    (a) General actuarial valuations. (1) Except as otherwise provided 
in this section and in Sec. 25.7520-3(b) (relating to exceptions to the 
use of prescribed tables under certain circumstances), in the case of 
certain gifts after April 30, 1989, the fair market value of annuities, 
interests for life or for a term of years (including unitrust 
interests), remainders, and reversions is their present value determined 
under this section. See Sec. 20.2031-7(d) of this chapter (and, for 
periods prior to May 1, 2009, Sec. 20.2031-7A) for the computation of 
the value of annuities, unitrust interests, life estates, terms for 
years, remainders, and reversions, other than interests described in 
paragraphs (a)(2) and (a)(3) of this section.
    (2) In the case of a gift to a beneficiary of a pooled income fund, 
see Sec. 1.642(c)-6(e) of this chapter (or, for periods prior to May 1, 
2009, Sec. 1.642(c)-6A) with respect to the valuation of the remainder 
interest.
    (3) In the case of a gift to a beneficiary of a charitable remainder 
annuity trust after April 30, 1989, see Sec. 1.664-2 of this chapter 
with respect to the valuation of the remainder interest. See Sec. 
1.664-4 of this chapter (Income Tax Regulations) with respect to the 
valuation of the remainder interest in property transferred to a 
charitable remainder unitrust.
    (b) Components of valuation--(1) Interest rate component--(i) 
Section 7520 Interest rate. The section 7520 interest rate is the rate 
of return, rounded to the nearest two-tenths of one percent, that is 
equal to 120 percent of the applicable Federal mid-term rate, compounded 
annually, for purposes of section 1274(d)(1), for the month in which the 
valuation date falls. In rounding the rate to the nearest two-tenths of 
a percent, any rate that is midway between one two-tenths of a percent 
and another is rounded up to the higher of those two rates. For example, 
if 120 percent of the applicable Federal mid-term rate is 10.30, the 
section 7520 interest rate component is 10.4. The section 7520 interest 
rate is published monthly by the Internal Revenue Service in the 
Internal Revenue Bulletin (See Sec. 601.601(d)(2)(ii)(b) of this 
chapter).
    (ii) Valuation date. Generally, the valuation date is the date on 
which the gift is made. For gift tax purposes, the valuation date is the 
date on which the gift is complete under Sec. 25.2511-2. For special 
rules in the case of charitable transfers, see Sec. 25.7520-2.
    (2) Mortality component. The mortality component reflects the 
mortality data most recently available from the United States census. As 
new mortality data becomes available after each decennial census, the 
mortality component described in this section will be revised and the 
revised mortality component tables will be published in the regulations 
at that time. For gifts with valuation dates on or after May 1, 2009, 
the mortality component table (Table 2000CM) is contained in Sec. 
20.2031-7(d)(7). See Sec. 20.2031-7A of

[[Page 728]]

this chapter for mortality component tables applicable to gifts for 
which the valuation date falls before May 1, 2009.
    (c) Tables. The present value on the valuation date of an annuity, 
life estate, term of years, remainder, or reversion is computed by using 
the section 7520 interest rate component that is described in paragraph 
(b)(1) of this section and the mortality component that is described in 
paragraph (b)(2) of this section. Actuarial factors for determining 
these present values are included in tables in these regulations and in 
publications by the Internal Revenue Service. If a special factor is 
required in order to value an interest, the Internal Revenue Service 
will furnish the factor upon a request for a ruling. The request for a 
ruling must be accompanied by a recitation of the facts, including the 
date of birth for each measuring life and copies of relevant 
instruments. A request for a ruling must comply with the instructions 
for requesting a ruling published periodically in the Internal Revenue 
Bulletin (see Rev. Proc. 94-1, 1994-1 I.R.B. 10, and subsequent updates, 
and Sec. Sec. 601.201 and 601.601(d)(2)(ii)(b) of this chapter) and 
include payment of the required user fee.
    (1) Regulation sections containing tables with interest rates 
between 0.2 and 14 percent for valuation dates on or after May 1, 2009. 
Section 1.642(c)-6(e)(6) of this chapter contains Table S used for 
determining the present value of a single life remainder interest in a 
pooled income fund as defined in Sec. 1.642(c)-5. See Sec. 1.642(c)-6A 
for single life remainder factors applicable to valuation dates before 
May 1, 2009. Section 1.664-4(e)(6) contains Table F (payout factors) and 
Table D (actuarial factors used in determining the present value of a 
remainder interest postponed for a term of years). Section 1.664-4(e)(7) 
contains Table U(1) (unitrust single life remainder factors). These 
tables are used in determining the present value of a remainder interest 
in a charitable remainder unitrust as defined in Sec. 1.664-3. See 
Sec. 1.664-4A for unitrust single life remainder factors applicable to 
valuation dates before May 1, 2009. Section 20.2031-7(d)(6) of this 
chapter contains Table B (actuarial factors used in determining the 
present value of an interest for a term of years), Table K (annuity end-
of-interval adjustment factors), and Table J (term certain annuity 
beginning-of-interval adjustment factors). Section 20.2031-7(d)(7) 
contains Table S (single life remainder factors), and Table 2000CM 
(mortality components). These tables are used in determining the present 
value of annuities, life estates, remainders, and reversions. See Sec. 
20.2031-7A for single life remainder factors and mortality components 
applicable to valuation dates before May 1, 2009.
    (2) Internal Revenue Service publications containing tables with 
interest rates between 0.2 and 22 percent for valuation dates on or 
after May 1, 2009. The following documents are available, at no charge, 
electronically via the IRS Internet site at http://www.irs.gov:
    (i) Internal Revenue Service Publication 1457, ``Actuarial 
Valuations Version 3A'' (2009). This publication includes tables of 
valuation factors, as well as examples that show how to compute other 
valuation factors, for determining the present value of annuities, life 
estates, terms of years, remainders, and reversions, measured by one or 
two lives. These factors may also be used in the valuation of interests 
in a charitable remainder annuity trust as defined in Sec. 1.664-2 and 
a pooled income fund as defined in Sec. 1.642(c)-5 of this chapter.
    (ii) Internal Revenue Service Publication 1458, ``Actuarial 
Valuations Version 3B'' (2009). This publication includes term certain 
tables and tables of one and two life valuation factors for determining 
the present value of remainder interests in a charitable remainder 
unitrust as defined in Sec. 1.664-3 of this chapter.
    (iii) Internal Revenue Service Publication 1459, ``Actuarial 
Valuations Version 3C'' (2009). This publication includes tables for 
computing depreciation adjustment factors. See Sec. 1.170A-12 of this 
chapter.

[[Page 729]]

    (d) Effective/applicability date. This section applies on and after 
May 1, 2009.

[T.D. 8540, 59 FR 30177, June 10, 1994, as amended by T.D. 8819, 64 FR 
23227, 23229, Apr. 30, 1999; 64 FR 33196, June 22, 1999; T.D. 8886, 65 
FR 36943, June 12, 2000; T.D. 9448, 74 FR 21516, May 7, 2009; T.D. 9540, 
76 FR 49642, Aug. 10, 2011]



Sec. 25.7520-2  Valuation of charitable interests.

    (a) In general--(1) Valuation. Except as otherwise provided in this 
section and in Sec. 25.7520-3 (relating to exceptions to the use of 
prescribed tables under certain circumstances), the fair market value of 
annuities, interests for life or for a term for years, remainders, and 
reversions for which a gift tax charitable deduction is allowable is the 
present value of such interests determined under Sec. 25.7520-1.
    (2) Prior-month election rule. If any part of the property interest 
transferred qualifies for a gift tax charitable deduction under section 
2522, the donor may elect to compute the present value of the interest 
transferred by use of the section 7520 interest rate for the month 
during which the gift is made or the section 7520 interest rate for 
either of the 2 months preceding the month during which the gift is 
made. Paragraph (b) of this section explains how a prior-month election 
is made. The interest rate for the month so elected is the applicable 
section 7520 interest rate. If the actuarial factor for either or both 
of the 2 months preceding the month during which the gift is made is 
based on a mortality experience that is different from the mortality 
experience at the date of the gift and if the donor elects to use the 
section 7520 rate for a prior month with the different mortality 
experience, the donor must use the actuarial factor derived from the 
mortality experience in effect during the month of the section 7520 rate 
elected. All actuarial computations relating to the gift must be made by 
applying the interest rate component and the mortality component of the 
month elected by the donor.
    (3) Gifts of more than one interest in the same property. If a donor 
makes a gift of more than one interest in the same property at the same 
time, the donor must, for purposes of valuing the gifts, use the same 
interest rate and mortality components for the gift of each interest in 
the property. If the donor has made gifts of more than one interest in 
the same property at different times, the donor must determine the value 
of the gift by the use of the interest rate component and mortality 
component in effect during the month of that gift or, if applicable 
under paragraph (a)(2) of this section, either of the two months 
preceding the month of the gift.
    (4) Information required with tax return. The following information 
must be attached to the gift tax return (or to the amended return) if 
the donor claims a charitable deduction for the present value of a 
temporary or remainder interest in property--
    (i) A complete description of the interest that is transferred, 
including a copy of the instrument of transfer;
    (ii) The valuation date of the transfer;
    (iii) The names and identification numbers of the beneficiaries of 
the transferred interest;
    (iv) The names and birthdates of any measuring lives, a description 
of any relevant terminal illness condition of any measuring life, and 
(if applicable) an explanation of how any terminal illness condition was 
taken into account in valuing the interest; and
    (v) A computation of the deduction showing the applicable section 
7520 interest rate that is used to value the transferred interest.
    (5) Place for filing returns. See section 6091 of the Internal 
Revenue Code and the regulations thereunder for the place for filing the 
return or other document required by this section.
    (b) Election of interest rate component--(1) Time for making 
election. A taxpayer makes a prior-month election under paragraph (a)(2) 
of this section by attaching the information described in paragraph 
(b)(2) of this section to the donor's gift tax return or to an amended 
return for that year that is filed within 24 months after the later of 
the date the original return for the year was filed or the due date for 
filing the return.
    (2) Manner of making election. A statement that the prior-month 
election

[[Page 730]]

under section 7520(a) of the Internal Revenue Code is being made and 
that identifies the elected month must be attached to the gift tax 
return (or to the amended return).
    (3) Revocability. The prior-month election may be revoked by filing 
an amended return within 24 months after the later of the date the 
original return of tax for that year was filed or the due date for 
filing the return. The revocation must be filed in the place referred to 
in paragraph (a)(5) of this section.
    (c) Effective dates. Paragraph (a) of this section is effective as 
of May 1, 1989. Paragraph (b) of this section is effective for elections 
made after June 10, 1994.



Sec. 25.7520-3  Limitation on the application of section 7520.

    (a) Internal Revenue Code sections to which section 7520 does not 
apply. Section 7520 of the Internal Revenue Code does not apply for 
purposes of--
    (1) Part I, subchapter D of subtitle A (section 401 et. seq.), 
relating to the income tax treatment of certain qualified plans. 
(However, section 7520 does apply to the estate and gift tax treatment 
of certain qualified plans and for purposes of determining excess 
accumulations under section 4980A);
    (2) Sections 72 and 101(b), relating to the income taxation of life 
insurance, endowment, and annuity contracts, unless otherwise provided 
for in the regulations under sections 72, 101, and 1011 (see, 
particularly, Sec. Sec. 1.101-2(e)(1)(iii)(b)(2), and 1.1011-2(c), 
Example 8);
    (3) Sections 83 and 451, unless otherwise provided for in the 
regulations under those sections;
    (4) Section 457, relating to the valuation of deferred compensation, 
unless otherwise provided for in the regulations under section 457;
    (5) Sections 3121(v) and 3306(r), relating to the valuation of 
deferred amounts, unless otherwise provided for in the regulations under 
those sections;
    (6) Section 6058, relating to valuation statements evidencing 
compliance with qualified plan requirements, unless otherwise provided 
for in the regulations under section 6058;
    (7) Section 7872, relating to income and gift taxation of interest-
free loans and loans with below-market interest rates, unless otherwise 
provided for in the regulations under section 7872; or
    (8) Section 2702(a)(2)(A), relating to the value of a nonqualified 
retained interest upon a transfer of an interest in trust to or for the 
benefit of a member of the transferor's family; and
    (9) Any other section of the Internal Revenue Code to the extent 
provided by the Internal Revenue Service in revenue rulings or revenue 
procedures. (See Sec. Sec. 601.201 and 601.601 of this chapter).
    (b) Other limitations on the application of section 7520--(1) In 
general--(i) Ordinary beneficial interests. For purposes of this 
section:
    (A) An ordinary annuity interest is the right to receive a fixed 
dollar amount at the end of each year during one or more measuring lives 
or for some other defined period. A standard section 7520 annuity factor 
for an ordinary annuity interest represents the present worth of the 
right to receive $1.00 per year for a defined period, using the interest 
rate prescribed under section 7520 for the appropriate month. If an 
annuity interest is payable more often than annually or is payable at 
the beginning of each period, a special adjustment must be made in any 
computation with a standard section 7520 annuity factor.
    (B) An ordinary income interest is the right to receive the income 
from or the use of property during one or more measuring lives or for 
some other defined period. A standard section 7520 income factor for an 
ordinary income interest represents the present worth of the right to 
receive the use of $1.00 for a defined period, using the interest rate 
prescribed under section 7520 for the appropriate month. However, in the 
case of certain gifts made after October 8, 1990, if the donor does not 
retain a qualified annuity, unitrust, or reversionary interest, the 
value of any interest retained by the donor is considered to be zero if 
the remainder beneficiary is a member of the donor's family. See Sec. 
25.2702-2.
    (C) An ordinary remainder or reversionary interest is the right to 
receive an interest in property at the end of one or more measuring 
lives or some

[[Page 731]]

other defined period. A standard section 7520 remainder factor for an 
ordinary remainder or reversionary interest represents the present worth 
of the right to receive $1.00 at the end of a defined period, using the 
interest rate prescribed under section 7520 for the appropriate month.
    (ii) Certain restricted beneficial interests. A restricted 
beneficial interest is an annuity, income, remainder, or reversionary 
interest that is subject to any contingency, power, or other 
restriction, whether the restriction is provided for by the terms of the 
trust, will, or other governing instrument or is caused by other 
circumstances. In general, a standard section 7520 annuity, income, or 
remainder factor may not be used to value a restricted beneficial 
interest. However, a special section 7520 annuity, income, or remainder 
factor may be used to value a restricted beneficial interest under some 
circumstances. See paragraphs (b)(2)(v) Example 5 and (b)(4) of this 
section, which illustrate situations in which special section 7520 
actuarial factors are needed to take into account limitations on 
beneficial interests. See Sec. 25.7520-1(c) for requesting a special 
factor from the Internal Revenue Service.
    (iii) Other beneficial interests. If, under the provisions of this 
paragraph (b), the interest rate and mortality components prescribed 
under section 7520 are not applicable in determining the value of any 
annuity, income, remainder, or reversionary interest, the actual fair 
market value of the interest (determined without regard to section 7520) 
is based on all of the facts and circumstances if and to the extent 
permitted by the Internal Revenue Code provision applicable to the 
property interest.
    (2) Provisions of governing instrument and other limitations on 
source of payment--(i) Annuities. A standard section 7520 annuity factor 
may not be used to determine the present value of an annuity for a 
specified term of years or the life of one or more individuals unless 
the effect of the trust, will, or other governing instrument is to 
ensure that the annuity will be paid for the entire defined period. In 
the case of an annuity payable from a trust or other limited fund, the 
annuity is not considered payable for the entire defined period if, 
considering the applicable section 7520 interest rate on the valuation 
date of the transfer, the annuity is expected to exhaust the fund before 
the last possible annuity payment is made in full. For this purpose, it 
must be assumed that it is possible for each measuring life to survive 
until age 110. For example, for a fixed annuity payable annually at the 
end of each year, if the amount of the annuity payment (expressed as a 
percentage of the initial corpus) is less than or equal to the 
applicable section 7520 interest rate at the date of the transfer, the 
corpus is assumed to be sufficient to make all payments. If the 
percentage exceeds the applicable section 7520 interest rate and the 
annuity is for a definite term of years, multiply the annual annuity 
amount by the Table B term certain annuity factor, as described in Sec. 
25.7520-1(c)(1), for the number of years of the defined period. If the 
percentage exceeds the applicable section 7520 interest rate and the 
annuity is payable for the life of one or more individuals, multiply the 
annual annuity amount by the Table B annuity factor for 110 years minus 
the age of the youngest individual. If the result exceeds the limited 
fund, the annuity may exhaust the fund, and it will be necessary to 
calculate a special section 7520 annuity factor that takes into account 
the exhaustion of the trust or fund. This computation would be modified, 
if appropriate, to take into account annuities with different payment 
terms.
    (ii) Income and similar interests--(A) Beneficial enjoyment. A 
standard section 7520 income factor for an ordinary income interest is 
not to be used to determine the present value of an income or similar 
interest in trust for a term of years or for the life of one or more 
individuals unless the effect of the trust, will, or other governing 
instrument is to provide the income beneficiary with that degree of 
beneficial enjoyment of the property during the term of the income 
interest that the principles of the law of trusts accord to a person who 
is unqualifiedly designated as the income beneficiary of a trust for a 
similar period of time. This

[[Page 732]]

degree of beneficial enjoyment is provided only if it was the 
transferor's intent, as manifested by the provisions of the governing 
instrument and the surrounding circumstances, that the trust provide an 
income interest for the income beneficiary during the specified period 
of time that is consistent with the value of the trust corpus and with 
its preservation. In determining whether a trust arrangement evidences 
that intention, the treatment required or permitted with respect to 
individual items must be considered in relation to the entire system 
provided for in the administration of the subject trust. Similarly, in 
determining the present value of the right to use tangible property 
(whether or not in trust) for one or more measuring lives or for some 
other specified period of time, the interest rate component prescribed 
under section 7520 and Sec. 1.7520-1 of this chapter may not be used 
unless, during the specified period, the effect of the trust, will or 
other governing instrument is to provide the beneficiary with that 
degree of use, possession, and enjoyment of the property during the term 
of interest that applicable state law accords to a person who is 
unqualifiedly designated as a life tenant or term holder for a similar 
period of time.
    (B) Diversions of income and corpus. A standard section 7520 income 
factor for an ordinary income interest may not be used to value an 
income interest or similar interest in property for a term of years, or 
for one or more measuring lives, if--
    (1) The trust, will, or other governing instrument requires or 
permits the beneficiary's income or other enjoyment to be withheld, 
diverted, or accumulated for another person's benefit without the 
consent of the income beneficiary; or
    (2) The governing instrument requires or permits trust corpus to be 
withdrawn from the trust for another person's benefit without the 
consent of the income beneficiary during the income beneficiary's term 
of enjoyment and without accountability to the income beneficiary for 
such diversion.
    (iii) Remainder and reversionary interests. A standard section 7520 
remainder interest factor for an ordinary remainder or reversionary 
interest may not be used to determine the present value of a remainder 
or reversionary interest (whether in trust or otherwise) unless, 
consistent with the preservation and protection that the law of trusts 
would provide for a person who is unqualifiedly designated as the 
remainder beneficiary of a trust for a similar duration, the effect of 
the administrative and dispositive provisions for the interest or 
interests that precede the remainder or reversionary interest is to 
assure that the property will be adequately preserved and protected 
(e.g., from erosion, invasion, depletion, or damage) until the remainder 
or reversionary interest takes effect in possession and enjoyment. This 
degree of preservation and protection is provided only if it was the 
transferor's intent, as manifested by the provisions of the arrangement 
and the surrounding circumstances, that the entire disposition provide 
the remainder or reversionary beneficiary with an undiminished interest 
in the property transferred at the time of the termination of the prior 
interest.
    (iv) Pooled income fund interests. In general, pooled income funds 
are created and administered to achieve a special rate of return. A 
beneficial interest in a pooled income fund is not ordinarily valued 
using a standard section 7520 income or remainder interest factor. The 
present value of a beneficial interest in a pooled income fund is 
determined according to rules and special remainder factors prescribed 
in Sec. 1.642(c)-6 of this chapter and, when applicable, the rules set 
forth under paragraph (b)(3) of this section if the individual who is 
the measuring life is terminally ill at the time of the transfer.
    (v) Examples. The provisions of this paragraph (b)(2) are 
illustrated by the following examples:

    Example 1. Unproductive property. The donor transfers corporation 
stock to a trust under the terms of which all of the trust income is 
payable to A for life. Considering the applicable federal rate under 
section 7520 and the appropriate life estate factor for a person A's 
age, the value of A's income interest, if valued under this section, 
would be $10,000. After A's death, the trust is to terminate and the 
trust property is to be distributed to B. The trust specifically 
authorizes, but does not require, the trustee to retain the shares

[[Page 733]]

of stock. The corporation has paid no dividends on this stock during the 
past 5 years, and there is no indication that this policy will change in 
the near future. Under applicable state law, the corporation is 
considered to be a sound investment that satisfies fiduciary standards. 
The facts and circumstances, including applicable state law, indicate 
that the income beneficiary would not have the legal right to compel the 
trustee to make the trust corpus productive in conformity with the 
requirements for a lifetime trust income interest under applicable local 
law. Therefore, the life income interest in this case is considered 
nonproductive. Consequently, A's income interest may not be valued 
actuarially under this section.
    Example 2. Beneficiary's right to make trust productive. The facts 
are the same as in Example 1, except that the trustee is not 
specifically authorized to retain the shares of corporation stock. 
Further, the terms of the trust specifically provide that the life 
income beneficiary may require the trustee to make the trust corpus 
productive consistent with income yield standards for trusts under 
applicable state law. Under that law, the minimum rate of income that a 
productive trust may produce is substantially below the section 7520 
interest rate on the valuation date. In this case, because A, the income 
beneficiary, has the right to compel the trustee to make the trust 
productive for purposes of applicable local law during A's lifetime, the 
income interest is considered an ordinary income interest for purposes 
of this paragraph, and the standard section 7520 life income factor may 
be used to determine the value of A's income interest. However, in the 
case of gifts made after October 8, 1990, if the donor was the life 
income beneficiary, the value of the income interest would be considered 
to be zero in this situation. See Sec. 25.2702-2.
    Example 3. Annuity trust funded with unproductive property. The 
donor, who is age 60, transfers corporation stock worth $1,000,000 to a 
trust. The trust will pay a 6 percent ($60,000 per year) annuity in cash 
or other property to the donor for 10 years or until the donor's prior 
death. Upon the termination of the trust, the trust property is to be 
distributed to the donor's child. The section 7520 rate for the month of 
the transfer is 8.2 percent. The corporation has paid no dividends on 
the stock during the past 5 years, and there is no indication that this 
policy will change in the near future. Under applicable state law, the 
corporation is considered to be a sound investment that satisfies 
fiduciary standards. Therefore, the trust's sole investment in this 
corporation is not expected to adversely affect the interest of either 
the annuity beneficiary or the remainder beneficiary. Considering the 6 
percent annuity payout rate and the 8.2 percent section 7520 interest 
rate, the trust corpus is considered sufficient to pay this annuity for 
the entire 10-year term of the trust, or even indefinitely. The trust 
specifically authorizes, but does not require, the trustee to retain the 
shares of stock. Although it appears that neither beneficiary would be 
able to compel the trustee to make the trust corpus produce investment 
income, the annuity interest in this case is considered to be an 
ordinary annuity interest, and a section 7520 annuity factor may be used 
to determine the present value of the annuity. In this case, the section 
7520 annuity factor would represent the right to receive $1.00 per year 
for a term of 10 years or the prior death of a person age 60.
    Example 4. Unitrust funded with unproductive property. The facts are 
the same as in Example 3, except that the donor has retained a unitrust 
interest equal to 7 percent of the value of the trust property, valued 
as of the beginning of each year. Although the trust corpus is 
nonincome-producing, the present value of the donor's retained unitrust 
interest may be determined by using the section 7520 unitrust factor for 
a term of years or a prior death.
    Example 5. Eroding corpus in an annuity trust. (i) The donor, who is 
age 60 and in normal health, transfers property worth $1,000,000 to a 
trust on or after May 1, 2009, but before 2019. The trust will pay a 10 
percent ($100,000 per year) annuity to a charitable organization for the 
life of the donor, payable annually at the end of each period, and the 
remainder then will be distributed to the donor's child. The section 
7520 rate for the month of the transfer is 6.8 percent. First, it is 
necessary to determine whether the annuity may exhaust the corpus before 
all annuity payments are made. Because it is assumed that any measuring 
life may survive until age 110, any life annuity could require payments 
until the measuring life reaches age 110. Based on a section 7520 
interest rate of 6.8 percent, the determination of whether the annuity 
may exhaust the corpus before the termination of the annuity interest is 
made as follows:

Age to which life annuity may continue................               110
less: Age of measuring life at date of transfer.......                60
                                                       -----------------
    Number of years annuity may continue..............                50
Annual annuity payment................................       $100,000.00
times: Annuity factor for 50 years....................

[[Page 734]]

 
    derived from Table B..............................
                                                       -----------------
    (1-.037277/.068)..................................           14.1577
Present value of term certain annuity.................     $1,415,770.00
 

    (ii) Because the present value of an annuity for a term of 50 years 
exceeds the corpus, the annuity may exhaust the trust before all 
payments are made. Consequently, the annuity must be valued as an 
annuity payable for a term of years or until the prior death of the 
annuitant, with the term of years determined by when the fund will be 
exhausted by the annuity payments.
    (iii) The annuity factor for a term of years at 6.8 percent is 
derived by subtracting the applicable remainder factor in Table B (see 
Sec. 20.2031-7(d)(6)) from 1.000000 and then dividing the result by 
.068. An annuity of $100,000 payable at the end of each year for a 
period that has an annuity factor of 10.0 would have a present value 
exactly equal to the principal available to pay the annuity over the 
term. The annuity factor for 17 years is 9.8999 and the annuity factor 
for 18 years is 10.2059. Thus, it is determined that the $1,000,000 
initial transfer will be sufficient to make 17 annual payments of 
$100,000, but not to make the entire 18th payment. The present value of 
an annuity of $100,000 payable at the end of each year for 17 years is 
$100,000 times 9.8999 or $989,990. The remaining amount is $10,010.00. 
Of the initial corpus amount, $10,010.00 is not needed to make payments 
for 17 years, so this amount, as accumulated for 18 years, will be 
available for the final payment. The 18-year accumulation factor is (1 + 
0.068)\18\ or 3.268004, so the amount available in 18 years is 
$10,010.00 times 3.268004 or $32,712.72. Therefore, for purposes of 
analysis, the annuity payments are considered to be composed of two 
distinct annuity components. The two annuity components taken together 
must equal the total annual amount of $100,000. The first annuity 
component is the exact amount that the trust will have available for the 
final payment, $32,712.72. The second annuity component then must be 
$100,000 minus $32,712.72, or $67,287.28. Specifically, the initial 
corpus will be able to make payments of $67,287.28 per year for 17 years 
plus payments of $32,712.72 per year for 18 years. The total annuity is 
valued by adding the value of the two separate annuity components.
    (iv) Based on Table H of Publication 1457, Actuarial Valuations 
Version 3A, which may be obtained from the IRS Internet site, the 
present value of an annuity of $67,287.28 per year payable for 17 years 
or until the prior death of a person aged 60 is $597,013.12 ($67,287.28 
x 8.8726). The present value of an annuity of $32,712.72 per year 
payable for 18 years or until the prior death of a person aged 60 is 
$296,887.56 ($32,712.72 x 9.0756). Thus, the present value of the 
charitable annuity interest is $893,900.68 ($597,013.12 + $296,887.56).

    (3) Mortality component. The mortality component prescribed under 
section 7520 may not be used to determine the present value of an 
annuity, income interest, remainder interest, or reversionary interest 
if an individual who is a measuring life dies or is terminally ill at 
the time the gift is completed. For purposes of this paragraph (b)(3), 
an individual who is known to have an incurable illness or other 
deteriorating physical condition is considered terminally ill if there 
is at least a 50 percent probability that the individual will die within 
1 year. However, if the individual survives for eighteen months or 
longer after the date the gift is completed, that individual shall be 
presumed to have not been terminally ill at the date the gift was 
completed unless the contrary is established by clear and convincing 
evidence.
    (4) Example. The provisions of paragraph (b)(3) of this section are 
illustrated by the following example:

    Example. Terminal illness. The donor transfers property worth 
$1,000,000 to a child on or after May 1, 2009 but before 2019, in 
exchange for the child's promise to pay the donor $80,000 per year for 
the donor's life, payable annually at the end of each period. The donor 
is age 75 but has been diagnosed with an incurable illness and has at 
least a 50 percent probability of dying within 1 year. The section 7520 
interest rate for the month of the transfer is 7.6 percent, and the 
standard annuity factor at that interest rate for a person age 75 in 
normal health is 6.6493 (1--.49465/.076). Thus, if the donor were not 
terminally ill, the present value of the annuity would be $531,944.00 
($80,000 x 6.6493). Assuming the presumption provided in paragraph 
(b)(3) of this section does not apply, because there is at least a 50 
percent probability that the donor will die within 1 year, the standard 
section 7520 annuity factor may not be used to determine the present 
value of the donor's annuity interest. Instead, a special section 7520 
annuity factor must be computed that takes into account the projection 
of the donor's actual life expectancy.
    (5) Additional limitations. Section 7520 does not apply to the 
extent as may

[[Page 735]]

otherwise be provided by the Commissioner.
    (c) Effective/applicability dates. Section 25.7520-3(a) is effective 
as of May 1, 1989. The provisions of paragraph (b) of this section, 
except Example 5 in paragraph (b)(2)(v) and paragraph (b)(4), are 
effective with respect to gifts made after December 13, 1995. Example 5 
in paragraph (b)(2)(v) and paragraph (b)(4) are effective with respect 
to gifts made on or after May 1, 2009.

[T.D. 8540, 59 FR 30177, June 10, 1994, as amended by T.D. 8630, 60 FR 
63919, Dec. 13, 1995; T.D. 8819, 64 FR 23228, Apr. 30, 1999; T.D. 8886, 
65 FR 36943, June 12, 2000; T.D. 9448, 74 FR 21517, May 7, 2009; T.D. 
9540, 76 FR 49642, Aug. 10, 2011]



Sec. 25.7520-4  Transitional rules.

    (a) Reliance. If the valuation date is after April 30, 1989, and 
before June 10, 1994, a donor can rely on Notice 89-24, 1989-1 C.B. 660, 
or Notice 89-60, 1989-1 C.B. 700 (See Sec. 601.601(d)(2)(ii)(b) of this 
chapter), in valuing the transferred interest.
    (b) Transfers in 1989. If a donor transferred an interest in 
property by gift after December 31, 1988, and before May 1, 1989, 
retaining an interest in the same property and, after April 30, 1989, 
and before January 1, 1990, transferred the retained interest in the 
property, the donor may, at the donor's option, value the transfer of 
the retained interest under either Sec. 25.2512-5(d) or Sec. 25.2512-
5A(d).
    (c) Effective date. This section is effective as of May 1, 1989.



Sec. 25.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec. 301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



PART 26_GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX
REFORM ACT OF 1986--Table of Contents



Sec.
26.2600-1 Table of contents.
26.2601-1 Effective dates.
26.2611-1 Generation-skipping transfer defined.
26.2612-1 Definitions.
26.2613-1 Skip person.
26.2632-1 Allocation of GST exemption.
26.2641-1 Applicable rate of tax.
26.2642-1 Inclusion ratio.
26.2642-2 Valuation.
26.2642-3 Special rule for charitable lead annuity trusts.
26.2642-4 Redetermination of applicable fraction.
26.2642-5 Finality of inclusion ratio.
26.2642-6 Qualified severance.
26.2651-1 General assignment.
26.2651-2 Individual assigned to more than 1 generation.
26.2651-3 Effective dates.
26.2652-1 Transferor defined; other definitions.
26.2652-2 Special election for qualified terminable interest property.
26.2653-1 Taxation of multiple skips.
26.2654-1 Certain trusts treated as separate trusts.
26.2662-1 Generation-skipping transfer tax return requirements.
26.2663-1 Recapture tax under section 2032A.
26.2663-2 Application of chapter 13 to transfers by nonresidents not 
          citizens of the United States.
26.6011-4 Requirement of statement disclosing participation in certain 
          transactions by taxpayers.
26.6060-1 Reporting requirements for tax return preparers.
26.6081-1 Automatic extension of time for filing generation-skipping 
          transfer tax returns.
26.6107-1 Tax return preparer must furnish copy of return to taxpayer 
          and must retain a copy or record.
26.6109-1 Tax return preparers furnishing identifying numbers for 
          returns or claims for refund.
26.6694-1 Section 6694 penalties applicable to tax return preparer.
26.6694-2 Penalties for understatement due to an unreasonable position.
26.6694-3 Penalty for understatement due to willful, reckless, or 
          intentional conduct.
26.6694-4 Extension of period of collection when preparer pays 15 
          percent of a penalty for understatement of taxpayer's 
          liability and certain other procedural matters.
26.6695-1 Other assessable penalties with respect to the preparation of 
          tax returns for other persons.
26.6696-1 Claims for credit or refund by tax return preparers.
26.7701-1 Tax return preparer.

    Authority: 26 U.S.C. 7805 and 26 U.S.C. 2663.
    Section 26.2632-1 also issued under 26 U.S.C. 2632 and 2663.

[[Page 736]]

    Section 26.2642-4 also issued under 26 U.S.C. 2632 and 2663.
    Section 26.2642-6 also issued under 26 U.S.C. 2642.
    Section 26.2662-1 also issued under 26 U.S.C. 2662.
    Section 26.2663-2 also issued under 26 U.S.C. 2632 and 2663.
    Section 26.6011-4 also issued under 26 U.S.C. 6011
    Section 26.6060-1 also issued under 26 U.S.C. 6060(a).
    Section 26.6081-1 also issued under the authority of 26 U.S.C. 
6081(a).
    Section 26.6109-2 also issued under 26 U.S.C. 6109(a).
    Section 26.6695-1 also issued under 26 U.S.C. 6695(b).

    Editorial Note: At 74 FR 5105, Jan. 29, 2009, the authority citation 
to part 26 was amended; however, a portion of the amendment could not be 
incorporated due to inaccurate amendatory instruction.

    Source: T.D. 8644, 60 FR 66903, Dec. 27, 1995, unless otherwise 
noted.



Sec. 26.2600-1  Table of contents.

    This section lists the captions that appear in the regulations under 
sections 2601 through 2663.

Sec. 26.2601-1 Effective dates.
    (a) Transfers subject to the generation-skipping transfer tax.
    (1) In general.
    (2) Certain transfers treated as if made after October 22, 1986.
    (3) Certain trust events treated as if occurring after October 22, 
1986.
    (4) Example.
    (b) Exceptions.
    (1) Irrevocable trusts.
    (2) Transition rule for wills or revocable trusts executed before 
October 22, 1986.
    (3) Transition rule in the case of mental incompetency.
    (4) Retention of trust's exempt status in the case of modifications, 
etc.
    (5) Exceptions to additions rule.
    (c) Additional effective dates.
Sec. 26.2611-1 Generation-skipping transfer defined.
Sec. 26.2612-1 Definitions.
    (a) Direct skip.
    (b) Taxable termination.
    (1) In general.
    (2) Partial termination.
    (c) Taxable distribution.
    (1) In general.
    (2) Look-through rule not to apply.
    (d) Skip person.
    (e) Interest in trust.
    (1) In general.
    (2) Exceptions.
    (3) Disclaimers.
    (f) Examples.
Sec. 26.2613-1 Skip person.
Sec. 26.2632-1 Allocation of GST exemption.
    (a) General rule.
    (b) Lifetime allocations.
    (1) Automatic allocation to direct skips.
    (2)Automatic allocation to indirect skips made after December 31, 
2000.
    (3) Election to treat trust as GST trust.
    (4) Allocation to other transfers.
    (c) Special rules during an estate tax inclusion period.
    (1) In general.
    (2) Estate tax inclusion period defined.
    (3) Termination of an ETIP.
    (4) Treatment of direct skips.
    (5) Examples.
    (d) Allocations after the transferor's death.
    (1) Allocation by executor.
    (2) Automatic allocation after death.
    (e) Effective date.
Sec. 26.2641-1 Applicable rate of tax.
Sec. 26.2642-1 Inclusion ratio.
    (a) In general.
    (b) Numerator of applicable fraction.
    (1) In general.
    (2) GSTs occurring during an ETIP.
    (c) Denominator of applicable fraction.
    (1) In general.
    (2) Zero denominator.
    (3) Nontaxable gifts.
    (d) Examples.
Sec. 26.2642-2 Valuation.
    (a) Lifetime transfers.
    (1) In general.
    (2) Special rule for late allocations during life.
    (b) Transfers at death.
    (1) In general.
    (2) Special rule for pecuniary payments.
    (3) Special rule for residual transfers after payment of a pecuniary 
payment.
    (4) Appropriate interest.
    (c) Examples.
Sec. 26.2642-3 Special rule for charitable lead annuity trusts.
    (a) In general.
    (b) Adjusted GST exemption defined.
    (c) Example.
Sec. 26.2642-4 Redetermination of applicable fraction.
    (a) In general.
    (1) Multiple transfers to a single trust.
    (2) Consolidation of separate trusts.
    (3) Property included in transferor's gross estate.
    (4) Imposition of recapture tax under section 2032A.
    (b) Examples.
Sec. 26.2642-5 Finality of inclusion ratio.
    (a) Direct skips.
    (b) Other GSTs.
Sec. 26.2642-6 Qualified severance.
    (a) In general.
    (b) Qualified severance defined.
    (c) Effective date of qualified severance.
    (d) Requirements for a qualified severance.

[[Page 737]]

    (e) Reporting a qualified severance.
    (f) Time for making a qualified severance.
    (g) Trusts that were irrevocable on September 25, 1985.
    (1) In general.
    (2) Trusts in receipt of a post-September 25, 1985, addition.
    (h) Treatment of trusts resulting from a severance that is not a 
qualified severance.
    (i) [Reserved]
    (j) Examples.
    (k) Effective date.
    (1) In general.
    (2) Transition rule.
Sec. 26.2651-1 Generation assignment.
    (a) Special rule for persons with a deceased parent.
    (1) In general.
    (2) Special rules.
    (3) Established or derived.
    (4) Special rule in the case of additional contributions to a trust.
    (a) Limited application to collateral heirs.
    (b) Examples.
Sec. 26.2651-2 Individual assigned to more than one generation.
    (a) In general.
    (b) Exception.
    (c) Special rules.
    (1) Corresponding generation adjustment.
    (2) Continued application of generation assignment.
    (d) Example.
Sec. 26.2651-3 Effective dates.
    (a) In general.
    (b) Transition rule.
Sec. 26.2652-1 Transferor defined; other definitions.
    (a) Transferor defined.
    (1) In general.
    (2) Transfers subject to Federal estate or gift tax.
    (3) Special rule for certain QTIP trusts.
    (4) Exercise of certain nongeneral powers of appointment.
    (5) Split-gift transfers.
    (6) Examples.
    (b) Trust defined.
    (1) In general.
    (2) Examples.
    (c) Trustee defined.
    (d) Executor defined.
    (e) Interest in trust.
Sec. 26.2652-2 Special election for qualified terminable interest 
property.
    (a) In general.
    (b) Time and manner of making election.
    (c) Transitional rule.
    (d) Examples.
Sec. 26.2653-1 Taxation of multiple skips.
    (a) General rule.
    (b) Examples.
Sec. 26.2654-1 Certain trusts treated as separate trusts.
    (a) Single trust treated as separate trusts.
    (1) Substantially separate and independent shares.
    (2) Multiple transferors with respect to a single trust.
    (3) Severance of a single trust.
    (4) Allocation of exemption.
    (5) Examples.
    (b) Division of a trust included in the gross estate.
    (1) In general.
    (2) Special rule.
    (3) Allocation of exemption.
    (4) Example.
    (c) Cross reference.
Sec. 26.2662-1 Generation-skipping transfer tax return requirements.
    (a) In general.
    (b) Form of return.
    (1) Taxable distributions.
    (2) Taxable terminations.
    (3) Direct skip.
    (c) Person liable for tax and required to make return.
    (1) In general.
    (2) Special rule for direct skips occurring at death with respect to 
property held in trust arrangements.
    (3) Limitation on personal liability of trustee.
    (4) Exceptions.
    (d) Time and manner of filing return.
    (1) In general.
    (2) Exceptions for alternative valuation of taxable termination.
    (e) Place for filing returns.
    (f) Lien on property.
Sec. 26.2663-1 Recapture tax under section 2032A.
Sec. 26.2663-2 Application of chapter 13 to transfers by nonresidents 
not citizens of the United States.
    (a) In general.
    (b) Transfers subject to Chapter 13.
    (1) Direct skips.
    (2) Taxable distributions and taxable terminations.
    (c) Trusts funded in part with property subject to Chapter 13 and in 
part with property not subject to Chapter 13.
    (1) In general.
    (2) Nontax portion of the trust.
    (3) Special rule with respect to estate tax inclusion period.
    (d) Examples.
    (e) Transitional rule for allocations for transfers made before 
December 27, 1995.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995, as amended by T.D. 8912, 65 FR 
79738, Dec. 20, 2000; T.D. 9208, 70 FR 37260, June 29, 2005; T.D. 9214, 
70 FR 41141, July 18, 2005; T.D. 9348, 72 FR 42294, Aug. 2, 2007; T.D. 
9421, 73 FR 44650, July 31, 2008]



Sec. 26.2601-1  Effective dates.

    (a) Transfers subject to the generation-skipping transfer tax--(1) 
In general. Except as otherwise provided in this section, the provisions 
of chapter 13 of the

[[Page 738]]

Internal Revenue Code of 1986 (Code) apply to any generation-skipping 
transfer (as defined in section 2611) made after October 22, 1986.
    (2) Certain transfers treated as if made after October 22, 1986. 
Solely for purposes of chapter 13, an inter vivos transfer is treated as 
if it were made on October 23, 1986, if it was--
    (i) Subject to chapter 12 (regardless of whether a tax was actually 
incurred or paid); and
    (ii) Made after September 25, 1985, but before October 23, 1986. For 
purposes of this paragraph, the value of the property transferred shall 
be the value of the property on the date the property was transferred.
    (3) Certain trust events treated as if occurring after October 22, 
1986. For purposes of chapter 13, if an inter vivos transfer is made to 
a trust after September 25, 1985, but before October 23, 1986, any 
subsequent distribution from the trust or termination of an interest in 
the trust that occurred before October 23, 1986, is treated as occurring 
immediately after the deemed transfer on October 23, 1986. If more than 
one distribution or termination occurs with respect to a trust, the 
events are treated as if they occurred on October 23, 1986, in the same 
order as they occurred. See paragraph (b)(1)(iv)(B) of this section for 
rules determining the portion of distributions and terminations subject 
to tax under chapter 13. This paragraph (a)(3) does not apply to 
transfers to trusts not subject to chapter 13 by reason of the 
transition rules in paragraphs (b) (2) and (3) of this section. The 
provisions of this paragraph (a)(3) do not apply in determining the 
value of the property under chapter 13.
    (4) Example. The following example illustrates the principle that 
paragraph (a)(2) of this section is not applicable to transfers under a 
revocable trust that became irrevocable by reason of the transferor's 
death after September 25, 1985, but before October 23, 1986:

    Example. T created a revocable trust on September 30, 1985, that 
became irrevocable when T died on October 10, 1986. Although the trust 
terminated in favor of a grandchild of T, the transfer to the grandchild 
is not treated as occurring on October 23, 1986, pursuant to paragraph 
(a)(2) of this section because it is not an inter vivos transfer subject 
to chapter 12. The transfer is not subject to chapter 13 because it is 
in the nature of a testamentary transfer that occurred prior to October 
23, 1986.

    (b) Exceptions--(1) Irrevocable trusts--(i) In general. The 
provisions of chapter 13 do not apply to any generation-skipping 
transfer under a trust (as defined in section 2652(b)) that was 
irrevocable on September 25, 1985. The rule of the preceding sentence 
does not apply to a pro rata portion of any generation-skipping transfer 
under an irrevocable trust if additions are made to the trust after 
September 25, 1985. See paragraph (b)(1)(iv) of this section for rules 
for determining the portion of the trust that is subject to the 
provisions of chapter 13. Further, the rule in the first sentence of 
this paragraph (b)(1)(i) does not apply to a transfer of property 
pursuant to the exercise, release, or lapse of a general power of 
appointment that is treated as a taxable transfer under chapter 11 or 
chapter 12. The transfer is made by the person holding the power at the 
time the exercise, release, or lapse of the power becomes effective, and 
is not considered a transfer under a trust that was irrevocable on 
September 25, 1985. See paragraph (b)(1)(v)(B) of this section regarding 
the treatment of the release, exercise, or lapse of a power of 
appointment that will result in a constructive addition to a trust. See 
Sec. 26.2652-1(a) for the definition of a transferor.
    (ii) Irrevocable trust defined--(A) In general. Unless otherwise 
provided in either paragraph (b)(1)(ii) (B) or (C) of this section, any 
trust (as defined in section 2652(b)) in existence on September 25, 
1985, is considered an irrevocable trust.
    (B) Property includible in the gross estate under section 2038. For 
purposes of this chapter a trust is not an irrevocable trust to the 
extent that, on September 25, 1985, the settlor held a power with 
respect to such trust that would have caused the value of the trust to 
be included in the settlor's gross estate for Federal estate tax 
purposes by reason of section 2038 (without regard to powers 
relinquished before September 25, 1985) if the settlor had died on 
September 25, 1985. A trust is considered subject to a power on 
September 25, 1985, even though the exercise of the power was subject to 
the

[[Page 739]]

precedent giving of notice, or even though the exercise could take 
effect only on the expiration of a stated period, whether or not on or 
before September 25, 1985, notice had been given or the power had been 
exercised. A trust is not considered subject to a power if the power is, 
by its terms, exercisable only on the occurrence of an event or 
contingency not subject to the settlor's control (other than the death 
of the settlor) and if the event or contingency had not in fact taken 
place on September 25, 1985.
    (C) Property includible in the gross estate under section 2042. A 
policy of insurance on an individual's life that is treated as a trust 
under section 2652(b) is not considered an irrevocable trust to the 
extent that, on September 25, 1985, the insured possessed any incident 
of ownership (as defined in Sec. 20.2042-1(c) of this chapter, and 
without regard to any incidents of ownership relinquished before 
September 25, 1985), that would have caused the value of the trust, 
(i.e., the insurance proceeds) to be included in the insured's gross 
estate for Federal estate tax purposes by reason of section 2042, if the 
insured had died on September 25, 1985.
    (D) Examples. The following examples illustrate the application of 
this paragraph (b)(1):

    Example 1. Section 2038 applicable. On September 25, 1985, T, the 
settlor of a trust that was created before September 25, 1985, held a 
testamentary power to add new beneficiaries to the trust. T held no 
other powers over any portion of the trust. The testamentary power held 
by T would have caused the trust to be included in T's gross estate 
under section 2038 if T had died on September 25, 1985. Therefore, the 
trust is not an irrevocable trust for purposes of this section.
    Example 2. Section 2038 not applicable when power held by a person 
other than settlor. On September 25, 1985, S, the spouse of the settlor 
of a trust in existence on that date, had an annual right to withdraw a 
portion of the principal of the trust. The trust was otherwise 
irrevocable on that date. Because the power was not held by the settlor 
of the trust, it is not a power described in section 2038. Thus, the 
trust is considered an irrevocable trust for purposes of this section.
    Example 3. Section 2038 not applicable. In 1984, T created a trust 
and retained the right to expand the class of remaindermen to include 
any of T's afterborn grandchildren. As of September 25, 1985, all of T's 
grandchildren were named remaindermen of the trust. Since the exercise 
of T's power was dependent on there being afterborn grandchildren who 
were not members of the class of remaindermen, a contingency that did 
not exist on September 25, 1985, the trust is not considered subject to 
the power on September 25, 1985, and is an irrevocable trust for 
purposes of this section. The result is not changed even if 
grandchildren are born after September 25, 1985, whether or not T 
exercises the power to expand the class of remaindermen.
    Example 4. Section 2042 applicable. On September 25, 1985, T 
purchased an insurance policy on T's own life and designated child, C, 
and grandchild, GC, as the beneficiaries. T retained the power to obtain 
from the insurer a loan against the surrender value of the policy. T's 
insurance policy is a trust (as defined in section 2652(b)) for chapter 
13 purposes. The trust is not considered an irrevocable trust because, 
on September 25, 1985, T possessed an incident of ownership that would 
have caused the value of the policy to be included in T's gross estate 
under section 2042 if T had died on that date.
    Example 5. Trust partially irrevocable. In 1984, T created a trust 
naming T's grandchildren as the income and remainder beneficiaries. T 
retained the power to revoke the trust as to one-half of the principal 
at any time prior to T's death. T retained no other powers over the 
trust principal. T did not die before September 25, 1985, and did not 
exercise or release the power before that date. The half of the trust 
not subject to T's power to revoke is an irrevocable trust for purposes 
of this section.

    (iii) Trust containing qualified terminable interest property--(A) 
In general. For purposes of chapter 13, a trust described in paragraph 
(b)(1)(ii) of this section that holds qualified terminable interest 
property by reason of an election under section 2056(b)(7) or section 
2523(f) (made either on, before or after September 25, 1985) is treated 
in the same manner as if the decedent spouse or the donor spouse (as the 
case may be) had made an election under section 2652(a)(3). Thus, 
transfers from such trusts are not subject to chapter 13, and the 
decedent spouse or the donor spouse (as the case may be) is treated as 
the transferor of such property. The rule of this paragraph (b)(1)(iii) 
does not apply to that portion of the trust that is subject to chapter 
13 by reason of an addition to the trust occurring after September 25, 
1985. See Sec. 26.2652-2(a) for rules where an election under section 
2652(a)(3) is made. See Sec. 26.2652-2(c) for rules where a portion of 
a trust

[[Page 740]]

is subject to an election under section 2652(a)(3).
    (B) Examples. The following examples illustrate the application of 
this paragraph (b)(1)(iii):

    Example 1. QTIP election made after September 25, 1985. On March 28, 
1985, T established a trust. The trust instrument provided that the 
trustee must distribute all income annually to T's spouse, S, during S's 
life. Upon S's death, the remainder is to be distributed to GC, the 
grandchild of T and S. On April 15, 1986, T elected under section 
2523(f) to treat the property in the trust as qualified terminable 
interest property. On December 1, 1987, S died and soon thereafter the 
trust assets were distributed to GC. Because the trust was irrevocable 
on September 25, 1985, the transfer to GC is not subject to tax under 
chapter 13. T is treated as the transferor with respect to the transfer 
of the trust assets to GC in the same manner as if T had made an 
election under section 2652(a)(3) to reverse the effect of the section 
2523(f) election for chapter 13 purposes.
    Example 2. Section 2652(a)(3) election deemed to have been made. 
Assume the same facts as in Example 1, except the trust instrument 
provides that after S's death all income is to be paid annually to C, 
the child of T and S. Upon C's death, the remainder is to be distributed 
to GC. C died on October 1, 1992, and soon thereafter the trust assets 
are distributed to GC. Because the trust was irrevocable on September 
25, 1985, the termination of C's interest is not subject to chapter 13.

    (iv) Additions to irrevocable trusts--(A) In general. If an addition 
is made after September 25, 1985, to an irrevocable trust which is 
excluded from chapter 13 by reason of paragraph (b)(1) of this section, 
a pro rata portion of subsequent distributions from (and terminations of 
interests in property held in) the trust is subject to the provisions of 
chapter 13. If an addition is made, the trust is thereafter deemed to 
consist of two portions, a portion not subject to chapter 13 (the non-
chapter 13 portion) and a portion subject to chapter 13 (the chapter 13 
portion), each with a separate inclusion ratio (as defined in section 
2642(a)). The non-chapter 13 portion represents the value of the assets 
of the trust as it existed on September 25, 1985. The applicable 
fraction (as defined in section 2642(a)(2)) for the non-chapter 13 
portion is deemed to be 1 and the inclusion ratio for such portion is 0. 
The chapter 13 portion of the trust represents the value of all 
additions made to the trust after September 25, 1985. The inclusion 
ratio for the chapter 13 portion is determined under section 2642. This 
paragraph (b)(1)(iv)(A) requires separate portions of one trust only for 
purposes of determining inclusion ratios. For purposes of chapter 13, a 
constructive addition under paragraph (b)(1)(v) of this section is 
treated as an addition. See paragraph (b)(4) of this section for 
exceptions to the additions rule of this paragraph (b)(1)(iv). See Sec. 
26.2654-1(a)(2) for rules treating additions to a trust by an individual 
other than the initial transferor as a separate trust for purposes of 
chapter 13.
    (B) Terminations of interests in and distributions from trusts. 
Where a termination or distribution described in section 2612 occurs 
with respect to a trust to which an addition has been made, the portion 
of such termination or distribution allocable to the chapter 13 portion 
is determined by reference to the allocation fraction, as defined in 
paragraph (b)(1)(iv)(C) of this section. In the case of a termination 
described in section 2612(a) with respect to a trust, the portion of 
such termination that is subject to chapter 13 is the product of the 
allocation fraction and the value of the trust (to the extent of the 
terminated interest therein). In the case of a distribution described in 
section 2612(b) from a trust, the portion of such distribution that is 
subject to chapter 13 is the product of the allocation fraction and the 
value of the property distributed.
    (C) Allocation fraction--(1) In general. The allocation fraction 
allocates appreciation and accumulated income between the chapter 13 and 
non-chapter 13 portions of a trust. The numerator of the allocation 
fraction is the amount of the addition (valued as of the date the 
addition is made), determined without regard to whether any part of the 
transfer is subject to tax under chapter 11 or chapter 12, but reduced 
by the amount of any Federal or state estate or gift tax imposed and 
subsequently paid by the recipient trust with respect to the addition. 
The denominator of the allocation fraction is the total value of the 
entire trust immediately after the addition. For purposes of this 
paragraph (b)(1)(iv)(C), the

[[Page 741]]

total value of the entire trust is the fair market value of the property 
held in trust (determined under the rules of section 2031), reduced by 
any amount attributable to or paid by the trust and attributable to the 
transfer to the trust that is similar to an amount that would be 
allowable as a deduction under section 2053 if the addition had occurred 
at the death of the transferor, and further reduced by the same amount 
that the numerator was reduced to reflect Federal or state estate or 
gift tax incurred by and subsequently paid by the recipient trust with 
respect to the addition. Where there is more than one addition to 
principal after September 25, 1985, the portion of the trust subject to 
chapter 13 after each such addition is determined pursuant to a revised 
fraction. In each case, the numerator of the revised fraction is the sum 
of the value of the chapter 13 portion of the trust immediately before 
the latest addition, and the amount of the latest addition. The 
denominator of the revised fraction is the total value of the entire 
trust immediately after the addition. If the transfer to the trust is a 
generation-skipping transfer, the numerator and denominator are reduced 
by the amount of the generation-skipping transfer tax, if any, that is 
imposed by chapter 13 on the transfer and actually recovered from the 
trust. The allocation fraction is rounded off to five decimal places 
(.00001).
    (2) Examples. The following examples illustrate the application of 
paragraph (b)(1)(iv) of this section. In each of the examples, assume 
that the recipient trust does not pay any Federal or state transfer tax 
by reason of the addition.

    Example 1. Post September 25, 1985, addition to trust. (i) On August 
16, 1980, T established an irrevocable trust. Under the trust 
instrument, the trustee is required to distribute the entire income 
annually to T's child, C, for life, then to T's grandchild, GC, for 
life. Upon GC's death, the remainder is to be paid to GC's issue. On 
October 1, 1986, when the total value of the entire trust is $400,000, T 
transfers $100,000 to the trust. The allocation fraction is computed as 
follows:
[GRAPHIC] [TIFF OMITTED] TR27DE95.002

    (ii) Thus, immediately after the transfer, 20 percent of the value 
of future generation-skipping transfers under the trust will be subject 
to chapter 13.
    Example 2. Effect of expenses. Assume the same facts as in Example 
1, except immediately prior to the transfer on October 1, 1986, the fair 
market value of the individual assets in the trust totaled $400,000. 
Also, assume that the trust had accrued and unpaid debts, expenses, and 
taxes totaling $300,000. Assume further that the entire $300,000 
represented amounts that would be deductible under section 2053 if the 
trust were includible in the transferor's gross estate. The numerator of 
the allocation fraction is $100,000 and the denominator of the 
allocation fraction is $200,000 (($400,000-$300,000)+$100,000). Thus, 
the allocation fraction is .5 ($100,000/$200,000) and 50 percent of the 
value of future generation-skipping transfers will be subject to chapter 
13.
    Example 3. Multiple additions. (i) Assume the same facts as in 
Example 1, except on January 30, 1988, when the total value of the 
entire trust is $600,000, T transfers an additional $40,000 to the 
trust. Before the transfer, the value of the portion of the trust that 
was attributable to the prior addition was $120,000 ($600,000x.2). The 
new allocation fraction is computed as follows:
[GRAPHIC] [TIFF OMITTED] TR27DE95.003

    (ii) Thus, immediately after the transfer, 25 percent of the value 
of future generation-skipping transfers under the trust will be subject 
to chapter 13.

[[Page 742]]

    Example 4. Allocation fraction at time of generation-skipping 
transfer. Assume the same facts as in Example 3, except on March 1, 
1989, when the value of the trust is $800,000, C dies. A generation-
skipping transfer occurs at C's death because of the termination of C's 
life estate. Therefore, $200,000 ($800,000x.25) is subject to tax under 
chapter 13.

    (v) Constructive additions--(A) Powers of Appointment. Except as 
provided in paragraph (b)(1)(v)(B) of this section, where any portion of 
a trust remains in the trust after the post-September 25, 1985, release, 
exercise, or lapse of a power of appointment over that portion of the 
trust, and the release, exercise, or lapse is treated to any extent as a 
taxable transfer under chapter 11 or chapter 12, the value of the entire 
portion of the trust subject to the power that was released, exercised, 
or lapsed is treated as if that portion had been withdrawn and 
immediately retransferred to the trust at the time of the release, 
exercise, or lapse. The creator of the power will be considered the 
transferor of the addition except to the extent that the release, 
exercise, or lapse of the power is treated as a taxable transfer under 
chapter 11 or chapter 12. See Sec. 26.2652-1 for rules for determining 
the identity of the transferor of property for purposes of chapter 13.
    (B) Special rule for certain powers of appointment. The release, 
exercise, or lapse of a power of appointment (other than a general power 
of appointment as defined in section 2041(b)) is not treated as an 
addition to a trust if--
    (1) Such power of appointment was created in an irrevocable trust 
that is not subject to chapter 13 under paragraph (b)(1) of this 
section; and
    (2) In the case of an exercise, the power of appointment is not 
exercised in a manner that may postpone or suspend the vesting, absolute 
ownership or power of alienation of an interest in property for a 
period, measured from the date of creation of the trust, extending 
beyond any life in being at the date of creation of the trust plus a 
period of 21 years plus, if necessary, a reasonable period of gestation 
(the perpetuities period). For purposes of this paragraph 
(b)(1)(v)(B)(2), the exercise of a power of appointment that validly 
postpones or suspends the vesting, absolute ownership or power of 
alienation of an interest in property for a term of years that will not 
exceed 90 years (measured from the date of creation of the trust) will 
not be considered an exercise that postpones or suspends vesting, 
absolute ownership or the power of alienation beyond the perpetuities 
period. If a power is exercised by creating another power, it is deemed 
to be exercised to whatever extent the second power may be exercised.
    (C) Constructive addition if liability is not paid out of trust 
principal. Where a trust described in paragraph (b)(1) of this section 
is relieved of any liability properly payable out of the assets of such 
trust, the person or entity who actually satisfies the liability is 
considered to have made a constructive addition to the trust in an 
amount equal to the liability. The constructive addition occurs when the 
trust is relieved of liability (e.g., when the right of recovery is no 
longer enforceable). But see Sec. 26.2652-1(a)(3) for rules involving 
the application of section 2207A in the case of an election under 
section 2652(a)(3).
    (D) Examples. The following examples illustrate the application of 
this paragraph (b)(1)(v):

    Example 1. Lapse of a power of appointment. On June 19, 1980, T 
established an irrevocable trust with a corpus of $500,000. The trust 
instrument provides that the trustee shall distribute the entire income 
from the trust annually to T's spouse, S, during S's life. At S's death, 
the remainder is to be distributed to T and S's grandchild, GC. T also 
gave S a general power of appointment over one-half of the trust assets. 
On December 21, 1989, when the value of the trust corpus is $1,500,000, 
S died without having exercised the general power of appointment. The 
value of one-half of the trust corpus, $750,000 ($1,500,000 x .5) is 
included in S's gross estate under section 2041(a) and is subject to tax 
under Chapter 11. Because the value of one-half of the trust corpus is 
subject to tax under Chapter 11 with respect to S's estate, S is treated 
as the transferor of that property for purposes of Chapter 13 (see 
section 2652(a)(1)(A)). For purposes of the generation-skipping transfer 
tax, the lapse of S's power of appointment is treated as if $750,000 
($1,500,000 x .5) had been distributed to S and then transferred back to 
the trust. Thus, S is considered to have added $750,000 ($1,500,000 x 
.5) to the trust at the date of S's death. Because this constructive 
addition occurred after September 25, 1985, 50 percent of the corpus of 
the trust became subject to Chapter 13 at S's death.

[[Page 743]]

    Example 2. Multiple actual additions. On June 19, 1980, T 
established an irrevocable trust with a principal of $500,000. The trust 
instrument provides that the trustee shall distribute the entire income 
from the trust annually to T's spouse, S, during S's life. At S's death, 
the remainder is to be distributed to GC, the grandchild of T and S. On 
October 1, 1985, when the trust assets were valued at $800,000, T added 
$200,000 to the trust. After the transfer on October 1, 1985, the 
allocation fraction was .2 ($200,000/$1,000,000). On December 21, 1989, 
when the value of the trust principal is $1,000,000, T adds $1,000,000 
to the trust. After this addition, the new allocation fraction is 0.6 
($1,200,000/$2,000,000). The numerator of the fraction is the value of 
that portion of trust assets that were subject to chapter 13 immediately 
prior to the addition (by reason of the first addition), $200,000 (.2 x 
$1,000,000), plus the value of the second transfer, $1,000,000, which 
equals $1,200,000. The denominator of the fraction, $2,000,000, is the 
total value of the trust assets immediately after the second transfer. 
Thus, 60 percent of the principal of the trust becomes subject to 
chapter 13.
    Example 3. Entire portion of trust subject to lapsed power is 
treated as an addition. On September 25, 1985, B possessed a general 
power of appointment over the assets of an irrevocable trust that had 
been created by T in 1980. Under the terms of the trust, B's power 
lapsed on July 20, 1987. For Federal gift tax purposes, B is treated as 
making a gift of ninety-five percent (100%--5%) of the value of the 
principal (see section 2514). However, because the entire trust was 
subject to the power of appointment, 100 percent (that portion of the 
trust subject to the power) of the assets of the trust are treated as a 
constructive addition. Thus, the entire amount of all generation-
skipping transfers occurring pursuant to the trust instrument after July 
20, 1987, are subject to chapter 13.
    Example 4. Exercise of power of appointment in favor of another 
trust. On March 1, 1985, T established an irrevocable trust as defined 
in paragraph (b)(1)(ii) of this section. Under the terms of the trust 
instrument, the trustee is required to distribute the entire income 
annually to T's child, C, for life, then to T's grandchild, GC, for 
life. GC has the power to appoint any or all of the trust assets to 
Trust 2 which is an irrevocable trust (as defined in paragraph 
(b)(1)(ii) of this section) that was established on August 1, 1985. The 
terms of Trust 2's governing instrument provide that the trustee shall 
pay income to T's great grandchild, GGC, for life. Upon GGC's death, the 
remainder is to be paid to GGC's issue. GGC was alive on March 1, 1985, 
when Trust 1 was created. C died on April 1, 1986. On July 1, 1987, GC 
exercised the power of appointment. The exercise of GC's power does not 
subject future transfers from Trust 2 to tax under chapter 13 because 
the exercise of the power in favor of Trust 2 does not suspend the 
vesting, absolute ownership, or power of alienation of an interest in 
property for a period, measured from the date of creation of Trust 1, 
extending beyond the life of GGC (a beneficiary under Trust 2 who was in 
being at the date of creation of Trust 1) plus a period of 21 years. The 
result would be the same if Trust 2 had been created after the effective 
date of chapter 13.
    Example 5. Exercise of power of appointment in favor of another 
trust. Assume the same facts as in Example 4, except that GGC was born 
on March 28, 1986. The valid exercise of GC's power in favor of Trust 2 
causes the principal of Trust 1 to be subject to chapter 13, because GGC 
was not born until after the creation of Trust 1. Thus, such exercise 
may suspend the vesting, absolute ownership, or power of alienation of 
an interest in the trust principal for a period, measured from the date 
of creation of Trust 1, extending beyond the life of GGC (a beneficiary 
under Trust 2 who was not a life in being at the date of creation of 
Trust 1).
    Example 6. Extension for the longer of two periods. Prior to the 
effective date of chapter 13, GP established an irrevocable trust under 
which the trust income was to be paid to GP's child, C, for life. C was 
given a testamentary power to appoint the remainder in further trust for 
the benefit of C's issue. In default of C's exercise of the power, the 
remainder was to pass to charity. C died on February 3, 1995, survived 
by a child who was alive when GP established the trust. C exercised the 
power in a manner that validly extends the trust in favor of C's issue 
until the latter of May 15, 2064 (80 years from the date the trust was 
created), or the death of C's child plus 21 years. C's exercise of the 
power is a constructive addition to the trust because the exercise may 
extend the trust for a period longer than the permissible periods of 
either the life of C's child (a life in being at the creation of the 
trust) plus 21 years or a term not more than 90 years measured from the 
creation of the trust. On the other hand, if C's exercise of the power 
could extend the trust based only on the life of C's child plus 21 years 
or only for a term of 80 years from the creation of the trust (but not 
the later of the two periods) then the exercise of the power would not 
have been a constructive addition to the trust.
    Example 7. Extension for the longer of two periods. The facts are 
the same as in Example 6 except local law provides that the effect of 
C's exercise is to extend the term of the trust until May 15, 2064, 
whether or not C's child predeceases that date by more than 21 years. 
C's exercise is not a constructive addition to the trust because C 
exercised the power in a manner that cannot postpone or suspend vesting, 
absolute ownership, or power of alienation for a term of years that will 
exceed 90 years. The result would be the

[[Page 744]]

same if the effect of C's exercise is either to extend the term of the 
trust until 21 years after the death of C's child or to extend the term 
of the trust until the first to occur of May 15, 2064 or 21 years after 
the death of C's child.

    (vi) Appreciation and income. Except to the extent that the 
provisions of paragraphs (b)(1)(iv) and (v) of this section allocate 
subsequent appreciation and accumulated income between the original 
trust and additions thereto, appreciation in the value of the trust and 
undistributed income added thereto are not considered an addition to the 
principal of a trust.
    (2) Transition rule for wills or revocable trusts executed before 
October 22, 1986--(i) In general. The provisions of chapter 13 do not 
apply to any generation-skipping transfer under a will or revocable 
trust executed before October 22, 1986, provided that--
    (A) The document in existence on October 21, 1986, is not amended at 
any time after October 21, 1986, in any respect which results in the 
creation of, or an increase in the amount of, a generation-skipping 
transfer;
    (B) In the case of a revocable trust, no addition is made to the 
revocable trust after October 21, 1986, that results in the creation of, 
or an increase in the amount of, a generation-skipping transfer; and
    (C) The decedent dies before January 1, 1987.
    (ii) Revocable trust defined. For purposes of this section, the term 
revocable trust means any trust (as defined in section 2652(b)) except 
to the extent that, on October 22, 1986, the trust--
    (A) Was an irrevocable trust described in paragraph (b)(1) of this 
section; or
    (B) Would have been an irrevocable trust described in paragraph 
(b)(1) of this section had it not been created or become irrevocable 
after September 25, 1985, and before October 22, 1986.
    (iii) Will or revocable trust containing qualified terminable 
interest property. The rules contained in paragraph (b)(1)(iii) of this 
section apply to any will or revocable trust within the scope of the 
transition rule of this paragraph (b)(2).
    (iv) Amendments to will or revocable trust. For purposes of this 
paragraph (b)(2), an amendment to a will or a revocable trust in 
existence on October 21, 1986, is not considered to result in the 
creation of, or an increase in the amount of, a generation-skipping 
transfer where the amendment is--
    (A) Basically administrative or clarifying in nature and only 
incidentally increases the amount transferred; or
    (B) Designed to ensure that an existing bequest or transfer 
qualifies for the applicable marital or charitable deduction for estate, 
gift, or generation-skipping transfer tax purposes and only incidentally 
increases the amount transferred to a skip person or to a generation-
skipping trust.
    (v) Creation of, or increase in the amount of, a GST. In determining 
whether a particular amendment to a will or revocable trust creates, or 
increases the amount of, a generation-skipping transfer for purposes of 
this paragraph (b)(2), the effect of the instrument(s) in existence on 
October 21, 1986, is measured against the effect of the instrument(s) in 
existence on the date of death of the decedent or on the date of any 
prior generation-skipping transfer. If the effect of an amendment cannot 
be immediately determined, it is deemed to create, or increase the 
amount of, a generation-skipping transfer until a determination can be 
made.
    (vi) Additions to revocable trusts. Any addition made after October 
21, 1986, but before the death of the settlor, to a revocable trust 
subjects all subsequent generation-skipping transfers under the trust to 
the provisions of chapter 13. Any addition made to a revocable trust 
after the death of the settlor (if the settlor dies before January 1, 
1987) is treated as an addition to an irrevocable trust. See paragraph 
(b)(1)(v) of this section for rules involving constructive additions to 
trusts. See paragraph (b)(1)(v)(B) of this section for rules providing 
that certain transfers to trusts are not treated as additions for 
purposes of this section.
    (vii) Examples. The following examples illustrate the application of 
paragraph (b)(2)(iv) of this section:
    (A) Facts applicable to Examples 1 through 5. In each of Examples 1 
through 5 assume that T executed a

[[Page 745]]

will prior to October 22, 1986, and that T dies on December 31, 1986.

    Example 1. Administrative change. On November 1, 1986, T executes a 
codicil to T's will removing one of the co-executors named in the will. 
Although the codicil may have the effect of lowering administrative 
costs and thus increasing the amount transferred, it is considered 
administrative in nature and thus does not cause generation-skipping 
transfers under the will to be subject to chapter 13.
    Example 2. Effect of amendment not immediately determinable. On 
November 1, 1986, T executes a codicil to T's will revoking a bequest of 
$100,000 to C, a non-skip person (as defined under section 2613(b)) and 
causing that amount to be added to a residuary trust held for a skip 
person. The amendment is deemed to increase the amount of a generation-
skipping transfer and prevents any transfers under the will from 
qualifying under paragraph (b)(2)(i) of this section. If, however, C 
dies before T and under local law the property would have been added to 
the residue in any event because the bequest would have lapsed, the 
codicil is not considered an amendment that increases the amount of a 
generation-skipping transfer.
    Example 3. Refund of tax paid because of amendment. T's will 
provided that an amount equal to the maximum allowable marital deduction 
would pass to T's spouse with the residue of the estate passing to a 
trust established for the benefit of skip persons. On October 23, 1986, 
the will is amended to provide that the marital share passing to T's 
spouse shall be the lesser of the maximum allowable marital deduction or 
the minimum amount that will result in no estate tax liability for T's 
estate. The amendment may increase the amount of a generation-skipping 
transfer. Therefore, any generation-skipping transfers under the will 
are subject to tax under chapter 13. If it becomes apparent that the 
amendment does not increase the amount of a generation-skipping 
transfer, a claim for refund may be filed with respect to any 
generation-skipping transfer tax that was paid within the period set 
forth in section 6511. For example, it would become apparent that the 
amendment did not result in an increase in the residue if it is 
subsequently determined that the maximum marital deduction and the 
minimum amount that will result in no estate tax liability are equal in 
amount.
    Example 4. An amendment that increases a generation-skipping 
transfer causes complete loss of exempt status. T's will provided for 
the creation of two trusts for the benefit of skip persons. On November 
1, 1986, T executed a codicil to the will specifically increasing the 
amount of a generation-skipping transfer under the will. All transfers 
made pursuant to the will or either of the trusts created thereunder are 
precluded from qualifying under the transition rule of paragraph 
(b)(2)(i) of this section and are subject to tax under chapter 13.
    Example 5. Corrective action effective. Assume that T in Example 4 
later executes a second codicil deleting the increase to the generation-
skipping transfer. Because the provision increasing a generation-
skipping transfer does not become effective, it is not considered an 
amendment to a will in existence on October 22, 1986.

    (B) Facts applicable to Examples 6 through 8. T created a trust on 
September 30, 1985, in which T retained the power to revoke the transfer 
at any time prior to T's death. The trust provided that, upon the death 
of T, the income was to be paid to T's spouse, W, for life and then to 
A, B, and C, the children of T's sibling, S, in equal shares for life, 
with one-third of the principal to be distributed per stirpes to each 
child's surviving issue upon the death of the child. The trustee has the 
power to make discretionary distributions of trust principal to T's 
sibling, S.

    Example 6. Amendment that affects only a person who is not a skip 
person. A became disabled, and T modified the trust on December 1, 1986, 
to increase A's share of the income. Since the amendment does not result 
in the creation of, or increase in the amount of, a generation-skipping 
transfer, transfers pursuant to the trust are not subject to chapter 13.
    Example 7. Amendment that adds a skip person. Assume that T amends 
the trust to add T's grandchild, D, as an income beneficiary. The trust 
will be subject to the provisions of chapter 13 because the amendment 
creates a generation-skipping transfer.
    Example 8. Refund of tax paid during interim period when effect of 
amendment is not determinable. Assume that T amends the trust to provide 
that the issue of S are to take a one-fourth share of the principal per 
stirpes upon S's death. Because the distribution to be made upon S's 
death may involve skip persons, the amendment is considered an amendment 
that creates or increases the amount of a generation-skipping transfer 
until a determination can be made. Accordingly, any distributions from 
(or terminations of interests in) such trust are subject to chapter 13 
until it is determined that no skip person has been added to the trust. 
At that time, a claim for refund may be filed within the period set 
forth in section 6511 with respect to any generation-skipping transfer 
tax that was paid.


[[Page 746]]


    (3) Transition rule in the case of mental incompetency--(i) In 
general. If an individual was under a mental disability to change the 
disposition of his or her property continuously from October 22, 1986, 
until the date of his or her death, the provisions of chapter 13 do not 
apply to any generation-skipping transfer--
    (A) Under a trust (as defined in section 2652(b)) to the extent such 
trust consists of property, or the proceeds of property, the value of 
which was included in the gross estate of the individual (other than 
property transferred by or on behalf of the individual during the 
individual's life after October 22, 1986); or
    (B) Which is a direct skip (other than a direct skip from a trust) 
that occurs by reason of the death of the individual.
    (ii) Mental disability defined. For purposes of this paragraph 
(b)(2), the term mental disability means mental incompetence to execute 
an instrument governing the disposition of the individual's property, 
whether or not there was an adjudication of incompetence and regardless 
of whether there has been an appointment of a guardian, fiduciary, or 
other person charged with either the care of the individual or the care 
of the individual's property.
    (iii)(A) Decedent who has not been adjudged mentally incompetent. If 
there has not been a court adjudication that the decedent was mentally 
incompetent on or before October 22, 1986, the executor must file, with 
Form 706, either--
    (1) A certification from a qualified physician stating that the 
decedent was--
    (i) Mentally incompetent at all times on and after October 22, 1986; 
and
    (ii) Did not regain competence to modify or revoke the terms of the 
trust or will prior to his or her death; or
    (2) Sufficient other evidence demonstrating that the decedent was 
mentally incompetent at all times on and after October 22, 1986, as well 
as a statement explaining why no certification is available from a 
physician; and
    (3) Any judgement or decree relating to the decedent's incompetency 
that was made after October 22, 1986.
    (B) Such items in paragraphs (b)(3)(iii)(A)(1), (2), and (3) of this 
section will be considered relevant, but not determinative, in 
establishing the decedent's state of competency.
    (iv) Decedent who has been adjudged mentally incompetent. If the 
decedent has been adjudged mentally incompetent on or before October 22, 
1986, a copy of the judgment or decree, and any modification thereof, 
must be filed with the Form 706.
    (v) Rule applies even if another person has power to change trust 
terms. In the case of a transfer from a trust, this paragraph (b)(3) 
applies even though a person charged with the care of the decedent or 
the decedent's property has the power to revoke or modify the terms of 
the trust, provided that the power is not exercised after October 22, 
1986, in a manner that creates, or increases the amount of, a 
generation-skipping transfer. See paragraph (b)(2)(iv) of this section 
for rules concerning amendments that create or increase the amount of a 
generation-skipping transfer.
    (vi) Example. The following example illustrates the application of 
paragraph (b)(3)(v) of this section:

    Example. T was mentally incompetent on October 22, 1986, and 
remained so until death in 1993. Prior to becoming incompetent, T 
created a revocable generation-skipping trust that was includible in T's 
gross estate. Prior to October 22, 1986, the appropriate court issued an 
order under which P, who was thereby charged with the care of T's 
property, had the power to modify or revoke the revocable trust. 
Although P exercised the power after October 22, 1986, and while T was 
incompetent, the power was not exercised in a manner that created, or 
increased the amount of, a generation-skipping transfer. Thus, the 
existence and exercise of P's power did not cause the trust to lose its 
exempt status under paragraph (b)(3) of this section. The result would 
be the same if the court order was issued after October 22, 1986.

    (4) Retention of trust's exempt status in the case of modifications, 
etc.--(i) In general. This paragraph (b)(4) provides rules for 
determining when a modification, judicial construction, settlement 
agreement, or trustee action with respect to a trust that is exempt from 
the generation-skipping transfer tax under paragraph (b)(1), (2), or (3) 
of this section (hereinafter referred to as an

[[Page 747]]

exempt trust) will not cause the trust to lose its exempt status. In 
general, unless specifically provided otherwise, the rules contained in 
this paragraph are applicable only for purposes of determining whether 
an exempt trust retains its exempt status for generation-skipping 
transfer tax purposes. Thus (unless specifically noted), the rules do 
not apply in determining, for example, whether the transaction results 
in a gift subject to gift tax, or may cause the trust to be included in 
the gross estate of a beneficiary, or may result in the realization of 
gain for purposes of section 1001.
    (A) Discretionary powers. The distribution of trust principal from 
an exempt trust to a new trust or retention of trust principal in a 
continuing trust will not cause the new or continuing trust to be 
subject to the provisions of chapter 13, if--
    (1) Either--
    (i) The terms of the governing instrument of the exempt trust 
authorize distributions to the new trust or the retention of trust 
principal in a continuing trust, without the consent or approval of any 
beneficiary or court; or
    (ii) At the time the exempt trust became irrevocable, state law 
authorized distributions to the new trust or retention of principal in 
the continuing trust, without the consent or approval of any beneficiary 
or court; and
    (2) The terms of the governing instrument of the new or continuing 
trust do not extend the time for vesting of any beneficial interest in 
the trust in a manner that may postpone or suspend the vesting, absolute 
ownership, or power of alienation of an interest in property for a 
period, measured from the date the original trust became irrevocable, 
extending beyond any life in being at the date the original trust became 
irrevocable plus a period of 21 years, plus if necessary, a reasonable 
period of gestation. For purposes of this paragraph (b)(4)(i)(A), the 
exercise of a trustee's distributive power that validly postpones or 
suspends the vesting, absolute ownership, or power of alienation of an 
interest in property for a term of years that will not exceed 90 years 
(measured from the date the original trust became irrevocable) will not 
be considered an exercise that postpones or suspends vesting, absolute 
ownership, or the power of alienation beyond the perpetuities period. If 
a distributive power is exercised by creating another power, it is 
deemed to be exercised to whatever extent the second power may be 
exercised.
    (B) Settlement. A court-approved settlement of a bona fide issue 
regarding the administration of the trust or the construction of terms 
of the governing instrument will not cause an exempt trust to be subject 
to the provisions of chapter 13, if--
    (1) The settlement is the product of arm's length negotiations; and
    (2) The settlement is within the range of reasonable outcomes under 
the governing instrument and applicable state law addressing the issues 
resolved by the settlement. A settlement that results in a compromise 
between the positions of the litigating parties and reflects the 
parties' assessments of the relative strengths of their positions is a 
settlement that is within the range of reasonable outcomes.
    (C) Judicial construction. A judicial construction of a governing 
instrument to resolve an ambiguity in the terms of the instrument or to 
correct a scrivener's error will not cause an exempt trust to be subject 
to the provisions of chapter 13, if--
    (1) The judicial action involves a bona fide issue; and
    (2) The construction is consistent with applicable state law that 
would be applied by the highest court of the state.
    (D) Other changes. (1) A modification of the governing instrument of 
an exempt trust (including a trustee distribution, settlement, or 
construction that does not satisfy paragraph (b)(4)(i)(A), (B), or (C) 
of this section) by judicial reformation, or nonjudicial reformation 
that is valid under applicable state law, will not cause an exempt trust 
to be subject to the provisions of chapter 13, if the modification does 
not shift a beneficial interest in the trust to any beneficiary who 
occupies a lower generation (as defined in section 2651) than the person 
or persons who held the beneficial interest prior to the modification, 
and the modification does not extend the time for vesting of any 
beneficial interest in the

[[Page 748]]

trust beyond the period provided for in the original trust.
    (2) For purposes of this section, a modification of an exempt trust 
will result in a shift in beneficial interest to a lower generation 
beneficiary if the modification can result in either an increase in the 
amount of a GST transfer or the creation of a new GST transfer. To 
determine whether a modification of an irrevocable trust will shift a 
beneficial interest in a trust to a beneficiary who occupies a lower 
generation, the effect of the instrument on the date of the modification 
is measured against the effect of the instrument in existence 
immediately before the modification. If the effect of the modification 
cannot be immediately determined, it is deemed to shift a beneficial 
interest in the trust to a beneficiary who occupies a lower generation 
(as defined in section 2651) than the person or persons who held the 
beneficial interest prior to the modification. A modification that is 
administrative in nature that only indirectly increases the amount 
transferred (for example, by lowering administrative costs or income 
taxes) will not be considered to shift a beneficial interest in the 
trust. In addition, administration of a trust in conformance with 
applicable local law that defines the term income as a unitrust amount 
(or permits a right to income to be satisfied by such an amount) or that 
permits the trustee to adjust between principal and income to fulfill 
the trustee's duty of impartiality between income and principal 
beneficiaries will not be considered to shift a beneficial interest in 
the trust, if applicable local law provides for a reasonable 
apportionment between the income and remainder beneficiaries of the 
total return of the trust and meets the requirements of Sec. 1.643(b)-1 
of this chapter.
    (E) Examples. The following examples illustrate the application of 
this paragraph (b)(4). In each example, assume that the trust 
established in 1980 was irrevocable for purposes of paragraph (b)(1)(ii) 
of this section and that there have been no additions to any trust after 
September 25, 1985. The examples are as follows:

    Example 1. Trustee's power to distribute principal authorized under 
trust instrument. In 1980, Grantor established an irrevocable trust 
(Trust) for the benefit of Grantor's child, A, A's spouse, and A's 
issue. At the time Trust was established, A had two children, B and C. A 
corporate fiduciary was designated as trustee. Under the terms of Trust, 
the trustee has the discretion to distribute all or part of the trust 
income to one or more of the group consisting of A, A's spouse or A's 
issue. The trustee is also authorized to distribute all or part of the 
trust principal to one or more trusts for the benefit of A, A's spouse, 
or A's issue under terms specified by the trustee in the trustee's 
discretion. Any trust established under Trust, however, must terminate 
21 years after the death of the last child of A to die who was alive at 
the time Trust was executed. Trust will terminate on the death of A, at 
which time the remaining principal will be distributed to A's issue, per 
stirpes. In 2002, the trustee distributes part of Trust's principal to a 
new trust for the benefit of B and C and their issue. The new trust will 
terminate 21 years after the death of the survivor of B and C, at which 
time the trust principal will be distributed to the issue of B and C, 
per stirpes. The terms of the governing instrument of Trust authorize 
the trustee to make the distribution to a new trust without the consent 
or approval of any beneficiary or court. In addition, the terms of the 
governing instrument of the new trust do not extend the time for vesting 
of any beneficial interest in a manner that may postpone or suspend the 
vesting, absolute ownership or power of alienation of an interest in 
property for a period, measured from the date of creation of Trust, 
extending beyond any life in being at the date of creation of Trust plus 
a period of 21 years, plus if necessary, a reasonable period of 
gestation. Therefore, neither Trust nor the new trust will be subject to 
the provisions of chapter 13 of the Internal Revenue Code.
    Example 2. Trustee's power to distribute principal pursuant to state 
statute. In 1980, Grantor established an irrevocable trust (Trust) for 
the benefit of Grantor's child, A, A's spouse, and A's issue. At the 
time Trust was established, A had two children, B and C. A corporate 
fiduciary was designated as trustee. Under the terms of Trust, the 
trustee has the discretion to distribute all or part of the trust income 
or principal to one or more of the group consisting of A, A's spouse or 
A's issue. Trust will terminate on the death of A, at which time, the 
trust principal will be distributed to A's issue, per stirpes. Under a 
state statute enacted after 1980 that is applicable to Trust, a trustee 
who has the absolute discretion under the terms of a testamentary 
instrument or irrevocable inter vivos trust agreement to invade the 
principal of a trust for the benefit of the income beneficiaries of the 
trust, may exercise the discretion by appointing so much or all of

[[Page 749]]

the principal of the trust in favor of a trustee of a trust under an 
instrument other than that under which the power to invade is created, 
or under the same instrument. The trustee may take the action either 
with consent of all the persons interested in the trust but without 
prior court approval, or with court approval, upon notice to all of the 
parties. The exercise of the discretion, however, must not reduce any 
fixed income interest of any income beneficiary of the trust and must be 
in favor of the beneficiaries of the trust. Under state law prior to the 
enactment of the state statute, the trustee did not have the authority 
to make distributions in trust. In 2002, the trustee distributes one-
half of Trust's principal to a new trust that provides for the payment 
of trust income to A for life and further provides that, at A's death, 
one-half of the trust remainder will pass to B or B's issue and one-half 
of the trust will pass to C or C's issue. Because the state statute was 
enacted after Trust was created and requires the consent of all of the 
parties, the transaction constitutes a modification of Trust. However, 
the modification does not shift any beneficial interest in Trust to a 
beneficiary or beneficiaries who occupy a lower generation than the 
person or persons who held the beneficial interest prior to the 
modification. In addition, the modification does not extend the time for 
vesting of any beneficial interest in Trust beyond the period provided 
for in the original trust. The new trust will terminate at the same date 
provided under Trust. Therefore, neither Trust nor the new trust will be 
subject to the provisions of chapter 13 of the Internal Revenue Code.
    Example 3. Construction of an ambiguous term in the instrument. In 
1980, Grantor established an irrevocable trust for the benefit of 
Grantor's children, A and B, and their issue. The trust is to terminate 
on the death of the last to die of A and B, at which time the principal 
is to be distributed to their issue. However, the provision governing 
the termination of the trust is ambiguous regarding whether the trust 
principal is to be distributed per stirpes, only to the children of A 
and B, or per capita among the children, grandchildren, and more remote 
issue of A and B. In 2002, the trustee files a construction suit with 
the appropriate local court to resolve the ambiguity. The court issues 
an order construing the instrument to provide for per capita 
distributions to the children, grandchildren, and more remote issue of A 
and B living at the time the trust terminates. The court's construction 
resolves a bona fide issue regarding the proper interpretation of the 
instrument and is consistent with applicable state law as it would be 
interpreted by the highest court of the state. Therefore, the trust will 
not be subject to the provisions of chapter 13 of the Internal Revenue 
Code.
    Example 4. Change in trust situs. In 1980, Grantor, who was 
domiciled in State X, executed an irrevocable trust for the benefit of 
Grantor's issue, naming a State X bank as trustee. Under the terms of 
the trust, the trust is to terminate, in all events, no later than 21 
years after the death of the last to die of certain designated 
individuals living at the time the trust was executed. The provisions of 
the trust do not specify that any particular state law is to govern the 
administration and construction of the trust. In State X, the common law 
rule against perpetuities applies to trusts. In 2002, a State Y bank is 
named as sole trustee. The effect of changing trustees is that the situs 
of the trust changes to State Y, and the laws of State Y govern the 
administration and construction of the trust. State Y law contains no 
rule against perpetuities. In this case, however, in view of the terms 
of the trust instrument, the trust will terminate at the same time 
before and after the change in situs. Accordingly, the change in situs 
does not shift any beneficial interest in the trust to a beneficiary who 
occupies a lower generation (as defined in section 2651) than the person 
or persons who held the beneficial interest prior to the transfer. 
Furthermore, the change in situs does not extend the time for vesting of 
any beneficial interest in the trust beyond that provided for in the 
original trust. Therefore, the trust will not be subject to the 
provisions of chapter 13 of the Internal Revenue Code. If, in this 
example, as a result of the change in situs, State Y law governed such 
that the time for vesting was extended beyond the period prescribed 
under the terms of the original trust instrument, the trust would not 
retain exempt status.
    Example 5. Division of a trust. In 1980, Grantor established an 
irrevocable trust for the benefit of his two children, A and B, and 
their issue. Under the terms of the trust, the trustee has the 
discretion to distribute income and principal to A, B, and their issue 
in such amounts as the trustee deems appropriate. On the death of the 
last to die of A and B, the trust principal is to be distributed to the 
living issue of A and B, per stirpes. In 2002, the appropriate local 
court approved the division of the trust into two equal trusts, one for 
the benefit of A and A's issue and one for the benefit of B and B's 
issue. The trust for A and A's issue provides that the trustee has the 
discretion to distribute trust income and principal to A and A's issue 
in such amounts as the trustee deems appropriate. On A's death, the 
trust principal is to be distributed equally to A's issue, per stirpes. 
If A dies with no living descendants, the principal will be added to the 
trust for B and B's issue. The trust for B and B's issue is identical 
(except for the beneficiaries), and terminates at B's death at which 
time the trust principal is to be distributed equally to B's issue, per 
stirpes. If B dies with no living

[[Page 750]]

descendants, principal will be added to the trust for A and A's issue. 
The division of the trust into two trusts does not shift any beneficial 
interest in the trust to a beneficiary who occupies a lower generation 
(as defined in section 2651) than the person or persons who held the 
beneficial interest prior to the division. In addition, the division 
does not extend the time for vesting of any beneficial interest in the 
trust beyond the period provided for in the original trust. Therefore, 
the two partitioned trusts resulting from the division will not be 
subject to the provisions of chapter 13 of the Internal Revenue Code.
    Example 6. Merger of two trusts. In 1980, Grantor established an 
irrevocable trust for Grantor's child and the child's issue. In 1983, 
Grantor's spouse also established a separate irrevocable trust for the 
benefit of the same child and issue. The terms of the spouse's trust and 
Grantor's trust are identical. In 2002, the appropriate local court 
approved the merger of the two trusts into one trust to save 
administrative costs and enhance the management of the investments. The 
merger of the two trusts does not shift any beneficial interest in the 
trust to a beneficiary who occupies a lower generation (as defined in 
section 2651) than the person or persons who held the beneficial 
interest prior to the merger. In addition, the merger does not extend 
the time for vesting of any beneficial interest in the trust beyond the 
period provided for in the original trust. Therefore, the trust that 
resulted from the merger will not be subject to the provisions of 
chapter 13 of the Internal Revenue Code.
    Example 7. Modification that does not shift an interest to a lower 
generation. In 1980, Grantor established an irrevocable trust for the 
benefit of Grantor's grandchildren, A, B, and C. The trust provides that 
income is to be paid to A, B, and C, in equal shares for life. The trust 
further provides that, upon the death of the first grandchild to die, 
one-third of the principal is to be distributed to that grandchild's 
issue, per stirpes. Upon the death of the second grandchild to die, one-
half of the remaining trust principal is to be distributed to that 
grandchild's issue, per stirpes, and upon the death of the last 
grandchild to die, the remaining principal is to be distributed to that 
grandchild's issue, per stirpes. In 2002, A became disabled. 
Subsequently, the trustee, with the consent of B and C, petitioned the 
appropriate local court and the court approved a modification of the 
trust that increased A's share of trust income. The modification does 
not shift a beneficial interest to a lower generation beneficiary 
because the modification does not increase the amount of a GST transfer 
under the original trust or create the possibility that new GST 
transfers not contemplated in the original trust may be made. In this 
case, the modification will increase the amount payable to A who is a 
member of the same generation as B and C. In addition, the modification 
does not extend the time for vesting of any beneficial interest in the 
trust beyond the period provided for in the original trust. Therefore, 
the trust as modified will not be subject to the provisions of chapter 
13 of the Internal Revenue Code. However, the modification increasing 
A's share of trust income is a transfer by B and C to A for Federal gift 
tax purposes.
    Example 8. Conversion of income interest into unitrust interest. In 
1980, Grantor established an irrevocable trust under the terms of which 
trust income is payable to A for life and, upon A's death, the remainder 
is to pass to A's issue, per stirpes. In 2002, the appropriate local 
court approves a modification to the trust that converts A's income 
interest into the right to receive the greater of the entire income of 
the trust or a fixed percentage of the trust assets valued annually 
(unitrust interest) to be paid each year to A for life. The modification 
does not result in a shift in beneficial interest to a beneficiary who 
occupies a lower generation (as defined in section 2651) than the person 
or persons who held the beneficial interest prior to the modification. 
In this case, the modification can only operate to increase the amount 
distributable to A and decrease the amount distributable to A's issue. 
In addition, the modification does not extend the time for vesting of 
any beneficial interest in the trust beyond the period provided for in 
the original trust. Therefore, the trust will not be subject to the 
provisions of chapter 13 of the Internal Revenue Code.
    Example 9. Allocation of capital gain to income. In 1980, Grantor 
established an irrevocable trust under the terms of which trust income 
is payable to Grantor's child, A, for life, and upon A's death, the 
remainder is to pass to A's issue, per stirpes. Under applicable state 
law, unless the governing instrument provides otherwise, capital gain is 
allocated to principal. In 2002, the trust is modified to allow the 
trustee to allocate capital gain to the income. The modification does 
not shift any beneficial interest in the trust to a beneficiary who 
occupies a lower generation (as defined in section 2651) than the person 
or persons who held the beneficial interest prior to the modification. 
In this case, the modification can only have the effect of increasing 
the amount distributable to A, and decreasing the amount distributable 
to A's issue. In addition, the modification does not extend the time for 
vesting of any beneficial interest in the trust beyond the period 
provided for in the original trust. Therefore, the trust will not be 
subject to the provisions of chapter 13 of the Internal Revenue Code.
    Example 10. Administrative change to terms of a trust. In 1980, 
Grantor executed an irrevocable trust for the benefit of Grantor's

[[Page 751]]

issue, naming a bank and five other individuals as trustees. In 2002, 
the appropriate local court approves a modification of the trust that 
decreases the number of trustees which results in lower administrative 
costs. The modification pertains to the administration of the trust and 
does not shift a beneficial interest in the trust to any beneficiary who 
occupies a lower generation (as defined in section 2651) than the person 
or persons who held the beneficial interest prior to the modification. 
In addition, the modification does not extend the time for vesting of 
any beneficial interest in the trust beyond the period provided for in 
the original trust. Therefore, the trust will not be subject to the 
provisions of chapter 13 of the Internal Revenue Code.
    Example 11. Conversion of income interest to unitrust interest under 
state statute. In 1980, Grantor, a resident of State X, established an 
irrevocable trust for the benefit of Grantor's child, A, and A's issue. 
The trust provides that trust income is payable to A for life and upon 
A's death the remainder is to pass to A's issue, per stirpes. In 2002, 
State X amends its income and principal statute to define income as a 
unitrust amount of 4% of the fair market value of the trust assets 
valued annually. For a trust established prior to 2002, the statute 
provides that the new definition of income will apply only if all the 
beneficiaries who have an interest in the trust consent to the change 
within two years after the effective date of the statute. The statute 
provides specific procedures to establish the consent of the 
beneficiaries. A and A's issue consent to the change in the definition 
of income within the time period, and in accordance with the procedures, 
prescribed by the state statute. The administration of the trust, in 
accordance with the state statute defining income to be a 4% unitrust 
amount, will not be considered to shift any beneficial interest in the 
trust. Therefore, the trust will not be subject to the provisions of 
chapter 13 of the Internal Revenue Code. Further, under these facts, no 
trust beneficiary will be treated as having made a gift for federal gift 
tax purposes, and neither the trust nor any trust beneficiary will be 
treated as having made a taxable exchange for federal income tax 
purposes. Similarly, the conclusions in this example would be the same 
if the beneficiaries' consent was not required, or, if the change in 
administration of the trust occurred because the situs of the trust was 
changed to State X from a state whose statute does not define income as 
a unitrust amount or if the situs was changed to such a state from State 
X.
    Example 12. Equitable adjustments under state statute. The facts are 
the same as in Example 11, except that in 2002, State X amends its 
income and principal statute to permit the trustee to make adjustments 
between income and principal when the trustee invests and manages the 
trust assets under the state's prudent investor standard, the trust 
describes the amount that shall or must be distributed to a beneficiary 
by referring to the trust's income, and the trustee after applying the 
state statutory rules regarding allocation of receipts between income 
and principal is unable to administer the trust impartially. The 
provision permitting the trustees to make these adjustments is effective 
in 2002 for trusts created at any time. The trustee invests and manages 
the trust assets under the state's prudent investor standard, and 
pursuant to authorization in the state statute, the trustee allocates 
receipts between the income and principal accounts in a manner to ensure 
the impartial administration of the trust. The administration of the 
trust in accordance with the state statute will not be considered to 
shift any beneficial interest in the trust. Therefore, the trust will 
not be subject to the provisions of chapter 13 of the Internal Revenue 
Code. Further, under these facts, no trust beneficiary will be treated 
as having made a gift for federal gift tax purposes, and neither the 
trust nor any trust beneficiary will be treated as having made a taxable 
exchange for federal income tax purposes. Similarly, the conclusions in 
this example would be the same if the change in administration of the 
trust occurred because the situs of the trust was changed to State X 
from a state whose statute does not authorize the trustee to make 
adjustments between income and principal or if the situs was changed to 
such a state from State X.

    (ii) Effective dates. The rules in this paragraph (b)(4) are 
generally applicable on and after December 20, 2000. However, the rule 
in the last sentence of paragraph (b)(4)(i)(D)(2) of this section and 
Example 11 and Example 12 in paragraph (b)(4)(i)(E) of this section 
regarding the administration of a trust and the determination of income 
in conformance with applicable state law applies to trusts for taxable 
years ending after January 2, 2004.
    (5) Exceptions to additions rule--(i) In general. Any addition to a 
trust made pursuant to an instrument or arrangement covered by the 
transition rules in paragraph (b) (1), (2) or (3) of this section is not 
treated as an addition for purposes of this section. Moreover, any 
property transferred inter vivos to a trust is not treated as an 
addition if the same property would have been added to the trust 
pursuant to an instrument covered by the transition rules in paragraph 
(b) (2) or (3) of this section.

[[Page 752]]

    (ii) Examples. The following examples illustrate the application of 
paragraph (b)(4)(i) of this section:

    Example 1. Addition pursuant to terms of exempt instrument. On 
December 31, 1980, T created an irrevocable trust having a principal of 
$100,000. Under the terms of the trust, the principal was to be held for 
the benefit of T's grandchild, GC. Pursuant to the terms of T's will, a 
document entitled to relief under the transition rule of paragraph 
(b)(2) of this section, the residue of the estate was paid to the trust. 
Because the addition to the trust was paid pursuant to the terms of an 
instrument (T's will) that is not subject to the provisions of chapter 
13 because of paragraph (b)(2) of this section, the payment to the trust 
is not considered an addition to the principal of the trust. Thus, 
distributions to or for the benefit of GC, are not subject to the 
provisions of chapter 13.
    Example 2. Property transferred inter vivos that would have been 
transferred to the same trust by the transferor's will. T is the grantor 
of a trust that was irrevocable on September 25, 1985. T's will, which 
was executed before October 22, 1986, and not amended thereafter, 
provides that, upon T's death, the entire estate will pour over into T's 
trust. On October 1, 1985, T transfers $100,000 to the trust. While T's 
will otherwise qualifies for relief under the transition rule in 
paragraph (b)(2) of this section, the transition rule is not applicable 
unless T dies prior to January 1, 1987. Thus, if T dies after December 
31, 1986, the transfer is treated as an addition to the trust for 
purposes of any distribution made from the trust after the transfer to 
the trust on October 1, 1985. If T dies before January 1, 1987, the 
entire trust (as well as any distributions from or terminations of 
interests in the trust prior to T's death) is exempt, under paragraph 
(b)(2) of this section, from chapter 13 because the $100,000 would have 
been added to the trust under a will that would have qualified under 
paragraph (b)(2) of this section. In either case, for any generation-
skipping transfers made after the transfer to the trust on October 1, 
1985, but before T's death, the $100,000 is treated as an addition to 
the trust and a proportionate amount of the trust is subject to chapter 
13.
    Example 3. Pour over to a revocable trust. T and S are the settlors 
of separate revocable trusts with equal values. Both trusts were 
established for the benefit of skip persons (as defined in section 
2613). S dies on December 1, 1985, and under the provisions of S's 
trust, the principal pours over into T's trust. If T dies before January 
1, 1987, the entire trust is excluded under paragraph (b)(2) of this 
section from the operation of chapter 13. If T dies after December 31, 
1986, the entire trust is subject to the generation-skipping transfer 
tax provisions because T's trust is not a trust described in paragraph 
(b)(1) or (2) of this section. In the latter case, the fact that S died 
before January 1, 1987, is irrelevant because the principal of S's trust 
was added to a trust that never qualified under the transition rules of 
paragraph (b)(1) or (2) of this section.
    Example 4. Pour over to exempt trust. Assume the same facts as in 
Example 3, except upon the death of S on December 1, 1985, S's trust 
continues as an irrevocable trust and that the principal of T's trust is 
to be paid over upon T's death to S's trust. Again, if T dies before 
January 1, 1987, S's entire trust falls within the provisions of 
paragraph (b)(2) of this section. However, if T dies after December 31, 
1986, the pour-over is considered an addition to the trust. Therefore, 
S's trust is not a trust excluded under paragraph (b)(2) of this section 
because an addition is made to the trust.
    Example 5. Lapse of a general power of appointment. S, the spouse of 
the settlor of an irrevocable trust that was created in 1980, had, on 
September 25, 1985, a general power of appointment over the trust 
assets. The trust provides that should S fail to exercise the power of 
appointment the property is to remain in the trust. On October 21, 1986, 
S executed a will under which S failed to exercise the power of 
appointment. If S dies before January 1, 1987, without having exercised 
the power in a manner which results in the creation of, or increase in 
the amount of, a generation-skipping transfer (or amended the will in a 
manner that results in the creation of, or increase in the amount of, a 
generation-skipping transfer), transfers pursuant to the trust or the 
will are not subject to chapter 13 because the trust is an irrevocable 
trust and the will qualifies under paragraph (b)(2) of this section.
    Example 6. Lapse of general power of appointment held by intestate 
decedent. Assume the same facts as in Example 5, except on October 22, 
1986, S did not have a will and that S dies after that date. Upon S's 
death, or upon the prior exercise or release of the power, the value of 
the entire trust is treated as having been distributed to S, and S is 
treated as having made an addition to the trust in the amount of the 
entire principal. Any distribution or termination pursuant to the trust 
occurring after S's death is subject to chapter 13. It is immaterial 
whether S's death occurs before January 1, 1987, since paragraph (b)(2) 
of this section is only applicable where a will or revocable trust was 
executed before October 22, 1986.

    (c) Additional effective dates. Except as otherwise provided, the 
regulations under Sec. Sec. 26.2611-1, 26.2612-1, 26.2613-1, 26.2632-1, 
26.2641-1, 26.2642-1, 26.2642-2, 26.2642-3, 26.2642-4, 26.2642-5, 
26.2652-1, 26.2652-2, 26.2653-1, 26.2654-1, 26.2663-1, and 26.2663-2 are 
effective with respect

[[Page 753]]

to generation-skipping transfers as defined in Sec. 26.2611-1 made on 
or after December 27, 1995. However, taxpayers may, at their option, 
rely on these regulations in the case of generation-skipping transfers 
made, and trusts that became irrevocable, after December 23, 1992, and 
before December 27, 1995. The last four sentences in paragraph (b)(1)(i) 
of this section are applicable on and after November 18, 1999.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29653, June 12, 1996, as 
amended at 61 FR 43656, Aug. 26, 1996; T.D. 8912, 65 FR 79738, Dec. 20, 
2000; 66 FR 11108, Feb. 22, 2001; 66 FR 12834, Feb. 28, 2001; T.D. 9102, 
69 FR 21, Jan. 2, 2004]



Sec. 26.2611-1  Generation-skipping transfer defined.

    A generation-skipping transfer (GST) is an event that is either a 
direct skip, a taxable distribution, or a taxable termination. See Sec. 
26.2612-1 for the definition of these terms. The determination as to 
whether an event is a GST is made by reference to the most recent 
transfer subject to the estate or gift tax. See Sec. 26.2652-1(a)(2) 
for determining whether a transfer is subject to Federal estate or gift 
tax.



Sec. 26.2612-1  Definitions.

    (a) Direct skip. A direct skip is a transfer to a skip person that 
is subject to Federal estate or gift tax. If property is transferred to 
a trust, the transfer is a direct skip only if the trust is a skip 
person. Only one direct skip occurs when a single transfer of property 
skips two or more generations. See paragraph (d) of this section for the 
definition of skip person. See Sec. 26.2652-1(b) for the definition of 
trust. See Sec. 26.2632-1(c)(4) for the time that a direct skip occurs 
if the transferred property is subject to an estate tax inclusion 
period.
    (b) Taxable termination--(1) In general. Except as otherwise 
provided in this paragraph (b), a taxable termination is a termination 
(occurring for any reason) of an interest in trust unless--
    (i) A transfer subject to Federal estate or gift tax occurs with 
respect to the property held in the trust at the time of the 
termination;
    (ii) Immediately after the termination, a person who is not a skip 
person has an interest in the trust; or
    (iii) At no time after the termination may a distribution, other 
than a distribution the probability of which occurring is so remote as 
to be negligible (including a distribution at the termination of the 
trust) be made from the trust to a skip person. For this purpose, the 
probability that a distribution will occur is so remote as to be 
negligible only if it can be ascertained by actuarial standards that 
there is less than a 5 percent probability that the distribution will 
occur.
    (2) Partial termination. If a distribution of a portion of trust 
property is made to a skip person by reason of a termination occurring 
on the death of a lineal descendant of the transferor, the termination 
is a taxable termination with respect to the distributed property.
    (3) Simultaneous terminations. A simultaneous termination of two or 
more interests creates only one taxable termination.
    (c) Taxable distribution--(1) In general. A taxable distribution is 
a distribution of income or principal from a trust to a skip person 
unless the distribution is a taxable termination or a direct skip. If 
any portion of GST tax (including penalties and interest thereon) 
imposed on a distributee is paid from the distributing trust, the 
payment is an additional taxable distribution to the distributee. For 
purposes of chapter 13, the additional distribution is treated as having 
been made on the last day of the calendar year in which the original 
taxable distribution is made. If Federal estate or gift tax is imposed 
on any individual with respect to an interest in property held by a 
trust, the interest in property is treated as having been distributed to 
the individual to the extent that the value of the interest is subject 
to Federal estate or gift tax. See Sec. 26.2652-1(a)(6) Example 5, 
regarding the treatment of the lapse of a power of appointment as a 
transfer to a trust.
    (2) Look-through rule not to apply. Solely for purposes of 
determining whether any transfer from a trust to another trust is a 
taxable distribution, the rules of section 2651(e)(2) do not apply. If 
the transferring trust and the

[[Page 754]]

recipient trust have the same transferor, see Sec. 26.2642-4(a) (1) and 
(2) for rules for recomputing the applicable fraction of the recipient 
trust.
    (d) Skip person. A skip person is--
    (1) An individual assigned to a generation more than one generation 
below that of the transferor (determined under the rules of section 
2651); or
    (2) A trust if--
    (i) All interests in the trust are held by skip persons; or
    (ii) No person holds an interest in the trust and no distributions, 
other than a distribution the probability of which occurring is so 
remote as to be negligible (including distributions at the termination 
of the trust), may be made after the transfer to a person other than a 
skip person. For this purpose, the probability that a distribution will 
occur is so remote as to be negligible only if it can be ascertained by 
actuarial standards that there is less than a 5 percent probability that 
the distribution will occur.
    (e) Interest in trust--(1) In general. An interest in trust is an 
interest in property held in trust as defined in section 2652(c) and 
these regulations. An interest in trust exists if a person--
    (i) Has a present right to receive trust principal or income;
    (ii) Is a permissible current recipient of trust principal or income 
and is not described in section 2055(a); or
    (iii) Is described in section 2055(a) and the trust is a charitable 
remainder annuity trust or unitrust (as defined in section 664(d)) or a 
pooled income fund (as defined in section 642(c)(5)).
    (2) Exceptions--(i) Support obligations. In general, an individual 
has a present right to receive trust income or principal if trust income 
or principal may be used to satisfy the individual's support 
obligations. However, an individual does not have an interest in a trust 
merely because a support obligation of that individual may be satisfied 
by a distribution that is either within the discretion of a fiduciary or 
pursuant to provisions of local law substantially equivalent to the 
Uniform Gifts (Transfers) to Minors Act.
    (ii) Certain interests disregarded. An interest which is used 
primarily to postpone or avoid the GST tax is disregarded for purposes 
of chapter 13. An interest is considered as used primarily to postpone 
or avoid the GST tax if a significant purpose for the creation of the 
interest is to postpone or avoid the tax.
    (3) Disclaimers. An interest does not exist to the extent it is 
disclaimed pursuant to a disclaimer that constitutes a qualified 
disclaimer under section 2518.
    (f) Examples. The following examples illustrate the provisions of 
this section.

    Example 1. Direct skip. T gratuitously conveys Blackacre to T's 
grandchild. Because the transfer is a transfer to a skip person of 
property subject to Federal gift tax, it is a direct skip.
    Example 2. Direct skip of more than one generation. T gratuitously 
conveys Blackacre to T's great-grandchild. The transfer is a direct 
skip. Only one GST tax is imposed on the direct skip although two 
generations are skipped by the transfer.
    Example 3. Withdrawal power in trust. T transfers $50,000 to a new 
trust providing that trust income is to be paid to T's child, C, for 
life and, on C's death, the trust principal is to be paid to T's 
descendants. Under the terms of the trust, T grants four grandchildren 
the right to withdraw $10,000 from the trust for a 60 day period 
following the transfer. Since C, who is not a skip person, has an 
interest in the trust, the trust is not a skip person. T's transfer to 
the trust is not a direct skip.
    Example 4. Taxable termination. T establishes an irrevocable trust 
under which the income is to be paid to T's child, C, for life. On the 
death of C, the trust principal is to be paid to T's grandchild, GC. 
Since C has an interest in the trust, the trust is not a skip person and 
the transfer to the trust is not a direct skip. If C dies survived by 
GC, a taxable termination occurs at C's death because C's interest in 
the trust terminates and thereafter the trust property is held by a skip 
person who occupies a lower generation than C.
    Example 5. Direct skip of property held in trust. T establishes a 
testamentary trust under which the income is to be paid to T's surviving 
spouse, S, for life and the remainder is to be paid to a grandchild of T 
and S. T's executor elects to treat the trust as qualified terminable 
interest property under section 2056(b)(7). The transfer to the trust is 
not a direct skip because S, a person who is not a skip person, holds a 
present right to receive income from the trust. Upon S's death, the 
trust property is included in S's gross estate under section 2044 and 
passes directly to a skip person. The GST occurring at that

[[Page 755]]

time is a direct skip because it is a transfer subject to chapter 11. 
The fact that the interest created by T is terminated at S's death is 
immaterial because S becomes the transferor at the time of the transfer 
subject to chapter 11.
    Example 6. Taxable termination. T establishes an irrevocable trust 
for the benefit of T's child, C, T's grandchild, GC, and T's great-
grandchild, GGC. Under the terms of the trust, income and principal may 
be distributed to any or all of the living beneficiaries at the 
discretion of the trustee. Upon the death of the second beneficiary to 
die, the trust principal is to be paid to the survivor. C dies first. A 
taxable termination occurs at that time because, immediately after C's 
interest terminates, all interests in the trust are held by skip persons 
(GC and GGC).
    Example 7. Taxable termination resulting from distribution. The 
facts are the same as in Example 6, except twenty years after C's death 
the trustee exercises its discretionary power and distributes the entire 
principal to GGC. The distribution results in a taxable termination 
because GC's interest in the trust terminates as a result of the 
distribution of the entire trust property to GGC, a skip person. The 
result would be the same if the trustee retained sufficient funds to pay 
the GST tax due by reason of the taxable termination, as well as any 
expenses of winding up the trust.
    Example 8. Simultaneous termination of interests of more than one 
beneficiary. T establishes an irrevocable trust for the benefit of T's 
child, C, T's grandchild, GC, and T's great-grandchild, GGC. Under the 
terms of the trust, income and principal may be distributed to any or 
all of the living beneficiaries at the discretion of the trustee. Upon 
the death of C, the trust property is to be distributed to GGC if then 
living. If C is survived by both GC and GGC, both C's and GC's interests 
in the trust will terminate on C's death. However, because both 
interests will terminate at the same time and as a result of one event, 
only one taxable termination occurs.
    Example 9. Partial taxable termination. T creates an irrevocable 
trust providing that trust income is to be paid to T's children, A and 
B, in such proportions as the trustee determines for their joint lives. 
On the death of the first child to die, one-half of the trust principal 
is to be paid to T's then living grandchildren. The balance of the trust 
principal is to be paid to T's grandchildren on the death of the 
survivor of A and B. If A predeceases B, the distribution occurring on 
the termination of A's interest in the trust is a taxable termination 
and not a taxable distribution. It is a taxable termination because the 
distribution is a distribution of a portion of the trust that occurs as 
a result of the death of A, a lineal descendant of T. It is immaterial 
that a portion of the trust continues and that B, a person other than a 
skip person, thereafter holds an interest in the trust.
    Example 10. Taxable distribution. T establishes an irrevocable trust 
under which the trust income is payable to T's child, C, for life. When 
T's grandchild, GC, attains 35 years of age, GC is to receive one-half 
of the principal. The remaining one-half of the principal is to be 
distributed to GC on C's death. Assume that C survives until GC attains 
age 35. When the trustee distributes one-half of the principal to GC on 
GC's 35th birthday, the distribution is a taxable distribution because 
it is a distribution to a skip person and is neither a taxable 
termination nor a direct skip.
    Example 11. Exercise of withdrawal right as taxable distribution. 
The facts are the same as in Example 10, except GC holds a continuing 
right to withdraw trust principal and after one year GC withdraws 
$10,000. The withdrawal by GC is not a taxable termination because the 
withdrawal does not terminate C's interest in the trust. The withdrawal 
by GC is a taxable distribution to GC.
    Example 12. Interest in trust. T establishes an irrevocable trust 
under which the income is to be paid to T's child, C, for life. On the 
death of C, the trust principal is to be paid to T's grandchild, GC. 
Because C has a present right to receive income from the trust, C has an 
interest in the trust. Because GC cannot currently receive distributions 
from the trust, GC does not have an interest in the trust.
    Example 13. Support obligation. T establishes an irrevocable trust 
for the benefit of T's grandchild, GC. The trustee has discretion to 
distribute property for GC's support without regard to the duty or 
ability of GC's parent, C, to support GC. Because GC is a permissible 
current recipient of trust property, GC has an interest in the trust. C 
does not have an interest in the trust because the potential use of the 
trust property to satisfy C's support obligation is within the 
discretion of a fiduciary. C would be treated as having an interest in 
the trust if the trustee was required to distribute trust property for 
GC's support.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29653, June 12, 1996, as 
amended by T.D. 9214, 70 FR 41141, July 18, 2005]



Sec. 26.2613-1  Skip person.

    For the definition of skip person see Sec. 26.2612-1(d).



Sec. 26.2632-1  Allocation of GST exemption.

    (a) General rule. Except as otherwise provided in this section, an 
individual

[[Page 756]]

or the individual's executor may allocate the individual's $1 million 
GST exemption at any time from the date of the transfer through the date 
for filing the individual's Federal estate tax return (including any 
extensions for filing that have been actually granted). If no estate tax 
return is required to be filed, the GST exemption may be allocated at 
any time through the date a Federal estate tax return would be due if a 
return were required to be filed (including any extensions actually 
granted). If property is held in trust, the allocation of GST exemption 
is made to the entire trust rather than to specific trust assets. If a 
transfer is a direct skip to a trust, the allocation of GST exemption to 
the transferred property is also treated as an allocation of GST 
exemption to the trust for purposes of future GSTs with respect to the 
trust by the same transferor.
    (b) Lifetime allocations--(1) Automatic allocation to direct skips--
(i) In general. If a direct skip occurs during the transferor's 
lifetime, the transferor's GST exemption not previously allocated 
(unused GST exemption) is automatically allocated to the transferred 
property (but not in excess of the fair market value of the property on 
the date of the transfer). The transferor may prevent the automatic 
allocation of GST exemption by describing on a timely-filed United 
States Gift (and Generation-Skipping Transfer) Tax Return (Form 709) the 
transfer and the extent to which the automatic allocation is not to 
apply. In addition, a timely-filed Form 709 accompanied by payment of 
the GST tax (as shown on the return with respect to the direct skip) is 
sufficient to prevent an automatic allocation of GST exemption with 
respect to the transferred property. See paragraph (c)(4) of this 
section for special rules in the case of direct skips treated as 
occurring at the termination of an estate tax inclusion period.
    (ii) Time for filing Form 709. A Form 709 is timely filed if it is 
filed on or before the date required for reporting the transfer if it 
were a taxable gift (i.e., the date prescribed by section 6075(b), 
including any extensions to file actually granted (the due date)). 
Except as provided in paragraph (b)(1)(iii) of this section, the 
automatic allocation of GST exemption (or the election to prevent the 
allocation, if made) is irrevocable after the due date. An automatic 
allocation of GST exemption is effective as of the date of the transfer 
to which it relates. Except as provided above, a Form 709 need not be 
filed to report an automatic allocation.
    (iii) Transitional rule. An election to prevent an automatic 
allocation of GST exemption filed on or before January 26, 1996, becomes 
irrevocable on July 24, 1996.
    (2) Automatic allocation to indirect skips made after December 31, 
2000--(i) In general. An indirect skip is a transfer of property to a 
GST trust as defined in section 2632(c)(3)(B) provided that the transfer 
is subject to gift tax and does not qualify as a direct skip. In the 
case of an indirect skip made after December 31, 2000, to which section 
2642(f) (relating to transfers subject to an estate tax inclusion period 
(ETIP)) does not apply, the transferor's unused GST exemption is 
automatically allocated to the property transferred (but not in excess 
of the fair market value of the property on the date of the transfer). 
The automatic allocation pursuant to this paragraph is effective whether 
or not a Form 709 is filed reporting the transfer, and is effective as 
of the date of the transfer to which it relates. An automatic allocation 
is irrevocable after the due date of the Form 709 for the calendar year 
in which the transfer is made. In the case of an indirect skip to which 
section 2642(f) does apply, the indirect skip is deemed to be made at 
the close of the ETIP and the GST exemption is deemed to be allocated at 
that time. In either case, except as otherwise provided in paragraph 
(b)(2)(ii) of this section, the automatic allocation of exemption 
applies even if an allocation of exemption is made to the indirect skip 
in accordance with section 2632(a).
    (ii) Prevention of automatic allocation. Except as otherwise 
provided in forms or other guidance published by the Service, the 
transferor may prevent the automatic allocation of GST exemption with 
regard to an indirect skip (including indirect skips to which section 
2642(f) may apply) by making an election, as provided in paragraph

[[Page 757]]

(b)(2)(iii) of this section. Notwithstanding paragraph (b)(2)(iii)(B) of 
this section, the transferor may also prevent the automatic allocation 
of GST exemption with regard to an indirect skip by making an 
affirmative allocation of GST exemption on a Form 709 filed at any time 
on or before the due date for timely filing (within the meaning of 
paragraph (b)(1)(ii) of this section) of an amount that is less than 
(but not equal to) the value of the property transferred as reported on 
that return, in accordance with the provisions of paragraph (b)(4) of 
this section. See paragraph (b)(4)(iii) Example 6 of this section. Any 
election out of the automatic allocation rules under this section has no 
effect on the application of the automatic allocation rules applicable 
after the transferor's death under section 2632(e) and paragraph (d) of 
this section.
    (iii) Election to have automatic allocation rules not apply--(A) In 
general. A transferor may prevent the automatic allocation of GST 
exemption (elect out) with respect to any transfer or transfers 
constituting an indirect skip made to a trust or to one or more separate 
shares that are treated as separate trusts under Sec. 26.2654-1(a)(1) 
(collectively referred to hereinafter as a trust). In the case of a 
transfer treated under section 2513 as made one-half by the transferor 
and one-half by the transferor's spouse, each spouse shall be treated as 
a separate transferor who must satisfy separately the requirements of 
paragraph (b)(2)(iii)(B) to elect out with respect to the transfer. A 
transferor may elect out with respect to--
    (1) One or more prior-year transfers subject to section 2642(f) 
(regarding ETIPs) made by the transferor to a specified trust or trusts;
    (2) One or more (or all) current-year transfers made by the 
transferor to a specified trust or trusts;
    (3) One or more (or all) future transfers made by the transferor to 
a specified trust or trusts;
    (4) All future transfers made by the transferor to all trusts 
(whether or not in existence at the time of the election out); or
    (5) Any combination of paragraphs (b)(2)(iii)(A)(1) through (4) of 
this section.
    (B) Manner of making an election out. Except as otherwise provided 
in forms or other guidance published by the IRS, an election out is made 
as described in this paragraph (b)(2)(iii)(B). To elect out, the 
transferor must attach a statement (election out statement) to a Form 
709 filed within the time period provided in paragraph (b)(2)(iii)(C) of 
this section (whether or not any transfer was made in the calendar year 
for which the Form 709 was filed, and whether or not a Form 709 
otherwise would be required to be filed for that year). See paragraph 
(b)(4)(iv) Example 7 of this section. The election out statement must 
identify the trust (except for an election out under paragraph 
(b)(2)(iii)(A)(4) of this section), and specifically must provide that 
the transferor is electing out of the automatic allocation of GST 
exemption with respect to the described transfer or transfers. Prior-
year transfers that are subject to section 2642(f), and to which the 
election out is to apply, must be specifically described or otherwise 
identified in the election out statement. Further, unless the election 
out is made for all transfers made to the trust in the current year and/
or in all future years, the current-year transfers and/or future 
transfers to which the election out is to apply must be specifically 
described or otherwise identified in the election out statement.
    (C) Time for making an election out. To elect out, the Form 709 with 
the attached election out statement must be filed on or before the due 
date for timely filing (within the meaning of paragraph (b)(1)(ii) of 
this section) of the Form 709 for the calendar year in which--
    (1) For a transfer subject to section 2642(f), the ETIP closes; or
    (2) For all other elections out, the first transfer to be covered by 
the election out was made.
    (D) Effect of election out. An election out does not affect the 
automatic allocation of GST exemption to any transfer not covered by the 
election out statement. Except for elections out for transfers described 
in paragraph

[[Page 758]]

(b)(2)(iii)(A)(1) of this section that are specifically described in an 
election out statement, an election out does not apply to any prior-year 
transfer to a trust, including any transfer subject to an ETIP (even if 
the ETIP closes after the election is made). An election out does not 
prevent the transferor from allocating the transferor's available GST 
exemption to any transfer covered by the election out, either on a 
timely filed Form 709 reporting the transfer or at a later date in 
accordance with the provisions of paragraph (b)(4) of this section. An 
election out with respect to future transfers remains in effect unless 
and until terminated. Once an election out with respect to future 
transfers is made, a transferor need not file a Form 709 in future years 
solely to prevent the automatic allocation of the GST exemption to any 
future transfer covered by the election out.
    (E) Termination of election out. Except as otherwise provided in 
forms or other guidance published by the IRS, an election out may be 
terminated as described in this paragraph (b)(2)(iii)(E). Pursuant to 
this section, a transferor may terminate an election out made on a Form 
709 for a prior year, to the extent that election out applied to future 
transfers or to a transfer subject to section 2642(f). To terminate an 
election out, the transferor must attach a statement (termination 
statement) to a Form 709 filed on or before the due date of the Form 709 
for the calendar year in which is made the first transfer to which the 
election out is not to apply (whether or not any transfer was made in 
the calendar year for which the Form 709 was filed, and whether or not a 
Form 709 otherwise would be required to be filed for that year). The 
termination statement must identify the trust (if applicable), describe 
the prior election out that is being terminated, specifically provide 
that the prior election out is being terminated, and either describe the 
extent to which the prior election out is being terminated or describe 
any current-year transfers to which the election out is not to apply. 
Consequently, the automatic allocation rules contained in section 
2632(c)(1) will apply to any current-year transfer described on the 
termination statement and, except as otherwise provided in this 
paragraph, to all future transfers that otherwise would have been 
covered by the election out. The termination of an election out does not 
affect any transfer, or any election out, that is not described in the 
termination statement. The termination of an election out will not 
revoke the election out for any prior-year transfer, except for a prior-
year transfer subject to section 2642(f) for which the election out is 
revoked on a timely filed Form 709 for the calendar year in which the 
ETIP closes or for any prior calendar year. The termination of an 
election out does not preclude the transferor from making another 
election out in the same or any subsequent year.
    (3) Election to treat trust as a GST trust--(i) In general. A 
transferor may elect to treat any trust as a GST trust (GST trust 
election), without regard to whether the trust is subject to section 
2642(f), with respect to--
    (A) Any current-year transfer (or any or all current-year transfers) 
by the electing transferor to the trust;
    (B) Any selected future transfers by the electing transferor to the 
trust;
    (C) All future transfers by the electing transferor to the trust; or
    (D) Any combination of paragraphs (b)(3)(i)(A) through (C) of this 
section.
    (ii) Time and manner of making GST trust election. Except as 
otherwise provided in forms or other guidance published by the Internal 
Revenue Service, a GST trust election is made as described in this 
paragraph (b)(3)(ii). To make a GST trust election, the transferor must 
attach a statement (GST trust election statement) to a Form 709 filed on 
or before the due date for timely filing (within the meaning of 
paragraph (b)(1)(ii) of this section) of the Form 709 for the calendar 
year in which the first transfer to be covered by the GST trust election 
is made (whether or not any transfer was made in the calendar year for 
which the Form 709 was filed, and whether or not a Form 709 otherwise 
would be required to be filed for that year). The GST trust election 
statement must identify the trust, specifically describe or otherwise 
clearly identify the transfers to be covered by the election, and 
specifically provide that the transferor is

[[Page 759]]

electing to have the trust treated as a GST trust with respect to the 
covered transfers.
    (iii) Effect of GST trust election. Except as otherwise provided in 
this paragraph, a GST trust election will cause all transfers made by 
the electing transferor to the trust that are subject to the election to 
be deemed to be made to a GST trust as defined in section 2632(c)(3)(B). 
Thus, the electing transferor's unused GST exemption may be allocated 
automatically to such transfers in accordance with paragraph (b)(2) of 
this section. A transferor may prevent the automatic allocation of GST 
exemption to future transfers to the trust either by terminating the GST 
trust election in accordance with paragraph (b)(3)(iv) of this section 
(in the case of trusts that would not otherwise be treated as GST 
trusts) or by electing out of the automatic allocation of GST exemption 
in accordance with paragraph (b)(2) of this section.
    (iv) Termination of GST trust election. Except as otherwise provided 
in forms or other guidance published by the Service, a GST trust 
election may be terminated as described in this paragraph (b)(3)(iv). A 
transferor may terminate a GST trust election made on a Form 709 for a 
prior year, to the extent that election applied to future transfers or 
to a transfer subject to section 2642(f). To terminate a GST trust 
election, the transferor must attach a statement (termination statement) 
to a Form 709 filed on or before the due date for timely filing (within 
the meaning of paragraph (b)(1)(ii) of this section) a Form 709 for the 
calendar year: in which is made the electing transferor's first transfer 
to which the GST trust election is not to apply; or that is the first 
calendar year for which the GST trust election is not to apply, even if 
no transfer is made to the trust during that year. The termination 
statement must identify the trust, describe the current-year transfer 
(if any), and provide that the prior GST trust election is terminated. 
Accordingly, if the trust otherwise does not satisfy the definition of a 
GST trust, the automatic allocation rules contained in section 
2632(c)(1) will not apply to the described current-year transfer or to 
any future transfers made by the transferor to the trust, unless and 
until another election under this paragraph (b)(3) is made.
    (4) Allocation to other transfers--(i) In general. An allocation of 
GST exemption to property transferred during the transferor's lifetime, 
other than in a direct skip, is made on Form 709. The allocation must 
clearly identify the trust to which the allocation is being made, the 
amount of GST exemption allocated to it, and if the allocation is late 
or if an inclusion ratio greater than zero is claimed, the value of the 
trust assets at the effective date of the allocation. See paragraph 
(b)(4)(ii) of this section. The allocation should also state the 
inclusion ratio of the trust after the allocation. Except as otherwise 
provided in this paragraph, an allocation of GST exemption may be made 
by a formula; e.g., the allocation may be expressed in terms of the 
amount necessary to produce an inclusion ratio of zero. However, formula 
allocations made with respect to charitable lead annuity trusts are not 
valid except to the extent they are dependent on values as finally 
determined for Federal estate or gift tax purposes. With respect to a 
timely allocation, an allocation of GST exemption becomes irrevocable 
after the due date of the return. Except as provided in Sec. 26.2642-3 
(relating to charitable lead annuity trusts), an allocation of GST 
exemption to a trust is void to the extent the amount allocated exceeds 
the amount necessary to obtain an inclusion ratio of zero with respect 
to the trust. See Sec. 26.2642-1 for the definition of inclusion ratio. 
An allocation is also void if the allocation is made with respect to a 
trust that has no GST potential with respect to the transferor making 
the allocation, at the time of the allocation. For this purpose, a trust 
has GST potential even if the possibility of a GST is so remote as to be 
negligible.
    (ii) Effective date of allocation--(A) In general. (1) Except as 
otherwise provided, an allocation of GST exemption is effective as of 
the date of any transfer as to which the Form 709 on which it is made is 
a timely filed return (a timely allocation). If more than one timely 
allocation is made, the earlier allocation is modified only if the later

[[Page 760]]

allocation clearly identifies the transfer and the nature and extent of 
the modification. Except as provided in paragraph (d)(1) of this 
section, an allocation to a trust made on a Form 709 filed after the due 
date for reporting a transfer to the trust (a late allocation) is 
effective on the date the Form 709 is filed and is deemed to precede in 
point of time any taxable event occurring on such date. For purposes of 
this paragraph (b)(4)(ii), the Form 709 is deemed filed on the date it 
is postmarked to the Internal Revenue Service address as directed in 
forms or other guidance published by the Service. See Sec. 26.2642-2 
regarding the effect of a late allocation in determining the inclusion 
ratio, etc. See paragraph (c)(1) of this section regarding allocation of 
GST exemption to property subject to an estate tax inclusion period. If 
it is unclear whether an allocation of GST exemption on a Form 709 is a 
late or a timely allocation to a trust, the allocation is effective in 
the following order--
    (i) To any transfer to the trust disclosed on the return as to which 
the return is a timely return;
    (ii) As a late allocation; and
    (iii) To any transfer to the trust not disclosed on the return as to 
which the return would be a timely return.
    (2) A late allocation to a trust may be made on a Form 709 that is 
timely filed with respect to another transfer. A late allocation is 
irrevocable when made.
    (B) Amount of allocation. If other transfers exist with respect to 
which GST exemption could be allocated under paragraphs (b)(4)(ii)(A)(1) 
(ii) and (iii), any GST exemption allocated under paragraph 
(b)(4)(ii)(A)(1)(i) of this section is allocated in an amount equal to 
the value of the transferred property as reported on the Form 709. Thus, 
if the GST exemption allocated on the Form 709 exceeds the value of the 
transfers reported on that return that have generation-skipping 
potential, the initial allocation under paragraph (b)(4)(ii)(A)(1)(i) of 
this section is in the amount of the value of those transfers as 
reported on that return. Any remaining amount of GST exemption allocated 
on that return is then allocated pursuant to paragraphs (b)(4)(ii)(A)(1) 
(ii) and (iii) of this section, notwithstanding any subsequent upward 
adjustment in value of the transfers reported on the return.
    (iii) Examples. The following examples illustrate the provisions of 
this paragraph (b):

    Example 1. Modification of allocation of GST exemption. On December 
1, 2003, T transfers $100,000 to an irrevocable GST trust described in 
section 2632(c)(3)(B). The transfer to the trust is not a direct skip. 
The date prescribed for filing the gift tax return reporting the taxable 
gift is April 15, 2004. On February 10, 2004, T files a Form 709 on 
which T properly elects out of the automatic allocation rules contained 
in section 2632(c)(1) with respect to the transfer in accordance with 
paragraph (b)(2)(iii) of this section, and allocates $50,000 of GST 
exemption to the trust. On April 13th of the same year, T files an 
additional Form 709 on which T confirms the election out of the 
automatic allocation rules contained in section 2632(c)(1) and allocates 
$100,000 of GST exemption to the trust in a manner that clearly 
indicates the intention to modify and supersede the prior allocation 
with respect to the 2003 transfer. The allocation made on the April 13 
return supersedes the prior allocation because it is made on a timely-
filed Form 709 that clearly identifies the trust and the nature and 
extent of the modification of GST exemption allocation. The allocation 
of $100,000 of GST exemption to the trust is effective as of December 1, 
2003. The result would be the same if the amended Form 709 decreased the 
amount of the GST exemption allocated to the trust.
    Example 2. Modification of allocation of GST exemption. The facts 
are the same as in Example 1 except, on July 8, 2004, T files a Form 709 
attempting to reduce the earlier allocation. The return filed on July 8, 
2004, is not a timely filed return. The $100,000 GST exemption allocated 
to the trust, as amended on April 13, 2004, remains in effect because an 
allocation, once made, is irrevocable and may not be modified after the 
last date on which a timely filed Form 709 may be filed.
    Example 3. Effective date of late allocation of GST exemption. On 
November 15, 2003, T transfers $100,000 to an irrevocable GST trust 
described in section 2632(c)(3)(B). The transfer to the trust is not a 
direct skip. The date prescribed for filing the gift tax return 
reporting the taxable gift is April 15, 2004. On February 10, 2004, T 
files a Form 709 on which T properly elects out of the automatic 
allocation rules contained in section 2632(c)(1) in accordance with 
paragraph (b)(2)(iii) of this section with respect to that transfer. On 
December 1, 2004, T files a Form 709 and allocates $50,000 to the trust. 
The allocation is effective as of December 1, 2004.

[[Page 761]]

    Example 4. Effective date of late allocation of GST exemption. T 
transfers $100,000 to an irrevocable GST trust on December 1, 2003, in a 
transfer that is not a direct skip. On April 15, 2004, T files a Form 
709 on which T properly elects out of the automatic allocation rules 
contained in section 2632(c)(1) with respect to the entire transfer in 
accordance with paragraph (b)(2)(iii) of this section and T does not 
make an allocation of any GST exemption on the Form 709. On September 1, 
2004, the trustee makes a taxable distribution from the trust to T's 
grandchild in the amount of $30,000. Immediately prior to the 
distribution, the value of the trust assets was $150,000. On the same 
date, T allocates GST exemption to the trust in the amount of $50,000. 
The allocation of GST exemption on the date of the transfer is treated 
as preceding in point of time the taxable distribution. At the time of 
the GST, the trust has an inclusion ratio of .6667 (1--(50,000/
150,000)).
    Example 5. Automatic allocation to split-gift. On December 1, 2003, 
T transfers $50,000 to an irrevocable GST Trust described in section 
2632(c)(3)(B). The transfer to the trust is not a direct skip. On April 
30, 2004, T and T's spouse, S, each files an initial gift tax return for 
2003, on which they consent, pursuant to section 2513, to have the gift 
treated as if one-half had been made by each. In spite of being made on 
a late-filed gift tax return for 2003, the election under section 2513 
is valid because neither spouse had filed a timely gift tax return for 
that year. Previously, neither T nor S filed a timely gift tax return 
electing out of the automatic allocation rules contained in section 
2632(c)(1). As a result of the election under section 2513, which is 
retroactive to the date of T's transfer, T and S are each treated as the 
transferor of one-half of the property transferred in the indirect skip. 
Thus, $25,000 of T's unused GST exemption and $25,000 of S's unused GST 
exemption is automatically allocated to the trust. Both allocations are 
effective on and after the date that T made the transfer. The result 
would be the same if T's transfer constituted a direct skip subject to 
the automatic allocation rules contained in section 2632(b).
    Example 6. Partial allocation of GST exemption. On December 1, 2003, 
T transfers $100,000 to an irrevocable GST trust described in section 
2632(c)(3)(B). The transfer to the trust is not a direct skip. The date 
prescribed for filing the gift tax return reporting the taxable gift is 
April 15, 2004. On February 10, 2004, T files a Form 709 on which T 
allocates $40,000 of GST exemption to the trust. By filing a timely Form 
709 on which a partial allocation is made of $40,000, T effectively 
elected out of the automatic allocation rules for the remaining value of 
the transfer for which T did not allocate GST exemption.

    (iv) Example. The following example illustrates language that may be 
used in the statement required under paragraph (b)(2)(iii) of this 
section to elect out of the automatic allocation rules under various 
scenarios:

    Example 1. On March 1, 2006, T transfers $100,000 to Trust B, a GST 
trust described in section 2632(c)(3)(B). Subsequently, on September 15, 
2006, T transfers an additional $75,000 to Trust B. No other transfers 
are made to Trust B in 2006. T attaches an election out statement to a 
timely filed Form 709 for calendar year 2006. Except with regard to 
paragraph (v) of this Example 1, the election out statement identifies 
Trust B as required under paragraph (b)(2)(iii)(B) of this section, and 
contains the following alternative election statements:
    (i) ``T hereby elects that the automatic allocation rules will not 
apply to the $100,000 transferred to Trust B on March 1, 2006.'' The 
election out of the automatic allocation rules will be effective only 
for T's March 1, 2006, transfer and will not apply to T's $75,000 
transfer made on September 15, 2006.
    (ii) ``Thereby elects that the automatic allocation rules will not 
apply to any transfers to Trust B in 2006.'' The election out of the 
automatic allocation rules will be effective for T's transfers to Trust 
B made on March 1, 2006, and September 15, 2006.
    (iii) ``T hereby elects that the automatic allocation rules will not 
apply to any transfers to Trust B made by T in 2006 or to any additional 
transfers T may make to Trust B in subsequent years.'' The election out 
of the automatic allocation rules will be effective for T's transfers to 
Trust B in 2006 and for all future transfers to be made by T to Trust B, 
unless and until T terminates the election out of the automatic 
allocation rules.
    (iv) ``T hereby elects that the automatic allocation rules will not 
apply to any transfers T has made or will make to Trust B in the years 
2006 through 2008.'' The election out of the automatic allocation rules 
will be effective for T's transfers to Trust B in 2006 through 2008. T's 
transfers to Trust B after 2008 will be subject to the automatic 
allocation rules, unless T elects out of those rules for one or more 
years after 2008. T may terminate the election out of the automatic 
allocation rules for 2007, 2008, or both in accordance with the 
termination rules of paragraph (b)(2)(iii)(E) of this section. T may 
terminate the election out for one or more of the transfers made in 2006 
only on a later but still timely filed Form 709 for calendar year 2006.
    (v) ``T hereby elects that the automatic allocation rules will not 
apply to any current or future transfer that T may make to any trust.'' 
The election out of the automatic allocation rules will be effective for 
all of T's

[[Page 762]]

transfers (current-year and future) to Trust B and to any and all other 
trusts (whether such trusts exist in 2006 or are created in a later 
year), unless and until T terminates the election out of the automatic 
allocation rules. T may terminate the election out with regard to one or 
more (or all) of the transfers covered by the election out in accordance 
with the termination rules of paragraph (b)(2)(iii)(E) of this section.

    (c) Special rules during an estate tax inclusion period--(1) In 
general--(i) Automatic allocations with respect to direct skips and 
indirect skips. A direct skip or an indirect skip that is subject to an 
estate tax inclusion period (ETIP) is deemed to have been made only at 
the close of the ETIP. The transferor may prevent the automatic 
allocation of GST exemption to a direct skip or an indirect skip by 
electing out of the automatic allocation rules at any time prior to the 
due date of the Form 709 for the calendar year in which the close of the 
ETIP occurs (whether or not any transfer was made in the calendar year 
for which the Form 709 was filed, and whether or not a Form 709 
otherwise would be required to be filed for that year). See paragraph 
(b)(2)(i) of this section regarding the automatic allocation of GST 
exemption to an indirect skip subject to an ETIP.
    (ii) Other allocations. An affirmative allocation of GST exemption 
cannot be revoked, but becomes effective as of (and no earlier than) the 
date of the close of the ETIP with respect to the trust. If an 
allocation has not been made prior to the close of the ETIP, an 
allocation of exemption is effective as of the close of the ETIP during 
the transferor's lifetime if made by the due date for filing the Form 
709 for the calendar year in which the close of the ETIP occurs (timely 
ETIP return). An allocation of exemption is effective in the case of the 
close of the ETIP by reason of the death of the transferor as provided 
in paragraph (d) of this section.
    (iii) Portion of trust subject to ETIP. If any part of a trust is 
subject to an ETIP, the entire trust is subject to the ETIP. See Sec. 
26.2642-1(b)(2) for rules determining the inclusion ratio applicable in 
the case of GSTs during an ETIP.
    (2) Estate tax inclusion period defined--(i) In general. An ETIP is 
the period during which, should death occur, the value of transferred 
property would be includible (other than by reason of section 2035) in 
the gross estate of--
    (A) The transferor; or
    (B) The spouse of the transferor.
    (ii) Exceptions--(A) For purposes of paragraph (c)(2) of this 
section, the value of transferred property is not considered as being 
subject to inclusion in the gross estate of the transferor or the spouse 
of the transferor if the possibility that the property will be included 
is so remote as to be negligible. A possibility is so remote as to be 
negligible if it can be ascertained by actuarial standards that there is 
less than a 5 percent probability that the property will be included in 
the gross estate.
    (B) For purposes of paragraph (c)(2) of this section, the value of 
transferred property is not considered as being subject to inclusion in 
the gross estate of the spouse of the transferor, if the spouse 
possesses with respect to any transfer to the trust, a right to withdraw 
no more than the greater of $5,000 or 5 percent of the trust corpus, and 
such withdrawal right terminates no later than 60 days after the 
transfer to the trust.
    (C) The rules of this paragraph (c)(2) do not apply to qualified 
terminable interest property with respect to which the special election 
under Sec. 26.2652-2 has been made.
    (3) Termination of an ETIP. An ETIP terminates on the first to occur 
of--
    (i) The death of the transferor;
    (ii) The time at which no portion of the property is includible in 
the transferor's gross estate (other than by reason of section 2035) or, 
in the case of an individual who is a transferor solely by reason of an 
election under section 2513, the time at which no portion would be 
includible in the gross estate of the individual's spouse (other than by 
reason of section 2035);
    (iii) The time of a GST, but only with respect to the property 
involved in the GST; or
    (iv) In the case of an ETIP arising by reason of an interest or 
power held by the transferor's spouse under subsection (c)(2)(i)(B) of 
this section, at the first to occur of--
    (A) The death of the spouse; or
    (B) The time at which no portion of the property would be includible 
in the

[[Page 763]]

spouse's gross estate (other than by reason of section 2035).
    (4) Treatment of direct skips. If property transferred to a skip 
person is subject to an ETIP, the direct skip is treated as occurring on 
the termination of the ETIP.
    (5) Examples. The following examples illustrate the rules of this 
section as they apply to the termination of an ETIP during the lifetime 
of the transferor. In each example assume that T transfers $100,000 to 
an irrevocable trust:

    Example 1. Allocation of GST exemption during ETIP. The trust 
instrument provides that trust income is to be paid to T for 9 years or 
until T's prior death. The trust principal is to be paid to T's 
grandchild on the termination of T's income interest. If T dies within 
the 9-year period, the value of the trust principal is includible in T's 
gross estate under section 2036(a). Thus, the trust is subject to an 
ETIP. T files a timely Form 709 reporting the transfer and allocating 
$100,000 of GST exemption to the trust. The allocation of GST exemption 
to the trust is not effective until the termination of the ETIP.
    Example 2. Effect of prior allocation on termination of ETIP. The 
facts are the same as in Example 1, except the trustee has the power to 
invade trust principal on behalf of T's grandchild, GC, during the term 
of T's income interest. In year 4, when the value of the trust is 
$200,000, the trustee distributes $15,000 to GC. The distribution is a 
taxable distribution. The ETIP with respect to the property distributed 
to GC terminates at the time of the taxable distribution. See paragraph 
(c)(3)(iii) of this section. Solely for purposes of determining the 
trust's inclusion ratio with respect to the taxable distribution, the 
prior $100,000 allocation of GST exemption (as well as any additional 
allocation made on a timely ETIP return) is effective immediately prior 
to the taxable distribution. See Sec. 26.2642-1(b)(2). The trust's 
inclusion ratio with respect to the taxable distribution is therefore 
.50 (1-(100,000/200,000)).
    Example 3. Split-gift transfers subject to ETIP. The trust 
instrument provides that trust income is to be paid to T for 9 years or 
until T's prior death. The trust principal is to be paid to T's 
grandchild on the termination of T's income interest. T files a timely 
Form 709 reporting the transfer. T's spouse, S, consents to have the 
gift treated as made one-half by S under section 2513. Because S is 
treated as transferring one-half of the property to T's grandchild, S 
becomes the transferor of one-half of the trust for purposes of chapter 
13. Because the value of the trust would be includible in T's gross 
estate if T died immediately after the transfer, S's transfer is subject 
to an ETIP. If S should die prior to the termination of the trust, S's 
executor may allocate S's GST exemption to the trust, but only to the 
portion of the trust for which S is treated as the transferor. However, 
the allocation does not become effective until the earlier of the 
expiration of T's income interest or T's death.
    Example 4. Transfer of retained interest as ETIP termination. The 
trust instrument provides that trust income is to be paid to T for 9 
years or until T's prior death. The trust principal is to be paid to T's 
grandchild on the termination of T's income interest. Four years after 
the initial transfer, T transfers the income interest to T's sibling. 
The ETIP with respect to the trust terminates on T's transfer of the 
income interest because, after the transfer, the trust property would 
not be includible in T's gross estate (other than by reason of section 
2035) if T died at that time.
    Example 5. Election out of automatic allocation of GST exemption for 
trust subject to an ETIP. On December 1, 2003, T transfers $100,000 to 
Trust A, an irrevocable GST trust described in section 2632(c)(3) that 
is subject to an estate tax inclusion period (ETIP). T made no other 
gifts in 2003. The ETIP terminates on December 31, 2008. T timely files 
a gift tax return (Form 709) reporting the gift on April 15, 2004. On 
May 15, 2006, T files a Form 709 on which T properly elects out of the 
automatic allocation rules contained in section 2632(c)(1) with respect 
to the December 1, 2003, transfer to Trust A in accordance with 
paragraph (b)(2)(iii) of this section. Because the indirect skip is not 
deemed to occur until December 31, 2008, T's election out of automatic 
GST allocation filed on May 15, 2006, is timely, and will be effective 
as of December 31, 2008 (unless revoked on a Form 709 filed on or before 
the due date of a Form 709 for calendar year 2008).

    (d) Allocations after the transferor's death--(1) Allocation by 
executor. Except as otherwise provided in this paragraph (d), an 
allocation of a decedent's unused GST exemption by the executor of the 
decedent's estate is made on the appropriate United States Estate (and 
Generation-Skipping Transfer) Tax Return (Form 706 or Form 706NA) filed 
on or before the date prescribed for filing the return by section 
6075(a) (including any extensions actually granted (the due date)). An 
allocation of GST exemption with respect to property included in the 
gross estate of a decedent is effective as of the date of death. A 
timely allocation of GST exemption by an executor with respect to a 
lifetime transfer of property that is not included in the transferor's 
gross estate

[[Page 764]]

is made on a Form 709. A late allocation of GST exemption by an 
executor, other than an allocation that is deemed to be made under 
section 2632(b)(1) or (c)(1), with respect to a lifetime transfer of 
property is made on Form 706, Form 706NA, or Form 709 (filed on or 
before the due date of the transferor's estate tax return) and applies 
as of the date the allocation is filed. An allocation of GST exemption 
to a trust (whether or not funded at the time the Form 706 or Form 706NA 
is filed) is effective if the notice of allocation clearly identifies 
the trust and the amount of the decedent's GST exemption allocated to 
the trust. An executor may allocate the decedent's GST exemption by use 
of a formula. For purposes of this section, an allocation is void if the 
allocation is made for a trust that has no GST potential with respect to 
the transferor for whom the allocation is being made, as of the date of 
the transferor's death. For this purpose, a trust has GST potential even 
if the possibility of a GST is so remote as to be negligible.
    (2) Automatic allocation after death. A decedent's unused GST 
exemption is automatically allocated on the due date for filing Form 706 
or Form 706NA to the extent not otherwise allocated by the decedent's 
executor on or before that date. The automatic allocation occurs whether 
or not a return is actually required to be filed. Unused GST exemption 
is allocated pro rata (subject to the rules of Sec. 26.2642-2(b)), on 
the basis of the value of the property as finally determined for 
purposes of chapter 11 (chapter 11 value), first to direct skips treated 
as occurring at the transferor's death. The balance, if any, of unused 
GST exemption is allocated pro rata (subject to the rules of Sec. 
26.2642-2(b)) on the basis of the chapter 11 value of the nonexempt 
portion of the trust property (or in the case of trusts that are not 
included in the gross estate, on the basis of the date of death value of 
the trust) to trusts with respect to which a taxable termination may 
occur or from which a taxable distribution may be made. The automatic 
allocation of GST exemption is irrevocable, and an allocation made by 
the executor after the automatic allocation is made is ineffective. No 
automatic allocation of GST exemption is made to a trust that will have 
a new transferor with respect to the entire trust prior to the 
occurrence of any GST with respect to the trust. In addition, no 
automatic allocation of GST exemption is made to a trust if, during the 
nine month period ending immediately after the death of the transferor--
    (i) No GST has occurred with respect to the trust; and
    (ii) At the end of such period no future GST can occur with respect 
to the trust.
    (e) Effective dates. This section is applicable as provided in Sec. 
26.2601-1(c), with the following exceptions:
    (1) Paragraphs (b)(2) and (b)(3), the third sentence of paragraph 
(b)(4)(i), the fourth sentence of paragraph (b)(4)(ii)(A)(1), paragraphs 
(b)(4)(iii) and (b)(4)(iv), and the fourth sentence of paragraph (d)(1) 
of this section, which will apply to elections made on or after July 13, 
2004; and
    (2) Paragraph (c)(1), and Example 5 of paragraph (c)(5), which will 
apply to elections made on or after June 29, 2005.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29654, June 12, 1996, as 
amended by T.D. 9208, 70 FR 37260, June 29, 2005]



Sec. 26.2641-1  Applicable rate of tax.

    The rate of tax applicable to any GST (applicable rate) is 
determined by multiplying the maximum Federal estate tax rate in effect 
at the time of the GST by the inclusion ratio (as defined in Sec. 
26.2642-1). For this purpose, the maximum Federal estate tax rate is the 
maximum rate set forth under section 2001(c) (without regard to section 
2001(c)(2)).



Sec. 26.2642-1  Inclusion ratio.

    (a) In general. Except as otherwise provided in this section, the 
inclusion ratio is determined by subtracting the applicable fraction 
(rounded to the nearest one-thousandth (.001)) from 1. In rounding the 
applicable fraction to the nearest one-thousandth, any amount that is 
midway between one one-thousandth and another one-thousandth is rounded 
up to the higher of those two amounts.

[[Page 765]]

    (b) Numerator of applicable fraction--(1) In general. Except as 
otherwise provided in this paragraph (b), and in Sec. Sec. 26.2642-3 
(providing a special rule for charitable lead annuity trusts) and 
26.2642-4 (providing rules for the redetermination of the applicable 
fraction), the numerator of the applicable fraction is the amount of GST 
exemption allocated to the trust (or to the transferred property in the 
case of a direct skip not in trust).
    (2) GSTs occurring during an ETIP--(i) In general. For purposes of 
determining the inclusion ratio with respect to a taxable termination or 
a taxable distribution that occurs during an ETIP, the numerator of the 
applicable fraction is the sum of--
    (A) The GST exemption previously allocated to the trust (including 
any allocation made to the trust prior to any taxable termination or 
distribution) reduced (but not below zero) by the nontax amount of any 
prior GSTs with respect to the trust; and
    (B) Any GST exemption allocated to the trust on a timely ETIP return 
filed after the termination of the ETIP. See Sec. 26.2632-1(c)(5) 
Example 2.
    (ii) Nontax amount of a prior GST. (1) The nontax amount of a prior 
GST with respect to the trust is the amount of the GST multiplied by the 
applicable fraction attributable to the trust at the time of the prior 
GST.
    (2) For rules regarding the allocation of GST exemption to property 
during an ETIP, see Sec. 26.2632-1(c).
    (c) Denominator of applicable fraction--(1) In general. Except as 
otherwise provided in this paragraph (c) and in Sec. Sec. 26.2642-3 and 
26.2642-4, the denominator of the applicable fraction is the value of 
the property transferred to the trust (or transferred in a direct skip 
not in trust) (as determined under Sec. 26.2642-2) reduced by the sum 
of--
    (i) Any Federal estate tax and any State death tax incurred by 
reason of the transfer that is chargeable to the trust and is actually 
recovered from the trust;
    (ii) The amount of any charitable deduction allowed under section 
2055, 2106, or 2522 with respect to the transfer; and
    (iii) In the case of a direct skip, the value of the portion of the 
transfer that is a nontaxable gift. See paragraph (c)(3) of this section 
for the definition of nontaxable gift.
    (2) Zero denominator. If the denominator of the applicable fraction 
is zero, the inclusion ratio is zero.
    (3) Nontaxable gifts. Generally, for purposes of chapter 13, a 
transfer is a nontaxable gift to the extent the transfer is excluded 
from taxable gifts by reason of section 2503(b) (after application of 
section 2513) or section 2503(e). However, a transfer to a trust for the 
benefit of an individual is not a nontaxable gift for purposes of this 
section unless--
    (i) Trust principal or income may, during the individual's lifetime, 
be distributed only to or for the benefit of the individual; and
    (ii) The assets of the trust will be includible in the gross estate 
of the individual if the individual dies before the trust terminates.
    (d) Examples. The following examples illustrate the provisions of 
this section. See Sec. 26.2652-2(d) Examples 2 and 3 for illustrations 
of the computation of the inclusion ratio where the special (reverse 
QTIP) election may be applicable.

    Example 1. Computation of the inclusion ratio. T transfers $100,000 
to a newly-created irrevocable trust providing that income is to be 
accumulated for 10 years. At the end of 10 years, the accumulated income 
is to be distributed to T's child, C, and the trust principal is to be 
paid to T's grandchild. T allocates $40,000 of T's GST exemption to the 
trust on a timely-filed gift tax return. The applicable fraction with 
respect to the trust is .40 ($40,000 (the amount of GST exemption 
allocated to the trust) over $100,000 (the value of the property 
transferred to the trust)). The inclusion ratio is .60 (1 - .40). If the 
maximum Federal estate tax rate is 55 percent at the time of a GST, the 
rate of tax applicable to the transfer (applicable rate) will be .333 
(55 percent (the maximum estate tax rate) x .60 (the inclusion ratio)).
    Example 2. Gift entirely nontaxable. On December 1, 1996, T 
transfers $10,000 to an irrevocable trust for the benefit of T's 
grandchild, GC. GC possesses a right to withdraw any contributions to 
the trust such that the entire transfer qualifies for the annual 
exclusion under section 2503(b). Under the terms of the trust, the 
income is to be paid to GC for 10 years or until GC's prior death. Upon 
the expiration of GC's income interest, the trust principal is payable 
to GC or GC's estate. The transfer to the trust is a direct

[[Page 766]]

skip. T made no prior gifts to or for the benefit of GC during 1996. The 
entire $10,000 transfer is a nontaxable transfer. For purposes of 
computing the tax on the direct skip, the denominator of the applicable 
fraction is zero, and thus, the inclusion ratio is zero.
    Example 3. Gift nontaxable in part. T transfers $12,000 to an 
irrevocable trust for the benefit of T's grandchild, GC. Under the terms 
of the trust, the income is to be paid to GC for 10 years or until GC's 
prior death. Upon the expiration of GC's income interest, the trust 
principal is payable to GC or GC's estate. Further, GC has the right to 
withdraw $10,000 of any contribution to the trust such that $10,000 of 
the transfer qualifies for the annual exclusion under section 2503(b). 
The amount of the nontaxable transfer is $10,000. Solely for purposes of 
computing the tax on the direct skip, T's transfer is divided into two 
portions. One portion is equal to the amount of the nontaxable transfer 
($10,000) and has a zero inclusion ratio; the other portion is $2,000 
($12,000 - $10,000). With respect to the $2,000 portion, the denominator 
of the applicable fraction is $2,000. Assuming that T has sufficient GST 
exemption available, the numerator of the applicable fraction is $2,000 
(unless T elects to have the automatic allocation provisions not apply). 
Thus, assuming T does not elect to have the automatic allocation not 
apply, the applicable fraction is one ($2,000/$2,000 = 1) and the 
inclusion ratio is zero (1 - 1 = 0).
    Example 4. Gift nontaxable in part. Assume the same facts as in 
Example 3, except T files a timely Form 709 electing that the automatic 
allocation of GST exemption not apply to the $12,000 transferred in the 
direct skip. T's transfer is divided into two portions, a $10,000 
portion with a zero inclusion ratio and a $2,000 portion with an 
applicable fraction of zero (0/$2,000 = 0) and an inclusion ratio of one 
(1 - 0 = 1).



Sec. 26.2642-2  Valuation.

    (a) Lifetime transfers--(1) In general. For purposes of determining 
the denominator of the applicable fraction, the value of property 
transferred during life is its fair market value on the effective date 
of the allocation of GST exemption. In the case of a timely allocation 
under Sec. 26.2632-1(b)(2)(ii), the denominator of the applicable 
fraction is the fair market value of the property as finally determined 
for purposes of chapter 12.
    (2) Special rule for late allocations during life. If a transferor 
makes a late allocation of GST exemption to a trust, the value of the 
property transferred to the trust is the fair market value of the trust 
assets determined on the effective date of the allocation of GST 
exemption. Except as otherwise provided in this paragraph (a)(2), if a 
transferor makes a late allocation of GST exemption to a trust, the 
transferor may, solely for purposes of determining the fair market value 
of the trust assets, elect to treat the allocation as having been made 
on the first day of the month during which the late allocation is made 
(valuation date). An election under this paragraph (a)(2) is not 
effective with respect to a life insurance policy or a trust holding a 
life insurance policy, if the insured individual has died. An allocation 
subject to the election contained in this paragraph (a)(2) is not 
effective until it is actually filed with the Internal Revenue Service. 
The election is made by stating on the Form 709 on which the allocation 
is made--
    (i) That the election is being made;
    (ii) The applicable valuation date; and
    (iii) The fair market value of the trust assets on the valuation 
date.
    (b) Transfers at death--(1) In general. Except as provided in 
paragraphs (b) (2) and (3) of this section, in determining the 
denominator of the applicable fraction, the value of property included 
in the decedent's gross estate is its value for purposes of chapter 11. 
In the case of qualified real property with respect to which the 
election under section 2032A is made, the value of the property is the 
value determined under section 2032A provided the recapture agreement 
described in section 2032A(d)(2) filed with the Internal Revenue Service 
specifically provides for the signatories' consent to the imposition of, 
and personal liability for, additional GST tax in the event an 
additional estate tax is imposed under section 2032A(c). See Sec. 
26.2642-4(a)(4). If the recapture agreement does not contain these 
provisions, the value of qualified real property as to which the 
election under section 2032A is made is the fair market value of the 
property determined without regard to the provisions of section 2032A.
    (2) Special rule for pecuniary payments--(i) In general. If a 
pecuniary payment is satisfied with cash, the denominator of the 
applicable fraction is

[[Page 767]]

the pecuniary amount. If property other than cash is used to satisfy a 
pecuniary payment, the denominator of the applicable fraction is the 
pecuniary amount only if payment must be made with property on the basis 
of the value of the property on--
    (A) The date of distribution; or
    (B) A date other than the date of distribution, but only if the 
pecuniary payment must be satisfied on a basis that fairly reflects net 
appreciation and depreciation (occurring between the valuation date and 
the date of distribution) in all of the assets from which the 
distribution could have been made.
    (ii) Other pecuniary amounts payable in kind. The denominator of the 
applicable fraction with respect to any property used to satisfy any 
other pecuniary payment payable in kind is the date of distribution 
value of the property.
    (3) Special rule for residual transfers after payment of a pecuniary 
payment--(i) In general. Except as otherwise provided in this paragraph 
(b)(3), the denominator of the applicable fraction with respect to a 
residual transfer of property after the satisfaction of a pecuniary 
payment is the estate tax value of the assets available to satisfy the 
pecuniary payment reduced, if the pecuniary payment carries appropriate 
interest (as defined in paragraph (b)(4) of this section), by the 
pecuniary amount. The denominator of the applicable fraction with 
respect to a residual transfer of property after the satisfaction of a 
pecuniary payment that does not carry appropriate interest is the estate 
tax value of the assets available to satisfy the pecuniary payment 
reduced by the present value of the pecuniary payment. For purposes of 
this paragraph (b)(3)(i), the present value of the pecuniary payment is 
determined by using--
    (A) The interest rate applicable under section 7520 at the death of 
the transferor; and
    (B) The period between the date of the transferor's death and the 
date the pecuniary amount is paid.
    (ii) Special rule for residual transfers after pecuniary payments 
payable in kind. The denominator of the applicable fraction with respect 
to any residual transfer after satisfaction of a pecuniary payment 
payable in kind is the date of distribution value of the property 
distributed in satisfaction of the residual transfer, unless the 
pecuniary payment must be satisfied on the basis of the value of the 
property on--
    (A) The date of distribution; or
    (B) A date other than the date of distribution, but only if the 
pecuniary payment must be satisfied on a basis that fairly reflects net 
appreciation and depreciation (occurring between the valuation date and 
the date of distribution) in all of the assets from which the 
distribution could have been made.
    (4) Appropriate interest--(i) In general. For purposes of this 
section and Sec. 26.2654-1 (relating to certain trusts treated as 
separate trusts), appropriate interest means that interest must be 
payable from the date of death of the transferor (or from the date 
specified under applicable State law requiring the payment of interest) 
to the date of payment at a rate--
    (A) At least equal to--
    (1) The statutory rate of interest, if any, applicable to pecuniary 
bequests under the law of the State whose law governs the administration 
of the estate or trust; or
    (2) If no such rate is indicated under applicable State law, 80 
percent of the rate that is applicable under section 7520 at the death 
of the transferor; and
    (B) Not in excess of the greater of--
    (1) The statutory rate of interest, if any, applicable to pecuniary 
bequests under the law of the State whose law governs the administration 
of the trust; or
    (2) 120 percent of the rate that is applicable under section 7520 at 
the death of the transferor.
    (ii) Pecuniary payments deemed to carry appropriate interest. For 
purposes of this paragraph (b)(4), if a pecuniary payment does not carry 
appropriate interest, the pecuniary payment is considered to carry 
appropriate interest to the extent--
    (A) The entire payment is made or property is irrevocably set aside 
to satisfy the entire pecuniary payment within 15 months of the 
transferor's death; or

[[Page 768]]

    (B) The governing instrument or applicable local law specifically 
requires the executor or trustee to allocate to the pecuniary payment a 
pro rata share of the income earned by the fund from which the pecuniary 
payment is to be made between the date of death of the transferor and 
the date of payment. For purposes of paragraph (b)(4)(ii)(A) of this 
section, property is irrevocably set aside if it is segregated and held 
in a separate account pending distribution.
    (c) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. T transfers $100,000 to a newly-created irrevocable trust 
on December 15, 1996. The trust provides that income is to be paid to 
T's child for 10 years. At the end of the 10-year period, the trust 
principal is to be paid to T's grandchild. T does not allocate any GST 
exemption to the trust on the gift tax return reporting the transfer. On 
November 15, 1997, T files a Form 709 allocating $50,000 of GST 
exemption to the trust. Because the allocation was made on a late filed 
return, the value of the property transferred to the trust is determined 
on the date the allocation is filed (unless an election is made pursuant 
to paragraph (a)(2) of this section to value the trust property as of 
the first day of the month in which the allocation document is filed 
with the Internal Revenue Service). On November 15, 1997, the value of 
the trust property is $150,000. Effective as of November 15, 1997, the 
applicable fraction with respect to the trust is .333 ($50,000 (the 
amount of GST exemption allocated to the trust) over $150,000 (the value 
of the trust principal on the effective date of the GST exemption 
allocation)), and the inclusion ratio is .667 (1.0-.333).
    Example 2. The facts are the same as in Example 1, except the value 
of the trust property is $80,000 on November 15, 1997. The applicable 
fraction is .625 ($50,000 over $80,000) and the inclusion ratio is .375 
(1.0-.625).
    Example 3. T transfers $100,000 to a newly-created irrevocable trust 
on December 15, 1996. The trust provides that income is to be paid to 
T's child for 10 years. At the end of the 10-year period, the trust 
principal is to be paid to T's grandchild. T does not allocate any GST 
exemption to the trust on the gift tax return reporting the transfer. On 
November 15, 1997, T files a Form 709 allocating $50,000 of GST 
exemption to the trust. T elects to value the trust principal on the 
first day of the month in which the allocation is made pursuant to the 
election provided in paragraph (a)(2) of this section. Because the late 
allocation is made in November, the value of the trust is determined as 
of November 1, 1997.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29654, June 12, 1996]



Sec. 26.2642-3  Special rule for charitable lead annuity trusts.

    (a) In general. In determining the applicable fraction with respect 
to a charitable lead annuity trust--
    (1) The numerator is the adjusted generation-skipping transfer tax 
exemption (adjusted GST exemption); and
    (2) The denominator is the value of all property in the trust 
immediately after the termination of the charitable lead annuity.
    (b) Adjusted GST exemption defined. The adjusted GST exemption is 
the amount of GST exemption allocated to the trust increased by an 
amount equal to the interest that would accrue if an amount equal to the 
allocated GST exemption were invested at the rate used to determine the 
amount of the estate or gift tax charitable deduction, compounded 
annually, for the actual period of the charitable lead annuity. If a 
late allocation is made to a charitable lead annuity trust, the adjusted 
GST exemption is the amount of GST exemption allocated to the trust 
increased by the interest that would accrue if invested at such rate for 
the period beginning on the date of the late allocation and extending 
for the balance of the actual period of the charitable lead annuity. The 
amount of GST exemption allocated to a charitable lead annuity trust is 
not reduced even though it is ultimately determined that the allocation 
of a lesser amount of GST exemption would have resulted in an inclusion 
ratio of zero. For purposes of chapter 13, a charitable lead annuity 
trust is any trust providing an interest in the form of a guaranteed 
annuity described in Sec. 25.2522(c)-3(c)(2)(vi) of this chapter for 
which the transferor is allowed a charitable deduction for Federal 
estate or gift tax purposes.
    (c) Example. The following example illustrates the provisions of 
this section:

    Example. T creates a charitable lead annuity trust for a 10-year 
term with the remainder payable to T's grandchild. T timely allocates an 
amount of GST exemption to the

[[Page 769]]

trust which T expects will ultimately result in a zero inclusion ratio. 
However, at the end of the charitable lead interest, because the 
property has not appreciated to the extent T anticipated, the numerator 
of the applicable fraction is greater than the denominator. The 
inclusion ratio for the trust is zero. No portion of the GST exemption 
allocated to the trust is restored to T or to T's estate.



Sec. 26.2642-4  Redetermination of applicable fraction.

    (a) In general. The applicable fraction for a trust is redetermined 
whenever additional exemption is allocated to the trust or when certain 
changes occur with respect to the principal of the trust. Except as 
otherwise provided in this paragraph (a), the numerator of the 
redetermined applicable fraction is the sum of the amount of GST 
exemption currently being allocated to the trust (if any) plus the value 
of the nontax portion of the trust, and the denominator of the 
redetermined applicable fraction is the value of the trust principal 
immediately after the event occurs. The nontax portion of a trust is 
determined by multiplying the value of the trust assets, determined 
immediately prior to the event, by the then applicable fraction.
    (1) Multiple transfers to a single trust. If property is added to an 
existing trust, the denominator of the redetermined applicable fraction 
is the value of the trust immediately after the addition reduced as 
provided in Sec. 26.2642-1(c).
    (2) Consolidation of separate trusts. If separate trusts created by 
one transferor are consolidated, a single applicable fraction for the 
consolidated trust is determined. The numerator of the redetermined 
applicable fraction is the sum of the nontax portions of each trust 
immediately prior to the consolidation.
    (3) Property included in transferor's gross estate. If the value of 
property held in a trust created by the transferor, with respect to 
which an allocation was made at a time that the trust was not subject to 
an ETIP, is included in the transferor's gross estate, the applicable 
fraction is redetermined if additional GST exemption is allocated to the 
property. The numerator of the redetermined applicable fraction is an 
amount equal to the nontax portion of the property immediately after the 
death of the transferor increased by the amount of GST exemption 
allocated by the executor of the transferor's estate to the trust. If 
additional GST exemption is not allocated to the trust, then, except as 
provided in this paragraph (a)(3), the applicable fraction immediately 
before death is not changed, if the trust was not subject to an ETIP at 
the time GST exemption was allocated to the trust. In any event, the 
denominator of the applicable fraction is reduced to reflect any federal 
or state, estate or inheritance taxes paid from the trust.
    (4) Imposition of recapture tax under section 2032A--(i) If an 
additional estate tax is imposed under section 2032A and if the section 
2032A election was effective (under Sec. 26.2642-2(b)) for purposes of 
the GST tax, the applicable fraction with respect to the property is 
redetermined as of the date of death of the transferor. In making the 
redetermination, any available GST exemption not allocated at the death 
of the transferor (or at a prior recapture event) is automatically 
allocated to the property. The denominator of the applicable fraction is 
the fair market value of the property at the date of the transferor's 
death reduced as provided in Sec. 26.2642-1(c) and further reduced by 
the amount of the additional GST tax actually recovered from the trust.
    (ii) The GST tax imposed with respect to any taxable termination, 
taxable distribution, or direct skip occurring prior to the recapture 
event is recomputed based on the applicable fraction as redetermined. 
Any additional GST tax as recomputed is due and payable on the date that 
is six months after the event that causes the imposition of the 
additional estate tax under section 2032A. The additional GST tax is 
remitted with Form 706-A and is reported by attaching a statement to 
Form 706-A showing the computation of the additional GST tax.
    (iii) The applicable fraction, as redetermined under this section, 
is also used in determining any GST tax imposed with respect to GSTs 
occurring after the date of the recapture event.
    (b) Examples. The following examples illustrate the principles of 
this section:


[[Page 770]]


    Example 1. Allocation of additional exemption. T transfers $200,000 
to an irrevocable trust under which the income is payable to T's child, 
C, for life. Upon the termination of the trust, the remainder is payable 
to T's grandchild, GC. At a time when no ETIP exists with respect to the 
trust property, T makes a timely allocation of $100,000 of GST 
exemption, resulting in an inclusion ratio of .50. Subsequently, when 
the entire trust property is valued at $500,000, T allocates an 
additional $100,000 of T's unused GST exemption to the trust. The 
inclusion ratio of the trust is recomputed at that time. The numerator 
of the applicable fraction is $350,000 ($250,000 (the nontax portion as 
of the date of the allocation) plus $100,000 (the GST exemption 
currently being allocated)). The denominator is $500,000 (the date of 
allocation fair market value of the trust). The inclusion ratio is .30 
(1 - .70).
    Example 2. Multiple transfers to a trust, allocation both timely and 
late. On December 10, 1993, T transfers $10,000 to an irrevocable trust 
that does not satisfy the requirements of section 2642(c)(2). T makes 
identical transfers to the trust on December 10, 1994, 1995, 1996, and 
on January 15, 1997. Immediately after the transfer on January 15, 1997, 
the value of the trust principal is $40,000. On January 14, 1998, when 
the value of the trust principal is $50,000, T allocates $30,000 of GST 
exemption to the trust. T discloses the 1997 transfer on the Form 709 
filed on January 14, 1998. Thus, T's allocation is a timely allocation 
with respect to the transfer in 1997, $10,000 of the allocation is 
effective as of the date of that transfer, and, on and after January 15, 
1997, the inclusion ratio of the trust is .75 (1 - ($10,000/$40,000)). 
The balance of the allocation is a late allocation with respect to prior 
transfers to the trust and is effective as of January 14, 1998. In 
redetermining the inclusion ratio as of that date, the numerator of the 
redetermined applicable fraction is $32,500 ($12,500 (.25 x $50,000), 
the nontax portion of the trust on January 14, 1998) plus $20,000 (the 
amount of GST exemption allocated late to the trust). The denominator of 
the new applicable fraction is $50,000 (the value of the trust principal 
at the time of the late allocation).
    Example 3. Excess allocation. (i) T creates an irrevocable trust for 
the benefit of T's child and grandchild in 1996 transferring $50,000 to 
the trust on the date of creation. T allocates no GST exemption to the 
trust on the Form 709 reporting the transfer. On July 1, 1997 (when the 
value of the trust property is $60,000), T transfers an additional 
$40,000 to the trust.
    (ii) On April 15, 1998, when the value of the trust is $150,000, T 
files a Form 709 reporting the 1997 transfer and allocating $150,000 of 
GST exemption to the trust. The allocation is a timely allocation of 
$40,000 with respect to the 1997 transfer and is effective as of that 
date. Thus, the applicable fraction for the trust as of July 1, 1997 is 
.40 ($40,000/$100,000 ($40,000 + $60,000)).
    (iii) The allocation is also a late allocation of $90,000, the 
amount necessary to attain a zero inclusion ratio on April 15, 1998, 
computed as follows: $60,000 (the nontax portion immediately prior to 
the allocation (.40 x $150,000)) plus $90,000 (the additional allocation 
necessary to produce a zero inclusion ratio based on a denominator of 
$150,000)/$150,000 equals one and, thus, an inclusion ratio of zero. The 
balance of the allocation, $20,000 ($150,000 less the timely allocation 
of $40,000 less the late allocation of $90,000) is void.
    Example 4. Undisclosed transfer. (i) The facts are the same as in 
Example 3, except that on February 1, 1998 (when the value of the trust 
is $150,000), T transfers an additional $50,000 to the trust and the 
value of the entire trust corpus on April 15, 1998 is $220,000. The Form 
709 filed on April 15, 1998 does not disclose the 1998 transfer. Under 
the rule in Sec. 26.2632-1(b)(2)(ii), the allocation is effective first 
as a timely allocation to the 1997 transfer; second, as a late 
allocation to the trust as of April 15, 1998; and, finally as a timely 
allocation to the February 1, 1998 transfer. As of April 15, 1998, 
$55,000, a pro rata portion of the trust assets, is considered to be the 
property transferred to the trust on February 1, 1998 (($50,000/
$200,000) x $220,000). The balance of the trust, $165,000, represents 
prior transfers to the trust.
    (ii) As in Example 3, the allocation is a timely allocation as to 
the 1997 transfer (and the applicable fraction as of July 1, 1997 is 
.40) and a late allocation as of 1998. The amount of the late allocation 
is $99,000, computed as follows: (.40 x $165,000 plus $99,000)/$165,000 
= one.
    (iii) The balance of the allocation, $11,000 ($150,000 less the 
timely allocation of $40,000 less the late allocation of $99,000) is a 
timely allocation as of February 1, 1998. The applicable fraction with 
respect to the trust, as of February 1, 1998, is .355, computed as 
follows: $60,000 (the nontax portion of the trust immediately prior to 
the February 1, 1998 transfer (.40 x $150,000)) plus $11,000 (the amount 
of the timely allocation to the 1998 transfer)/$200,000 (the value of 
the trust on February 1, 1998, after the transfer on that date) = 
$71,000/$200,000 = .355.
    (iv) The applicable fraction with respect to the trust, as of April 
15, 1998, is .805 computed as follows: $78,100 (the nontax portion 
immediately prior to the allocation (.355 x $220,000)) plus $99,000 (the 
amount of the late allocation)/ $220,000 = $177,100/$220,000 = .805.
    Example 5. Redetermination of inclusion ratio on ETIP termination. 
(i) T transfers $100,000 to an irrevocable trust. The trust instrument 
provides that trust income is to be paid to T for 9 years or until T's 
prior death. The trust principal is to be paid to T's grandchild, GC,

[[Page 771]]

on the termination of T's income interest. The trustee has the power to 
invade trust principal for the benefit of GC during the term of T's 
income interest. The trust is subject to an ETIP while T holds the 
retained income interest. T files a timely Form 709 reporting the 
transfer and allocates $100,000 of GST exemption to the trust. In year 
4, when the value of the trust is $200,000, the trustee distributes 
$15,000 to GC. The distribution is a taxable distribution. Because of 
the existence of the ETIP, the inclusion ratio with respect to the 
taxable distribution is determined immediately prior to the occurrence 
of the GST. Thus, the inclusion ratio applicable to the year 4 GST is 
.50 (1 - ($100,000/$200,000)).
    (ii) In year 5, when the value of the trust is again $200,000, the 
trustee distributes another $15,000 to GC. Because the trust is still 
subject to the ETIP in year 5, the inclusion ratio with respect to the 
year 5 GST is again computed immediately prior to the GST. In computing 
the new inclusion ratio, the numerator of the applicable fraction is 
reduced by the nontax portion of prior GSTs occurring during the ETIP. 
Thus, the numerator of the applicable fraction with respect to the GST 
in year 5 is $92,500 ($100,000 - (.50 x $15,000)) and the inclusion 
ratio applicable with respect to the GST in year 5 is .537 (1 - 
($92,500/$200,000) = .463). Any additional GST exemption allocated on a 
timely ETIP return with respect to the GST in year 5 is effective 
immediately prior to the transfer.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29654, June 12, 1996]



Sec. 26.2642-5  Finality of inclusion ratio.

    (a) Direct skips. The inclusion ratio applicable to a direct skip 
becomes final when no additional GST tax (including additional GST tax 
payable as a result of a cessation, etc. of qualified use under section 
2032A(c)) may be assessed with respect to the direct skip.
    (b) Other GSTs. With respect to taxable distributions and taxable 
terminations, the inclusion ratio for a trust becomes final, on the 
later of--
    (1) The expiration of the period for assessment with respect to the 
first GST tax return filed using that inclusion ratio (unless the trust 
is subject to an election under section 2032A in which case the 
applicable date under this subsection is the expiration of the period of 
assessment of any additional GST tax due as a result of a cessation, 
etc. of qualified use under section 2032A); or
    (2) The expiration of the period for assessment of Federal estate 
tax with respect to the estate of the transferor. For purposes of this 
paragraph (b)(2), if an estate tax return is not required to be filed, 
the period for assessment is determined as if a return were required to 
be filed and as if the return were timely filed within the period 
prescribed by section 6075(a).

[T.D. 8644, 60 FR 66903, Dec. 27, 1995, as amended at 61 FR 43656, Aug. 
26, 1996]



Sec. 26.2642-6  Qualified severance.

    (a) In general. If a trust is divided in a qualified severance into 
two or more trusts, the separate trusts resulting from the severance 
will be treated as separate trusts for generation-skipping transfer 
(GST) tax purposes and the inclusion ratio of each new resulting trust 
may differ from the inclusion ratio of the original trust. Because the 
post-severance resulting trusts are treated as separate trusts for GST 
tax purposes, certain actions with respect to one resulting trust will 
generally have no GST tax impact with respect to the other resulting 
trust(s). For example, GST exemption allocated to one resulting trust 
will not impact on the inclusion ratio of the other resulting trust(s); 
a GST tax election made with respect to one resulting trust will not 
apply to the other resulting trust(s); the occurrence of a taxable 
distribution or termination with regard to a particular resulting trust 
will not have any GST tax impact on any other trust resulting from that 
severance. In general, the rules in this section are applicable only for 
purposes of the GST tax and are not applicable in determining, for 
example, whether the resulting trusts may file separate income tax 
returns or whether the severance may result in a gift subject to gift 
tax, may cause any trust to be included in the gross estate of a 
beneficiary, or may result in a realization of gain for purposes of 
section 1001. See Sec. 1.1001-1(h) of this chapter for rules relating 
to whether a qualified severance will constitute an exchange of property 
for other property differing materially either in kind or in extent.
    (b) Qualified severance defined. A qualified severance is a division 
of a trust (other than a division described

[[Page 772]]

in Sec. 26.2654-1(b)) into two or more separate trusts that meets each 
of the requirements in paragraph (d) of this section.
    (c) Effective date of qualified severance. A qualified severance is 
applicable as of the date of the severance, as defined in Sec. 26.2642-
6(d)(3), and the resulting trusts are treated as separate trusts for GST 
tax purposes as of that date.
    (d) Requirements for a qualified severance. For purposes of this 
section, a qualified severance must satisfy each of the following 
requirements:
    (1) The single trust is severed pursuant to the terms of the 
governing instrument, or pursuant to applicable local law.
    (2) The severance is effective under local law.
    (3) The date of severance is either the date selected by the trustee 
as of which the trust assets are to be valued in order to determine the 
funding of the resulting trusts, or the court-imposed date of funding in 
the case of an order of the local court with jurisdiction over the trust 
ordering the trustee to fund the resulting trusts on or as of a specific 
date. For a date to satisfy the definition in the preceding sentence, 
however, the funding must be commenced immediately upon, and funding 
must occur within a reasonable time (but in no event more than 90 days) 
after, the selected valuation date.
    (4) The single trust (original trust) is severed on a fractional 
basis, such that each new trust (resulting trust) is funded with a 
fraction or percentage of the original trust, and the sum of those 
fractions or percentages is one or one hundred percent, respectively. 
For this purpose, the fraction or percentage may be determined by means 
of a formula (for example, that fraction of the trust the numerator of 
which is equal to the transferor's unused GST tax exemption, and the 
denominator of which is the fair market value of the original trust's 
assets on the date of severance). The severance of a trust based on a 
pecuniary amount does not satisfy this requirement. For example, the 
severance of a trust is not a qualified severance if the trust is 
divided into two trusts, with one trust to be funded with $1,500,000 and 
the other trust to be funded with the balance of the original trust's 
assets. With respect to the particular assets to be distributed to each 
separate trust resulting from the severance, each such trust may be 
funded with the appropriate fraction or percentage (pro rata portion) of 
each asset held by the original trust. Alternatively, the assets may be 
divided among the resulting trusts on a non-pro rata basis, based on the 
fair market value of the assets on the date of severance. However, if a 
resulting trust is funded on a non-pro rata basis, each asset received 
by a resulting trust must be valued, solely for funding purposes, by 
multiplying the fair market value of the asset held in the original 
trust as of the date of severance by the fraction or percentage of that 
asset received by that resulting trust. Thus, the assets must be valued 
without taking into account any discount or premium arising from the 
severance, for example, any valuation discounts that might arise because 
the resulting trust receives less than the entire interest held by the 
original trust. See paragraph (j), Example 6 of this section.
    (5) The terms of the resulting trusts must provide, in the 
aggregate, for the same succession of interests of beneficiaries as are 
provided in the original trust. This requirement is satisfied if the 
beneficiaries of the separate resulting trusts and the interests of the 
beneficiaries with respect to the separate trusts, when the separate 
trusts are viewed collectively, are the same as the beneficiaries and 
their respective beneficial interests with respect to the original trust 
before severance. With respect to trusts from which discretionary 
distributions may be made to any one or more beneficiaries on a non-pro 
rata basis, this requirement is satisfied if--
    (i) The terms of each of the resulting trusts are the same as the 
terms of the original trust (even though each permissible distributee of 
the original trust is not a beneficiary of all of the resulting trusts);
    (ii) Each beneficiary's interest in the resulting trusts 
(collectively) equals the beneficiary's interest in the original trust, 
determined by the terms of the trust instrument or, if none, on a per-
capita basis. For example, in the case of the severance of a 
discretionary

[[Page 773]]

trust established for the benefit of A, B, and C and their descendants 
with the remainder to be divided equally among those three families, 
this requirement is satisfied if the trust is divided into three 
separate trusts of equal value with one trust established for the 
benefit of A and A's descendants, one trust for the benefit of B and B's 
descendants, and one trust for the benefit of C and C's descendants;
    (iii) The severance does not shift a beneficial interest in the 
trust to any beneficiary in a lower generation (as determined under 
section 2651) than the person or persons who held the beneficial 
interest in the original trust; and
    (iv) The severance does not extend the time for the vesting of any 
beneficial interest in the trust beyond the period provided for in (or 
applicable to) the original trust.
    (6) In the case of a qualified severance of a trust with an 
inclusion ratio as defined in Sec. 26.2642-1 of either one or zero, 
each trust resulting from the severance will have an inclusion ratio 
equal to the inclusion ratio of the original trust.
    (7)(i) In the case of a qualified severance occurring after GST tax 
exemption has been allocated to the trust (whether by an affirmative 
allocation, a deemed allocation, or an automatic allocation pursuant to 
the rules contained in section 2632), if the trust has an inclusion 
ratio as defined in Sec. 26.2642-1 that is greater than zero and less 
than one, then either paragraph (d)(7)(ii) or (iii) of this section must 
be satisfied.
    (ii) The trust is severed initially into only two resulting trusts. 
One resulting trust must receive that fractional share of the total 
value of the original trust as of the date of severance that is equal to 
the applicable fraction, as defined in Sec. 26.2642-1(b) and (c), used 
to determine the inclusion ratio of the original trust immediately 
before the severance. The other resulting trust must receive that 
fractional share of the total value of the original trust as of the date 
of severance that is equal to the excess of one over the fractional 
share described in the preceding sentence. The trust receiving the 
fractional share equal to the applicable fraction shall have an 
inclusion ratio of zero, and the other trust shall have an inclusion 
ratio of one. If the applicable fraction with respect to the original 
trust is .50, then, with respect to the two equal trusts resulting from 
the severance, the trustee may designate which of the resulting trusts 
will have an inclusion ratio of zero and which will have an inclusion 
ratio of one. Each separate trust resulting from the severance then may 
be further divided in accordance with the rules of this section. See 
paragraph (j), Example 7, of this section.
    (iii) The trust is severed initially into more than two resulting 
trusts. One or more of the resulting trusts in the aggregate must 
receive that fractional share of the total value of the original trust 
as of the date of severance that is equal to the applicable fraction 
used to determine the inclusion ratio of the original trust immediately 
before the severance. The trust or trusts receiving such fractional 
share shall have an inclusion ratio of zero, and each of the other 
resulting trust or trusts shall have an inclusion ratio of one. (If, 
however, two or more of the resulting trusts each receives the 
fractional share of the total value of the original trust equal to the 
applicable fraction, the trustee may designate which of those resulting 
trusts will have an inclusion ratio of zero and which will have an 
inclusion ratio of one.) The resulting trust or trusts with an inclusion 
ratio of one must receive in the aggregate that fractional share of the 
total value of the original trust as of the date of severance that is 
equal to the excess of one over the fractional share described in the 
second sentence of this paragraph. See paragraph (j), Example 9, of this 
section.
    (e) Reporting a qualified severance--(1) In general. A qualified 
severance is reported by filing Form 706-GS(T), ``Generation-Skipping 
Transfer Tax Return for Terminations,'' (or such other form as may be 
provided from time to time by the Internal Revenue Service (IRS) for the 
purpose of reporting a qualified severance). Unless otherwise provided 
in the applicable form or instructions, the IRS requests that the filer 
write ``Qualified Severance''

[[Page 774]]

at the top of the form and attach a Notice of Qualified Severance 
(Notice). The return and attached Notice should be filed by April 15th 
of the year immediately following the year during which the severance 
occurred or by the last day of the period covered by an extension of 
time, if an extension of time is granted, to file such form.
    (2) Information concerning the original trust. The Notice should 
provide, with respect to the original trust that was severed--
    (i) The name of the transferor;
    (ii) The name and date of creation of the original trust;
    (iii) The tax identification number of the original trust; and
    (iv) The inclusion ratio before the severance.
    (3) Information concerning each new trust. The Notice should 
provide, with respect to each of the resulting trusts created by the 
severance--
    (i) The name and tax identification number of the trust;
    (ii) The date of severance (within the meaning of paragraph (c) of 
this section);
    (iii) The fraction of the total assets of the original trust 
received by the resulting trust;
    (iv) Other details explaining the basis for the funding of the 
resulting trust (a fraction of the total fair market value of the assets 
on the date of severance, or a fraction of each asset); and
    (v) The inclusion ratio.
    (f) Time for making a qualified severance. (1) A qualified severance 
of a trust may occur at any time prior to the termination of the trust. 
Thus, provided that the separate resulting trusts continue in existence 
after the severance, a qualified severance may occur either before or 
after--
    (i) GST tax exemption has been allocated to the trust;
    (ii) A taxable event has occurred with respect to the trust; or
    (iii) An addition has been made to the trust.
    (2) Because a qualified severance is effective as of the date of 
severance, a qualified severance has no effect on a taxable termination 
as defined in section 2612(a) or a taxable distribution as defined in 
section 2612(b) that occurred prior to the date of severance. A 
qualified severance shall be deemed to occur before a taxable 
termination or a taxable distribution that occurs by reason of the 
qualified severance. See paragraph (j) Example 8 of this section.
    (g) Trusts that were irrevocable on September 25, 1985--(1) In 
general. See Sec. 26.2601-1(b)(4) for rules regarding severances and 
other actions with respect to trusts that were irrevocable on September 
25, 1985.
    (2) Trusts in receipt of a post-September 25, 1985, addition. A 
trust described in Sec. 26.2601-1(b)(1)(iv)(A) that is deemed for GST 
tax purposes to consist of one separate share not subject to GST tax 
(the non-chapter 13 portion) with an inclusion ratio of zero, and one 
separate share subject to GST tax (the chapter 13 portion) with an 
inclusion ratio determined under section 2642, may be severed into two 
trusts in accordance with Sec. 26.2654-1(a)(3). One resulting trust 
will hold the non-chapter 13 portion of the original trust (the non-
chapter 13 trust) and will not be subject to GST tax, and the other 
resulting trust will hold the chapter 13 portion of the original trust 
(the chapter 13 trust) and will have the same inclusion ratio as the 
chapter 13 portion immediately prior to the severance. The chapter 13 
trust may be further divided in a qualified severance in accordance with 
the rules of this section. The non-chapter 13 trust may be further 
divided in accordance with the rules of Sec. 26.2601-1(b)(4).
    (h) Treatment of trusts resulting from a severance that is not a 
qualified severance. Trusts resulting from a severance (other than a 
severance recognized for GST tax purposes under Sec. 26.2654-1) that 
does not meet the requirements of a qualified severance under paragraph 
(b) of this section will be treated, after the date of severance, as 
separate trusts for purposes of the GST tax, provided that the trusts 
resulting from such severance are recognized as separate trusts under 
applicable state law. The post-severance treatment of the resulting 
trusts as separate trusts for GST tax purposes generally permits the 
allocation of GST tax exemption, the making of various elections 
permitted for GST tax purposes, and the occurrence of a taxable 
distribution or termination with regard to a particular

[[Page 775]]

resulting trust, with no GST tax impact on any other trust resulting 
from that severance. Each trust resulting from a severance described in 
this paragraph (h), however, will have the same inclusion ratio 
immediately after the severance as that of the original trust 
immediately before the severance. (See Sec. 26.2654-1 for the inclusion 
ratio of each trust resulting from a severance described in that 
section.) Further, any trust resulting from a nonqualified severance may 
be severed subsequently, pursuant to a qualified severance described in 
this Sec. 26.2642-6.
    (i) [Reserved]
    (j) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. Succession of interests. T dies in 2006. T's will 
establishes a testamentary trust (Trust) providing that income is to be 
paid to T's sister, S, for her life. On S's death, one-half of the 
corpus is to be paid to T's child, C (or to C's estate if C fails to 
survive S), and one-half of the corpus is to be paid to T's grandchild, 
GC (or to GC's estate if GC fails to survive S). On the Form 706, 
``United States Estate (and Generation-Skipping Transfer) Tax Return,'' 
filed for T's estate, T's executor allocates all of T's available GST 
tax exemption to other transfers and trusts, such that Trust's inclusion 
ratio is 1. Subsequent to filing the Form 706 in 2007 and in accordance 
with applicable state law, the trustee divides Trust into two separate 
trusts, Trust 1 and Trust 2, with each trust receiving 50 percent of the 
value of the assets of the original trust as of the date of severance. 
Trust 1 provides that trust income is to be paid to S for life with 
remainder to C or C's estate, and Trust 2 provides that trust income is 
to be paid to S for life with remainder to GC or GC's estate. Because 
Trust 1 and Trust 2 provide for the same succession of interests in the 
aggregate as provided in the original trust, the severance constitutes a 
qualified severance, provided that all other requirements of section 
2642(a)(3) and this section are satisfied.
    Example 2. Succession of interests in discretionary trust. In 2006, 
T establishes Trust, an irrevocable trust providing that income may be 
paid from time to time in such amounts as the trustee deems advisable to 
any one or more members of the group consisting of T's children (A and 
B) and their respective descendants. In addition, the trustee may 
distribute corpus to any trust beneficiary in such amounts as the 
trustee deems advisable. On the death of the last to die of A and B, the 
trust is to terminate and the corpus is to be distributed in two equal 
shares, one share to the then-living descendants of each child, per 
stirpes. T elects, under section 2632(c)(5), to not have the automatic 
allocation rules contained in section 2632(c) apply with respect to T's 
transfers to Trust, and T does not otherwise allocate GST tax exemption 
with respect to Trust. As a result, Trust has an inclusion ratio of one. 
In 2008, the trustee of Trust, pursuant to applicable state law, divides 
Trust into two equal but separate trusts, Trust 1 and Trust 2, each of 
which has terms identical to the terms of Trust except for the identity 
of the beneficiaries. Trust 1 and Trust 2 each has an inclusion ratio of 
one. Trust 1 provides that income is to be paid in such amounts as the 
trustee deems advisable to A and A's descendants. In addition, the 
trustee may distribute corpus to any trust beneficiary in such amounts 
as the trustee deems advisable. On the death of A, Trust 1 is to 
terminate and the corpus is to be distributed to the then-living 
descendants of A, per stirpes, but, if A dies with no living 
descendants, the principal will be added to Trust 2. Trust 2 contains 
identical provisions, except that B and B's descendants are the trust 
beneficiaries and, if B dies with no living descendants, the principal 
will be added to Trust 1. Trust 1 and Trust 2 in the aggregate provide 
for the same beneficiaries and the same succession of interests as 
provided in Trust, and the severance does not shift any beneficial 
interest to a beneficiary who occupies a lower generation than the 
person or persons who held the beneficial interest in Trust. 
Accordingly, the severance constitutes a qualified severance, provided 
that all other requirements of section 2642(a)(3) and this section are 
satisfied.
    Example 3. Severance based on actuarial value of beneficial 
interests. In 2004, T establishes Trust, an irrevocable trust providing 
that income is to be paid to T's child C during C's lifetime. Upon C's 
death, Trust is to terminate and the assets of Trust are to be paid to 
GC, C's child, if living, or, if GC is not then living, to GC's estate. 
T properly elects, under section 2632(c)(5), not to have the automatic 
allocation rules contained in section 2632(c) apply with respect to T's 
transfers to Trust, and T does not otherwise allocate GST tax exemption 
with respect to Trust. Thus, Trust has an inclusion ratio of one. In 
2009, the trustee of Trust, pursuant to applicable state law, divides 
Trust into two separate trusts, Trust 1 for the benefit of C (and on C's 
death to C's estate), and Trust 2 for the benefit of GC (and on GC's 
death to GC's estate). The document severing Trust directs that Trust 1 
is to be funded with an amount equal to the actuarial value of C's 
interest in Trust prior to the severance, determined under section 7520 
of the Internal Revenue Code. Similarly, Trust 2 is to be funded with an 
amount equal to the actuarial value of GC's interest in Trust prior to 
the severance, determined under section 7520.

[[Page 776]]

Trust 1 and Trust 2 do not provide for the same succession of interests 
as provided under the terms of the original trust. Therefore, the 
severance is not a qualified severance. Furthermore, because the 
severance results in no non-skip person having an interest in Trust 2, 
Trust 2 constitutes a skip person under section 2613 and, therefore, the 
severance results in a taxable termination subject to GST tax.
    Example 4. Severance of a trust with a 50% inclusion ratio. On 
September 1, 2006, T transfers $100,000 to a trust for the benefit of 
T's grandchild, GC. On a timely filed Form 709, ``United States Gift 
(and Generation-Skipping Transfer) Tax Return,'' reporting the transfer, 
T allocates all of T's remaining GST tax exemption ($50,000) to the 
trust. As a result of the allocation, the applicable fraction with 
respect to the trust is .50 [$50,000 (the amount of GST tax exemption 
allocated to the trust) divided by $100,000 (the value of the property 
transferred to the trust)]. The inclusion ratio with respect to the 
trust is .50 [1-.50]. In 2007, pursuant to authority granted under 
applicable state law, the trustee severs the trust into two trusts, 
Trust 1 and Trust 2, each of which is identical to the original trust 
and each of which receives a 50 percent fractional share of the total 
value of the original trust, valued as of the date of severance. Because 
the applicable fraction with respect to the original trust is .50 and 
the trust is severed into two equal trusts, the trustee may designate 
which resulting trust has an inclusion ratio of one, and which resulting 
trust has an inclusion ratio of zero. Accordingly, in the Notice of 
Qualified Severance reporting the severance, the trustee designates 
Trust 1 as having an inclusion ratio of zero, and Trust 2 as having an 
inclusion ratio of one. The severance constitutes a qualified severance, 
provided that all other requirements of section 2642(a)(3) and this 
section are satisfied.
    Example 5. Funding of severed trusts on a non-pro rata basis. T's 
will establishes a testamentary trust (Trust) for the benefit of T's 
descendants, to be funded with T's stock in Corporation A and 
Corporation B, both publicly traded stocks. T dies on May 1, 2004, at 
which time the Corporation A stock included in T's gross estate has a 
fair market value of $100,000 and the stock of Corporation B included in 
T's gross estate has a fair market value of $200,000. On a timely filed 
Form 706, T's executor allocates all of T's remaining GST tax exemption 
($270,000) to Trust. As a result of the allocation, the applicable 
fraction with respect to Trust is .90 [$270,000 (the amount of GST tax 
exemption allocated to the trust) divided by $300,000 (the value of the 
property transferred to the trust)]. The inclusion ratio with respect to 
Trust is .10 [1-.90]. On August 1, 2008, in accordance with applicable 
local law, the trustee executes a document severing Trust into two 
trusts, Trust 1 and Trust 2, each of which is identical to Trust. The 
instrument designates August 3, 2008, as the date of severance (within 
the meaning of paragraph (d)(3) of this section). The terms of the 
instrument severing Trust provide that Trust 1 is to be funded on a non-
pro rata basis with assets having a fair market value on the date of 
severance equal to 90% of the value of Trust's assets on that date, and 
Trust 2 is to be funded with assets having a fair market value on the 
date of severance equal to 10% of the value of Trust's assets on that 
date. On August 3, 2008, the value of the Trust assets totals $500,000, 
consisting of Corporation A stock worth $450,000 and Corporation B stock 
worth $50,000. On August 4, 2008, the trustee takes all action necessary 
to transfer all of the Corporation A stock to Trust 1 and to transfer 
all of the Corporation B stock to Trust 2. On August 6, 2008, the stock 
transfers are completed and the stock is received by the appropriate 
resulting trust. Accordingly, Trust 1 is funded with assets having a 
value equal to 90% of the value of Trust as of the date of severance, 
August 3, 2008, and Trust 2 is funded with assets having a value equal 
to 10% of the value of Trust as of the date of severance. Therefore, the 
severance constitutes a qualified severance, provided that all other 
requirements of section 2642(a)(3) and this section are satisfied. Trust 
1 will have an inclusion ratio of zero and Trust 2 will have an 
inclusion ratio of one.
    Example 6. Funding of severed trusts on a non-pro rata basis. (i) 
T's will establishes an irrevocable trust (Trust) for the benefit of T's 
descendants. As a result of the allocation of GST tax exemption, the 
applicable fraction with respect to Trust is .60 and Trust's inclusion 
ratio is .40 [1-.60]. Pursuant to authority granted under applicable 
state law, on August 1, 2008, the trustee executes a document severing 
Trust into two trusts, Trust 1 and Trust 2, each of which is identical 
to Trust. The instrument of severance provides that the severance is 
intended to qualify as a qualified severance within the meaning of 
section 2642(a)(3) and designates August 3, 2008, as the date of 
severance (within the meaning of paragraph (d)(3) of this section). The 
instrument further provides that Trust 1 and Trust 2 are to be funded on 
a non-pro rata basis with Trust 1 funded with assets having a fair 
market value on the date of severance equal to 40% of the value of 
Trust's assets on that date and Trust 2 funded with assets having a fair 
market value equal to 60% of the value of Trust's assets on that date. 
The fair market value of the assets used to fund each trust is to be 
determined in compliance with the requirements of paragraph (d)(4) of 
this section.
    (ii) On August 3, 2008, the fair market value of the Trust assets 
totals $4,000,000, consisting of 52% of the outstanding common

[[Page 777]]

stock in Company, a closely-held corporation, valued at $3,000,000 and 
$1,000,000 in cash and marketable securities. Trustee proposes to divide 
the Company stock equally between Trust 1 and Trust 2, and thus transfer 
26% of the Company stock to Trust 1 and 26% of the stock to Trust 2. In 
addition, the appropriate amount of cash and marketable securities will 
be distributed to each trust. In accordance with paragraph (d)(4) of 
this section, for funding purposes, the interest in the Company stock 
distributed to each trust is valued as a pro rata portion of the value 
of the 52% interest in Company held by Trust before severance, without 
taking into account, for example, any valuation discount that might 
otherwise apply in valuing the noncontrolling interest distributed to 
each resulting trust.
    (iii) Accordingly, for funding purposes, each 26% interest in 
Company stock distributed to Trust 1 and Trust 2 is valued at $1,500,000 
(.5 x $3,000,000). Therefore, Trust 1, which is to be funded with 
$1,600,000 (.40 x $4,000,000), receives $100,000 in cash and marketable 
securities valued as of August 3, 2008, in addition to the Company 
stock, and Trust 2, which is to be funded with $2,400,000 (.60 x 
$4,000,000), receives $900,000 in cash and marketable securities in 
addition to the Company stock. Therefore, the severance is a qualified 
severance, provided that all other requirements of section 2642(a)(3) 
and this section are satisfied.
    Example 7. Statutory qualified severance. T dies on October 1, 2004. 
T's will establishes a testamentary trust (Trust) to be funded with 
$1,000,000. Trust income is to be paid to T's child, S, for S's life. 
The trustee may also distribute trust corpus from time to time, in equal 
or unequal shares, for the benefit of any one or more members of the 
group consisting of S and T's three grandchildren (GC1, GC2, and GC3). 
On S's death, Trust is to terminate and the assets are to be divided 
equally among GC1, GC2, and GC3 (or their respective then-living 
descendants, per stirpes). On a timely filed Form 706, T's executor 
allocates all of T's remaining GST tax exemption ($300,000) to Trust. As 
a result of the allocation, the applicable fraction with respect to the 
trust is .30 [$300,000 (the amount of GST tax exemption allocated to the 
trust) divided by $1,000,000 (the value of the property transferred to 
the trust)]. The inclusion ratio with respect to the trust is .70 
[1-.30]. On June 1, 2007, the trustee determines that it is in the best 
interest of the beneficiaries to sever Trust to provide a separate trust 
for each of T's three grandchildren and their respective families. The 
trustee severs Trust into two trusts, Trust 1 and Trust 2, each with 
terms and beneficiaries identical to Trust and thus each providing that 
trust income is to be paid to S for life, trust principal may be 
distributed for the benefit of any or all members of the group 
consisting of S and T's grandchildren, and, on S's death, the trust is 
to terminate and the assets are to be divided equally among GC1, GC2, 
and GC3 (or their respective then-living descendants, per stirpes). The 
instrument severing Trust provides that Trust 1 is to receive 30% of 
Trust's assets and Trust 2 is to receive 70% of Trust's assets. Further, 
each such trust is to be funded with a pro rata portion of each asset 
held in Trust. The trustee then severs Trust 1 into three equal trusts, 
Trust GC1, Trust GC2, and Trust GC3. Each trust is named for a 
grandchild of T and provides that trust income is to be paid to S for 
life, trust principal may be distributed for the benefit of S and T's 
grandchild for whom the trust is named, and, on S's death, the trust is 
to terminate and the trust proceeds distributed to the respective 
grandchild for whom the trust is named. If that grandchild has 
predeceased the termination date, the trust proceeds are to be 
distributed to that grandchild's then-living descendants, per stirpes, 
or, if none, then equally to the other two trusts resulting from the 
severance of Trust 1. Each such resulting trust is to be funded with a 
pro rata portion of each Trust 1 asset. The trustee also severs Trust 2 
in a similar manner, into Trust GC1(2), Trust GC2(2), and Trust GC3(2). 
The severance of Trust into Trust 1 and Trust 2, the severance of Trust 
1 into Trust GC1, Trust GC2, Trust GC3, and the severance of Trust 2 
into Trust GC1(2), Trust GC2(2) and Trust GC3(2), constitute qualified 
severances, provided that all other requirements of section 2642(a)(3) 
and this section are satisfied with respect to each severance. Trust 
GC1, Trust GC2, Trust GC3 will each have an inclusion ratio of zero and 
Trust GC1(2), Trust GC2(2), and Trust GC3(2) will each have an inclusion 
ratio of one.
    Example 8. Qualified severance deemed to precede a taxable 
termination. In 2004, T establishes an inter vivos irrevocable trust 
(Trust) for a term of 10 years providing that Trust income is to be paid 
annually in equal shares to T's child C and T's grandchild GC (the child 
of another then-living child of T). If either C or GC dies prior to the 
expiration of the 10-year term, the deceased beneficiary's share of 
Trust's income is to be paid to that beneficiary's then-living 
descendants, per stirpes, for the balance of the trust term. At the 
expiration of the 10-year trust term, the corpus is to be distributed 
equally to C and GC; if either C or GC is not then living, then such 
decedent's share is to be distributed instead to such decedent's then-
living descendants, per stirpes. T allocates T's GST tax exemption to 
Trust such that Trust's applicable fraction is .50 and Trust's inclusion 
ratio is .50 [1-.50]. In 2006, pursuant to applicable state law, the 
trustee severs the trust into two equal trusts, Trust 1 and Trust 2. The 
instrument severing Trust provides that Trust 1 is to receive 50% of the 
Trust assets, and

[[Page 778]]

Trust 2 is to receive 50% of Trust's assets. Both resulting trusts are 
identical to Trust, except that each has different beneficiaries: C and 
C's descendants are designated as the beneficiaries of Trust 1, and GC 
and GC's descendants are designated as the beneficiaries of Trust 2. The 
severance constitutes a qualified severance, provided all other 
requirements of section 2642(a)(3) and this section are satisfied. 
Because the applicable fraction with respect to Trust is .50 and Trust 
was severed into two equal trusts, the trustee may designate which 
resulting trust has an inclusion ratio of one, and which has an 
inclusion ratio of zero. Accordingly, in the Notice of Qualified 
Severance reporting the severance, the trustee designates Trust 1 as 
having an inclusion ratio of one, and Trust 2 as having an inclusion 
ratio of zero. Because Trust 2 is a skip person under section 2613, the 
severance of Trust resulting in the distribution of 50% of Trust's 
corpus to Trust 2 would constitute a taxable termination or distribution 
(as described in section 2612(a)) of that 50% of Trust for GST tax 
purposes, but for the rule that a qualified severance is deemed to 
precede a taxable termination that is caused by the qualified severance. 
Thus, no GST tax will be due with regard to the creation and funding of 
Trust 2 because the inclusion ratio of Trust 2 is zero.
    Example 9. Regulatory qualified severance. (i) In 2004, T 
establishes an inter vivos irrevocable trust (Trust) providing that 
trust income is to be paid annually in equal shares to T's children, A 
and B, for 10 years. Trust provides that the trustee has discretion to 
make additional distributions of principal to A and B during the 10-year 
term without adjustments to their shares of income or the trust 
remainder. If either (or both) dies prior to the expiration of the 10-
year term, the deceased child's share of trust income is to be paid to 
the child's then living descendants, per stirpes, for the balance of the 
trust term. At the expiration of the 10-year term, the corpus is to be 
distributed equally to A and B; if A and B (or either or them) is not 
then living, then such decedent's share is to be distributed instead to 
such decedent's then living descendants, per stirpes. T allocates GST 
tax exemption to Trust such that Trust's applicable fraction is .25 and 
its inclusion ratio is .75.
    (ii) In 2006, pursuant to applicable state law, the trustee severs 
the trust into three trusts: Trust 1, Trust 2, and Trust 3. The 
instrument severing Trust provides that Trust 1 is to receive 50% of 
Trust's assets, Trust 2 is to receive 25% of Trust's assets, and Trust 3 
is to receive 25% of Trust's assets. All three resulting trusts are 
identical to Trust, except that each has different beneficiaries: A and 
A's issue are designated as the beneficiaries of Trust 1, and B and B's 
issue are designated as the beneficiaries of Trust 2 and Trust 3. The 
severance constitutes a qualified severance, provided that all other 
requirements of section 2642(a)(3) and this section are satisfied. Trust 
1 will have an inclusion ratio of 1. Because both Trust 2 and Trust 3 
have each received the fractional share of Trust's assets equal to 
Trust's applicable fraction of .25, trustee designates that Trust 2 will 
have an inclusion ratio of one and that Trust 3 will have an inclusion 
ratio of zero.
    Example 10. Beneficiary's interest dependent on inclusion ratio. On 
August 8, 2006, T transfers $1,000,000 to Trust and timely allocates 
$400,000 of T's remaining GST tax exemption to Trust. As a result of the 
allocation, the applicable fraction with respect to Trust is .40 
[$400,000 divided by $1,000,000] and Trust's inclusion ratio is .60 
[1-.40]. Trust provides that all income of Trust will be paid annually 
to C, T's child, for life. On C's death, the corpus is to pass in 
accordance with C's exercise of a testamentary limited power to appoint 
the corpus of Trust to C's lineal descendants. However, Trust provides 
that if, at the time of C's death, Trust's inclusion ratio is greater 
than zero, then C may also appoint that fraction of the trust corpus 
equal to the inclusion ratio to the creditors of C's estate. On May 3, 
2008, pursuant to authority granted under applicable state law, the 
trustee severs Trust into two trusts. Trust 1 is funded with 40% of 
Trust's assets, and Trust 2 is funded with 60% of Trust's assets in 
accordance with the requirements of this section. Both Trust 1 and Trust 
2 provide that all income of Trust will be paid annually to C during C's 
life. On C's death, Trust 1 corpus is to pass in accordance with C's 
exercise of a testamentary limited power to appoint the corpus to C's 
lineal descendants. Trust 2 is to pass in accordance with C's exercise 
of a testamentary power to appoint the corpus of Trust to C's lineal 
descendants and to the creditors of C's estate. The severance 
constitutes a qualified severance, provided that all other requirements 
of section 2642(a)(3) and this section are satisfied. No additional 
contribution or allocation of GST tax exemption is made to either Trust 
1 or Trust 2 prior to C's death. Accordingly, the inclusion ratio with 
respect to Trust 1 is zero. The inclusion ratio with respect to Trust 2 
is one until C's death, at which time C will become the transferor of 
Trust 2 for GST tax purposes. (Some or all of C's GST tax exemption may 
be allocated to Trust 2 upon C's death.)
    Example 11. Date of severance. Trust is an irrevocable trust that 
has both skip person and non-skip person beneficiaries. Trust holds two 
parcels of real estate, Property A and Property B, stock in Company X, a 
publicly traded company, and cash. On June 16, 2008, the local court 
with jurisdiction over Trust issues an order, pursuant to the trustee's 
petition authorized under state law, severing Trust into two resulting 
trusts of equal

[[Page 779]]

value, Trust 1 and Trust 2. The court order directs that Property A will 
be distributed to Trust 1 and Property B will be distributed to Trust 2, 
and that an appropriate amount of stock and cash will be distributed to 
each trust such that the total value of property distributed to each 
trust as of the date of severance will be equal. The court order does 
not mandate a particular date of funding. Trustee receives notice of the 
court order on June 24, and selects July 16, 2008, as the date of 
severance. On June 26, 2008, Trustee commences the process of 
transferring title to Property A and Property B to the appropriate 
resulting trust(s), which process is completed on July 8, 2008. Also on 
June 26, the Trustee hires a professional appraiser to value Property A 
and Property B as of the date of severance and receives the appraisal 
report on Friday, October 3, 2008. On Monday, October 6, 2008, Trustee 
commences the process of transferring to Trust 1 and Trust 2 the 
appropriate amount of Company X stock valued as of July 16, 2008, and 
that transfer (as well as the transfer of Trust's cash) is completed by 
October 9, 2008. Under the facts presented, the funding of Trust 1 and 
Trust 2 occurred within 90 days of the date of severance selected by the 
trustee, and within a reasonable time after the date of severance taking 
into account the nature of the assets involved and the need to obtain an 
appraisal. Accordingly, the date of severance for purposes of this 
section is July 16, 2008, the resulting trusts are to be funded based on 
the value of the original trust assets as of that date, and the 
severance is a qualified severance assuming that all other requirements 
of section 2642(a)(3) and this section are met. (However, if Trust had 
contained only marketable securities and cash, then in order to satisfy 
the reasonable time requirement, the stock transfer would have to have 
been commenced, and generally completed, immediately after the date of 
severance, and the cash distribution would have to have been made at the 
same time.)
    Example 12. Other severance that does not meet the requirements of a 
qualified severance. (i) In 2004, T establishes an irrevocable inter 
vivos trust (Trust) providing that Trust income is to be paid to T's 
children, A and B, in equal shares for their joint lives. Upon the death 
of the first to die of A and B, all Trust income will be paid to the 
survivor of A and B. At the death of the survivor, the corpus is to be 
distributed in equal shares to T's grandchildren, W and X (with any 
then-deceased grandchild's share being paid in accordance with that 
grandchild's testamentary general power of appointment). W is A's child 
and X is B's child. T elects under section 2632(c)(5) not to have the 
automatic allocation rules contained in section 2632(c) apply with 
respect to T's transfers to Trust, but T allocates GST tax exemption to 
Trust resulting in Trust having an inclusion ratio of .30.
    (ii) In 2009, the trustee of Trust, as permitted by applicable state 
law, divides Trust into two separate trusts, Trust 1 and Trust 2. Trust 
1 provides that trust income is to be paid to A for life and, on A's 
death, the remainder is to be distributed to W (or pursuant to W's 
testamentary general power of appointment). Trust 2 provides that trust 
income is to be paid to B for life and, on B's death, the remainder is 
to be distributed to X (or pursuant to X's testamentary general power of 
appointment). Because Trust 1 and Trust 2 do not provide A and B with 
the contingent survivor income interests that were provided to A and B 
under the terms of Trust, Trust 1 and Trust 2 do not provide for the 
same succession of interests in the aggregate as provided by Trust. 
Therefore, the severance does not satisfy the requirements of this 
section and is not a qualified severance. Provided that Trust 1 and 
Trust 2 are recognized as separate trusts under applicable state law, 
Trust 1 and Trust 2 will be recognized as separate trusts for GST tax 
purposes pursuant to paragraph (h) of this section, prospectively from 
the date of the severance. However, Trust 1 and Trust 2 each have an 
inclusion ratio of .30 immediately after the severance, the same as the 
inclusion ratio of Trust prior to severance.
     Example 13. Qualified severance following a non-qualified 
severance. Assume the same facts as in Example 12, except that, as of 
November 4, 2010, the trustee of Trust 1 severs Trust 1 into two trusts, 
Trust 3 and Trust 4, in accordance with applicable local law. The 
instrument severing Trust 1 provides that both resulting trusts have 
provisions identical to Trust 1. The terms of the instrument severing 
Trust 1 further provide that Trust 3 is to be funded on a pro rata basis 
with assets having a fair market value as of the date of severance equal 
to 70% of the value of Trust 1's assets on that date, and Trust 4 is to 
be funded with assets having a fair market value as of the date of 
severance equal to 30% of the value of Trust 1's assets on that date. 
The severance constitutes a qualified severance, provided that all other 
requirements of section 2642(a)(3) and this section are satisfied. Trust 
3 will have an inclusion ratio of zero and Trust 4 will have an 
inclusion ratio of one.

    (k) Effective/applicability date--(1) In general. Except as 
otherwise provided in this paragraph (k), this section applies to 
severances occurring on or after August 2, 2007. Paragraph (d)(7)(iii), 
paragraph (h), and Examples 9, 12 and 13 of paragraph (j) of this 
section apply to severances occurring on or after September 2, 2008.

[[Page 780]]

    (2) Transition rule. In the case of a qualified severance occurring 
after December 31, 2000, and before August 2, 2007, taxpayers may rely 
on any reasonable interpretation of section 2642(a)(3) as long as 
reasonable notice concerning the qualified severance and identification 
of the trusts involved has been given to the IRS. For this purpose, the 
proposed regulations (69 FR 51967) are treated as a reasonable 
interpretation of the statute. For purposes of the reporting provisions 
of Sec. 26.2642-6(e), notice to the IRS should be mailed by the due 
date of the gift tax return (including extensions granted) for gifts 
made during the year in which the severance occurred. If no gift tax 
return is filed, notice to the IRS should be mailed by April 15th of the 
year immediately following the year during which the severance occurred. 
For severances occurring between December 31, 2000, and January 1, 2007, 
notification should be mailed to the IRS as soon as reasonably 
practicable after August 2, 2007, if sufficient notice has not already 
been given.

[T.D. 9348, 72 FR 42294, Aug. 2, 2007, as amended by T.D. 9421, 73 FR 
44650, July 31, 2008]



Sec. 26.2651-1  Generation assignment.

    (a) Special rule for persons with a deceased parent--(1) In general. 
This paragraph (a) applies for purposes of determining whether a 
transfer to or for the benefit of an individual who is a descendant of a 
parent of the transferor (or the transferor's spouse or former spouse) 
is a generation-skipping transfer. If that individual's parent, who is a 
lineal descendant of the parent of the transferor (or the transferor's 
spouse or former spouse), is deceased at the time the transfer (from 
which an interest of such individual is established or derived) is 
subject to the tax imposed on the transferor by chapter 11 or 12 of the 
Internal Revenue Code, the individual is treated as if that individual 
were a member of the generation that is one generation below the lower 
of--
    (i) The transferor's generation; or
    (ii) The generation assignment of the individual's youngest living 
lineal ancestor who is also a descendant of the parent of the transferor 
(or the transferor's spouse or former spouse).
    (2) Special rules--(i) Corresponding generation adjustment. If an 
individual's generation assignment is adjusted with respect to a 
transfer in accordance with paragraph (a)(1) of this section, a 
corresponding adjustment with respect to that transfer is made to the 
generation assignment of each--
    (A) Spouse or former spouse of that individual;
    (B) Descendant of that individual; and
    (C) Spouse or former spouse of each descendant of that individual.
    (ii) Continued application of generation assignment. If a transfer 
to a trust would be a generation-skipping transfer but for paragraph 
(a)(1) of this section, any generation assignment determined under this 
paragraph (a) continues to apply in determining whether any subsequent 
distribution from (or termination of an interest in) the portion of the 
trust attributable to that transfer is a generation-skipping transfer.
    (iii) Ninety-day rule. For purposes of paragraph (a)(1) of this 
section, any individual who dies no later than 90 days after a transfer 
occurring by reason of the death of the transferor is treated as having 
predeceased the transferor.
    (iv) Local law. A living person is not treated as having predeceased 
the transferor solely by reason of a provision of applicable local law; 
e.g., an individual who disclaims is not treated as a predeceased parent 
solely because state law treats a disclaimant as having predeceased the 
transferor for purposes of determining the disposition of the disclaimed 
property.
    (3) Established or derived. For purposes of section 2651(e) and 
paragraph (a)(1) of this section, an individual's interest is 
established or derived at the time the transferor is subject to transfer 
tax on the property. See Sec. 26.2652-1(a) for the definition of a 
transferor. If the same transferor, on more than one occasion, is 
subject to transfer tax imposed by either chapter 11 or 12 of the 
Internal Revenue Code on the property so transferred (whether the same 
property, reinvestments thereof, income thereon, or any or all of 
these), then the relevant time for determining whether paragraph (a)(1) 
of this section applies is the earliest time at which

[[Page 781]]

the transferor is subject to the tax imposed by either chapter 11 or 12 
of the Internal Revenue Code. For purposes of section 2651(e) and 
paragraph (a)(1) of this section, the interest of a remainder 
beneficiary of a trust for which an election under section 2523(f) or 
section 2056(b)(7) (QTIP election) has been made will be deemed to have 
been established or derived, to the extent of the QTIP election, on the 
date as of which the value of the trust corpus is first subject to tax 
under section 2519 or section 2044. The preceding sentence does not 
apply to a trust, however, to the extent that an election under section 
2652(a)(3) (reverse QTIP election) has been made for the trust because, 
to the extent of a reverse QTIP election, the spouse who established the 
trust will remain the transferor of the trust for generation-skipping 
transfer tax purposes.
    (4) Special rule in the case of additional contributions to a trust. 
If a transferor referred to in paragraph (a)(1) of this section 
contributes additional property to a trust that existed before the 
application of paragraph (a)(1), then the additional property is treated 
as being held in a separate trust for purposes of chapter 13 of the 
Internal Revenue Code. The provisions of Sec. 26.2654-1(a)(2), 
regarding treatment as separate trusts, apply as if different 
transferors had contributed to the separate portions of the single 
trust. Additional subsequent contributions from that transferor will be 
added to the new share that is treated as a separate trust.
    (b) Limited application to collateral heirs. Paragraph (a) of this 
section does not apply in the case of a transfer to any individual who 
is not a lineal descendant of the transferor (or the transferor's spouse 
or former spouse) if the transferor has any living lineal descendant at 
the time of the transfer.
    (c) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. T establishes an irrevocable trust, Trust, providing that 
trust income is to be paid to T's grandchild, GC, for 5 years. At the 
end of the 5-year period or on GC's prior death, Trust is to terminate 
and the principal is to be distributed to GC if GC is living or to GC's 
children if GC has died. The transfer that occurred on the creation of 
the trust is subject to the tax imposed by chapter 12 of the Internal 
Revenue Code and, at the time of the transfer, T's child, C, who is a 
parent of GC, is deceased. GC is treated as a member of the generation 
that is one generation below T's generation. As a result, GC is not a 
skip person and Trust is not a skip person. Therefore, the transfer to 
Trust is not a direct skip. Similarly, distributions to GC during the 
term of Trust and at the termination of Trust will not be GSTs.
    Example 2. On January 1, 2004, T transfers $100,000 to an 
irrevocable inter vivos trust that provides T with an annuity payable 
for four years or until T's prior death. The annuity satisfies the 
definition of a qualified interest under section 2702(b). When the trust 
terminates, the corpus is to be paid to T's grandchild, GC. The transfer 
is subject to the tax imposed by chapter 12 of the Internal Revenue Code 
and, at the time of the transfer, T's child, C, who is a parent of GC, 
is living. C dies in 2006. In this case, C was alive at the time the 
transfer by T was subject to the tax imposed by chapter 12 of the 
Internal Revenue Code. Therefore, section 2651(e) and paragraph (a)(1) 
of this section do not apply. When the trust subsequently terminates, 
the distribution to GC is a taxable termination that is subject to the 
GST tax to the extent the trust has an inclusion ratio greater than 
zero. See section 2642(a).
    Example 3. T dies testate in 2002, survived by T's spouse, S, their 
children, C1 and C2, and C1's child, GC. Under the terms of T's will, a 
trust is established for the benefit of S and of T and S's descendants. 
Under the terms of the trust, all income is payable to S during S's 
lifetime and the trustee may distribute trust corpus for S's health, 
support and maintenance. At S's death, the corpus is to be distributed, 
outright, to C1 and C2. If either C1 or C2 has predeceased S, the 
deceased child's share of the corpus is to be distributed to that 
child's then-living descendants, per stirpes. The executor of T's estate 
makes the election under section 2056(b)(7) to treat the trust property 
as qualified terminable interest property (QTIP) but does not make the 
election under section 2652(a)(3) (reverse QTIP election). In 2003, C1 
dies survived by S and GC. In 2004, S dies, and the trust terminates. 
The full fair market value of the trust is includible in S's gross 
estate under section 2044 and S becomes the transferor of the trust 
under section 2652(a)(1)(A). GC's interest is considered established or 
derived at S's death, and because C1 is deceased at that time, GC is 
treated as a member of the generation that is one generation below the 
generation of the transferor, S. As a result, GC is not a skip person 
and the transfer to GC is not a direct skip.
    Example 4. The facts are the same as in Example 3. However, the 
executor of T's estate makes the election under section 2652(a)(3) 
(reverse QTIP election) for the entire trust.

[[Page 782]]

Therefore, T remains the transferor because, for purposes of chapter 13 
of the Internal Revenue Code, the election to be treated as qualified 
terminable interest property is treated as if it had not been made. In 
this case, GC's interest is established or derived on T's death in 2002. 
Because C1 was living at the time of T's death, the predeceased parent 
rule under section 2651(e) does not apply, even though C1 was deceased 
at the time the transfer from S to GC was subject to the tax under 
chapter 11 of the Internal Revenue Code. When the trust terminates, the 
distribution to GC is a taxable termination that is subject to the GST 
tax to the extent the trust has an inclusion ratio greater than zero. 
See section 2642(a).
    Example 5. T establishes an irrevocable trust providing that trust 
income is to be paid to T's grandniece, GN, for 5 years or until GN's 
prior death. At the end of the 5-year period or on GN's prior death, the 
trust is to terminate and the principal is to be distributed to GN if 
living, or if GN has died, to GN's then-living descendants, per stirpes. 
S is a sibling of T and the parent of N. N is the parent of GN. At the 
time of the transfer, T has no living lineal descendant, S is living, N 
is deceased, and the transfer is subject to the gift tax imposed by 
chapter 12 of the Internal Revenue Code. GN is treated as a member of 
the generation that is one generation below T's generation because S, 
GN's youngest living lineal ancestor who is also a descendant of T's 
parent, is in T's generation. As a result, GN is not a skip person and 
the transfer to the trust is not a direct skip. In addition, 
distributions to GN during the term of the trust and at the termination 
of the trust will not be GSTs.
    Example 6. On January 1, 2004, T transfers $50,000 to a great-
grandniece, GGN, who is the great-grandchild of B, a brother of T. At 
the time of the transfer, T has no living lineal descendants and B's 
grandchild, GN, who is a parent of GGN and a child of B's living child, 
N, is deceased. GGN will be treated as a member of the generation that 
is one generation below the lower of T's generation or the generation 
assignment of GGN's youngest living lineal ancestor who is also a 
descendant of the parent of the transferor. In this case, N is GGN's 
youngest living lineal ancestor who is also a descendant of the parent 
of T. Because N's generation assignment is lower than T's generation, 
GGN will be treated as a member of the generation that is one generation 
below N's generation assignment (i.e., GGN will be treated as a member 
of her parent's generation). As a result, GGN remains a skip person and 
the transfer to GGN is a direct skip.
    Example 7. T has a child, C. C and C's spouse, S, have a 20-year-old 
child, GC. C dies and S subsequently marries S2. S2 legally adopts GC. T 
transfers $100,000 to GC. Under section 2651(b)(1), GC is assigned to 
the generation that is two generations below T. However, since GC's 
parent, C, is deceased at the time of the transfer, GC will be treated 
as a member of the generation that is one generation below T. As a 
result, GC is not a skip person and the transfer to GC is not a direct 
skip.

[T.D. 9214, 70 FR 41142, July 18, 2005]



Sec. 26.2651-2  Individual assigned to more than 1 generation.

    (a) In general. Except as provided in paragraph (b) or (c) of this 
section, an individual who would be assigned to more than 1 generation 
is assigned to the youngest of the generations to which that individual 
would be assigned.
    (b) Exception. Notwithstanding paragraph (a) of this section, an 
adopted individual (as defined in this paragraph) will be treated as a 
member of the generation that is one generation below the adoptive 
parent for purposes of determining whether a transfer to the adopted 
individual from the adoptive parent (or the spouse or former spouse of 
the adoptive parent, or a lineal descendant of a grandparent of the 
adoptive parent) is subject to chapter 13 of the Internal Revenue Code. 
For purposes of this paragraph (b), an adopted individual is an 
individual who is--
    (1) Legally adopted by the adoptive parent;
    (2) A descendant of a parent of the adoptive parent (or the spouse 
or former spouse of the adoptive parent);
    (3) Under the age of 18 at the time of the adoption; and
    (4) Not adopted primarily for the purpose of avoiding GST tax. The 
determination of whether an adoption is primarily for GST tax-avoidance 
purposes is made based upon all of the facts and circumstances. The most 
significant factor is whether there is a bona fide parent/child 
relationship between the adoptive parent and the adopted individual, in 
which the adoptive parent has fully assumed all significant 
responsibilities for the care and raising of the adopted child. Other 
factors may include (but are not limited to), at the time of the 
adoption--
    (i) The age of the adopted individual (for example, the younger the 
age of the adopted individual, or the age of the youngest of siblings 
who are all adopted together, the more likely the

[[Page 783]]

adoption will not be considered primarily for GST tax-avoidance 
purposes); and
    (ii) The relationship between the adopted individual and the 
individual's parents (for example, objective evidence of the absence or 
incapacity of the parents may indicate that the adoption is not 
primarily for GST tax-avoidance purposes).
    (c) Special rules--(1) Corresponding generation adjustment. If an 
individual's generation assignment is adjusted with respect to a 
transfer in accordance with paragraph (b) of this section, a 
corresponding adjustment with respect to that transfer is made to the 
generation assignment of each--
    (i) Spouse or former spouse of that individual;
    (ii) Descendant of that individual; and
    (iii) Spouse or former spouse of each descendant of that individual.
    (2) Continued application of generation assignment. If a transfer to 
a trust would be a generation-skipping transfer but for paragraph (b) of 
this section, any generation assignment determined under paragraph (b) 
or (c) of this section continues to apply in determining whether any 
subsequent distribution from (or termination of an interest in) the 
portion of the trust attributable to that transfer is a generation-
skipping transfer.
    (d) Example. The following example illustrates the provisions of 
this section:

    Example. T has a child, C. C has a 20-year-old child, GC. T legally 
adopts GC and transfers $100,000 to GC. GC's generation assignment is 
determined by section 2651(b)(1) and GC is assigned to the generation 
that is two generations below T. In addition, because T has legally 
adopted GC, GC is generally treated as a child of T under state law. 
Under these circumstances, GC is an individual who is assigned to more 
than one generation and the exception in Sec. 26.2651-2(b) does not 
apply. Thus, the special rule under section 2651(f)(1) applies and GC is 
assigned to the generation that is two generations below T. GC remains a 
skip person with respect to T and the transfer to GC is a direct skip.

[T.D. 9214, 70 FR 41142, July 18, 2005]



Sec. 26.2651-3  Effective dates.

    (a) In general. The rules of Sec. Sec. 26.2651-1 and 26.2651-2 are 
applicable for terminations, distributions, and transfers occurring on 
or after July 18, 2005.
    (b) Transition rule. In the case of transfers occurring after 
December 31, 1997, and before July 18, 2005, taxpayers may rely on any 
reasonable interpretation of section 2651(e). For this purpose, these 
final regulations, as well as the proposed regulations issued on 
September 3, 2004 (69 FR 53862), are treated as a reasonable 
interpretation of the statute.

[T.D. 9214, 70 FR 41142, July 18, 2005]



Sec. 26.2652-1  Transferor defined; other definitions.

    (a) Transferor defined--(1) In general. Except as otherwise provided 
in paragraph (a)(3) of this section, the individual with respect to whom 
property was most recently subject to Federal estate or gift tax is the 
transferor of that property for purposes of chapter 13. An individual is 
treated as transferring any property with respect to which the 
individual is the transferor. Thus, an individual may be a transferor 
even though there is no transfer of property under local law at the time 
the Federal estate or gift tax applies. For purposes of this paragraph, 
a surviving spouse is the transferor of a qualified domestic trust 
created by the deceased spouse that is included in the surviving 
spouse's gross estate, provided the trust is not subject to the election 
described in Sec. 26.2652-2 (reverse QTIP election). A surviving spouse 
is also the transferor of a qualified domestic trust created by the 
surviving spouse pursuant to section 2056(d)(2)(B).
    (2) Transfers subject to Federal estate or gift tax. For purposes of 
this chapter, a transfer is subject to Federal gift tax if a gift tax is 
imposed under section 2501(a) (without regard to exemptions, exclusions, 
deductions, and credits). A transfer is subject to Federal estate tax if 
the value of the property is includible in the decedent's gross estate 
as determined under section 2031 or section 2103.
    (3) Special rule for certain QTIP trusts. Solely for purposes of 
chapter 13, if a

[[Page 784]]

transferor of qualified terminable interest property (QTIP) elects under 
Sec. 26.2652-2(a) to treat the property as if the QTIP election had not 
been made (reverse QTIP election), the identity of the transferor of the 
property is determined without regard to the application of sections 
2044, 2207A, and 2519.
    (4) Split-gift transfers. In the case of a transfer with respect to 
which the donor's spouse makes an election under section 2513 to treat 
the gift as made one-half by the spouse, the electing spouse is treated 
as the transferor of one-half of the entire value of the property 
transferred by the donor, regardless of the interest the electing spouse 
is actually deemed to have transferred under section 2513. The donor is 
treated as the transferor of one-half of the value of the entire 
property. See Sec. 26.2632-1(c)(5) Example 3, regarding allocation of 
GST exemption with respect to split-gift transfers subject to an ETIP.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (a):

    Example 1. Identity of transferor. T transfers $100,000 to a trust 
for the sole benefit of T's grandchild. The transfer is subject to 
Federal gift tax because a gift tax is imposed under section 2501(a) 
(without regard to exemptions, exclusions, deductions, and credits). 
Thus, for purposes of chapter 13, T is the transferor of the $100,000. 
It is immaterial that a portion of the transfer is excluded from the 
total amount of T's taxable gift by reason of section 2503(b).
    Example 2. Gift splitting and identity of transferor. The facts are 
the same as in Example 1, except T's spouse, S, consents under section 
2513 to split the gift with T. For purposes of chapter 13, S and T are 
each treated as a transferor of $50,000 to the trust.
    Example 3. Change of transferor on subsequent transfer tax event. T 
transfers $100,000 to a trust providing that all the net trust income is 
to be paid to T's spouse, S, for S's lifetime. T elects under section 
2523(f) to treat the transfer as a transfer of qualified terminable 
interest property, and T does not make the reverse QTIP election under 
section 2652(a)(3). On S's death, the trust property is included in S's 
gross estate under section 2044. Thus, S becomes the transferor at the 
time of S's death.
    Example 4. Effect of transfer of an interest in trust on identity of 
the transferor. T transfers $100,000 to a trust providing that all of 
the net income is to be paid to T's child, C, for C's lifetime. At C's 
death, the trust property is to be paid to T's grandchild. C transfers 
the income interest to X, an unrelated party, in a transfer that is a 
completed transfer for Federal gift tax purposes. Because C's transfer 
is a transfer of a term interest in the trust that does not affect the 
rights of other parties with respect to the trust property, T remains 
the transferor with respect to the trust.
    Example 5. Effect of lapse of withdrawal right on identity of 
transferor. T transfers $10,000 to a new trust providing that the trust 
income is to be paid to T's child, C, for C's life and, on the death of 
C, the trust principal is to be paid to T's grandchild, GC. The trustee 
has discretion to distribute principal for GC's benefit during C's 
lifetime. C has a right to withdraw $10,000 from the trust for a 60-day 
period following the transfer. Thereafter, the power lapses. C does not 
exercise the withdrawal right. The transfer by T is subject to Federal 
gift tax because a gift tax is imposed under section 2501(a) (without 
regard to exemptions, exclusions, deductions, and credits) and, thus, T 
is treated as having transferred the entire $10,000 to the trust. On the 
lapse of the withdrawal right, C becomes a transferor to the extent C is 
treated as having made a completed transfer for purposes of chapter 12. 
Therefore, except to the extent that the amount with respect to which 
the power of withdrawal lapses exceeds the greater of $5,000 or 5% of 
the value of the trust property, T remains the transferor of the trust 
property for purposes of chapter 13.
    Example 6. Effect of reverse QTIP election on identity of the 
transferor. T establishes a testamentary trust having a principal of 
$500,000. Under the terms of the trust, all trust income is payable to 
T's surviving spouse, S, during S's lifetime. T's executor makes an 
election to treat the trust property as qualified terminable interest 
property and also makes the reverse QTIP election. For purposes of 
chapter 13, T is the transferor with respect to the trust. On S's death, 
the then full fair market value of the trust is includible in S's gross 
estate under section 2044. However, because of the reverse QTIP 
election, S does not become the transferor with respect to the trust; T 
continues to be the transferor.
    Example 7. Effect of reverse QTIP election on constructive 
additions. The facts are the same as in Example 6, except the inclusion 
of the QTIP trust in S's gross estate increased the Federal estate tax 
liability of S's estate by $200,000. The estate does not exercise the 
right of recovery from the trust granted under section 2207A. Under 
local law, the beneficiaries of S's residuary estate (which bears all 
estate taxes under the will) could compel the executor to exercise the 
right of recovery but do not do so. Solely for purposes of chapter 13, 
the beneficiaries of the residuary estate are not treated as having made 
an addition to the trust by reason of

[[Page 785]]

their failure to exercise their right of recovery. Because of the 
reverse QTIP election, for GST purposes, the trust property is not 
treated as includible in S's gross estate and, under those 
circumstances, no right of recovery exists.
    Example 8. Effect of reverse QTIP election on constructive 
additions. S, the surviving spouse of T, dies testate. At the time of 
S's death, S was the beneficiary of a trust with respect to which T's 
executor made a QTIP election under section 2056(b)(7). Thus, the trust 
is includible in S's gross estate under section 2044. T's executor also 
made the reverse QTIP election with respect to the trust. S's will 
provides that all death taxes payable with respect to the trust are 
payable from S's residuary estate. Since the transferor of the property 
is determined without regard to section 2044 and section 2207A, S is not 
treated as making a constructive addition to the trust by reason of the 
tax apportionment clause in S's will.
    Example 9. Split-gift transfers. T transfers $100,000 to an inter 
vivos trust that provides T with an annuity payable for ten years or 
until T's prior death. The annuity satisfies the definition of a 
qualified interest under section 2702(b). When the trust terminates, the 
corpus is to be paid to T's grandchild, GC. T's spouse, S, consents 
under section 2513 to have the gift treated as made one-half by S. Under 
section 2513, only the actuarial value of the gift to GC is eligible to 
be treated as made one-half by S. However, because S is treated as the 
donor of one-half of the gift to GC, S becomes the transferor of one-
half of the entire trust ($50,000) for purposes of Chapter 13.

    (b) Trust defined--(1) In general. A trust includes any arrangement 
(other than an estate) that has substantially the same effect as a 
trust. Thus, for example, arrangements involving life estates and 
remainders, estates for years, and insurance and annuity contracts are 
trusts. Generally, a transfer as to which the identity of the transferee 
is contingent upon the occurrence of an event is a transfer in trust; 
however, a transfer of property included in the transferor's gross 
estate, as to which the identity of the transferee is contingent upon an 
event that must occur within 6 months of the transferor's death, is not 
considered a transfer in trust solely by reason of the existence of the 
contingency.
    (2) Examples. The following examples illustrate the provisions of 
this paragraph (b):

    Example 1. Uniform gifts to minors transfers. T transfers cash to an 
account in the name of T's child, C, as custodian for C's child, GC (who 
is a minor), under a state statute substantially similar to the Uniform 
Gifts to Minors Act. For purposes of chapter 13, the transfer to the 
custodial account is treated as a transfer to a trust.
    Example 2. Contingent transfers. T bequeaths $200,000 to T's child, 
C, provided that if C does not survive T by more than 6 months, the 
bequest is payable to T's grandchild, GC. C dies 4 months after T. The 
bequest is not a transfer in trust because the contingency that 
determines the recipient of the bequest must occur within 6 months of 
T's death. The bequest to GC is a direct skip.
    Example 3. Contingent transfers. The facts are the same as in 
Example 2, except C must survive T by 18 months to take the bequest. The 
bequest is a transfer in trust for purposes of chapter 13, and the death 
of C is a taxable termination.

    (c) Trustee defined. The trustee of a trust is the person designated 
as trustee under local law or, if no such person is so designated, the 
person in actual or constructive possession of property held in trust.
    (d) Executor defined. For purposes of chapter 13, the executor is 
the executor or administrator of the decedent's estate. However, if no 
executor or administrator is appointed, qualified or acting within the 
United States, the executor is the fiduciary who is primarily 
responsible for payment of the decedent's debts and expenses. If there 
is no such executor, administrator or fiduciary, the executor is the 
person in actual or constructive possession of the largest portion of 
the value of the decedent's gross estate.
    (e) Interest in trust. See Sec. 26.2612-1(e) for the definition of 
interest in trust.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29654, June 12, 1996, as 
amended by T.D. 8720, 62 FR 27498, May 20, 1997]



Sec. 26.2652-2  Special election for qualified terminable interest
property.

    (a) In general. If an election is made to treat property as 
qualified terminable interest property (QTIP) under section 2523(f) or 
section 2056(b)(7), the person making the election may, for purposes of 
chapter 13, elect to treat the property as if the QTIP election had not 
been made (reverse QTIP election). An election under this section is 
irrevocable. An election under this section is not effective unless it 
is made with respect to all of the property in

[[Page 786]]

the trust to which the QTIP election applies. See, however, Sec. 
26.2654-1(b)(1). Property that qualifies for a deduction under section 
2056(b)(5) is not eligible for the election under this section.
    (b) Time and manner of making election. An election under this 
section is made on the return on which the QTIP election is made. If a 
protective QTIP election is made, no election under this section is 
effective unless a protective reverse QTIP election is also made.
    (c) Transitional rule. If a reverse QTIP election is made with 
respect to a trust prior to December 27, 1995, and GST exemption has 
been allocated to that trust, the transferor (or the transferor's 
executor) may elect to treat the trust as two separate trusts, one of 
which has a zero inclusion ratio by reason of the transferor's GST 
exemption previously allocated to the trust. The separate trust with the 
zero inclusion ratio consists of that fractional share of the value of 
the entire trust equal to the value of the nontax portion of the trust 
under Sec. 26.2642-4(a). The reverse QTIP election is treated as 
applying only to the trust with the zero inclusion ratio. An election 
under this paragraph (c) is made by attaching a statement to a copy of 
the return on which the reverse QTIP election was made under section 
2652(a)(3). The statement must indicate that an election is being made 
to treat the trust as two separate trusts and must identify the values 
of the two separate trusts. The statement is to be filed in the same 
place in which the original return was filed and must be filed before 
June 24, 1996. A trust subject to the election described in this 
paragraph is treated as a trust that was created by two transferors. See 
Sec. 26.2654-1(a)(2) for special rules involving trusts with multiple 
transferors.
    (d) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Special (reverse QTIP) election under section 2652(a)(3). 
T transfers $1,000,000 to a trust providing that all trust income is to 
be paid to T's spouse, S, for S's lifetime. On S's death, the trust 
principal is payable to GC, a grandchild of S and T. T elects to treat 
all of the transfer as a transfer of QTIP and also makes the reverse 
QTIP election for all of the property. Because of the reverse QTIP 
election, T continues to be treated as the transferor of the property 
after S's death for purposes of chapter 13. A taxable termination rather 
than a direct skip occurs on S's death.
    Example 2. Election under transition rule. In 1994, T died leaving 
$4 million in trust for the benefit of T's surviving spouse, S. On 
January 16, 1995, T's executor filed T's Form 706 on which the executor 
elects to treat the entire trust as qualified terminable interest 
property. The executor also makes a reverse QTIP election. The reverse 
QTIP election is effective with respect to the entire trust even though 
T's executor could allocate only $1 million of GST exemption to the 
trust. T's executor may elect to treat the trust as two separate trusts, 
one having a value of 25% of the value of the single trust and an 
inclusion ratio of zero, but only if the election is made prior to June 
24, 1996. If the executor makes the transitional election, the other 
separate trust, having a value of 75% of the value of the single trust 
and an inclusion ratio of one, is not treated as subject to the reverse 
QTIP election.
    Example 3. Denominator of the applicable fraction of QTIP trust. T 
bequeaths $1,500,000 to a trust in which T's surviving spouse, S, 
receives an income interest for life. Upon the death of S, the property 
is to remain in trust for the benefit of C, the child of T and S. Upon 
C's death, the trust is to terminate and the trust property paid to the 
descendants of C. The bequest qualifies for the estate tax marital 
deduction under section 2056(b)(7) as QTIP. The executor does not make 
the reverse QTIP election under section 2652(a)(3). As a result, S 
becomes the transferor of the trust at S's death when the value of the 
property in the QTIP trust is included in S's gross estate under section 
2044. For purposes of computing the applicable fraction with respect to 
the QTIP trust upon S's death, the denominator of the fraction is 
reduced by any Federal estate tax (whether imposed under section 2001, 
2101 or 2056A(b)) and State death tax attributable to the trust property 
that is actually recovered from the trust.



Sec. 26.2653-1  Taxation of multiple skips.

    (a) General rule. If property is held in trust immediately after a 
GST, solely for purposes of determining whether future events involve a 
skip person, the transferor is thereafter deemed to occupy the 
generation immediately above the highest generation of any person 
holding an interest in the trust immediately after the transfer. If no 
person holds an interest in the trust immediately after the GST, the 
transferor is treated as occupying the generation above the highest 
generation of any person in existence at the time of the GST who then 
occupies the highest

[[Page 787]]

generation level of any person who may subsequently hold an interest in 
the trust. See Sec. 26.2612-1(e) for rules determining when a person 
has an interest in property held in trust.
    (b) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. T transfers property to an irrevocable trust for the 
benefit of T's grandchild, GC, and great-grandchild, GGC. During GC's 
life, the trust income may be distributed to GC and GGC in the trustee's 
absolute discretion. At GC's death, the trust property passes to GGC. 
Both GC and GGC have an interest in the trust for purposes of chapter 
13. The transfer by T to the trust is a direct skip, and the property is 
held in trust immediately after the transfer. After the direct skip, the 
transferor is treated as being one generation above GC, the highest 
generation individual having an interest in the trust. Therefore, GC is 
no longer a skip person and distributions to GC are not taxable 
distributions. However, because GGC occupies a generation that is two 
generations below the deemed generation of T, GGC is a skip person and 
distributions of trust income to GGC are taxable distributions.
    Example 2. T transfers property to an irrevocable trust providing 
that the income is to be paid to T's child, C, for life. At C's death, 
the trust income is to be accumulated for 10 years and added to 
principal. At the end of the 10-year accumulation period, the trust 
income is to be paid to T's grandchild, GC, for life. Upon GC's death, 
the trust property is to be paid to T's great-grandchild, GGC, or to 
GGC's estate. A GST occurs at C's death. Immediately after C's death and 
during the 10-year accumulation period, no person has an interest in the 
trust within the meaning of section 2652(c) and Sec. 26.2612-1(e) 
because no one can receive current distributions of income or principal. 
Immediately after C's death, T is treated as occupying the generation 
above the generation of GC (the trust beneficiary in existence at the 
time of the GST who then occupies the highest generation level of any 
person who may subsequently hold an interest in the trust). Thus, 
subsequent income distributions to GC are not taxable distributions.



Sec. 26.2654-1  Certain trusts treated as separate trusts.

    (a) Single trust treated as separate trusts--(1) Substantially 
separate and independent shares--(i) In general. If a single trust 
consists solely of substantially separate and independent shares for 
different beneficiaries, the share attributable to each beneficiary (or 
group of beneficiaries) is treated as a separate trust for purposes of 
Chapter 13. The phrase ``substantially separate and independent shares'' 
generally has the same meaning as provided in Sec. 1.663(c)-3. However, 
except as provided in paragraph (a)(1)(iii) of this section, a portion 
of a trust is not a separate share unless such share exists from and at 
all times after the creation of the trust. For purposes of this 
paragraph (a)(1), a trust is treated as created at the date of death of 
the grantor if the trust is includible in its entirety in the grantor's 
gross estate for Federal estate tax purposes. Further, except with 
respect to shares or trusts that are treated as separate trusts under 
local law, treatment of a single trust as separate trusts under this 
paragraph (a)(1) does not permit treatment of those portions as separate 
trusts for purposes of filing returns and payment of tax or for purposes 
of computing any other tax imposed under the Internal Revenue Code. 
Also, additions to, and distributions from, such trusts are allocated 
pro rata among the separate trusts, unless the governing instrument 
expressly provides otherwise. See Sec. 26.2642-6 and paragraph (b) of 
this section regarding the treatment, for purposes of Chapter 13, of 
separate trusts resulting from the discretionary severance of a single 
trust.
    (ii) Certain pecuniary amounts. For purposes of this section, if a 
person holds the current right to receive a mandatory (i.e., 
nondiscretionary and noncontingent) payment of a pecuniary amount at the 
death of the transferor from an inter vivos trust that is includible in 
the transferor's gross estate, or a testamentary trust, the pecuniary 
amount is a separate and independent share if--
    (A) The trustee is required to pay appropriate interest (as defined 
in Sec. 26.2642-2(b)(4)(i) and (ii)) to the person; and
    (B) If the pecuniary amount is payable in kind on the basis of value 
other than the date of distribution value of the assets, the trustee is 
required to allocate assets to the pecuniary payment in a manner that 
fairly reflects net appreciation or depreciation in the value of the 
assets in the fund available to pay the pecuniary amount measured

[[Page 788]]

from the valuation date to the date of payment.
    (iii) Mandatory severances. For purposes of this section, if the 
governing instrument of a trust requires the division or severance of a 
single trust into separate trusts upon the future occurrence of a 
particular event not within the discretion of the trustee or any other 
person, and if the trusts resulting from such a division or severance 
are recognized as separate trusts under applicable state law, then each 
resulting trust is treated as a separate trust for purposes of Chapter 
13. For this purpose, the rules of paragraph (b)(1)(ii)(C) of this 
section apply with respect to the severance and funding of the trusts. 
Similarly, if the governing instrument requires the division of a single 
trust into separate shares under the circumstances described in this 
paragraph, each such share is treated as a separate trust for purposes 
of Chapter 13. The post-severance treatment of the resulting shares or 
trusts as separate trusts for GST tax purposes generally permits the 
allocation of GST tax exemption, the making of various elections 
permitted for GST tax purposes, and the occurrence of a taxable 
distribution or termination with regard to a particular resulting share 
or trust, with no GST tax impact on any other trust or share resulting 
from that severance. The treatment of a single trust as separate trusts 
under this paragraph (a)(1), however, does not permit treatment of those 
portions as separate trusts for purposes of filing returns and payment 
of tax or for purposes of computing any other tax imposed under the 
Internal Revenue Code, if those portions are not treated as separate 
trusts under local law. Also, additions to, and distributions from, such 
trusts are allocated pro rata among the separate trusts, unless the 
governing instrument expressly provides otherwise. Each separate share 
and each trust resulting from a mandatory division or severance 
described in this paragraph will have the same inclusion ratio 
immediately after the severance as that of the original trust 
immediately before the division or severance.
    (2) Multiple transferors with respect to single trust--(i) In 
general. If there is more than one transferor with respect to a trust, 
the portions of the trust attributable to the different transferors are 
treated as separate trusts for purposes of chapter 13. Treatment of a 
single trust as separate trusts under this paragraph (a)(2) does not 
permit treatment of those portions as separate trusts for purposes of 
filing returns and payment of tax or for purposes of computing any other 
tax imposed under the Internal Revenue Code. Also, additions to, and 
distributions from, such trusts are allocated pro rata among the 
separate trusts unless otherwise expressly provided in the governing 
instrument.
    (ii) Addition by a transferor. If an individual makes an addition to 
a trust of which the individual is not the sole transferor, the portion 
of the single trust attributable to each separate trust is determined by 
multiplying the fair market value of the single trust immediately after 
the contribution by a fraction. The numerator of the fraction is the 
value of the separate trust immediately after the contribution. The 
denominator of the fraction is the fair market value of all the property 
in the single trust immediately after the transfer.
    (3) Severance of a single trust. A single trust treated as separate 
trusts under paragraphs (a)(1) or (2) of this section may be divided at 
any time into separate trusts to reflect that treatment. For this 
purpose, the rules of paragraph (b)(1)(ii)(C) of this section apply with 
respect to the severance and funding of the severed trusts.
    (4) Allocation of exemption--(i) In general. With respect to a 
separate share treated as a separate trust under paragraph (a)(1) or (2) 
of this section, an individual's GST exemption is allocated to the 
separate trust. See Sec. 26.2632-1 for rules concerning the allocation 
of GST exemption.
    (ii) Automatic allocation to direct skips. If the transfer is a 
direct skip to a trust that occurs during the transferor's lifetime and 
is treated as a transfer to separate trusts under paragraphs (a)(1) or 
(a)(2) of this section, the transferor's GST exemption not previously 
allocated is automatically allocated on a pro rata basis among the 
separate trusts. The transferor may prevent an automatic allocation of

[[Page 789]]

GST exemption to a separate share of a single trust by describing on a 
timely-filed United States Gift (and Generation-Skipping Transfer) Tax 
Return (Form 709) the transfer and the extent to which the automatic 
allocation is not to apply to a particular share. See Sec. 26.2632-1(b) 
for rules for avoiding the automatic allocation of GST exemption.
    (5) Examples. The following examples illustrate the principles of 
this section (a):

    Example 1. Separate shares as separate trusts. T transfers $100,000 
to a trust under which income is to be paid in equal shares for 10 years 
to T's child, C, and T's grandchild, GC (or their respective estates). 
The trust does not permit distributions of principal during the term of 
the trust. At the end of the 10-year term, the trust principal is to be 
distributed to C and GC in equal shares. The shares of C and GC in the 
trust are separate and independent and, therefore, are treated as 
separate trusts. The result would not be the same if the trust permitted 
distributions of principal unless the distributions could only be made 
from a one-half separate share of the initial trust principal and the 
distributee's future rights with respect to the trust are 
correspondingly reduced. T may allocate part of T's GST exemption under 
section 2632(a) to the share held for the benefit of GC.
    Example 2. Separate share rule inapplicable. The facts are the same 
as in Example 1, except the trustee holds the discretionary power to 
distribute the income in any proportion between C and GC during the last 
year of the trust. The shares of C and GC in the trust are not separate 
and independent shares throughout the entire term of the trust and, 
therefore, are not treated as separate trusts for purposes of chapter 
13.
    Example 3. Pecuniary payment as separate share. T creates a lifetime 
revocable trust providing that on T's death $500,000 is payable to T's 
spouse, S, with the balance of the principal to be held for the benefit 
of T's grandchildren. The value of the trust is includible in T's gross 
estate upon T's death. Under the terms of the trust, the payment to S is 
required to be made in cash, and under local law S is entitled to 
receive interest on the payment at an annual rate of 6 percent, 
commencing immediately upon T's death. For purposes of chapter 13, the 
trust is treated as created at T's death, and the $500,000 payable to S 
from the trust is treated as a separate share. The result would be the 
same if the payment to S could be satisfied using noncash assets at 
their value on the date of distribution. Further, the result would be 
the same if the decedent's probate estate poured over to the revocable 
trust on the decedent's death and was then distributed in accordance 
with the terms of the trust.
    Example 4. Pecuniary payment not treated as separate share. The 
facts are the same as in Example 3, except the bequest to S is to be 
paid in noncash assets valued at their values as finally determined for 
Federal estate tax purposes. Neither the trust instrument nor local law 
requires that the assets distributed in satisfaction of the bequest 
fairly reflect net appreciation or depreciation in all the assets from 
which the bequest may be funded. S's $500,000 bequest is not treated as 
a separate share and the trust is treated as a single trust for purposes 
of chapter 13.
    Example 5. Multiple transferors to single trust. A transfers 
$100,000 to an irrevocable generation-skipping trust; B simultaneously 
transfers $50,000 to the same trust. As of the time of the transfers, 
the single trust is treated as two trusts for purposes of chapter 13. 
Because A contributed \2/3\ of the value of the initial corpus, \2/3\ of 
the single trust principal is treated as a separate trust created by A. 
Similarly, because B contributed \1/3\ of the value of the initial 
corpus, \1/3\ of the single trust is treated as a separate trust created 
by B. A or B may allocate their GST exemption under section 2632(a) to 
the respective separate trusts.
    Example 6. Additional contributions. A transfers $100,000 to an 
irrevocable generation-skipping trust; B simultaneously transfers 
$50,000 to the same trust. When the value of the single trust has 
increased to $180,000, A contributes an additional $60,000 to the trust. 
At the time of the additional contribution, the portion of the single 
trust attributable to each grantor's separate trust must be 
redetermined. The portion of the single trust attributable to A's 
separate trust immediately after the contribution is \3/4\ (((2/3 x 
$180,000) + $60,000)/$240,000). The portion attributable to B's separate 
trust after A's addition is \1/4\.
    Example 7. Distributions from a separate share. The facts are the 
same as in Example 6, except that, after A's second contribution, 
$50,000 is distributed to a beneficiary of the trust. Absent a provision 
in the trust instrument that charges the distribution against the 
contribution of either A or B, \3/4\ of the distribution is treated as 
made from the separate trust of which A is the transferor and \1/4\ from 
the separate trust of which B is the transferor.
    Example 8. Subsequent mandatory division into separate trusts. T 
creates an irrevocable trust that provides the trustee with the 
discretionary power to distribute income or corpus to T's children and 
grandchildren. The trust provides that, when T's youngest child reaches 
age 21, the trust will be divided into separate shares, one share for 
each child of T. The income from a respective child's share will be paid 
to the child during the

[[Page 790]]

child's life, with the remainder passing on the child's death to such 
child's children (grandchildren of T). The separate shares that come 
into existence when the youngest child reaches age 21 will be recognized 
as of that date as separate trusts for purposes of Chapter 13. The 
inclusion ratio of the separate trusts will be identical to the 
inclusion ratio of the trust before the severance. Any allocation of GST 
tax exemption to the trust after T's youngest child reaches age 21 may 
be made to any one or more of the separate shares. The result would be 
the same if the trust instrument provided that the trust was to be 
divided into separate trusts when T's youngest child reached age 21, 
provided that the severance and funding of the separate trusts meets the 
requirements of this section.

    (b) Division of a trust included in the gross estate--(1) In 
general. The severance of a trust that is included in the transferor's 
gross estate (or created under the transferor's will) into two or more 
trusts is recognized for purposes of chapter 13 if--
    (i) The trust is severed pursuant to a direction in the governing 
instrument providing that the trust is to be divided upon the death of 
the transferor; or
    (ii) The governing instrument does not require or otherwise direct 
severance but the trust is severed pursuant to discretionary authority 
granted either under the governing instrument or under local law; and
    (A) The terms of the new trusts provide in the aggregate for the 
same succession of interests and beneficiaries as are provided in the 
original trust;
    (B) The severance occurs (or a reformation proceeding, if required, 
is commenced) prior to the date prescribed for filing the Federal estate 
tax return (including extensions actually granted) for the estate of the 
transferor; and
    (C) Either--
    (1) The new trusts are severed on a fractional basis. If severed on 
a fractional basis, the separate trusts need not be funded with a pro 
rata portion of each asset held by the undivided trust. The trusts may 
be funded on a nonpro rata basis provided funding is based on either the 
fair market value of the assets on the date of funding or in a manner 
that fairly reflects the net appreciation or depreciation in the value 
of the assets measured from the valuation date to the date of funding; 
or
    (2) If the severance is required (by the terms of the governing 
instrument) to be made on the basis of a pecuniary amount, the pecuniary 
payment is satisfied in a manner that would meet the requirements of 
paragraph (a)(1)(ii) of this section if it were paid to an individual.
    (2) Special rule. If a court order severing the trust has not been 
issued at the time the Federal estate tax return is filed, the executor 
must indicate on a statement attached to the return that a proceeding 
has been commenced to sever the trust and describe the manner in which 
the trust is proposed to be severed. A copy of the petition or other 
instrument used to commence the proceeding must also be attached to the 
return. If the governing instrument of a trust or local law authorizes 
the severance of the trust, a severance pursuant to that authorization 
is treated as meeting the requirement of paragraph (b)(1)(ii)(B) of this 
section if the executor indicates on the Federal estate tax return that 
separate trusts will be created (or funded) and clearly sets forth the 
manner in which the trust is to be severed and the separate trusts 
funded.
    (3) Allocation of exemption. An individual's GST exemption under 
Sec. 2632 may be allocated to the separate trusts created pursuant to 
this section at the discretion of the executor or trustee.
    (4) Examples. The following examples illustrate the provisions of 
this section (b):

    Example 1. Severance of single trust. T's will establishes a 
testamentary trust providing that income is to be paid to T's spouse for 
life. At the spouse's death, one-half of the corpus is to be paid to T's 
child, C, or C's estate (if C fails to survive the spouse) and one-half 
of the corpus is to be paid to T's grandchild, GC, or GC's estate (if GC 
fails to survive the spouse). If the requirements of paragraph (b) of 
this section are otherwise satisfied, T's executor may divide the 
testamentary trust equally into two separate trusts, one trust providing 
an income interest to spouse for life with remainder to C, and the other 
trust with an income interest to spouse for life with remainder to GC. 
Furthermore, if the requirements of paragraph (b) of this section are 
satisfied, the executor or trustee may further divide the trust for

[[Page 791]]

the benefit of GC. GST exemption may be allocated to any of the divided 
trusts.
    Example 2. Severance of revocable trust. T creates an inter vivos 
revocable trust providing that, at T's death and after payment of all 
taxes and administration expenses, the remaining corpus will be divided 
into two trusts. One trust, for the benefit of T's spouse, is to be 
funded with the smallest amount that, if qualifying for the marital 
deduction, will reduce the estate tax to zero. The other trust, for the 
benefit of T's descendants, is to be funded with the balance of the 
revocable trust corpus. The trust corpus is includible in T's gross 
estate. Each trust is recognized as a separate trust for purposes of 
chapter 13.
    Example 3. Formula severance. T's will establishes a testamentary 
marital trust (Trust) that meets the requirements of qualified 
terminable interest property (QTIP) if an election under section 
2056(b)(7) is made. Trust provides that all trust income is to be paid 
to T's spouse for life. On the spouse's death, the trust corpus is to be 
held in further trust for the benefit of T's then-living descendants. On 
T's date of death in January of 2004, T's unused GST tax exemption is 
$1,200,000, and T's will includes $200,000 of bequests to T's 
grandchildren. Prior to the due date for filing the Form 706, ``United 
States Estate (and Generation-Skipping Transfer) Tax Return,'' for T's 
estate, T's executor, pursuant to applicable state law, divides Trust 
into two separate trusts, Trust 1 and Trust 2. Trust 1 is to be funded 
with that fraction of the Trust assets, the numerator of which is 
$1,000,000, and the denominator of which is the value of the Trust 
assets as finally determined for federal estate tax purposes. Trust 2 is 
to be funded with that fraction of the Trust assets, the numerator of 
which is the excess of the Trust assets over $1,000,000, and the 
denominator of which is the value of the Trust assets as finally 
determined for federal estate tax purposes. On the Form 706 filed for 
the estate, T's executor makes a QTIP election under section 2056(b)(7) 
with respect to Trust 1 and Trust 2 and a ``reverse'' QTIP election 
under section 2652(a)(3) with respect to Trust 1. Further, T's executor 
allocates $200,000 of T's available GST tax exemption to the bequests to 
T's grandchildren, and the balance of T's exemption ($1,000,000) to 
Trust 1. If the requirements of paragraph (b) of this section are 
otherwise satisfied, Trust 1 and Trust 2 are recognized as separate 
trusts for GST tax purposes. Accordingly, the ``reverse'' QTIP election 
and allocation of GST tax exemption with respect to Trust 1 are 
recognized and effective for generation-skipping transfer tax purposes.
    (c) Cross reference. For rules applicable to the qualified severance 
of trusts (whether or not includible in the transferor's gross estate), 
see Sec. 26.2642-6.
    (d) Effective date. Paragraph (a)(1)(i), paragraph (a)(1)(iii), and 
Example 8 of paragraph (a)(5) apply to severances occurring on or after 
September 2, 2008.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29654, June 12, 1996, as 
amended at 61 FR 43656, Aug. 26, 1996; T.D. 9348, 72 FR 42297, Aug. 2, 
2007; T.D. 9421, 73 FR 44652, July 31, 2008]



Sec. 26.2662-1  Generation-skipping transfer tax return requirements.

    (a) In general. Chapter 13 imposes a tax on generation-skipping 
transfers (as defined in section 2611). The requirements relating to the 
return of tax depend on the type of generation-skipping transfer 
involved. This section contains rules for filing the required tax 
return. Paragraph (c)(2) of this section provides special rules 
concerning the return requirements for generation-skipping transfers 
pursuant to certain trust arrangements (as defined in paragraph 
(c)(2)(ii) of this section), such as life insurance policies and 
annuities.
    (b) Form of return--(1) Taxable distributions. Form 706GS(D) must be 
filed in accordance with its instructions for any taxable distribution 
(as defined in section 2612(b)). The trust involved in a transfer 
described in the preceding sentence must file Form 706GS(D-1) in 
accordance with its instructions. A copy of Form 706GS(D-1) shall be 
sent to each distributee.
    (2) Taxable terminations. Form 706GS(T) must be filed in accordance 
with its instructions for any taxable termination (as defined in section 
2612(a)).
    (3) Direct skip--(i) Inter vivos direct skips. Form 709 must be 
filed in accordance with its instructions for any direct skip (as 
defined in section 2612(c)) that is subject to chapter 12 and occurs 
during the life of the transferor.
    (ii) Direct skips occurring at death--(A) In general. Form 706 or 
Form 706NA must be filed in accordance with its instructions for any 
direct skips (as defined in section 2612(c)) that are subject to chapter 
11 and occur at the death of the decedent.
    (B) Direct skips payable from a trust. Schedule R-1 of Form 706 must 
be filed

[[Page 792]]

in accordance with its instructions for any direct skip from a trust if 
such direct skip is subject to chapter 11. See paragraph (c)(2) of this 
section for special rules relating to the person liable for tax and 
required to make the return under certain circumstances.
    (c) Person liable for tax and required to make return--(1) In 
general. Except as otherwise provided in this section, the following 
person is liable for the tax imposed by section 2601 and must make the 
required tax return--
    (i) The transferee in a taxable distribution (as defined in section 
2612(b));
    (ii) The trustee in the case of a taxable termination (as defined in 
section 2612(a));
    (iii) The transferor (as defined in section 2652(a)(1)(B)) in the 
case of an inter vivos direct skip (as defined in section 2612(c));
    (iv) The trustee in the case of a direct skip from a trust or with 
respect to property that continues to be held in trust; or
    (v) The executor in the case of a direct skip (other than a direct 
skip described in paragraph (c)(1)(iv) of this section) if the transfer 
is subject to chapter 11. See paragraph (c)(2) of this section for 
special rules relating to direct skips to or from certain trust 
arrangements (as defined in paragraph (c)(2)(ii) of this section).
    (2) Special rule for direct skips occurring at death with respect to 
property held in trust arrangements--(i) In general. In the case of 
certain property held in a trust arrangement (as defined in paragraph 
(c)(2)(ii) of this section) at the date of death of the transferor, the 
person who is required to make the return and who is liable for the tax 
imposed by chapter 13 is determined under paragraphs (c)(2)(iii) and 
(iv) of this section.
    (ii) Trust arrangement defined. For purposes of this section, the 
term trust arrangement includes any arrangement (other than an estate) 
which, although not an explicit trust, has the same effect as an 
explicit trust. For purposes of this section, the term ``explicit 
trust'' means a trust described in Sec. 301.7701-4(a).
    (iii) Executor's liability in the case of transfers with respect to 
decedents dying on or after June 24, 1996 if the transfer is less than 
$250,000. In the case of a direct skip occurring at death, the executor 
of the decedent's estate is liable for the tax imposed on that direct 
skip by chapter 13 and is required to file Form 706 or Form 706NA (and 
not Schedule R-1 of Form 706) if, at the date of the decedent's death--
    (A) The property involved in the direct skip is held in a trust 
arrangement; and
    (B) The total value of the property involved in direct skips with 
respect to the trustee of that trust arrangement is less than $250,000.
    (iv) Executor's liability in the case of transfers with respect to 
decedents dying prior to June 24, 1996 if the transfer is less than 
$100,000. In the case of a direct skip occurring at death with respect 
to a decedent dying prior to June 24, 1996, the rule in paragraph 
(c)(2)(iii) of this section that imposes liability upon the executor 
applies only if the property involved in the direct skip with respect to 
the trustee of the trust arrangement, in the aggregate, is less than 
$100,000.
    (v) Executor's right of recovery. In cases where the rules of 
paragraphs (c)(2)(iii) and (iv) of this section impose liability for the 
generation-skipping transfer tax on the executor, the executor is 
entitled to recover from the trustee (if the property continues to be 
held in trust) or from the recipient of the property (in the case of a 
transfer from a trust), the generation-skipping transfer tax 
attributable to the transfer.
    (vi) Examples. The following examples illustrate the application of 
this paragraph (c)(2) with respect to decedents dying on or after June 
24, 1996:

    Example 1. Insurance proceeds less than $250,000. On August 1, 1997, 
T, the insured under an insurance policy, died. The proceeds ($200,000) 
were includible in T's gross estate for Federal estate tax purposes. T's 
grandchild, GC, was named the sole beneficiary of the policy. The 
insurance policy is treated as a trust under section 2652(b)(1), and the 
payment of the proceeds to GC is a transfer from a trust for purposes of 
chapter 13. Therefore, the payment of the proceeds to GC is a direct 
skip. Since the proceeds from the policy ($200,000) are less than 
$250,000, the executor is liable for the tax imposed by chapter 13 and 
is required to file Form 706.
    Example 2. Aggregate insurance proceeds of $250,000 or more. Assume 
the same facts as in

[[Page 793]]

Example 1, except T is the insured under two insurance policies issued 
by the same insurance company. The proceeds ($150,000) from each policy 
are includible in T's gross estate for Federal estate tax purposes. T's 
grandchild, GC1, was named the sole beneficiary of Policy 1, and T's 
other grandchild, GC2, was named the sole beneficiary of Policy 2. GC1 
and GC2 are skip persons (as defined in section 2613). Therefore, the 
payments of the proceeds are direct skips. Since the total value of the 
policies ($300,000) exceeds $250,000, the insurance company is liable 
for the tax imposed by chapter 13 and is required to file Schedule R-1 
of Form 706.
    Example 3. Insurance proceeds of $250,000 or more held by insurance 
company. On August 1, 1997, T, the insured under an insurance policy, 
dies. The policy provides that the insurance company shall make monthly 
payments of $750 to GC, T's grandchild, for life with the remainder 
payable to T's great grandchild, GGC. The face value of the policy is 
$300,000. Since the proceeds continue to be held by the insurance 
company (the trustee), the proceeds are treated as if they were 
transferred to a trust for purposes of chapter 13. The trust is a skip 
person (as defined in section 2613(a)(2)) and the transfer is a direct 
skip. Since the total value of the policy ($300,000) exceeds $250,000, 
the insurance company is liable for the tax imposed by chapter 13 and is 
required to file Schedule R-1 of Form 706.
    Example 4. Insurance proceeds less than $250,000 held by insurance 
company. Assume the same facts as in Example 3, except the policy 
provides that the insurance company shall make monthly payments of $500 
to GC and that the face value of the policy is $200,000. The transfer is 
a transfer to a trust for purposes of chapter 13. However, since the 
total value of the policy ($200,000) is less than $250,000, the executor 
is liable for the tax imposed by chapter 13 and is required to file Form 
706.
    Example 5. On August 1, 1997, A, the insured under a life insurance 
policy, dies. The insurance proceeds on A's life that are payable under 
policies issued by Company X are in the aggregate amount of $200,000 and 
are includible in A's gross estate. Because the proceeds are includible 
in A's gross estate, the generation-skipping transfer that occurs upon 
A's death, if any, will be a direct skip rather than a taxable 
distribution or a taxable termination. Accordingly, because the 
aggregate amount of insurance proceeds with respect to Company X is less 
than $250,000, Company X may pay the proceeds without regard to whether 
the beneficiary is a skip person in relation to the decedent-transferor.

    (3) Limitation on personal liability of trustee. Except as provided 
in paragraph (c)(3)(iii) of this section, a trustee is not personally 
liable for any increases in the tax imposed by section 2601 which is 
attributable to the fact that--
    (i) A transfer is made to the trust during the life of the 
transferor for which a gift tax return is not filed; or
    (ii) The inclusion ratio with respect to the trust, determined by 
reference to the transferor's gift tax return, is erroneous, the actual 
inclusion ratio being greater than the reported inclusion ratio.
    (iii) This paragraph (c)(3) does not apply if the trustee has or is 
deemed to have knowledge of facts sufficient to reasonably conclude that 
a gift tax return was required to be filed or that the inclusion ratio 
is erroneous. A trustee is deemed to have knowledge of such facts if the 
trustee's agent, employee, partner, or co-trustee has knowledge of such 
facts.
    (4) Exceptions--(i) Legal or mental incapacity. If a distributee is 
legally or mentally incapable of making a return, the return may be made 
for the distributee by the distributee's guardian or, if no guardian has 
been appointed, by a person charged with the care of the distributee's 
person or property.
    (ii) Returns made by fiduciaries. See section 6012(b) for a 
fiduciary's responsibilities regarding the returns of decedents, returns 
of persons under a disability, returns of estates and trusts, and 
returns made by joint fiduciaries.
    (d) Time and manner of filing return--(1) In general. Forms 706, 
706NA, 706GS(D), 706GS(D-1), 706GS(T), 709, and Schedule R-1 of Form 706 
must be filed with the Internal Revenue Service office with which an 
estate or gift tax return of the transferor must be filed. The return 
shall be filed--
    (i) Direct skip. In the case of a direct skip, on or before the date 
on which an estate or gift tax return is required to be filed with 
respect to the transfer (see section 6075(b)(3)); and
    (ii) Other transfers. In all other cases, on or before the 15th day 
of the 4th month after the close of the calendar year in which such 
transfer occurs. See paragraph (d)(2) of this section for an exception 
to this rule when an election is made under section 2624(c) to value 
property included in certain taxable terminations in accordance with 
section 2032.

[[Page 794]]

    (2) Exception for alternative valuation of taxable termination. In 
the case of a taxable termination with respect to which an election is 
made under section 2624(c) to value property in accordance with section 
2032, a Form 706GS(T) must be filed on or before the 15th day of the 4th 
month after the close of the calendar year in which the taxable 
termination occurred, or on or before the 10th month following the month 
in which the death that resulted in the taxable termination occurred, 
whichever is later.
    (e) Place for filing returns. See section 6091 for the place for 
filing any return, declaration, statement, or other document, or copies 
thereof, required by chapter 13.
    (f) Lien on property. The liens imposed under sections 6324, 6324A, 
and 6324B are applicable with respect to the tax imposed under chapter 
13. Thus, a lien under section 6324 is imposed in the amount of the tax 
imposed by section 2601 on all property transferred in a generation-
skipping transfer until the tax is fully paid or becomes uncollectible 
by reason of lapse of time. The lien attaches at the time of the 
generation-skipping transfer and is in addition to the lien for taxes 
under section 6321.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29654, June 12, 1996]



Sec. 26.2663-1  Recapture tax under section 2032A.

    See Sec. 26.2642-4(a)(4) for rules relating to the recomputation of 
the applicable fraction and the imposition of additional GST tax, if 
additional estate tax is imposed under section 2032A.



Sec. 26.2663-2  Application of chapter 13 to transfers by nonresidents
not citizens of the United States.

    (a) In general. This section provides rules for applying chapter 13 
of the Internal Revenue Code to transfers by a transferor who is a 
nonresident not a citizen of the United States (NRA transferor). For 
purposes of this section, an individual is a resident or citizen of the 
United States if that individual is a resident or citizen of the United 
States under the rules of chapter 11 or 12 of the Internal Revenue Code, 
as the case may be. Every NRA transferor is allowed a GST exemption of 
$1,000,000. See Sec. 26.2632-1 regarding the allocation of the 
exemption.
    (b) Transfers subject to chapter 13--(1) Direct skips. A transfer by 
a NRA transferor is a direct skip subject to chapter 13 only to the 
extent that the transfer is subject to the Federal estate or gift tax 
within the meaning of Sec. 26.2652-1(a)(2). See Sec. 26.2612-1(a) for 
the definition of direct skip.
    (2) Taxable distributions and taxable terminations. Chapter 13 
applies to a taxable distribution or a taxable termination to the extent 
that the initial transfer of property to the trust by a NRA transferor, 
whether during life or at death, was subject to the Federal estate or 
gift tax within the meaning of Sec. 26.2652-1(a)(2). See Sec. 26.2612-
1(b) for the definition of a taxable termination and Sec. 26.2612-1(c) 
for the definition of a taxable distribution.
    (c) Trusts funded in part with property subject to chapter 13 and in 
part with property not subject to chapter 13--(1) In general. If a 
single trust created by a NRA transferor is in part subject to chapter 
13 under the rules of paragraph (b) of this section and in part not 
subject to chapter 13, the applicable fraction with respect to the trust 
is determined as of the date of the transfer, except as provided in 
paragraph (c)(3) of this section.
    (i) Numerator of applicable fraction. The numerator of the 
applicable fraction is the sum of the amount of GST exemption allocated 
to the trust (if any) plus the value of the nontax portion of the trust.
    (ii) Denominator of applicable fraction. The denominator of the 
applicable fraction is the value of the property transferred to the 
trust reduced as provided in Sec. 26.2642-1(c).
    (2) Nontax portion of the trust. The nontax portion of a trust is a 
fraction, the numerator of which is the value of property not subject to 
chapter 13 determined as of the date of the initial completed transfer 
to the trust, and the denominator of which is the value of the entire 
trust. For example, T, a NRA transferor, transfers property that has a 
value of $1,000 to a generation-skipping trust. Of the property 
transferred to the trust, property having a value of $200 is subject to 
chapter

[[Page 795]]

13 and property having a value of $800 is not subject to chapter 13. The 
nontax portion is .8 ($800 (the value of the property not subject to 
chapter 13) over $1,000 (the total value of the property transferred to 
the trust)).
    (3) Special rule with respect to the estate tax inclusion period. 
For purposes of this section, the provisions of Sec. 26.2632-1(c), 
providing rules applicable in the case of an estate tax inclusion period 
(ETIP), apply only if the property transferred by the NRA transferor is 
subsequently included in the transferor's gross estate. If the property 
is not subsequently included in the gross estate, then the nontax 
portion of the trust and the applicable fraction are determined as of 
the date of the initial transfer. If the property is subsequently 
included in the gross estate, then the nontax portion and the applicable 
fraction are determined as of the date of death.
    (d) Examples. The following examples illustrate the provisions of 
this section. In each example T, a NRA, is the transferor; C is T's 
child; and GC is C's child and a grandchild of T:

    Example 1. Direct transfer to skip person. T transfers property to 
GC in a transfer that is subject to Federal gift tax under chapter 12 
within the meaning of Sec. 26.2652-1(a)(2). At the time of the 
transfer, C and GC are NRAs. T's transfer is subject to chapter 13 
because the transfer is subject to gift tax under chapter 12.
    Example 2. Transfers of both U.S. and foreign situs property. (i) 
T's will established a testamentary trust for the benefit of C and GC. 
The trust was funded with stock in a publicly traded U.S. corporation 
having a value on the date of T's death of $100,000, and property not 
situated in the United States (and therefore not subject to estate tax) 
having a value on the date of T's death of $400,000.
    (ii) On a timely filed estate tax return (Form 706NA), the executor 
of T's estate allocates $50,000 of GST exemption under section 2632(a) 
to the trust. The numerator of the applicable fraction is $450,000, the 
sum of $50,000 (the amount of exemption allocated to the trust) plus 
$400,000 (the value of the nontax portion of the trust (4/5x$500,000)). 
The denominator is $500,000. Hence, the applicable fraction with respect 
to the trust is .9 ($450,000/$500,000), and the inclusion ratio is .1 (1 
- 9/10).
    Example 3. Inter vivos transfer of U.S. and foreign situs property 
to a trust and a timely allocation of GST exemption. T establishes a 
trust providing that trust income is payable to T's child for life and 
the remainder is to be paid to T's grandchild. T transfers property to 
the trust that has a value of $100,000 and is subject to chapter 13. T 
also transfers property to the trust that has a value of $300,000 but is 
not subject to chapter 13. T allocates $100,000 of exemption to the 
trust on a timely filed United States Gift (and Generation-Skipping 
Transfer) Tax Return (Form 709). The applicable fraction with respect to 
the trust is 1, determined as follows: $300,000 (the value of the nontax 
portion of the trust) plus $100,000 (the exemption allocated to the 
trust)/ $400,000 (the total value of the property transferred to the 
trust).
    Example 4. Inter vivos transfer of U.S. and foreign situs property 
to a trust and a late allocation of GST exemption. (i) In 1996, T 
transfers $500,000 of property to an inter vivos trust the terms of 
which provide that income is payable to C, for life, with the remainder 
to GC. The property transferred to the trust consists of property 
subject to chapter 13 that has a value of $400,000 on the date of the 
transfer and property not subject to chapter 13 that has a value of 
$100,000. T does not allocate GST exemption to the trust. On the 
transfer date, the nontax portion of the trust is .2 ($100,000/$500,000) 
and the applicable fraction is also .2 determined as follows: $100,000 
(the value of the nontax portion of the trust)/$500,000 (the value of 
the property transferred to the trust).
    (ii) In 1999, when the value of the trust is $800,000, T allocates 
$100,000 of GST exemption to the trust. The applicable fraction of the 
trust must be recomputed. The numerator of the applicable fraction is 
$260,000 ($100,000 (the amount of GST exemption allocated to the trust)) 
plus $160,000 (the value of the nontax portion of the trust as of the 
date of allocation (.2x$800,000)). The denominator of the applicable 
fraction is $800,000. Accordingly, the applicable fraction with respect 
to the trust after the allocation is .325 ($260,000/$800,000) and the 
inclusion ratio is .675 (1-.325).
    Example 5. Taxable termination. The facts are the same as in Example 
4 except that, in 2006, when the value of the property is $1,200,000, C 
dies and the trust corpus is distributed to GC. The termination is a 
taxable termination. If no further GST exemption has been allocated to 
the trust, the applicable fraction remains .325 and the inclusion ratio 
remains .675.
    Example 6. Estate Tax Inclusion Period. (i) T transferred property 
to an inter vivos trust the terms of which provided T with an annuity 
payable for 10 years or until T's prior death. The annuity satisfies the 
definition of a qualified interest under section 2702(b). The trust also 
provided that, at the end of the trust term, the remainder will pass to 
GC or GC's estate. The property transferred to the

[[Page 796]]

trust consisted of property subject to chapter 13 that has a value of 
$100,000 and property not subject to chapter 13 that has a value of 
$400,000. T allocated $100,000 of GST exemption to the trust. If T dies 
within the 10 year period, the value of the trust principal will be 
subject to inclusion in T's gross estate to the extent provided in 
sections 2103 and 2104(b). Accordingly, the ETIP rule under paragraph 
(c)(3) of this section applies.
    (ii) In year 6 of the trust term, T died. At T's death, the trust 
corpus had a value of $800,000, and $500,000 was includible in T's gross 
estate as provided in sections 2103 and 2104(b). Thus, $500,000 of the 
trust corpus is subject to chapter 13 and $300,000 is not subject to 
chapter 13. The $100,000 GST exemption allocation is effective as of T's 
date of death. Also, the nontax portion of the trust and the applicable 
fraction are determined as of T's date of death. In this case, the 
nontax portion of the trust is .375, determined as follows: $300,000 
(the value of the trust not subject to chapter 13)/$800,000 (the value 
of the trust). The numerator of the applicable fraction is $400,000, 
determined as follows: $100,000 (GST exemption previously allocated to 
the trust) plus $300,000 (the value of the nontax portion of the trust). 
The denominator of the applicable fraction is $800,000. Thus, the 
applicable fraction with respect to the trust is .50, unless additional 
exemption is allocated to the trust by T's executor or the automatic 
allocation rules of Sec. 26.2632-1(d)(2) apply.
    Example 7. The facts are the same as in Example 6 except that T 
survives the termination date of T's retained annuity and the trust 
corpus is distributed to GC. Since the trust was not included in T's 
gross estate, the ETIP rules do not apply. Accordingly, the nontax 
portion of the trust and the applicable fraction are determined as of 
the date of the transfer to the trust. The nontax portion of the trust 
is .80 ($400,000/$500,000). The numerator of the applicable fraction is 
$500,000 determined as follows: $100,000 (GST exemption allocated to the 
trust) plus $400,000 (the value of the nontax portion of the trust). 
Accordingly, the applicable fraction is 1, and the inclusion ratio is 
zero.

    (e) Transitional rule for allocations for transfers made before 
December 27, 1995. If an NRA made a GST (inter vivos or testamentary) 
after December 23, 1992, and before December 27, 1995 that is subject to 
chapter 13 (within the meaning of Sec. 26.2663-2), the NRA will be 
treated as having made a timely allocation of GST exemption to the 
transfer in a calendar year in the order prescribed in section 2632(c). 
Thus, a NRA's unused GST exemption will initially be treated as 
allocated to any direct skips made during the calendar year and then to 
any trusts with respect to which the NRA made transfers during the same 
calendar year and from which a taxable distribution or a taxable 
termination may occur. Allocations within the above categories are made 
in the order in which the transfers occur. Allocations among 
simultaneous transfers within the same category are made pursuant to the 
principles of section 2632(c)(2). This transitional allocation rule will 
not apply if the NRA transferor, or the executor of the NRA's estate, as 
the case may be, elected to have an automatic allocation of GST 
exemption not apply by describing on a timely-filed Form 709 for the 
year of the transfer, or a timely filed Form 706NA, the details of the 
transfer and the extent to which the allocation was not to apply.

[T.D. 8644, 60 FR 66903, Dec. 27, 1995; 61 FR 29654, June 12, 1996]



Sec. 26.6011-4  Requirement of statement disclosing participation in 
certain transactions by taxpayers.

    (a) In general. If a transaction is identified as a listed 
transaction or a transaction of interest as defined in Sec. 1.6011-4 of 
this chapter by the Commissioner in published guidance, and the listed 
transaction or transaction of interest involves a tax on generation-
skipping transfers under chapter 13 of subtitle B of the Internal 
Revenue Code, the transaction must be disclosed in the manner stated in 
such published guidance.
    (b) Effective/applicability date. This section applies to listed 
transactions and transactions of interest entered into on or after 
November 14, 2011.

[T.D. 9556, 76 FR 70341, Nov. 14, 2011]



Sec. 26.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs one or more tax return 
preparers to prepare a return or claim for refund of generation-skipping 
transfer tax under chapter 13 of subtitle B of the Internal Revenue 
Code, other than for the person, at any time during a return period, 
shall satisfy the record keeping and inspection requirements in the 
manner stated in Sec. 1.6060-1 of this chapter.

[[Page 797]]

    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



Sec. 26.6081-1  Automatic extension of time for filing 
generation-skipping transfer tax returns.

    (a) In general. A skip person distributee required to file a return 
on Form 706-GS(D), ``Generation-Skipping Transfer Tax Return for 
Distributions,'' or a trustee required to file a return on Form 706-
GS(T), ``Generation-Skipping Transfer Tax Return for Terminations,'' 
will be allowed an automatic 6-month extension of time to file the 
return after the date prescribed for filing if the skip person 
distributee or trustee files an application under this section in 
accordance with paragraph (b) of this section.
    (b) Requirements. To satisfy this paragraph (b), a skip person 
distributee or trustee must--
    (1) Submit a complete application on Form 7004, ``Application for 
Automatic Extension of Time to File Certain Business Income Tax, 
Information, and Other Returns,'' or in any other manner prescribed by 
the Commissioner;
    (2) File the application on or before the date prescribed for filing 
the return with the Internal Revenue Service office designated in the 
application's instructions; and
    (3) Remit the amount of the properly estimated unpaid tax liability 
on or before the date prescribed for payment.
    (c) No extension of time for the payment of tax. An automatic 
extension of time for filing a return granted under paragraph (a) of 
this section will not extend the time for payment of any tax due on such 
return.
    (d) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the skip 
person distributee or trustee a notice of termination at least 10 days 
prior to the termination date designated in such notice. The 
Commissioner must mail the notice of termination to the address shown on 
the Form 7004 or to the skip person distributee or trustee's last known 
address. For further guidance regarding the definition of last known 
address, see Sec. 301.6212-2 of this chapter.
    (e) Penalties. See section 6651 for failure to file a generation-
skipping transfer tax return or failure to pay the amount shown as tax 
on the return.
    (f) Effective/applicability dates. This section is applicable for 
applications for an automatic extension of time to file a generation-
skipping transfer tax return filed after July 1, 2008.

[73 FR 37369, July 1, 2008]



Sec. 26.6107-1  Tax return preparer must furnish copy of return to
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of any 
return or claim for refund of generation-skipping transfer tax under 
chapter 13 of subtitle B of the Internal Revenue Code shall furnish a 
completed copy of the return or claim for refund to the taxpayer, and 
retain a completed copy or record in the manner stated in Sec. 1.6107-1 
of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



Sec. 26.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each generation-skipping transfer tax return or 
claim for refund prepared by one or more signing tax return preparers 
must include the identifying number of the preparer required by Sec. 
1.6695-1(b) of this chapter to sign the return or claim for refund in 
the manner stated in Sec. 1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after December 31, 
2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008]



Sec. 26.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of generation-skipping transfer tax 
returns or claims for refund, see Sec. 1.6694-1 of this chapter.

[[Page 798]]

    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after December 31, 2008.

[T.D. 9436, 73 FR 78452, Dec. 22, 2008, as amended at 74 FR 5105, Jan. 
29, 2009]



Sec. 26.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of generation-skipping transfer tax under chapter 13 
of subtitle B of the Internal Revenue Code (Code) shall be subject to 
penalties under section 6694(a) of the Code in the manner stated in 
Sec. 1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78453, Dec. 22, 2008]



Sec. 26.6694-3  Penalty for understatement due to willful, reckless,
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of generation-skipping transfer tax under chapter 13 
of subtitle B of the Internal Revenue Code (Code) shall be subject to 
penalties under section 6694(b) of the Code in the manner stated in 
Sec. 1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78453, Dec. 22, 2008]



Sec. 26.6694-4  Extension of period of collection when preparer pays 15
percent of a penalty for understatement of taxpayer's liability and 

certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim for 
refund for generation-skipping transfer tax under chapter 13 of subtitle 
B of the Internal Revenue Code pays 15 percent of a penalty for 
understatement of taxpayer's liability, and procedural matters relating 
to the investigation, assessment and collection of the penalties under 
section 6694(a) and (b), the rules under Sec. 1.6694-4 of this chapter 
will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78453, Dec. 22, 2008]



Sec. 26.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of generation-skipping transfer tax under chapter 13 
of subtitle B of the Internal Revenue Code (Code) shall be subject to 
penalties for failure to furnish a copy to the taxpayer under section 
6695(a) of the Code, failure to sign the return under section 6695(b) of 
the Code, failure to furnish an identification number under section 
6695(c) of the Code, failure to retain a copy or list under section 
6695(d) of the Code, failure to file a correct information return under 
section 6695(e) of the Code, and negotiation of a check under section 
6695(f) of the Code, in the manner stated in Sec. 1.6695-1 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78453, Dec. 22, 2008]



Sec. 26.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for 
generation-skipping transfer tax under chapter 13 of subtitle B of the 
Internal Revenue Code, or by an appraiser that prepared an appraisal in 
connection with such a return or claim for refund under section 6695A, 
the rules under Sec. 1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78453, Dec. 22, 2008]

[[Page 799]]



Sec. 26.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec. 301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78453, Dec. 22, 2008]

                         PARTS 27	29 [RESERVED]

[[Page 801]]



                              FINDING AIDS




  --------------------------------------------------------------------

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  Table of OMB Control Numbers
  List of CFR Sections Affected

[[Page 803]]



                    Table of CFR Titles and Chapters




                      (Revised as of April 1, 2013)

                      Title 1--General Provisions

 Chapter I  Administrative Committee of the Federal Register 
                (Parts 1--49)
Chapter II  Office of the Federal Register (Parts 50--299)
  Chapter 
       III  Administrative Conference of the United States (Parts 
                300--399)
Chapter IV  Miscellaneous Agencies (Parts 400--500)

                    Title 2--Grants and Agreements

            Subtitle A--Office of Management and Budget Guidance 
                for Grants and Agreements
 Chapter I  Office of Management and Budget Governmentwide 
                Guidance for Grants and Agreements (Parts 2--199)
Chapter II  Office of Management and Budget Circulars and Guidance 
                (200--299)
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements
  Chapter 
       III  Department of Health and Human Services (Parts 300-- 
                399)
Chapter IV  Department of Agriculture (Parts 400--499)
Chapter VI  Department of State (Parts 600--699)
  Chapter 
       VII  Agency for International Development (Parts 700--799)
  Chapter 
      VIII  Department of Veterans Affairs (Parts 800--899)
Chapter IX  Department of Energy (Parts 900--999)
Chapter XI  Department of Defense (Parts 1100--1199)
  Chapter 
       XII  Department of Transportation (Parts 1200--1299)
  Chapter 
      XIII  Department of Commerce (Parts 1300--1399)
  Chapter 
       XIV  Department of the Interior (Parts 1400--1499)
Chapter XV  Environmental Protection Agency (Parts 1500--1599)
  Chapter 
     XVIII  National Aeronautics and Space Administration (Parts 
                1800--1899)
Chapter XX  United States Nuclear Regulatory Commission (Parts 
                2000--2099)
  Chapter 
      XXII  Corporation for National and Community Service (Parts 
                2200--2299)
  Chapter 
     XXIII  Social Security Administration (Parts 2300--2399)
  Chapter 
      XXIV  Housing and Urban Development (Parts 2400--2499)
  Chapter 
       XXV  National Science Foundation (Parts 2500--2599)
  Chapter 
      XXVI  National Archives and Records Administration (Parts 
                2600--2699)

[[Page 804]]

  Chapter 
     XXVII  Small Business Administration (Parts 2700--2799)
  Chapter 
    XXVIII  Department of Justice (Parts 2800--2899)
  Chapter 
       XXX  Department of Homeland Security (Parts 3000--3099)
  Chapter 
      XXXI  Institute of Museum and Library Services (Parts 3100--
                3199)
  Chapter 
     XXXII  National Endowment for the Arts (Parts 3200--3299)
  Chapter 
    XXXIII  National Endowment for the Humanities (Parts 3300--
                3399)
  Chapter 
     XXXIV  Department of Education (Parts 3400--3499)
  Chapter 
      XXXV  Export-Import Bank of the United States (Parts 3500--
                3599)
  Chapter 
    XXXVII  Peace Corps (Parts 3700--3799)
  Chapter 
     LVIII  Election Assistance Commission (Parts 5800--5899)

                        Title 3--The President

 Chapter I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

 Chapter I  Government Accountability Office (Parts 1--199)
Chapter II  Recovery Accountability and Transparency Board (Parts 
                200--299)

                   Title 5--Administrative Personnel

 Chapter I  Office of Personnel Management (Parts 1--1199)
Chapter II  Merit Systems Protection Board (Parts 1200--1299)
  Chapter 
       III  Office of Management and Budget (Parts 1300--1399)
 Chapter V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
Chapter VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
  Chapter 
      VIII  Office of Special Counsel (Parts 1800--1899)
Chapter IX  Appalachian Regional Commission (Parts 1900--1999)
Chapter XI  Armed Forces Retirement Home (Parts 2100--2199)
  Chapter 
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
Chapter XV  Office of Administration, Executive Office of the 
                President (Parts 2500--2599)
  Chapter 
       XVI  Office of Government Ethics (Parts 2600--2699)
  Chapter 
       XXI  Department of the Treasury (Parts 3100--3199)
  Chapter 
      XXII  Federal Deposit Insurance Corporation (Parts 3200--
                3299)

[[Page 805]]

  Chapter 
     XXIII  Department of Energy (Parts 3300--3399)
  Chapter 
      XXIV  Federal Energy Regulatory Commission (Parts 3400--
                3499)
  Chapter 
       XXV  Department of the Interior (Parts 3500--3599)
  Chapter 
      XXVI  Department of Defense (Parts 3600-- 3699)
  Chapter 
    XXVIII  Department of Justice (Parts 3800--3899)
  Chapter 
      XXIX  Federal Communications Commission (Parts 3900--3999)
  Chapter 
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
  Chapter 
      XXXI  Farm Credit Administration (Parts 4100--4199)
  Chapter 
    XXXIII  Overseas Private Investment Corporation (Parts 4300--
                4399)
  Chapter 
     XXXIV  Securities and Exchange Commission (Parts 4400--4499)
  Chapter 
      XXXV  Office of Personnel Management (Parts 4500--4599)
  Chapter 
    XXXVII  Federal Election Commission (Parts 4700--4799)
Chapter XL  Interstate Commerce Commission (Parts 5000--5099)
  Chapter 
       XLI  Commodity Futures Trading Commission (Parts 5100--
                5199)
  Chapter 
      XLII  Department of Labor (Parts 5200--5299)
  Chapter 
     XLIII  National Science Foundation (Parts 5300--5399)
  Chapter 
       XLV  Department of Health and Human Services (Parts 5500--
                5599)
  Chapter 
      XLVI  Postal Rate Commission (Parts 5600--5699)
  Chapter 
     XLVII  Federal Trade Commission (Parts 5700--5799)
  Chapter 
    XLVIII  Nuclear Regulatory Commission (Parts 5800--5899)
  Chapter 
      XLIX  Federal Labor Relations Authority (Parts 5900--5999)
 Chapter L  Department of Transportation (Parts 6000--6099)
  Chapter 
       LII  Export-Import Bank of the United States (Parts 6200--
                6299)
  Chapter 
      LIII  Department of Education (Parts 6300--6399)
  Chapter 
       LIV  Environmental Protection Agency (Parts 6400--6499)
Chapter LV  National Endowment for the Arts (Parts 6500--6599)
  Chapter 
       LVI  National Endowment for the Humanities (Parts 6600--
                6699)
  Chapter 
      LVII  General Services Administration (Parts 6700--6799)
  Chapter 
     LVIII  Board of Governors of the Federal Reserve System 
                (Parts 6800--6899)
  Chapter 
       LIX  National Aeronautics and Space Administration (Parts 
                6900--6999)
Chapter LX  United States Postal Service (Parts 7000--7099)
  Chapter 
       LXI  National Labor Relations Board (Parts 7100--7199)
  Chapter 
      LXII  Equal Employment Opportunity Commission (Parts 7200--
                7299)
  Chapter 
     LXIII  Inter-American Foundation (Parts 7300--7399)
  Chapter 
      LXIV  Merit Systems Protection Board (Parts 7400--7499)
  Chapter 
       LXV  Department of Housing and Urban Development (Parts 
                7500--7599)

[[Page 806]]

  Chapter 
      LXVI  National Archives and Records Administration (Parts 
                7600--7699)
  Chapter 
     LXVII  Institute of Museum and Library Services (Parts 7700--
                7799)
  Chapter 
    LXVIII  Commission on Civil Rights (Parts 7800--7899)
  Chapter 
      LXIX  Tennessee Valley Authority (Parts 7900--7999)
  Chapter 
       LXX  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 8000--8099)
  Chapter 
      LXXI  Consumer Product Safety Commission (Parts 8100--8199)
  Chapter 
    LXXIII  Department of Agriculture (Parts 8300--8399)
  Chapter 
     LXXIV  Federal Mine Safety and Health Review Commission 
                (Parts 8400--8499)
  Chapter 
     LXXVI  Federal Retirement Thrift Investment Board (Parts 
                8600--8699)
  Chapter 
    LXXVII  Office of Management and Budget (Parts 8700--8799)
  Chapter 
      LXXX  Federal Housing Finance Agency (Parts 9000--9099)
  Chapter 
    LXXXII  Special Inspector General for Iraq Reconstruction 
                (Parts 9200--9299)
  Chapter 
   LXXXIII  Special Inspector General for Afghanistan 
                Reconstruction (Parts 9300--9399)
  Chapter 
    LXXXIV  Bureau of Consumer Financial Protection (Parts 9400--
                9499)
  Chapter 
     XCVII  Department of Homeland Security Human Resources 
                Management System (Department of Homeland 
                Security--Office of Personnel Management) (Parts 
                9700--9799)
  Chapter 
     XCVII  Council of the Inspectors General on Integrity and 
                Efficiency (Parts 9800--9899)

                      Title 6--Domestic Security

 Chapter I  Department of Homeland Security, Office of the 
                Secretary (Parts 1--99)

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
 Chapter I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
Chapter II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
  Chapter 
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
Chapter IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)

[[Page 807]]

 Chapter V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
Chapter VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
  Chapter 
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
  Chapter 
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
Chapter IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
 Chapter X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
Chapter XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
  Chapter 
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
Chapter XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
  Chapter 
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
  Chapter 
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
  Chapter 
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
Chapter XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)
  Chapter 
       XXV  Office of Advocacy and Outreach, Department of 
                Agriculture (Parts 2500--2599)
  Chapter 
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
  Chapter 
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
  Chapter 
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
  Chapter 
      XXIX  Office of Energy Policy and New Uses, Department of 
                Agriculture (Parts 2900--2999)
  Chapter 
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
  Chapter 
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
  Chapter 
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
  Chapter 
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
  Chapter 
     XXXIV  National Institute of Food and Agriculture (Parts 
                3400--3499)
  Chapter 
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)

[[Page 808]]

  Chapter 
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
  Chapter 
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
  Chapter 
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
  Chapter 
       XLI  [Reserved]
  Chapter 
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

                    Title 8--Aliens and Nationality

 Chapter I  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)
 Chapter V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

 Chapter I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
Chapter II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
  Chapter 
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

 Chapter I  Nuclear Regulatory Commission (Parts 0--199)
Chapter II  Department of Energy (Parts 200--699)
  Chapter 
       III  Department of Energy (Parts 700--999)
 Chapter X  Department of Energy (General Provisions) (Parts 
                1000--1099)
  Chapter 
      XIII  Nuclear Waste Technical Review Board (Parts 1300--
                1399)
  Chapter 
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
  Chapter 
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Parts 1800--1899)

                      Title 11--Federal Elections

 Chapter I  Federal Election Commission (Parts 1--9099)
Chapter II  Election Assistance Commission (Parts 9400--9499)

                      Title 12--Banks and Banking

 Chapter I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
Chapter II  Federal Reserve System (Parts 200--299)
  Chapter 
       III  Federal Deposit Insurance Corporation (Parts 300--399)

[[Page 809]]

Chapter IV  Export-Import Bank of the United States (Parts 400--
                499)
 Chapter V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
Chapter VI  Farm Credit Administration (Parts 600--699)
  Chapter 
       VII  National Credit Union Administration (Parts 700--799)
  Chapter 
      VIII  Federal Financing Bank (Parts 800--899)
Chapter IX  Federal Housing Finance Board (Parts 900--999)
 Chapter X  Bureau of Consumer Financial Protection (Parts 1000--
                1099)
Chapter XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
  Chapter 
       XII  Federal Housing Finance Agency (Parts 1200--1299)
  Chapter 
      XIII  Financial Stability Oversight Council (Parts 1300--
                1399)
  Chapter 
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
Chapter XV  Department of the Treasury (Parts 1500--1599)
  Chapter 
       XVI  Office of Financial Research (Parts 1600--1699)
  Chapter 
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
  Chapter 
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

 Chapter I  Small Business Administration (Parts 1--199)
  Chapter 
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
Chapter IV  Emergency Steel Guarantee Loan Board (Parts 400--499)
 Chapter V  Emergency Oil and Gas Guaranteed Loan Board (Parts 
                500--599)

                    Title 14--Aeronautics and Space

 Chapter I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
Chapter II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
  Chapter 
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--1199)
 Chapter V  National Aeronautics and Space Administration (Parts 
                1200--1299)
Chapter VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
 Chapter I  Bureau of the Census, Department of Commerce (Parts 
                30--199)

[[Page 810]]

Chapter II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
  Chapter 
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
Chapter IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
  Chapter 
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
  Chapter 
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
Chapter IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
Chapter XI  Technology Administration, Department of Commerce 
                (Parts 1100--1199)
  Chapter 
      XIII  East-West Foreign Trade Board (Parts 1300--1399)
  Chapter 
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
Chapter XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
  Chapter 
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399)

                    Title 16--Commercial Practices

 Chapter I  Federal Trade Commission (Parts 0--999)
Chapter II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

 Chapter I  Commodity Futures Trading Commission (Parts 1--199)
Chapter II  Securities and Exchange Commission (Parts 200--399)
Chapter IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

 Chapter I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
  Chapter 
       III  Delaware River Basin Commission (Parts 400--499)
Chapter VI  Water Resources Council (Parts 700--799)
  Chapter 
      VIII  Susquehanna River Basin Commission (Parts 800--899)
  Chapter 
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

 Chapter I  U.S. Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)

[[Page 811]]

Chapter II  United States International Trade Commission (Parts 
                200--299)
  Chapter 
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
Chapter IV  U.S. Immigration and Customs Enforcement, Department 
                of Homeland Security (Parts 400--599)

                     Title 20--Employees' Benefits

 Chapter I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
Chapter II  Railroad Retirement Board (Parts 200--399)
  Chapter 
       III  Social Security Administration (Parts 400--499)
Chapter IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
 Chapter V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
Chapter VI  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 700--799)
  Chapter 
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
  Chapter 
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
Chapter IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 1000--1099)

                       Title 21--Food and Drugs

 Chapter I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
Chapter II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
  Chapter 
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

 Chapter I  Department of State (Parts 1--199)
Chapter II  Agency for International Development (Parts 200--299)
  Chapter 
       III  Peace Corps (Parts 300--399)
Chapter IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
 Chapter V  Broadcasting Board of Governors (Parts 500--599)
  Chapter 
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
Chapter IX  Foreign Service Grievance Board (Parts 900--999)
 Chapter X  Inter-American Foundation (Parts 1000--1099)
Chapter XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
  Chapter 
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
  Chapter 
      XIII  Millennium Challenge Corporation (Parts 1300--1399)

[[Page 812]]

  Chapter 
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
Chapter XV  African Development Foundation (Parts 1500--1599)
  Chapter 
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
  Chapter 
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

 Chapter I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
Chapter II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
  Chapter 
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
 Chapter I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
Chapter II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
  Chapter 
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
Chapter IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
 Chapter V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
Chapter VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
  Chapter 
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
  Chapter 
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
Chapter IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)

[[Page 813]]

 Chapter X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
  Chapter 
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
Chapter XV  Emergency Mortgage Insurance and Loan Programs, 
                Department of Housing and Urban Development (Parts 
                2700--2799)
Chapter XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
  Chapter 
      XXIV  Board of Directors of the HOPE for Homeowners Program 
                (Parts 4000--4099)
  Chapter 
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

                           Title 25--Indians

 Chapter I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
Chapter II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
  Chapter 
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
Chapter IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--799)
 Chapter V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
Chapter VI  Office of the Assistant Secretary-Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
  Chapter 
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Parts 1200--1299)

                      Title 26--Internal Revenue

 Chapter I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--End)

           Title 27--Alcohol, Tobacco Products and Firearms

 Chapter I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
Chapter II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

 Chapter I  Department of Justice (Parts 0--299)
  Chapter 
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
 Chapter V  Bureau of Prisons, Department of Justice (Parts 500--
                599)

[[Page 814]]

Chapter VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
  Chapter 
       VII  Office of Independent Counsel (Parts 700--799)
  Chapter 
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
Chapter IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
Chapter XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
 Chapter I  National Labor Relations Board (Parts 100--199)
Chapter II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
  Chapter 
       III  National Railroad Adjustment Board (Parts 300--399)
Chapter IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
 Chapter V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
Chapter IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
 Chapter X  National Mediation Board (Parts 1200--1299)
  Chapter 
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
  Chapter 
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
  Chapter 
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
Chapter XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
  Chapter 
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
  Chapter 
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
Chapter XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

 Chapter I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
Chapter II  Bureau of Safety and Environmental Enforcement, 
                Department of the Interior (Parts 200--299)
Chapter IV  Geological Survey, Department of the Interior (Parts 
                400--499)
 Chapter V  Bureau of Ocean Energy Management, Department of the 
                Interior (Parts 500--599)
  Chapter 
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)
  Chapter 
       XII  Office of Natural Resources Revenue, Department of the 
                Interior (Parts 1200--1299)

[[Page 815]]

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
 Chapter I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
Chapter II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
Chapter IV  Secret Service, Department of the Treasury (Parts 
                400--499)
 Chapter V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
Chapter VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
  Chapter 
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)
  Chapter 
      VIII  Office of International Investment, Department of the 
                Treasury (Parts 800--899)
Chapter IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)
 Chapter X  Financial Crimes Enforcement Network, Department of 
                the Treasury (Parts 1000--1099)

                      Title 32--National Defense

            Subtitle A--Department of Defense
 Chapter I  Office of the Secretary of Defense (Parts 1--399)
 Chapter V  Department of the Army (Parts 400--699)
Chapter VI  Department of the Navy (Parts 700--799)
  Chapter 
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
  Chapter 
       XII  Defense Logistics Agency (Parts 1200--1299)
  Chapter 
       XVI  Selective Service System (Parts 1600--1699)
  Chapter 
      XVII  Office of the Director of National Intelligence (Parts 
                1700--1799)
  Chapter 
     XVIII  National Counterintelligence Center (Parts 1800--1899)
  Chapter 
       XIX  Central Intelligence Agency (Parts 1900--1999)
Chapter XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
  Chapter 
       XXI  National Security Council (Parts 2100--2199)
  Chapter 
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
  Chapter 
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
  Chapter 
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

 Chapter I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
Chapter II  Corps of Engineers, Department of the Army (Parts 
                200--399)

[[Page 816]]

Chapter IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
 Chapter I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
Chapter II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
  Chapter 
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)
Chapter IV  Office of Vocational and Adult Education, Department 
                of Education (Parts 400--499)
 Chapter V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599)
Chapter VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
  Chapter 
       VII  Office of Educational Research and Improvement, 
                Department of Education (799--799) [Reserved]
Chapter XI  National Institute for Literacy (Parts 1100--1199)
            Subtitle C--Regulations Relating to Education
  Chapter 
       XII  National Council on Disability (Parts 1200--1299)

                          Title 35 [Reserved]

             Title 36--Parks, Forests, and Public Property

 Chapter I  National Park Service, Department of the Interior 
                (Parts 1--199)
Chapter II  Forest Service, Department of Agriculture (Parts 200--
                299)
  Chapter 
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
Chapter IV  American Battle Monuments Commission (Parts 400--499)
 Chapter V  Smithsonian Institution (Parts 500--599)
Chapter VI  [Reserved]
  Chapter 
       VII  Library of Congress (Parts 700--799)
  Chapter 
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
Chapter IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
 Chapter X  Presidio Trust (Parts 1000--1099)
Chapter XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
  Chapter 
       XII  National Archives and Records Administration (Parts 
                1200--1299)
Chapter XV  Oklahoma City National Memorial Trust (Parts 1500--
                1599)
  Chapter 
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

[[Page 817]]

             Title 37--Patents, Trademarks, and Copyrights

 Chapter I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
Chapter II  Copyright Office, Library of Congress (Parts 200--299)
  Chapter 
       III  Copyright Royalty Board, Library of Congress (Parts 
                300--399)
Chapter IV  Assistant Secretary for Technology Policy, Department 
                of Commerce (Parts 400--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

 Chapter I  Department of Veterans Affairs (Parts 0--199)
Chapter II  Armed Forces Retirement Home (Parts 200--299)

                       Title 39--Postal Service

 Chapter I  United States Postal Service (Parts 1--999)
  Chapter 
       III  Postal Regulatory Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

 Chapter I  Environmental Protection Agency (Parts 1--1099)
Chapter IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
 Chapter V  Council on Environmental Quality (Parts 1500--1599)
Chapter VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
  Chapter 
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)

          Title 41--Public Contracts and Property Management

            Subtitle A--Federal Procurement Regulations System 
                [Note]
            Subtitle B--Other Provisions Relating to Public 
                Contracts
Chapter 50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
Chapter 51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
Chapter 60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
Chapter 61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
 Chapters 
   62--100  [Reserved]
            Subtitle C--Federal Property Management Regulations 
                System
  Chapter 
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
  Chapter 
       102  Federal Management Regulation (Parts 102-1--102-299)
 Chapters 
       103  104 [Reserved]

[[Page 818]]

  Chapter 
       105  General Services Administration (Parts 105-1--105-999)
  Chapter 
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
  Chapter 
       114  Department of the Interior (Parts 114-1--114-99)
  Chapter 
       115  Environmental Protection Agency (Parts 115-1--115-99)
  Chapter 
       128  Department of Justice (Parts 128-1--128-99)
 Chapters 
  129--200  [Reserved]
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System [Reserved]
            Subtitle F--Federal Travel Regulation System
  Chapter 
       300  General (Parts 300-1--300-99)
  Chapter 
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)
  Chapter 
       302  Relocation Allowances (Parts 302-1--302-99)
  Chapter 
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-1--303-99)
  Chapter 
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

 Chapter I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
Chapter IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--599)
 Chapter V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1999)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
 Chapter I  Bureau of Reclamation, Department of the Interior 
                (Parts 400--999)
Chapter II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
  Chapter 
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10099)

             Title 44--Emergency Management and Assistance

 Chapter I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
Chapter IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

[[Page 819]]

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)158 I18[Reserved]
            Subtitle B--Regulations Relating to Public Welfare
Chapter II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
  Chapter 
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
Chapter IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)
 Chapter V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
Chapter VI  National Science Foundation (Parts 600--699)
  Chapter 
       VII  Commission on Civil Rights (Parts 700--799)
  Chapter 
      VIII  Office of Personnel Management (Parts 800--899)
 Chapter X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
Chapter XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
  Chapter 
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
  Chapter 
      XIII  Office of Human Development Services, Department of 
                Health and Human Services (Parts 1300--1399)
  Chapter 
       XVI  Legal Services Corporation (Parts 1600--1699)
  Chapter 
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
  Chapter 
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
  Chapter 
       XXI  Commission on Fine Arts (Parts 2100--2199)
  Chapter 
     XXIII  Arctic Research Commission (Part 2301)
  Chapter 
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
  Chapter 
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

 Chapter I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
Chapter II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
  Chapter 
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
Chapter IV  Federal Maritime Commission (Parts 500--599)

[[Page 820]]

                      Title 47--Telecommunication

 Chapter I  Federal Communications Commission (Parts 0--199)
Chapter II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
  Chapter 
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)
Chapter IV  National Telecommunications and Information 
                Administration, Department of Commerce, and 
                National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 400--499)

           Title 48--Federal Acquisition Regulations System

 Chapter 1  Federal Acquisition Regulation (Parts 1--99)
 Chapter 2  Defense Acquisition Regulations System, Department of 
                Defense (Parts 200--299)
 Chapter 3  Health and Human Services (Parts 300--399)
 Chapter 4  Department of Agriculture (Parts 400--499)
 Chapter 5  General Services Administration (Parts 500--599)
 Chapter 6  Department of State (Parts 600--699)
 Chapter 7  Agency for International Development (Parts 700--799)
 Chapter 8  Department of Veterans Affairs (Parts 800--899)
 Chapter 9  Department of Energy (Parts 900--999)
Chapter 10  Department of the Treasury (Parts 1000--1099)
Chapter 12  Department of Transportation (Parts 1200--1299)
Chapter 13  Department of Commerce (Parts 1300--1399)
Chapter 14  Department of the Interior (Parts 1400--1499)
Chapter 15  Environmental Protection Agency (Parts 1500--1599)
Chapter 16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
Chapter 17  Office of Personnel Management (Parts 1700--1799)
Chapter 18  National Aeronautics and Space Administration (Parts 
                1800--1899)
Chapter 19  Broadcasting Board of Governors (Parts 1900--1999)
Chapter 20  Nuclear Regulatory Commission (Parts 2000--2099)
Chapter 21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
Chapter 23  Social Security Administration (Parts 2300--2399)
Chapter 24  Department of Housing and Urban Development (Parts 
                2400--2499)
Chapter 25  National Science Foundation (Parts 2500--2599)
Chapter 28  Department of Justice (Parts 2800--2899)
Chapter 29  Department of Labor (Parts 2900--2999)
Chapter 30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
Chapter 34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
Chapter 51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)

[[Page 821]]

Chapter 52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
Chapter 53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399) 
                [Reserved]
Chapter 54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
Chapter 57  African Development Foundation (Parts 5700--5799)
Chapter 61  Civilian Board of Contract Appeals, General Services 
                Administration (Parts 6100--6199)
Chapter 63  Department of Transportation Board of Contract Appeals 
                (Parts 6300--6399)
Chapter 99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
 Chapter I  Pipeline and Hazardous Materials Safety 
                Administration, Department of Transportation 
                (Parts 100--199)
Chapter II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
  Chapter 
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
Chapter IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
 Chapter V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
Chapter VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
  Chapter 
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
  Chapter 
      VIII  National Transportation Safety Board (Parts 800--999)
 Chapter X  Surface Transportation Board, Department of 
                Transportation (Parts 1000--1399)
Chapter XI  Research and Innovative Technology Administration, 
                Department of Transportation (Parts 1400--1499) 
                [Reserved]
  Chapter 
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1699)

                   Title 50--Wildlife and Fisheries

 Chapter I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
Chapter II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
  Chapter 
       III  International Fishing and Related Activities (Parts 
                300--399)

[[Page 822]]

Chapter IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
 Chapter V  Marine Mammal Commission (Parts 500--599)
Chapter VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

[[Page 823]]





           Alphabetical List of Agencies Appearing in the CFR




                      (Revised as of April 1, 2013)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Administrative Conference of the United States    1, III
Advisory Council on Historic Preservation         36, VIII
Advocacy and Outreach, Office of                  7, XXV
Afghanistan Reconstruction, Special Inspector     22, LXXXIII
     General for
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development              2, VII; 22, II
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            2, IV; 5, LXXIII
  Advocacy and Outreach, Office of                7, XXV
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Economic Research Service                       7, XXXVII
  Energy Policy and New Uses, Office of           2, IX; 7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  National Institute of Food and Agriculture      7, XXXIV
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII, L
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV, L
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII, L
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII

[[Page 824]]

Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase from People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Bureau of Ocean Energy Management, Regulation,    30, II
     and Enforcement
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chemical Safety and Hazardous Investigation       40, VI
     Board
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X
Civil Rights, Commission on                       5, LXVIII; 45, VII
Civil Rights, Office for                          34, I
Council of the Inspectors General on Integrity    5, XCVIII
     and Efficiency
Court Services and Offender Supervision Agency    5, LXX
     for the District of Columbia
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce Department                               2, XIII; 44, IV; 50, VI
  Census Bureau                                   15, I
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Telecommunications and Information     15, XXIII; 47, III, IV
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Productivity, Technology and Innovation,        37, IV
       Assistant Secretary for
  Secretary of Commerce, Office of                15, Subtitle A
  Technology Administration                       15, XI
  Technology Policy, Assistant Secretary for      37, IV
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Financial Protection Bureau              5, LXXXIV; 12, X
Consumer Product Safety Commission                5, LXXI; 16, II
Copyright Office                                  37, II
Copyright Royalty Board                           37, III
Corporation for National and Community Service    2, XXII; 45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    5, LXX; 28, VIII
   for the District of Columbia
[[Page 825]]

Customs and Border Protection                     19, I
Defense Contract Audit Agency                     32, I
Defense Department                                2, XI; 5, XXVI; 32, 
                                                  Subtitle A; 40, VII
  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III, 
                                                  48, 51
  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 2, XI; 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
District of Columbia, Court Services and          5, LXX; 28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          2, XXXIV; 5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Vocational and Adult Education, Office of       34, IV
Educational Research and Improvement, Office of   34, VII
Election Assistance Commission                    2, LVIII; 11, II
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             2, IX; 5, XXIII; 10, II, 
                                                  III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   2, XV; 5, LIV; 40, I, IV, 
                                                  VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Administration, Office of                       5, XV
  Environmental Quality, Council on               40, V

[[Page 826]]

  Management and Budget, Office of                2, Subtitle A; 5, III, 
                                                  LXXVII; 14, VI; 48, 99
  National Drug Control Policy, Office of         21, III
  National Security Council                       32, XXI; 47, 2
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           2, XXXV; 5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       5, XXXVII; 11, I
Federal Emergency Management Agency               44, I
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Agency                    5, LXXX; 12, XII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority                 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Financial Crimes Enforcement Network              31, X
Financial Research Office                         12, XVI
Financial Stability Oversight Council             12, XIII
Fine Arts, Commission on                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV

[[Page 827]]

Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5
  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Accountability Office                  4, I
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          2, III; 5, XLV; 45, 
                                                  Subtitle A,
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Human Development Services, Office of           45, XIII
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  2, XXX; 6, I; 8, I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection                   19, I
  Federal Emergency Management Agency             44, I
  Human Resources Management and Labor Relations  5, XCVII
       Systems
  Immigration and Customs Enforcement Bureau      19, IV
  Transportation Security Administration          49, XII
HOPE for Homeowners Program, Board of Directors   24, XXIV
     of
Housing and Urban Development, Department of      2, XXIV; 5, LXV; 24, 
                                                  Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Human Development Services, Office of             45, XIII
Immigration and Customs Enforcement Bureau        19, IV
Immigration Review, Executive Office for          8, V

[[Page 828]]

Independent Counsel, Office of                    28, VII
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII, XV
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior Department                               2, XIV
  American Indians, Office of the Special         25, VII
       Trustee
  Bureau of Ocean Energy Management, Regulation,  30, II
       and Enforcement
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Natural Resource Revenue, Office of             30, XII
  Ocean Energy Management, Bureau of              30, V
  Reclamation, Bureau of                          43, I
  Secretary of the Interior, Office of            2, XIV; 43, Subtitle A
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
Investment Security, Office of                    31, VIII
Iraq Reconstruction, Special Inspector General    5, LXXXVII
     for
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                2, XXVIII; 5, XXVIII; 28, 
                                                  I, XI; 40, IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Offices of Independent Counsel                  28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  5, XLII
  Employee Benefits Security Administration       29, XXV

[[Page 829]]

  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Office of Workers' Compensation Programs        20, VII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Office                                37, II
  Copyright Royalty Board                         37, III
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II, LXIV
Micronesian Status Negotiations, Office for       32, XXVII
Millennium Challenge Corporation                  22, XIII
Mine Safety and Health Administration             30, I
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
Museum and Library Services, Institute of         2, XXXI
National Aeronautics and Space Administration     2, XVIII; 5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   2, XXII; 45, XII, XXV
National Archives and Records Administration      2, XXVI; 5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Capital Planning Commission              1, IV
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National Council on Disability                    34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           21, III
National Endowment for the Arts                   2, XXXII
National Endowment for the Humanities             2, XXXIII
National Foundation on the Arts and the           45, XI
     Humanities
National Highway Traffic Safety Administration    23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute for Literacy                   34, XI
National Institute of Food and Agriculture        7, XXXIV
National Institute of Standards and Technology    15, II
National Intelligence, Office of Director of      32, XVII
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI

[[Page 830]]

National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       2, XXV; 5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III, IV
     Administration
National Transportation Safety Board              49, VIII
Natural Resources Conservation Service            7, VI
Natural Resource Revenue, Office of               30, XII
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
     Commission
Nuclear Regulatory Commission                     2, XX; 5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Ocean Energy Management, Bureau of                30, V
Offices of Independent Counsel                    28, VI
Office of Workers' Compensation Programs          20, VII
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 45, VIII
  Human Resources Management and Labor Relations  5, XCVII
       Systems, Department of Homeland Security
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Pipeline and Hazardous Materials Safety           49, I
     Administration
Postal Regulatory Commission                      5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Procurement and Property Management, Office of    7, XXXII
Productivity, Technology and Innovation,          37, IV
     Assistant Secretary
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Recovery Accountability and Transparency Board    4, II
Refugee Resettlement, Office of                   45, IV
Relocation Allowances                             41, 302
Research and Innovative Technology                49, XI
     Administration
Rural Business-Cooperative Service                7, XVIII, XLII, L
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV, L
Rural Telephone Bank                              7, XVI

[[Page 831]]

Rural Utilities Service                           7, XVII, XVIII, XLII, L
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                5, XXXIV; 17, II
Selective Service System                          32, XVI
Small Business Administration                     2, XXVII; 13, I
Smithsonian Institution                           36, V
Social Security Administration                    2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  2, VI; 22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Technology Administration                         15, XI
Technology Policy, Assistant Secretary for        37, IV
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     2, XII; 5, L
  Commercial Space Transportation                 14, III
  Contract Appeals, Board of                      48, 63
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 47, IV; 49, V
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Surface Transportation Board                    49, X
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               5, XXI; 12, XV; 17, IV; 
                                                  31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection                   19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Claims Collection Standards             31, IX
  Federal Law Enforcement Training Center         31, VII
  Financial Crimes Enforcement Network            31, X
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  Investment Security, Office of                  31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
   and Water Commission, United States Section
[[Page 832]]

Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs Department                       2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Vocational and Adult Education, Office of         34, IV
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I
World Agricultural Outlook Board                  7, XXXVIII

[[Page 833]]







                      Table of OMB Control Numbers



The OMB control numbers for chapter I of title 26 were consolidated into 
Sec. Sec.  601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR 
58008, Nov. 12, 1996, Sec.  601.9000 was removed. Section 602.101 is 
reprinted below for the convenience of the user.

     PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Sec.  602.101  OMB Control numbers.

    (a) Purpose. This part collects and displays the control numbers 
assigned to collections of information in Internal Revenue Service 
regulations by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1980. The Internal Revenue Service intends 
that this part comply with the requirements of Sec. Sec.  1320.7(f), 
1320.12, 1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations 
implementing the Paperwork Reduction Act), for the display of control 
numbers assigned by OMB to collections of information in Internal 
Revenue Service regulations. This part does not display control numbers 
assigned by the Office of Management and Budget to collections of 
information of the Bureau of Alcohol, Tobacco, and Firearms.
    (b) Display.

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................    1545-1654
1.23-5.....................................................    1545-0074
1.25-1T....................................................    1545-0922
                                                               1545-0930
1.25-2T....................................................    1545-0922
                                                               1545-0930
1.25-3T....................................................    1545-0922
                                                               1545-0930
1.25-4T....................................................    1545-0922
1.25-5T....................................................    1545-0922
1.25-6T....................................................    1545-0922
1.25-7T....................................................    1545-0922
1.25-8T....................................................    1545-0922
1.25A-1....................................................    1545-1630
1.28-1.....................................................    1545-0619
1.31-2.....................................................    1545-0074
1.32-2.....................................................    1545-0074
1.32-3.....................................................    1545-1575
1.36B-5....................................................    1545-2232
1.37-1.....................................................    1545-0074
1.37-3.....................................................    1545-0074
1.41-2.....................................................    1545-0619
1.41-3.....................................................    1545-0619
1.41-4A....................................................    1545-0074
1.41-4 (b) and (c).........................................    1545-0074
1.41-8(b)..................................................    1545-1625
1.41-8(d)..................................................    1545-0732
1.41-9.....................................................    1545-0619
1.42-1T....................................................    1545-0984
                                                               1545-0988
1.42-2.....................................................    1545-1005
1.42-5.....................................................    1545-1357
1.42-6.....................................................    1545-1102
1.42-8.....................................................    1545-1102
1.42-10....................................................    1545-1102
1.42-13....................................................    1545-1357
1.42-14....................................................    1545-1423
1.42-17....................................................    1545-1357
1.42-18....................................................    1545-2088
1.43-3(a)(3)...............................................    1545-1292
1.43-3(b)(3)...............................................    1545-1292
1.44B-1....................................................    1545-0219
1.45D-1....................................................    1545-1765
1.45G-1....................................................    1545-2031
1.46-1.....................................................    1545-0123
                                                               1545-0155
1.46-3.....................................................    1545-0155
1.46-4.....................................................    1545-0155
1.46-5.....................................................    1545-0155
1.46-6.....................................................    1545-0155
1.46-8.....................................................    1545-0155
1.46-9.....................................................    1545-0155
1.46-10....................................................    1545-0118
1.46-11....................................................    1545-0155
1.47-1.....................................................    1545-0155
                                                               1545-0166
1.47-3.....................................................    1545-0155
                                                               1545-0166
1.47-4.....................................................    1545-0123
1.47-5.....................................................    1545-0092
1.47-6.....................................................    1545-0099
1.48-3.....................................................    1545-0155
1.48-4.....................................................    1545-0155
                                                               1545-0808
1.48-5.....................................................    1545-0155
1.48-6.....................................................    1545-0155
1.48-12....................................................    1545-0155
                                                               1545-1783
1.50A-1....................................................    1545-0895
1.50A-2....................................................    1545-0895
1.50A-3....................................................    1545-0895
1.50A-4....................................................    1545-0895
1.50A-5....................................................    1545-0895
1.50A-6....................................................    1545-0895
1.50A-7....................................................    1545-0895
1.50B-1....................................................    1545-0895
1.50B-2....................................................    1545-0895
1.50B-3....................................................    1545-0895

[[Page 834]]

 
1.50B-4....................................................    1545-0895
1.50B-5....................................................    1545-0895
1.51-1.....................................................    1545-0219
                                                               1545-0241
                                                               1545-0244
                                                               1545-0797
1.52-2.....................................................    1545-0219
1.52-3.....................................................    1545-0219
1.56-1.....................................................    1545-0123
1.56(g)-1..................................................    1545-1233
1.56A-1....................................................    1545-0227
1.56A-2....................................................    1545-0227
1.56A-3....................................................    1545-0227
1.56A-4....................................................    1545-0227
1.56A-5....................................................    1545-0227
1.57-5.....................................................    1545-0227
1.58-1.....................................................    1545-0175
1.58-9(c)(5)(iii)(B).......................................    1545-1093
1.58-9(e)(3)...............................................    1545-1093
1.59-1.....................................................    1545-1903
1.61-2.....................................................    1545-0771
1.61-2T....................................................    1545-0771
1.61-4.....................................................    1545-0187
1.61-15....................................................    1545-0074
1.62-2.....................................................    1545-1148
1.63-1.....................................................    1545-0074
1.66-4.....................................................    1545-1770
1.67-2T....................................................    1545-0110
1.67-3.....................................................    1545-1018
1.67-3T....................................................    1545-0118
1.71-1T....................................................    1545-0074
1.72-4.....................................................    1545-0074
1.72-6.....................................................    1545-0074
1.72-9.....................................................    1545-0074
1.72-17....................................................    1545-0074
1.72-17A...................................................    1545-0074
1.72-18....................................................    1545-0074
1.74-1.....................................................    1545-1100
1.79-2.....................................................    1545-0074
1.79-3.....................................................    1545-0074
1.83-2.....................................................    1545-0074
1.83-5.....................................................    1545-0074
1.83-6.....................................................    1545-1448
1.103-10...................................................    1545-0123
                                                               1545-0940
1.103-15AT.................................................    1545-0720
1.103-18...................................................    1545-1226
1.103(n)-2T................................................    1545-0874
1.103(n)-4T................................................    1545-0874
1.103A-2...................................................    1545-0720
1.105-4....................................................    1545-0074
1.105-5....................................................    1545-0074
1.105-6....................................................    1545-0074
1.108-4....................................................    1545-1539
1.108-5....................................................    1545-1421
1.108-7....................................................    1545-2155
1.108(i)-1T................................................    1545-2147
1.108(i)-2T................................................    1545-2147
1.110-1....................................................    1545-1661
1.117-5....................................................    1545-0869
1.118-2....................................................    1545-1639
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1.120-3....................................................    1545-0057
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1.121-4....................................................    1545-0072
                                                               1545-0091
1.121-5....................................................    1545-0072
1.127-2....................................................    1545-0768
1.132-1T...................................................    1545-0771
1.132-2....................................................    1545-0771
1.132-2T...................................................    1545-0771
1.132-5....................................................    1545-0771
1.132-5T...................................................    1545-0771
                                                               1545-1098
1.132-9(b).................................................    1545-1676
1.141-1....................................................    1545-1451
1.141-12...................................................    1545-1451
1.142-2....................................................    1545-1451
1.142(f)(4)-1..............................................    1545-1730
1.148-0....................................................    1545-1098
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1.148-2....................................................    1545-1098
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1.148-11...................................................    1545-1098
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1.149(e)-1.................................................    1545-0720
1.150-1....................................................    1545-1347
1.151-1....................................................    1545-0074
1.152-3....................................................    1545-0071
                                                               1545-1783
1.152-4....................................................    1545-0074
1.152-4T...................................................    1545-0074
1.162-1....................................................    1545-0139
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1.162-5....................................................    1545-0139
1.162-6....................................................    1545-0139
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1.162-24...................................................    1545-2115
1.162-27...................................................    1545-1466
1.163-5....................................................    1545-0786
                                                               1545-1132
1.163-8T...................................................    1545-0995
1.163-10T..................................................    1545-0074
1.163-13...................................................    1545-1491
1.163(d)-1.................................................    1545-1421
1.165-1....................................................    1545-0177
1.165-2....................................................    1545-0177
1.165-3....................................................    1545-0177
1.165-4....................................................    1545-0177
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1.166-4....................................................    1545-0123
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1.167(a)-5T................................................    1545-1021
1.167(a)-7.................................................    1545-0172
1.167(a)-11................................................    1545-0152
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1.167(a)-12................................................    1545-0172
1.167(d)-1.................................................    1545-0172
1.167(e)-1.................................................    1545-0172
1.167(f)-11................................................    1545-0172
1.167(l)-1.................................................    1545-0172
1.168(d)-1.................................................    1545-1146
1.168(f)(8)-1T.............................................    1545-0923
1.168(i)-1.................................................    1545-1331
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1.170A-1...................................................    1545-0074
1.170A-2...................................................    1545-0074
1.170A-4(A)(b).............................................    1545-0123
1.170A-8...................................................    1545-0074
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1.170A-13(f)...............................................    1545-1464
1.170A-14..................................................    1545-0763
1.171-4....................................................    1545-1491
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1.172-1....................................................    1545-0172
1.172-13...................................................    1545-0863
1.173-1....................................................    1545-0172
1.174-3....................................................    1545-0152
1.174-4....................................................    1545-0152
1.175-3....................................................    1545-0187
1.175-6....................................................    1545-0152
1.177-1....................................................    1545-0172
1.179-2....................................................    1545-1201
1.179-3....................................................    1545-1201
1.179-5....................................................    1545-0172
                                                               1545-1201
1.179B-1T..................................................    1545-2076
1.179C-1...................................................    1545-2103
1.179C-1T..................................................    1545-2103
1.180-2....................................................    1545-0074
1.181-1....................................................    1545-2059
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1.181-3....................................................    1545-2059
1.182-6....................................................    1545-0074
1.183-1....................................................    1545-0195
1.183-2....................................................    1545-0195
1.183-3....................................................    1545-0195
1.183-4....................................................    1545-0195
1.190-3....................................................    1545-0074
1.194-2....................................................    1545-0735
1.194-4....................................................    1545-0735
1.195-1....................................................    1545-1582
1.197-1T...................................................    1545-1425
1.197-2....................................................    1545-1671
1.199-6....................................................    1545-1966
1.213-1....................................................    1545-0074
1.215-1T...................................................    1545-0074
1.217-2....................................................    1545-0182
1.243-3....................................................    1545-0123
1.243-4....................................................    1545-0123
1.243-5....................................................    1545-0123
1.248-1....................................................    1545-0172
1.261-1....................................................    1545-1041
1.263(a)-5.................................................    1545-1870
1.263(e)-1.................................................    1545-0123
1.263A-1...................................................    1545-0987
1.263A-1T..................................................    1545-0187
1.263A-2...................................................    1545-0987
1.263A-3...................................................    1545-0987
1.263A-8(b)(2)(iii)........................................    1545-1265
1.263A-9(d)(1).............................................    1545-1265
1.263A-9(f)(1)(ii).........................................    1545-1265
1.263A-9(f)(2)(iv).........................................    1545-1265
1.263A-9(g)(2)(iv)(C)......................................    1545-1265
1.263A-9(g)(3)(iv).........................................    1545-1265
1.265-1....................................................    1545-0074
1.265-2....................................................    1545-0123
1.266-1....................................................    1545-0123
1.267(f)-1.................................................    1545-0885
1.268-1....................................................    1545-0184
1.274-1....................................................    1545-0139
1.274-2....................................................    1545-0139
1.274-3....................................................    1545-0139
1.274-4....................................................    1545-0139
1.274-5....................................................    1545-0771
1.274-5A...................................................    1545-0139
                                                               1545-0771
1.274-5T...................................................    1545-0074
                                                               1545-0172
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1.274-6....................................................    1545-0139
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1.274-6T...................................................    1545-0074
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1.274-7....................................................    1545-0139
1.274-8....................................................    1545-0139
1.279-6....................................................    1545-0123
1.280C-4...................................................    1545-1155
1.280F-3T..................................................    1545-0074
1.280G-1...................................................    1545-1851
1.281-4....................................................    1545-0123
1.302-4....................................................    1545-0074
1.305-3....................................................    1545-0123
1.305-5....................................................    1545-1438
1.307-2....................................................    1545-0074
1.312-15...................................................    1545-0172
1.316-1....................................................    1545-0123
1.331-1....................................................    1545-0074
1.332-4....................................................    1545-0123
1.332-6....................................................    1545-2019
1.337(d)-1.................................................    1545-1160
1.337(d)-2.................................................    1545-1160
                                                               1545-1774
1.337(d)-4.................................................    1545-1633
1.337(d)-5.................................................    1545-1672
1.337(d)-6.................................................    1545-1672
1.337(d)-7.................................................    1545-1672
1.338-2....................................................    1545-1658
1.338-5....................................................    1545-1658
1.338-10...................................................    1545-1658
1.338-11...................................................    1545-1990
1.338(h)(10)-1.............................................    1545-1658
1.338(i)-1.................................................    1545-1990
1.341-7....................................................    1545-0123
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1.355-5....................................................    1545-2019
1.362-2....................................................    1545-0123
1.367(a)-1T................................................    1545-0026
1.367(a)-2T................................................    1545-0026
1.367(a)-3.................................................    1545-0026
                                                               1545-1478
1.367(a)-3T................................................    1545-2183
1.367(a)-6T................................................    1545-0026
1.367(a)-7.................................................    1545-2183
1.367(a)-7T................................................    1545-2183
1.367(a)-8.................................................    1545-1271
                                                               1545-2056
                                                               1545-2183
1.367(b)-1.................................................    1545-1271
1.367(b)-3T................................................    1545-1666
1.367(d)-1T................................................    1545-0026
1.367(e)-1.................................................    1545-1487
1.367(e)-2.................................................    1545-1487
1.368-1....................................................    1545-1691
1.368-3....................................................    1545-2019
1.371-1....................................................    1545-0123
1.371-2....................................................    1545-0123
1.374-3....................................................    1545-0123
1.381(b)-1.................................................    1545-0123
1.381(c)(4)-1..............................................    1545-0123
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1.381(c)(5)-1..............................................    1545-0123
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1.381(c)(6)-1..............................................    1545-0123
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1.381(c)(8)-1..............................................    1545-0123
1.381(c)(10)-1.............................................    1545-0123
1.381(c)(11)-1(k)..........................................    1545-0123
1.381(c)(13)-1.............................................    1545-0123
1.381(c)(17)-1.............................................    1545-0045
1.381(c)(22)-1.............................................    1545-1990
1.381(c)(25)-1.............................................    1545-0045
1.382-1T...................................................    1545-0123
1.382-2....................................................    1545-0123
1.382-2T...................................................    1545-0123
1.382-3....................................................    1545-1281
                                                               1545-1345
1.382-4....................................................    1545-1120
1.382-6....................................................    1545-1381
1.382-8....................................................    1545-1434
1.382-9....................................................    1545-1120
                                                               1545-1260
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1.382-11...................................................    1545-2019
1.382-91...................................................    1545-1260
                                                               1545-1324
1.383-1....................................................    1545-0074
                                                               1545-1120
1.401-1....................................................    1545-0020
                                                               1545-0197
                                                               1545-0200
                                                               1545-0534
                                                               1545-0710
1.401(a)-11................................................    1545-0710
1.401(a)-20................................................    1545-0928
1.401(a)-31................................................    1545-1341
1.401(a)-50................................................    1545-0710
1.401(a)(31)-1.............................................    1545-1341
1.401(b)-1.................................................    1545-0197
1.401(f)-1.................................................    1545-0710
1.401(k)-1.................................................    1545-1039
                                                               1545-1069
                                                               1545-1669
                                                               1545-1930
1.401(k)-2.................................................    1545-1669
1.401(k)-3.................................................    1545-1669
1.401(k)-4.................................................    1545-1669
1.401(m)-3.................................................    1545-1699
1.401(a)(9)-1..............................................    1545-1573
1.401(a)(9)-3..............................................    1545-1466
1.401(a)(9)-4..............................................    1545-1573
1.401-12(n)................................................    1545-0806
1.401-14...................................................    1545-0710
1.402(c)-2.................................................    1545-1341
1.402(f)-1.................................................    1545-1341
                                                               1545-1632
1.402A-1...................................................    1545-1992
1.403(b)-1.................................................    1545-0710
1.403(b)-3.................................................    1545-0996
1.403(b)-7.................................................    1545-1341
1.403(b)-10................................................    1545-2068
1.404(a)-4.................................................    1545-0710
1.404(a)-12................................................    1545-0710
1.404A-2...................................................    1545-0123
1.404A-6...................................................    1545-0123
1.408-2....................................................    1545-0390
1.408-5....................................................    1545-0747
1.408-6....................................................    1545-0203
                                                               1545-0390
1.408-7....................................................    1545-0119
1.408(q)-1.................................................    1545-1841
1.408A-2...................................................    1545-1616
1.408A-4...................................................    1545-1616
1.408A-5...................................................    1545-1616
1.408A-7...................................................    1545-1616
1.410(a)-2.................................................    1545-0710
1.410(d)-1.................................................    1545-0710
1.411(a)-11................................................    1545-1471
                                                               1545-1632
1.411(d)-4.................................................    1545-1545
1.411(d)-6.................................................    1545-1477
1.412(b)-5.................................................    1545-0710
1.412(c)(1)-2..............................................    1545-0710
1.412(c)(2)-1..............................................    1545-0710
1.412(c)(3)-2..............................................    1545-0710
1.414(c)-5.................................................    1545-0797
1.414(r)-1.................................................    1545-1221
1.415-2....................................................    1545-0710
1.415-6....................................................    1545-0710
1.417(a)(3)-1..............................................    1545-0928
1.417(e)-1.................................................    1545-1471
                                                               1545-1724
1.417(e)-1T................................................    1545-1471
1.419A(f)(6)-1.............................................    1545-1795
1.422-1....................................................    1545-0820
1.430(f)-1.................................................    1545-2095
1.430(g)-1.................................................    1545-2095
1.430(h)(2)-1..............................................    1545-2095
1.436-1....................................................    1545-2095
1.441-2....................................................    1545-1748
1.442-1....................................................    1545-0074
                                                               1545-0123
                                                               1545-0134
                                                               1545-0152
                                                               1545-0820
                                                               1545-1748
1.443-1....................................................    1545-0123
1.444-3T...................................................    1545-1036
1.444-4....................................................    1545-1591
1.446-1....................................................    1545-0074
                                                               1545-0152
1.446-4(d).................................................    1545-1412
1.448-1(g).................................................    1545-0152
1.448-1(h).................................................    1545-0152
1.448-1(i).................................................    1545-0152
1.448-2....................................................    1545-1855
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1.451-1....................................................    1545-0091
1.451-4....................................................    1545-0123
1.451-5....................................................    1545-0074
1.451-6....................................................    1545-0074
1.451-7....................................................    1545-0074
1.453-1....................................................    1545-0152
1.453-2....................................................    1545-0152
1.453-8....................................................    1545-0152
                                                               1545-0228
1.453-10...................................................    1545-0152
1.453A-1...................................................    1545-0152
                                                               1545-1134
1.453A-2...................................................    1545-0152
                                                               1545-1134
1.453A-3...................................................    1545-0963
1.454-1....................................................    1545-0074
1.455-2....................................................    1545-0152
1.455-6....................................................    1545-0123
1.456-2....................................................    1545-0123
1.456-6....................................................    1545-0123
1.456-7....................................................    1545-0123
1.457-8....................................................    1545-1580
1.458-1....................................................    1545-0879
1.458-2....................................................    1545-0152
1.460-1....................................................    1545-1650
1.460-6....................................................    1545-1031
                                                               1545-1572
                                                               1545-1732
1.461-1....................................................    1545-0074
1.461-2....................................................    1545-0096
1.461-4....................................................    1545-0917
1.461-5....................................................    1545-0917
1.463-1T...................................................    1545-0916
1.465-1T...................................................    1545-0712
1.466-1T...................................................    1545-0152
1.466-4....................................................    1545-0152
1.468A-3...................................................    1545-1269
                                                               1545-1378
                                                               1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d).....................    1545-2091
1.468A-4...................................................    1545-0954
1.468A-7...................................................    1545-0954
                                                               1545-1511
1.468A-8...................................................    1545-1269
1.468B-1...................................................    1545-1631
1.468B-1(j)................................................    1545-1299
1.468B-2(k)................................................    1545-1299
1.468B-2(l)................................................    1545-1299
1.468B-3(b)................................................    1545-1299
1.468B-3(e)................................................    1545-1299
1.468B-5(b)................................................    1545-1299
1.468B-9...................................................    1545-1631
1.469-1....................................................    1545-1008
1.469-2T...................................................    1545-0712
                                                               1545-1091
1.469-4T...................................................    1545-0985
                                                               1545-1037
1.469-7....................................................    1545-1244
1.471-2....................................................    1545-0123
1.471-5....................................................    1545-0123
1.471-6....................................................    1545-0123
1.471-8....................................................    1545-0123
1.471-11...................................................    1545-0123
                                                               1545-0152
1.472-1....................................................    1545-0042
                                                               1545-0152
1.472-2....................................................    1545-0152
1.472-3....................................................    1545-0042
1.472-5....................................................    1545-0152
1.472-8....................................................    1545-0028
                                                               1545-0042
                                                               1545-1767
1.475(a)-4.................................................    1545-1945
1.475(b)-4.................................................    1545-1496
1.481-4....................................................    1545-0152
1.481-5....................................................    1545-0152
1.482-1....................................................    1545-1364
1.482-4....................................................    1545-1364
1.482-7....................................................    1545-1364
                                                               1545-1794
1.482-9(b).................................................    1545-2149
1.501(a)-1.................................................    1545-0056
                                                               1545-0057
1.501(c)(3)-1..............................................    1545-0056
1.501(c)(9)-5..............................................    1545-0047
1.501(c)(17)-3.............................................    1545-0047
1.501(e)-1.................................................    1545-0814
1.503(c)-1.................................................    1545-0047
                                                               1545-0052
1.505(c)-1T................................................    1545-0916
1.507-1....................................................    1545-0052
1.507-2....................................................    1545-0052
1.508-1....................................................    1545-0052
                                                               1545-0056
1.509(a)-3.................................................    1545-0047
1.509(a)-4.................................................    1545-2157
1.509(a)-5.................................................    1545-0047
1.509(c)-1.................................................    1545-0052
1.512(a)-1.................................................    1545-0687
1.512(a)-4.................................................    1545-0047
                                                               1545-0687
1.521-1....................................................    1545-0051
                                                               1545-0058
1.527-2....................................................    1545-0129
1.527-5....................................................    1545-0129
1.527-6....................................................    1545-0129
1.527-9....................................................    1545-0129
1.528-8....................................................    1545-0127
1.533-2....................................................    1545-0123
1.534-2....................................................    1545-0123
1.542-3....................................................    1545-0123
1.545-2....................................................    1545-0123
1.545-3....................................................    1545-0123
1.547-2....................................................    1545-0045
                                                               1545-0123
1.547-3....................................................    1545-0123
1.551-4....................................................    1545-0074
1.552-3....................................................    1545-0099
1.552-4....................................................    1545-0099
1.552-5....................................................    1545-0099
1.556-2....................................................    1545-0704
1.561-1....................................................    1545-0044
1.561-2....................................................    1545-0123
1.562-3....................................................    1545-0123
1.563-2....................................................    1545-0123
1.564-1....................................................    1545-0123
1.565-1....................................................    1545-0043
                                                               1545-0123
1.565-2....................................................    1545-0043
1.565-3....................................................    1545-0043
1.565-5....................................................    1545-0043
1.565-6....................................................    1545-0043
1.585-1....................................................    1545-0123
1.585-3....................................................    1545-0123
1.585-8....................................................    1545-1290
1.586-2....................................................    1545-0123
1.593-1....................................................    1545-0123
1.593-6....................................................    1545-0123
1.593-6A...................................................    1545-0123
1.593-7....................................................    1545-0123
1.595-1....................................................    1545-0123
1.597-2....................................................    1545-1300
1.597-4....................................................    1545-1300

[[Page 838]]

 
1.597-6....................................................    1545-1300
1.597-7....................................................    1545-1300
1.611-2....................................................    1545-0099
1.611-3....................................................    1545-0007
                                                               1545-0099
                                                               1545-1784
1.612-4....................................................    1545-0074
1.612-5....................................................    1545-0099
1.613-3....................................................    1545-0099
1.613-4....................................................    1545-0099
1.613-6....................................................    1545-0099
1.613-7....................................................    1545-0099
1.613A-3...................................................    1545-0919
1.613A-3(e)................................................    1545-1251
1.613A-3(l)................................................    1545-0919
1.613A-5...................................................    1545-0099
1.613A-6...................................................    1545-0099
1.614-2....................................................    1545-0099
1.614-3....................................................    1545-0099
1.614-5....................................................    1545-0099
1.614-6....................................................    1545-0099
1.614-8....................................................    1545-0099
1.617-1....................................................    1545-0099
1.617-3....................................................    1545-0099
1.617-4....................................................    1545-0099
1.631-1....................................................    1545-0007
1.631-2....................................................    1545-0007
1.641(b)-2.................................................    1545-0092
1.642(c)-1.................................................    1545-0092
1.642(c)-2.................................................    1545-0092
1.642(c)-5.................................................    1545-0074
1.642(c)-6.................................................    1545-0020
                                                               1545-0074
                                                               1545-0092
1.642(g)-1.................................................    1545-0092
1.642(i)-1.................................................    1545-0092
1.645-1....................................................    1545-1578
1.663(b)-2.................................................    1545-0092
1.664-1....................................................    1545-0196
1.664-1(a)(7)..............................................    1545-1536
1.664-1(c).................................................    1545-2101
1.664-2....................................................    1545-0196
1.664-3....................................................    1545-0196
1.664-4....................................................    1545-0020
                                                               1545-0196
1.665(a)-0A through
1.665(g)-2A................................................    1545-0192
1.666(d)-1A................................................    1545-0092
1.671-4....................................................    1545-1442
1.671-5....................................................    1545-1540
1.701-1....................................................    1545-0099
1.702-1....................................................    1545-0074
1.703-1....................................................    1545-0099
1.704-2....................................................    1545-1090
1.706-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0134
1.706-1T...................................................    1545-0099
1.707-3(c)(2)..............................................    1545-1243
1.707-5(a)(7)(ii)..........................................    1545-1243
1.707-6(c).................................................    1545-1243
1.707-8....................................................    1545-1243
1.708-1....................................................    1545-0099
1.732-1....................................................    1545-0099
                                                               1545-1588
1.736-1....................................................    1545-0074
1.743-1....................................................    1545-0074
                                                               1545-1588
1.751-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0941
1.752-2....................................................    1545-1905
1.752-5....................................................    1545-1090
1.752-7....................................................    1545-1843
1.754-1....................................................    1545-0099
1.755-1....................................................    1545-0099
1.761-2....................................................    1545-1338
1.801-1....................................................    1545-0123
                                                               1545-0128
1.801-3....................................................    1545-0123
1.801-5....................................................    1545-0128
1.801-8....................................................    1545-0128
1.804-4....................................................    1545-0128
1.811-2....................................................    1545-0128
1.812-2....................................................    1545-0128
1.815-6....................................................    1545-0128
1.818-4....................................................    1545-0128
1.818-5....................................................    1545-0128
1.818-8....................................................    1545-0128
1.819-2....................................................    1545-0128
1.821-1....................................................    1545-1027
1.821-3....................................................    1545-1027
1.821-4....................................................    1545-1027
1.822-5....................................................    1545-1027
1.822-6....................................................    1545-1027
1.822-8....................................................    1545-1027
1.822-9....................................................    1545-1027
1.823-2....................................................    1545-1027
1.823-5....................................................    1545-1027
1.823-6....................................................    1545-1027
1.825-1....................................................    1545-1027
1.826-1....................................................    1545-1027
1.826-2....................................................    1545-1027
1.826-3....................................................    1545-1027
1.826-4....................................................    1545-1027
1.826-6....................................................    1545-1027
1.831-3....................................................    1545-0123
1.831-4....................................................    1545-0123
1.832-4....................................................    1545-1227
1.832-5....................................................    1545-0123
1.848-2(g)(8)..............................................    1545-1287
1.848-2(h)(3)..............................................    1545-1287
1.848-2(i)(4)..............................................    1545-1287
1.851-2....................................................    1545-1010
1.851-4....................................................    1545-0123
1.852-1....................................................    1545-0123
1.852-4....................................................    1545-0123
                                                               1545-0145
1.852-6....................................................    1545-0123
                                                               1545-0144
1.852-7....................................................    1545-0074
1.852-9....................................................    1545-0074
                                                               1545-0123
                                                               1545-0144
                                                               1545-0145
                                                               1545-1783
1.852-11...................................................    1545-1094
1.853-3....................................................    1545-2035
1.853-4....................................................    1545-2035
1.854-2....................................................    1545-0123
1.855-1....................................................    1545-0123
1.856-2....................................................    1545-0123
                                                               1545-1004
1.856-6....................................................    1545-0123
1.856-7....................................................    1545-0123
1.856-8....................................................    1545-0123
1.857-8....................................................    1545-0123
1.857-9....................................................    1545-0074
1.858-1....................................................    1545-0123
1.860-2....................................................    1545-0045
1.860-4....................................................    1545-0045
                                                               1545-1054
                                                               1545-1057
1.860E-1...................................................    1545-1675

[[Page 839]]

 
1.860E-2(a)(5).............................................    1545-1276
1.860E-2(a)(7).............................................    1545-1276
1.860E-2(b)(2).............................................    1545-1276
1.860G-2...................................................    1545-2110
1.861-2....................................................    1545-0089
1.861-3....................................................    1545-0089
1.861-4....................................................    1545-1900
1.861-8....................................................    1545-0126
1.861-8(e)(6) and (g)......................................    1545-1224
1.861-9T...................................................    1545-0121
                                                               1545-1072
1.861-18...................................................    1545-1594
1.863-1....................................................    1545-1476
1.863-3....................................................    1545-1476
                                                               1545-1556
1.863-3A...................................................    1545-0126
1.863-4....................................................    1545-0126
1.863-7....................................................    1545-0132
1.863-8....................................................    1545-1718
1.863-9....................................................    1545-1718
1.864-4....................................................    1545-0126
1.871-1....................................................    1545-0096
1.871-6....................................................    1545-0795
1.871-7....................................................    1545-0089
1.871-10...................................................    1545-0089
                                                               1545-0165
1.874-1....................................................    1545-0089
1.881-4....................................................    1545-1440
1.882-4....................................................    1545-0126
1.883-0....................................................    1545-1677
1.883-1....................................................    1545-1677
1.883-2....................................................    1545-1677
1.883-3....................................................    1545-1677
1.883-4....................................................    1545-1677
1.883-5....................................................    1545-1677
1.884-0....................................................    1545-1070
1.884-1....................................................    1545-1070
1.884-2....................................................    1545-1070
1.884-2T...................................................    1545-0126
                                                               1545-1070
1.884-4....................................................    1545-1070
1.884-5....................................................    1545-1070
1.892-1T...................................................    1545-1053
1.892-2T...................................................    1545-1053
1.892-3T...................................................    1545-1053
1.892-4T...................................................    1545-1053
1.892-5T...................................................    1545-1053
1.892-6T...................................................    1545-1053
1.892-7T...................................................    1545-1053
1.897-2....................................................    1545-0123
                                                               1545-0902
1.897-3....................................................    1545-0123
1.897-5T...................................................    1545-0902
1.897-6T...................................................    1545-0902
1.901-2....................................................    1545-0746
1.901-2A...................................................    1545-0746
1.901-3....................................................    1545-0122
1.902-1....................................................    1545-0122
                                                               1545-1458
1.904-1....................................................    1545-0121
                                                               1545-0122
1.904-2....................................................    1545-0121
                                                               1545-0122
1.904-3....................................................    1545-0121
1.904-4....................................................    1545-0121
1.904-5....................................................    1545-0121
1.904-7....................................................    1545-2104
1.904-7T...................................................    1545-2104
1.904(f)-1.................................................    1545-0121
                                                               1545-0122
1.904(f)-2.................................................    1545-0121
1.904(f)-3.................................................    1545-0121
1.904(f)-4.................................................    1545-0121
1.904(f)-5.................................................    1545-0121
1.904(f)-6.................................................    1545-0121
1.904(f)-7.................................................    1545-1127
1.905-2....................................................    1545-0122
1.905-3T...................................................    1545-1056
1.905-4T...................................................    1545-1056
1.905-5T...................................................    1545-1056
1.911-1....................................................    1545-0067
                                                               1545-0070
1.911-2....................................................    1545-0067
                                                               1545-0070
1.911-3....................................................    1545-0067
                                                               1545-0070
1.911-4....................................................    1545-0067
                                                               1545-0070
1.911-5....................................................    1545-0067
                                                               1545-0070
1.911-6....................................................    1545-0067
                                                               1545-0070
1.911-7....................................................    1545-0067
                                                               1545-0070
1.913-13...................................................    1545-0067
1.921-1T...................................................    1545-0190
                                                               1545-0884
                                                               1545-0935
                                                               1545-0939
1.921-2....................................................    1545-0884
1.921-3T...................................................    1545-0935
1.923-1T...................................................    1545-0935
1.924(a)-1T................................................    1545-0935
1.925(a)-1T................................................    1545-0935
1.925(b)-1T................................................    1545-0935
1.926(a)-1T................................................    1545-0935
1.927(a)-1T................................................    1545-0935
1.927(b)-1T................................................    1545-0935
1.927(d)-1.................................................    1545-0884
1.927(d)-2T................................................    1545-0935
1.927(e)-1T................................................    1545-0935
1.927(e)-2T................................................    1545-0935
1.927(f)-1.................................................    1545-0884
1.931-1....................................................    1545-0074
                                                               1545-0123
1.934-1....................................................    1545-0782
1.935-1....................................................    1545-0074
                                                               1545-0087
                                                               1545-0803
1.936-1....................................................    1545-0215
                                                               1545-0217
1.936-4....................................................    1545-0215
1.936-5....................................................    1545-0704
1.936-6....................................................    1545-0215
1.936-7....................................................    1545-0215
1.936-10(c)................................................    1545-1138
1.937-1....................................................    1545-1930
1.952-2....................................................    1545-0126
1.953-2....................................................    1545-0126
1.954-1....................................................    1545-1068
1.954-2....................................................    1545-1068
1.955-2....................................................    1545-0123
1.955-3....................................................    1545-0123
1.955A-2...................................................    1545-0755
1.955A-3...................................................    1545-0755
1.956-1....................................................    1545-0704
1.956-2....................................................    1545-0704
1.959-1....................................................    1545-0704
1.959-2....................................................    1545-0704
1.960-1....................................................    1545-0122
1.962-2....................................................    1545-0704
1.962-3....................................................    1545-0704
1.962-4....................................................    1545-0704
1.964-1....................................................    1545-0126

[[Page 840]]

 
                                                               1545-0704
                                                               1545-1072
                                                               1545-2104
1.964-3....................................................    1545-0126
1.970-2....................................................    1545-0126
1.985-2....................................................    1545-1051
                                                               1545-1131
1.985-3....................................................    1545-1051
1.988-0....................................................    1545-1131
1.988-1....................................................    1545-1131
1.988-2....................................................    1545-1131
1.988-3....................................................    1545-1131
1.988-4....................................................    1545-1131
1.988-5....................................................    1545-1131
1.988-6....................................................    1545-1831
1.992-1....................................................    1545-0190
                                                               1545-0938
1.992-2....................................................    1545-0190
                                                               1545-0884
                                                               1545-0938
1.992-3....................................................    1545-0190
                                                               1545-0938
1.992-4....................................................    1545-0190
                                                               1545-0938
1.993-3....................................................    1545-0938
1.993-4....................................................    1545-0938
1.994-1....................................................    1545-0938
1.995-5....................................................    1545-0938
1.1001-1...................................................    1545-1902
1.1012-1...................................................    1545-0074
                                                               1545-1139
1.1014-4...................................................    1545-0184
1.1015-1...................................................    1545-0020
1.1017-1...................................................    1545-1539
1.1031(d)-1T...............................................    1545-1021
1.1033(a)-2................................................    1545-0184
1.1033(g)-1................................................    1545-0184
1.1034-1...................................................    1545-0072
1.1039-1...................................................    1545-0184
1.1041-1T..................................................    1545-0074
1.1041-2...................................................    1545-1751
1.1042-1T..................................................    1545-0916
1.1044(a)-1................................................    1545-1421
1.1045-1...................................................    1545-1893
1.1060-1...................................................    1545-1658
                                                               1545-1990
1.1071-1...................................................    1545-0184
1.1071-4...................................................    1545-0184
1.1081-4...................................................    1545-0028
                                                               1545-0046
                                                               1545-0123
1.1081-11..................................................    1545-2019
1.1082-1...................................................    1545-0046
1.1082-2...................................................    1545-0046
1.1082-3...................................................    1545-0046
                                                               1545-0184
1.1082-4...................................................    1545-0046
1.1082-5...................................................    1545-0046
1.1082-6...................................................    1545-0046
1.1083-1...................................................    1545-0123
1.1092(b)-1T...............................................    1545-0644
1.1092(b)-2T...............................................    1545-0644
1.1092(b)-3T...............................................    1545-0644
1.1092(b)-4T...............................................    1545-0644
1.1092(b)-5T...............................................    1545-0644
1.1211-1...................................................    1545-0074
1.1212-1...................................................    1545-0074
1.1221-2...................................................    1545-1480
1.1231-1...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0074
1.1232-3...................................................    1545-0074
1.1237-1...................................................    1545-0184
1.1239-1...................................................    1545-0091
1.1242-1...................................................    1545-0184
1.1243-1...................................................    1545-0123
1.1244(e)-1................................................    1545-0123
                                                               1545-1447
1.1245-1...................................................    1545-0184
1.1245-2...................................................    1545-0184
1.1245-3...................................................    1545-0184
1.1245-4...................................................    1545-0184
1.1245-5...................................................    1545-0184
1.1245-6...................................................    1545-0184
1.1247-1...................................................    1545-0122
1.1247-2...................................................    1545-0122
1.1247-4...................................................    1545-0122
1.1247-5...................................................    1545-0122
1.1248-7...................................................    1545-0074
1.1248(f)-2................................................    1545-2183
1.1248(f)-3T...............................................    1545-2183
1.1250-1...................................................    1545-0184
1.1250-2...................................................    1545-0184
1.1250-3...................................................    1545-0184
1.1250-4...................................................    1545-0184
1.1250-5...................................................    1545-0184
1.1251-1...................................................    1545-0184
1.1251-2...................................................    1545-0074
                                                               1545-0184
1.1251-3...................................................    1545-0184
1.1251-4...................................................    1545-0184
1.1252-1...................................................    1545-0184
1.1252-2...................................................    1545-0184
1.1254-1(c)(3).............................................    1545-1352
1.1254-4...................................................    1545-1493
1.1254-5(d)(2).............................................    1545-1352
1.1258-1...................................................    1545-1452
1.1272-3...................................................    1545-1353
1.1273-2(f)(9).............................................    1545-1353
1.1273-2(h)(2).............................................    1545-1353
1.1274-3(d)................................................    1545-1353
1.1274-5(b)................................................    1545-1353
1.1274A-1(c)...............................................    1545-1353
1.1275-2...................................................    1545-1450
1.1275-3...................................................    1545-0887
                                                               1545-1353
                                                               1545-1450
1.1275-4...................................................    1545-1450
1.1275-6...................................................    1545-1450
1.1287-1...................................................    1545-0786
1.1291-9...................................................    1545-1507
1.1291-10..................................................    1545-1304
                                                               1545-1507
1.1294-1T..................................................    1545-1002
                                                               1545-1028
1.1295-1...................................................    1545-1555
1.1295-3...................................................    1545-1555
1.1298-3...................................................    1545-1507
1.1301-1...................................................    1545-1662
1.1311(a)-1................................................    1545-0074
1.1361-1...................................................    1545-0731
                                                               1545-1591
                                                               1545-2114
1.1361-3...................................................    1545-1590
1.1361-5...................................................    1545-1590
1.1362-1...................................................    1545-1308
1.1362-2...................................................    1545-1308
1.1362-3...................................................    1545-1308
1.1362-4...................................................    1545-1308
1.1362-5...................................................    1545-1308
1.1362-6...................................................    1545-1308
1.1362-7...................................................    1545-1308

[[Page 841]]

 
1.1362-8...................................................    1545-1590
1.1363-2...................................................    1545-1906
1.1366-1...................................................    1545-1613
1.1367-1(f)................................................    1545-1139
1.1368-1(f)(2).............................................    1545-1139
1.1368-1(f)(3).............................................    1545-1139
1.1368-1(f)(4).............................................    1545-1139
1.1368-1(g)(2).............................................    1545-1139
1.1374-1A..................................................    1545-0130
1.1377-1...................................................    1545-1462
1.1378-1...................................................    1545-1748
1.1383-1...................................................    1545-0074
1.1385-1...................................................    1545-0074
                                                               1545-0098
1.1388-1...................................................    1545-0118
                                                               1545-0123
1.1397E-1..................................................    1545-1908
1.1398-1...................................................    1545-1375
1.1398-2...................................................    1545-1375
1.1402(a)-2................................................    1545-0074
1.1402(a)-5................................................    1545-0074
1.1402(a)-11...............................................    1545-0074
1.1402(a)-15...............................................    1545-0074
1.1402(a)-16...............................................    1545-0074
1.1402(b)-1................................................    1545-0171
1.1402(c)-2................................................    1545-0074
1.1402(e)(1)-1.............................................    1545-0074
1.1402(e)(2)-1.............................................    1545-0074
1.1402(e)-1A...............................................    1545-0168
1.1402(e)-2A...............................................    1545-0168
1.1402(e)-3A...............................................    1545-0168
1.1402(e)-4A...............................................    1545-0168
1.1402(e)-5A...............................................    1545-0168
1.1402(f)-1................................................    1545-0074
1.1402(h)-1................................................    1545-0064
1.1441-1...................................................    1545-1484
1.1441-2...................................................    1545-0795
1.1441-3...................................................    1545-0165
                                                               1545-0795
1.1441-4...................................................    1545-1484
1.1441-5...................................................    1545-0096
                                                               1545-0795
                                                               1545-1484
1.1441-6...................................................    1545-0055
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1.1443-1...................................................    1545-0096
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1.1445-2...................................................    1545-0902
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1.1445-3...................................................    1545-0902
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1.1445-4...................................................    1545-0902
1.1445-5...................................................    1545-0902
1.1445-6...................................................    1545-0902
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1.1445-7...................................................    1545-0902
1.1445-8...................................................    1545-0096
1.1445-9T..................................................    1545-0902
1.1445-10T.................................................    1545-0902
1.1446-1...................................................    1545-1934
1.1446-3...................................................    1545-1934
1.1446-4...................................................    1545-1934
1.1446-5...................................................    1545-1934
1.1446-6...................................................    1545-1934
1.1451-1...................................................    1545-0054
1.1451-2...................................................    1545-0054
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1.1461-2...................................................    1545-0054
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1.1462-1...................................................    1545-0795
1.1492-1...................................................    1545-0026
1.1494-1...................................................    1545-0026
1.1502-5...................................................    1545-0257
1.1502-9...................................................    1545-1634
1.1502-9A..................................................    1545-0121
1.1502-13..................................................    1545-0123
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1.1502-16..................................................    1545-0123
1.1502-18..................................................    1545-0123
1.1502-19..................................................    1545-0123
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1.1502-20..................................................    1545-1774
1.1502-21..................................................    1545-1237
1.1502-21T.................................................    1545-2171
1.1502-31..................................................    1545-1344
1.1502-32..................................................    1545-1344
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1.1502-33..................................................    1545-1344
1.1502-35..................................................    1545-1828
1.1502-36..................................................    1545-2096
1.1502-47..................................................    1545-0123
1.1502-75..................................................    1545-0025
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1.1502-76..................................................    1545-1344
1.1502-76T.................................................    1545-2019
1.1502-77..................................................    1545-1699
1.1502-77A.................................................    1545-0123
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1.1502-78..................................................    1545-0582
1.1502-95..................................................    1545-1218
1.1502-95A.................................................    1545-1218
1.1502-96..................................................    1545-1218
1.1503-2...................................................    1545-1583
1.1503-2A..................................................    1545-1083
1.1503(d)-1................................................    1545-1946
1.1503(d)-3................................................    1545-1946
1.1503(d)-4................................................    1545-1946
1.1503(d)-5................................................    1545-1946
1.1503(d)-6................................................    1545-1946
1.1552-1...................................................    1545-0123
1.1561-3...................................................    1545-0123
1.1563-1...................................................    1545-0123
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1.1563-3...................................................    1545-0123
1.5000B-1..................................................    1545-2177
1.6001-1...................................................    1545-0058
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1.6011-1...................................................    1545-0055
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1.6011-3...................................................    1545-0238
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1.6011-4...................................................    1545-1685
1.6012-1...................................................    1545-0067
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1.6012-2...................................................    1545-0047
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1.6013-1...................................................    1545-0074
1.6013-2...................................................    1545-0091
1.6013-6...................................................    1545-0074
1.6013-7...................................................    1545-0074
1.6015-5...................................................    1545-1719
1.6015(a)-1................................................    1545-0087
1.6015(b)-1................................................    1545-0087
1.6015(d)-1................................................    1545-0087
1.6015(e)-1................................................    1545-0087
1.6015(f)-1................................................    1545-0087
1.6015(g)-1................................................    1545-0087
1.6015(h)-1................................................    1545-0087
1.6015(i)-1................................................    1545-0087
1.6017-1...................................................    1545-0074
                                                               1545-0087
                                                               1545-0090
1.6031(a)-1................................................    1545-1583
1.6031(b)-1T...............................................    1545-0099
1.6031(c)-1T...............................................    1545-0099
1.6032-1...................................................    1545-0099
1.6033-2...................................................    1545-0047
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1.6033-3...................................................    1545-0052
1.6034-1...................................................    1545-0092
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1.6035-1...................................................    1545-0704
1.6035-2...................................................    1545-0704
1.6035-3...................................................    1545-0704
1.6037-1...................................................    1545-0130
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1.6038-2...................................................    1545-1617
                                                               1545-2020
1.6038-3...................................................    1545-1617
1.6038A-2..................................................    1545-1191
1.6038A-3..................................................    1545-1191
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1.6038B-1..................................................    1545-1617
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1.6038B-1T.................................................    1545-0026
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1.6038B-2..................................................    1545-1617
1.6039-2...................................................    1545-0820
1.6041-1...................................................    1545-0008
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1.6041-2...................................................    1545-0008
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1.6041-3...................................................    1545-1148
1.6041-4...................................................    1545-0115
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1.6041-5...................................................    1545-0295
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1.6041-6...................................................    1545-0008
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1.6042-1...................................................    1545-0110
1.6042-2...................................................    1545-0110
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1.6042-3...................................................    1545-0295
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1.6044-5...................................................    1545-0118
1.6045-1...................................................    1545-0715
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1.6045-1(c)(3)(xi)(C)......................................    1545-2186
1.6045A-1..................................................    1545-2186
1.6045-2...................................................    1545-0115
1.6045-4...................................................    1545-1085
1.6046-1...................................................    1545-0704
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1.6046-2...................................................    1545-0704
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1.6046A....................................................    1545-1646
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1.6049-6...................................................    1545-0096
1.6049-7...................................................    1545-1018
1.6049-7T..................................................    1545-0112
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1.6050A-1..................................................    1545-0115
1.6050B-1..................................................    1545-0120
1.6050D-1..................................................    1545-0120
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1.6050E-1..................................................    1545-0120
1.6050H-1..................................................    1545-0901
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1.6050H-1T.................................................    1545-0901
1.6050H-2..................................................    1545-0901
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1.6050I-2..................................................    1545-1449
1.6050J-1T.................................................    1545-0877
1.6050K-1..................................................    1545-0941
1.6050S-1..................................................    1545-1678
1.6050S-2..................................................    1545-1729
1.6050S-3..................................................    1545-1678
1.6050S-4..................................................    1545-1729
1.6052-1...................................................    1545-0008
1.6052-2...................................................    1545-0008
1.6060-1...................................................    1545-0074
1.6060-1(a)(1).............................................    1545-1231
1.6061-1...................................................    1545-0123
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1.6091-3...................................................    1545-0089
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1.6115-1...................................................    1545-1464
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1.6164-5...................................................    1545-0135
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1.6302-2...................................................    1545-0098
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1.6425-3...................................................    1545-0170
1.6654-1...................................................    1545-0087
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1.6654-2...................................................    1545-0087
1.6654-3...................................................    1545-0087
1.6654-4...................................................    1545-0087
1.6655(e)-1................................................    1545-1421
1.6662-3(c)................................................    1545-0889
1.6662-4(e) and (f)........................................    1545-0889
1.6662-6...................................................    1545-1426
1.6694-1...................................................    1545-0074
1.6694-2...................................................    1545-0074
1.6694-2(c)................................................    1545-1231
1.6694-2(c)(3).............................................    1545-1231
1.6694-3(e)................................................    1545-1231
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1.6696-1...................................................    1545-0074
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1.6851-2...................................................    1545-0086
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1.7476-1...................................................    1545-0197
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1.7519-2T..................................................    1545-1036
1.7520-1...................................................    1545-1343
1.7520-2...................................................    1545-1343
1.7520-3...................................................    1545-1343
1.7520-4...................................................    1545-1343
1.7701(l)-3................................................    1545-1642
1.7872-15..................................................    1545-1792
1.9100-1...................................................    1545-0074
1.9101-1...................................................    1545-0008
2.1-4......................................................    1545-0123
2.1-5......................................................    1545-0123
2.1-6......................................................    1545-0123
2.1-10.....................................................    1545-0123
2.1-11.....................................................    1545-0123
2.1-12.....................................................    1545-0123
2.1-13.....................................................    1545-0123
2.1-20.....................................................    1545-0123
2.1-22.....................................................    1545-0123
2.1-26.....................................................    1545-0123
3.2........................................................    1545-0123
4.954-1....................................................    1545-1068
4.954-2....................................................    1545-1068
5.6411-1...................................................    1545-0042
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5c.44F-1...................................................    1545-0619
5c.128-1...................................................    1545-0123
5c.168(f)(8)-1.............................................    1545-0123
5c.168(f)(8)-2.............................................    1545-0123
5c.168(f)(8)-6.............................................    1545-0123
5c.168(f)(8)-8.............................................    1545-0123
5c.305-1...................................................    1545-0110
5c.442-1...................................................    1545-0152
5f.103-1...................................................    1545-0720
5f.103-3...................................................    1545-0720
5f.6045-1..................................................    1545-0715
6a.103A-2..................................................    1545-0123
                                                               1545-0720
6a.103A-3..................................................    1545-0720
7.465-1....................................................    1545-0712
7.465-2....................................................    1545-0712
7.465-3....................................................    1545-0712
7.465-4....................................................    1545-0712
7.465-5....................................................    1545-0712
7.936-1....................................................    1545-0217
7.999-1....................................................    1545-0216
7.6039A-1..................................................    1545-0015
7.6041-1...................................................    1545-0115
11.410-1...................................................    1545-0710
11.412(c)-7................................................    1545-0710
11.412(c)-11...............................................    1545-0710
12.7.......................................................    1545-0190
12.8.......................................................    1545-0191
12.9.......................................................    1545-0195
14a.422A-1.................................................    1545-0123
15A.453-1..................................................    1545-0228
16.3-1.....................................................    1545-0159
16A.126-2..................................................    1545-0074
16A.1255-1.................................................    1545-0184
16A.1255-2.................................................    1545-0184
18.1371-1..................................................    1545-0130
18.1378-1..................................................    1545-0130
18.1379-1..................................................    1545-0130
18.1379-2..................................................    1545-0130
20.2010-2T.................................................    1545-0015
20.2011-1..................................................    1545-0015
20.2014-5..................................................    1545-0015
                                                               1545-0260
20.2014-6..................................................    1545-0015
20.2016-1..................................................    1545-0015
20.2031-2..................................................    1545-0015
20.2031-3..................................................    1545-0015
20.2031-4..................................................    1545-0015
20.2031-6..................................................    1545-0015
20.2031-7..................................................    1545-0020
20.2031-10.................................................    1545-0015
20.2032-1..................................................    1545-0015
20.2032A-3.................................................    1545-0015
20.2032A-4.................................................    1545-0015
20.2032A-8.................................................    1545-0015
20.2039-4..................................................    1545-0015
20.2051-1..................................................    1545-0015
20.2053-3..................................................    1545-0015
20.2053-9..................................................    1545-0015
20.2053-10.................................................    1545-0015
20.2055-1..................................................    1545-0015
20.2055-2..................................................    1545-0015
                                                               1545-0092
20.2055-3..................................................    1545-0015
20.2056(b)-4...............................................    1545-0015
20.2056(b)-7...............................................    1545-0015
                                                               1545-1612
20.2056A-2.................................................    1545-1443
20.2056A-3.................................................    1545-1360
20.2056A-4.................................................    1545-1360
20.2056A-10................................................    1545-1360
20.2106-1..................................................    1545-0015
20.2106-2..................................................    1545-0015
20.2204-1..................................................    1545-0015
20.2204-2..................................................    1545-0015
20.6001-1..................................................    1545-0015
20.6011-1..................................................    1545-0015
20.6018-1..................................................    1545-0015
                                                               1545-0531
20.6018-2..................................................    1545-0015
20.6018-3..................................................    1545-0015
20.6018-4..................................................    1545-0015
                                                               1545-0022
20.6036-2..................................................    1545-0015
20.6060-1(a)(1)............................................    1545-1231
20.6061-1..................................................    1545-0015
20.6065-1..................................................    1545-0015
20.6075-1..................................................    1545-0015
20.6081-1..................................................    1545-0015
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20.6091-1..................................................    1545-0015
20.6107-1..................................................    1545-1231
20.6161-1..................................................    1545-0015
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20.6161-2..................................................    1545-0015
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20.6163-1..................................................    1545-0015
20.6166-1..................................................    1545-0181
20.6166A-1.................................................    1545-0015
20.6166A-3.................................................    1545-0015
20.6324A-1.................................................    1545-0754
20.7520-1..................................................    1545-1343
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22.0.......................................................    1545-0015
25.2511-2..................................................    1545-0020
25.2512-2..................................................    1545-0020
25.2512-3..................................................    1545-0020
25.2512-5..................................................    1545-0020
25.2512-9..................................................    1545-0020
25.2513-1..................................................    1545-0020
25.2513-2..................................................    1545-0020
                                                               1545-0021
25.2513-3..................................................    1545-0020
25.2518-2..................................................    1545-0959
25.2522(a)-1...............................................    1545-0196
25.2522(c)-3...............................................    1545-0020
                                                               1545-0196
25.2523(a)-1...............................................    1545-0020
                                                               1545-0196
25.2523(f)-1...............................................    1545-0015
25.2701-2..................................................    1545-1241
25.2701-4..................................................    1545-1241
25.2701-5..................................................    1545-1273
25.2702-5..................................................    1545-1485
25.2702-6..................................................    1545-1273
25.6001-1..................................................    1545-0020
                                                               1545-0022
25.6011-1..................................................    1545-0020
25.6019-1..................................................    1545-0020
25.6019-2..................................................    1545-0020
25.6019-3..................................................    1545-0020
25.6019-4..................................................    1545-0020
25.6060-1(a)(1)............................................    1545-1231
25.6061-1..................................................    1545-0020
25.6065-1..................................................    1545-0020
25.6075-1..................................................    1545-0020
25.6081-1..................................................    1545-0020
25.6091-1..................................................    1545-0020
25.6091-2..................................................    1545-0020
25.6107-1..................................................    1545-1231
25.6151-1..................................................    1545-0020
25.6161-1..................................................    1545-0020
25.7520-1..................................................    1545-1343
25.7520-2..................................................    1545-1343
25.7520-3..................................................    1545-1343
25.7520-4..................................................    1545-1343
26.2601-1..................................................    1545-0985
26.2632-1..................................................    1545-0985
                                                               1545-1892
26.2642-1..................................................    1545-0985
26.2642-2..................................................    1545-0985
26.2642-3..................................................    1545-0985
26.2642-4..................................................    1545-0985
26.2642-6..................................................    1545-1902
26.2652-2..................................................    1545-0985
26.2654-1..................................................    1545-1902
26.2662-1..................................................    1545-0015
                                                               1545-0985
26.2662-2..................................................    1545-0985
26.6060-1(a)(1)............................................    1545-1231
26.6107-1..................................................    1545-1231
31.3102-3..................................................    1545-0029
                                                               1545-0059
                                                               1545-0065
31.3121(b)(19)-1...........................................    1545-0029
31.3121(d)-1...............................................    1545-0004
31.3121(i)-1...............................................    1545-0034
31.3121(k)-4...............................................    1545-0137
31.3121(r)-1...............................................    1545-0029
31.3121(s)-1...............................................    1545-0029
31.3121(v)(2)-1............................................    1545-1643
31.3302(a)-2...............................................    1545-0028
31.3302(a)-3...............................................    1545-0028
31.3302(b)-2...............................................    1545-0028
31.3302(e)-1...............................................    1545-0028
31.3306(c)(18)-1...........................................    1545-0029
31.3401(a)-1...............................................    1545-0029
31.3401(a)(6)..............................................    1545-1484
31.3401(a)(6)-1............................................    1545-0029
                                                               1545-0096
                                                               1545-0795
31.3401(a)(7)-1............................................    1545-0029
31.3401(a)(8)(A)-1 ........................................    1545-0029
                                                               1545-0666
31.3401(a)(8)(C)-1 ........................................    1545-0029
31.3401(a)(15)-1...........................................    1545-0182
31.3401(c)-1...............................................    1545-0004
31.3402(b)-1...............................................    1545-0010
31.3402(c)-1...............................................    1545-0010
31.3402(f)(1)-1............................................    1545-0010
31.3402(f)(2)-1............................................    1545-0010
                                                               1545-0410
31.3402(f)(3)-1............................................    1545-0010
31.3402(f)(4)-1............................................    1545-0010
31.3402(f)(4)-2............................................    1545-0010
31.3402(f)(5)-1............................................    1545-0010
                                                               1545-1435
31.3402(h)(1)-1............................................    1545-0029
31.3402(h)(3)-1............................................    1545-0010
                                                               1545-0029
31.3402(h)(4)-1............................................    1545-0010
31.3402(i)-(1).............................................    1545-0010
31.3402(i)-(2).............................................    1545-0010
31.3402(k)-1...............................................    1545-0065
31.3402(l)-(1).............................................    1545-0010
31.3402(m)-(1).............................................    1545-0010
31.3402(n)-(1).............................................    1545-0010
31.3402(o)-2...............................................    1545-0415
31.3402(o)-3...............................................    1545-0008
                                                               1545-0010
                                                               1545-0415
                                                               1545-0717
31.3402(p)-1...............................................    1545-0415
                                                               1545-0717
31.3402(q)-1...............................................    1545-0238
                                                               1545-0239
31.3404-1..................................................    1545-0029
31.3405(c)-1...............................................    1545-1341
31.3406(a)-1...............................................    1545-0112
31.3406(a)-2...............................................    1545-0112
31.3406(a)-3...............................................    1545-0112
31.3406(a)-4...............................................    1545-0112
31.3406(b)(2)-1............................................    1545-0112
31.3406(b)(2)-2............................................    1545-0112
31.3406(b)(2)-3............................................    1545-0112
31.3406(b)(2)-4............................................    1545-0112
31.3406(b)(2)-5............................................    1545-0112
31.3406(b)(3)-1............................................    1545-0112
31.3406(b)(3)-2............................................    1545-0112
31.3406(b)(3)-3............................................    1545-0112
31.3406(b)(3)-4............................................    1545-0112
31.3406(b)(4)-1............................................    1545-0112
31.3406(c)-1...............................................    1545-0112
31.3406(d)-1...............................................    1545-0112
31.3406(d)-2...............................................    1545-0112
31.3406(d)-3...............................................    1545-0112
31.3406(d)-4...............................................    1545-0112
31.3406(d)-5...............................................    1545-0112
31.3406(e)-1...............................................    1545-0112
31.3406(f)-1...............................................    1545-0112
31.3406(g)-1...............................................    1545-0096
                                                               1545-0112
                                                               1545-1819
31.3406(g)-2...............................................    1545-0112
31.3406(g)-3...............................................    1545-0112
31.3406(h)-1...............................................    1545-0112
31.3406(h)-2...............................................    1545-0112

[[Page 846]]

 
31.3406(h)-3...............................................    1545-0112
31.3406(i)-1...............................................    1545-0112
31.3501(a)-1T..............................................    1545-0771
31.3503-1..................................................    1545-0024
31.3504-1..................................................    1545-0029
31.6001-1..................................................    1545-0798
31.6001-2..................................................    1545-0034
                                                               1545-0798
31.6001-3..................................................    1545-0798
31.6001-4..................................................    1545-0028
31.6001-5..................................................    1545-0798
31.6001-6..................................................    1545-0029
                                                               1459-0798
31.6011(a)-1...............................................    1545-0029
                                                               1545-0034
                                                               1545-0035
                                                               1545-0059
                                                               1545-0074
                                                               1545-0256
                                                               1545-0718
                                                               1545-2097
31.6011(a)-2...............................................    1545-0001
                                                               1545-0002
31.6011(a)-3...............................................    1545-0028
31.6011(a)-3A..............................................    1545-0955
31.6011(a)-4...............................................    1545-0034
                                                               1545-0035
                                                               1545-0718
                                                               1545-1413
                                                               1545-2097
31.6011(a)-5...............................................    1545-0028
                                                               1545-0718
                                                               1545-2097
31.6011(a)-6...............................................    1545-0028
31.6011(a)-7...............................................    1545-0074
31.6011(a)-8...............................................    1545-0028
31.6011(a)-9...............................................    1545-0028
31.6011(a)-10..............................................    1545-0112
31.6011(b)-1...............................................    1545-0003
31.6011(b)-2...............................................    1545-0029
31.6051-1..................................................    1545-0008
                                                               1545-0182
                                                               1545-0458
                                                               1545-1729
31.6051-2..................................................    1545-0008
31.6051-3..................................................    1545-0008
31.6053-1..................................................    1545-0029
                                                               1545-0062
                                                               1545-0064
                                                               1545-0065
                                                               1545-1603
31.6053-2..................................................    1545-0008
31.6053-3..................................................    1545-0065
                                                               1545-0714
31.6053-4..................................................    1545-0065
                                                               1545-1603
31.6060-1(a)(1)............................................    1545-1231
31.6065(a)-1...............................................    1545-0029
31.6071(a)-1...............................................    1545-0001
                                                               1545-0028
                                                               1545-0029
31.6071(a)-1A..............................................    1545-0955
31.6081(a)-1...............................................    1545-0008
                                                               1545-0028
31.6091-1..................................................    1545-0028
                                                               1545-0029
31.6107-1..................................................    1545-1231
31.6157-1..................................................    1545-0955
31.6205-1..................................................    1545-0029
                                                               1545-2097
31.6301(c)-1AT.............................................    1545-0035
                                                               1545-0112
                                                               1545-0257
31.6302-1..................................................    1545-1413
31.6302-2..................................................    1545-1413
31.6302-3..................................................    1545-1413
31.6302-4..................................................    1545-1413
31.6302(c)-2...............................................    1545-0001
                                                               1545-0257
31.6302(c)-2A..............................................    1545-0955
31.6302(c)-3...............................................    1545-0257
31.6402(a)-2...............................................    1545-0256
                                                               1545-2097
31.6413(a)-1...............................................    1545-0029
                                                               1545-2097
31.6413(a)-2...............................................    1545-0029
                                                               1545-0256
                                                               1545-2097
31.6413(c)-1...............................................    1545-0029
                                                               1545-0171
31.6414-1..................................................    1545-0029
                                                               1545-2097
32.1.......................................................    1545-0029
                                                               1545-0415
32.2.......................................................    1545-0029
35a.3406-2.................................................    1545-0112
35a.9999-5.................................................    1545-0029
36.3121(l)(1)-1............................................    1545-0137
36.3121(l)(1)-2............................................    1545-0137
36.3121(l)(3)-1............................................    1545-0123
36.3121(1)(7)-1............................................    1545-0123
36.3121(1)(10)-1...........................................    1545-0029
36.3121(1)(10)-3...........................................    1545-0029
36.3121(1)(10)-4...........................................    1545-0257
40.6060-1(a)(1)............................................    1545-1231
40.6107-1..................................................    1545-1231
40.6302(c)-3(b)(2)(ii).....................................    1545-1296
40.6302(c)-3(b)(2)(iii)....................................    1545-1296
40.6302(c)-3(e)............................................    1545-1296
40.6302(c)-3(f)(2)(ii).....................................    1545-1296
41.4481-1..................................................    1545-0143
41.4481-2..................................................    1545-0143
41.4483-3..................................................    1545-0143
41.6001-1..................................................    1545-0143
41.6001-2..................................................    1545-0143
41.6001-3..................................................    1545-0143
41.6060-1(a)(1)............................................    1545-1231
41.6071(a)-1...............................................    1545-0143
41.6081(a)-1...............................................    1545-0143
41.6091-1..................................................    1545-0143
41.6107-1..................................................    1545-1231
41.6109-1..................................................    1545-0143
41.6151(a)-1...............................................    1545-0143
41.6156-1..................................................    1545-0143
41.6161(a)(1)-1............................................    1545-0143
44.4401-1..................................................    1545-0235
44.4403-1..................................................    1545-0235
44.4412-1..................................................    1545-0236
44.4901-1..................................................    1545-0236
44.4905-1..................................................    1545-0236
44.4905-2..................................................    1545-0236
44.6001-1..................................................    1545-0235
44.6011(a)-1...............................................    1545-0235
                                                               1545-0236
44.6060-1(a)(1)............................................    1545-1231
44.6071-1..................................................    1545-0235
44.6091-1..................................................    1545-0235
44.6107-1..................................................    1545-1231
44.6151-1..................................................    1545-0235
44.6419-1..................................................    1545-0235
44.6419-2..................................................    1545-0235
46.4371-4..................................................    1545-0023
46.4374-1..................................................    1545-0023
46.4375-1..................................................    1545-2238

[[Page 847]]

 
46.4376-1..................................................    1545-2238
46.4701-1..................................................    1545-0023
                                                               1545-0257
48.4041-4..................................................    1545-0023
48.4041-5..................................................    1545-0023
48.4041-6..................................................    1545-0023
48.4041-7..................................................    1545-0023
48.4041-9..................................................    1545-0023
48.4041-10.................................................    1545-0023
48.4041-11.................................................    1545-0023
48.4041-12.................................................    1545-0023
48.4041-13.................................................    1545-0023
48.4041-18.................................................    1545-0023
48.4041-19.................................................    1545-0023
48.4041-20.................................................    1545-0023
48.4041-21.................................................    1545-1270
48.4042-2..................................................    1545-0023
48.4052-1..................................................    1545-1418
48.4061(a)-1...............................................    1545-0023
48.4061(a)-2...............................................    1545-0023
48.4061(b)-3...............................................    1545-0023
48.4064-1..................................................    1545-0014
                                                               1545-0242
48.4071-1..................................................    1545-0023
48.4073-1..................................................    1545-0023
48.4073-3..................................................    1545-0023
                                                               1545-1074
                                                               1545-1087
48.4081-2..................................................    1545-1270
                                                               1545-1418
48.4081-3..................................................    1545-1270
                                                               1545-1418
                                                               1545-1897
48.4081-4(b)(2)(ii)........................................    1545-1270
48.4081-4(b)(3)(i).........................................    1545-1270
48.4081-4(c)...............................................    1545-1270
48.4081-6(c)(1)(ii)........................................    1545-1270
48.4081-7..................................................    1545-1270
                                                               1545-1418
48.4082-1T.................................................    1545-1418
48.4082-2..................................................    1545-1418
48.4082-6..................................................    1545-1418
48.4082-7..................................................    1545-1418
48.4091-3..................................................    1545-1418
48.4101-1..................................................    1545-1418
48.4101-1T.................................................    1545-1418
48.4101-2..................................................    1545-1418
48.4161(a)-1...............................................    1545-0723
48.4161(a)-2...............................................    1545-0723
48.4161(a)-3...............................................    1545-0723
48.4161(b)-1...............................................    1545-0723
48.4216(a)-2...............................................    1545-0023
48.4216(a)-3...............................................    1545-0023
48.4216(c)-1...............................................    1545-0023
48.4221-1..................................................    1545-0023
48.4221-2..................................................    1545-0023
48.4221-3..................................................    1545-0023
48.4221-4..................................................    1545-0023
48.4221-5..................................................    1545-0023
48.4221-6..................................................    1545-0023
48.4221-7..................................................    1545-0023
48.4222(a)-1...............................................    1545-0014
                                                               1545-0023
48.4223-1..................................................    1545-0023
                                                               1545-0257
                                                               1545-0723
48.6302(c)-1...............................................    1545-0023
                                                               1545-0257
48.6412-1..................................................    1545-0723
48.6416(a)-1...............................................    1545-0023
                                                               1545-0723
48.6416(a)-2...............................................    1545-0723
48.6416(a)-3...............................................    1545-0723
48.6416(b)(1)-1............................................    1545-0723
48.6416(b)(1)-2............................................    1545-0723
48.6416(b)(1)-3............................................    1545-0723
48.6416(b)(1)-4............................................    1545-0723
48.6416(b)(2)-1............................................    1545-0723
48.6416(b)(2)-2............................................    1545-0723
48.6416(b)(2)-3............................................    1545-0723
                                                               1545-1087
48.6416(b)(2)-4............................................    1545-0723
48.6416(b)(3)-1............................................    1545-0723
48.6416(b)(3)-2............................................    1545-0723
48.6416(b)(3)-3............................................    1545-0723
48.6416(b)(4)-1............................................    1545-0723
48.6416(b)(5)-1............................................    1545-0723
48.6416(c)-1...............................................    1545-0723
48.6416(e)-1...............................................    1545-0023
                                                               1545-0723
48.6416(f)-1...............................................    1545-0023
                                                               1545-0723
48.6416(g)-1...............................................    1545-0723
48.6416(h)-1...............................................    1545-0723
48.6420(c)-2...............................................    1545-0023
48.6420(f)-1...............................................    1545-0023
48.6420-1..................................................    1545-0162
                                                               1545-0723
48.6420-2..................................................    1545-0162
                                                               1545-0723
48.6420-3..................................................    1545-0162
                                                               1545-0723
48.6420-4..................................................    1545-0162
                                                               1545-0723
48.6420-5..................................................    1545-0162
                                                               1545-0723
48.6420-6..................................................    1545-0162
                                                               1545-0723
48.6421-0..................................................    1545-0162
                                                               1545-0723
48.6421-1..................................................    1545-0162
                                                               1545-0723
48.6421-2..................................................    1545-0162
                                                               1545-0723
48.6421-3..................................................    1545-0162
                                                               1545-0723
48.6421-4..................................................    1545-0162
                                                               1545-0723
48.6421-5..................................................    1545-0162
                                                               1545-0723
48.6421-6..................................................    1545-0162
                                                               1545-0723
48.6421-7..................................................    1545-0162
                                                               1545-0723
48.6424-0..................................................    1545-0723
48.6424-1..................................................    1545-0723
48.6424-2..................................................    1545-0723
48.6424-3..................................................    1545-0723
48.6424-4..................................................    1545-0723
48.6424-5..................................................    1545-0723
48.6424-6..................................................    1545-0723
48.6427-0..................................................    1545-0723
48.6427-1..................................................    1545-0023
                                                               1545-0162
                                                               1545-0723
48.6427-2..................................................    1545-0162
                                                               1545-0723
48.6427-3..................................................    1545-0723
48.6427-4..................................................    1545-0723
48.6427-5..................................................    1545-0723
48.6427-8..................................................    1545-1418
48.6427-9..................................................    1545-1418
48.6427-10.................................................    1545-1418
48.6427-11.................................................    1545-1418

[[Page 848]]

 
49.4251-1..................................................    1545-1075
49.4251-2..................................................    1545-1075
49.4251-4(d)(2)............................................    1545-1628
49.4253-3..................................................    1545-0023
49.4253-4..................................................    1545-0023
49.4264(b)-1...............................................    1545-0023
                                                               1545-0224
                                                               1545-0225
                                                               1545-0226
                                                               1545-0230
                                                               1545-0257
                                                               1545-0912
49.4271-1(d)...............................................    1545-0685
51.8T......................................................    1545-2209
52.4682-1(b)(2)(iii).......................................    1545-1153
52.4682-2(b)...............................................    1545-1153
                                                               1545-1361
52.4682-2(d)...............................................    1545-1153
                                                               1545-1361
52.4682-3(c)(2)............................................    1545-1153
52.4682-3(g)...............................................    1545-1153
52.4682-4(f)...............................................    1545-0257
                                                               1545-1153
52.4682-5(d)...............................................    1545-1361
52.4682-5(f)...............................................    1545-1361
53.4940-1..................................................    1545-0052
                                                               1545-0196
53.4942(a)-1...............................................    1545-0052
53.4942(a)-2...............................................    1545-0052
53.4942(a)-3...............................................    1545-0052
53.4942(b)-3...............................................    1545-0052
53.4945-1..................................................    1545-0052
53.4945-4..................................................    1545-0052
53.4945-5..................................................    1545-0052
53.4945-6..................................................    1545-0052
53.4947-1..................................................    1545-0196
53.4947-2..................................................    1545-0196
53.4948-1..................................................    1545-0052
53.4958-6..................................................    1545-1623
53.4961-2..................................................    1545-0024
53.4963-1..................................................    1545-0024
53.6001-1..................................................    1545-0052
53.6011-1..................................................    1545-0049
                                                               1545-0052
                                                               1545-0092
                                                               1545-0196
53.6060-1(a)(1)............................................    1545-1231
53.6065-1..................................................    1545-0052
53.6071-1..................................................    1545-0049
53.6081-1..................................................    1545-0066
                                                               1545-0148
53.6107-1..................................................    1545-1231
53.6161-1..................................................    1545-0575
54.4972-1..................................................    1545-0197
54.4975-7..................................................    1545-0575
54.4977-1T.................................................    1545-0771
54.4980B-6.................................................    1545-1581
54.4980B-7.................................................    1545-1581
54.4980B-8.................................................    1545-1581
54.4980F-1.................................................    1545-1780
54.4981A-1T................................................    1545-0203
54.6011-1..................................................    1545-0575
54.6011-1T.................................................    1545-0575
54.6060-1(a)(1)............................................    1545-1231
54.6107-1..................................................    1545-1231
54.9801-3..................................................    1545-1537
54.9801-4..................................................    1545-1537
54.9801-5..................................................    1545-1537
54.9801-6..................................................    1545-1537
54.9812-1T.................................................    1545-2165
54.9815-1251T..............................................    1545-2178
54.9815-2711T..............................................    1545-2179
54.9815-2712T..............................................    1545-2180
54.9815-2714T..............................................    1545-2172
54.9815-2715...............................................    1545-2229
54.9815-2719AT.............................................    1545-2181
54.9815-2719T..............................................    1545-2182
55.6001-1..................................................    1545-0123
55.6011-1..................................................    1545-0123
                                                               1545-0999
                                                               1545-1016
55.6060-1(a)(1)............................................    1545-1231
55.6061-1..................................................    1545-0999
55.6071-1..................................................    1545-0999
55.6107-1..................................................    1545-1231
56.4911-6..................................................    1545-0052
56.4911-7..................................................    1545-0052
56.4911-9..................................................    1545-0052
56.4911-10.................................................    1545-0052
56.6001-1..................................................    1545-1049
56.6011-1..................................................    1545-1049
56.6060-1(a)(1)............................................    1545-1231
56.6081-1..................................................    1545-1049
56.6107-1..................................................    1545-1231
56.6161-1..................................................    1545-0257
                                                               1545-1049
145.4051-1.................................................    1545-0745
145.4052-1.................................................    1545-0120
                                                               1545-0745
                                                               1545-1076
145.4061-1.................................................    1545-0224
                                                               1545-0230
                                                               1545-0257
                                                               1545-0745
156.6001-1.................................................    1545-1049
156.6011-1.................................................    1545-1049
156.6060-1(a)(1)...........................................    1545-1231
156.6081-1.................................................    1545-1049
156.6107-1.................................................    1545-1231
156.6161-1.................................................    1545-1049
157.6001-1.................................................    1545-1824
157.6011-1.................................................    1545-1824
157.6060-1(a)(1)...........................................    1545-1231
157.6081-1.................................................    1545-1824
157.6107-1.................................................    1545-1231
157.6161-1.................................................    1545-1824
301.6011-2.................................................    1545-0225
                                                               1545-0350
                                                               1545-0387
                                                               1545-0441
                                                               1545-0957
301.6011(g)-1..............................................    1545-2079
301.6017-1.................................................    1545-0090
301.6034-1.................................................    1545-0092
301.6035-1.................................................    1545-0123
301.6036-1.................................................    1545-0013
                                                               1545-0773
301.6047-1.................................................    1545-0367
                                                               1545-0957
301.6057-1.................................................    1545-0710
301.6057-2.................................................    1545-0710
301.6058-1.................................................    1545-0710
301.6059-1.................................................    1545-0710
301.6103(c)-1..............................................    1545-1816
301.6103(n)-1..............................................    1545-1841
301.6103(p)(2)(B)-1........................................    1545-1757
301.6104(a)-1..............................................    1545-0495
301.6104(a)-5..............................................    1545-0056
301.6104(a)-6..............................................    1545-0056
301.6104(b)-1..............................................    1545-0094
                                                               1545-0742
301.6104(d)-1..............................................    1545-1655
301.6104(d)-2..............................................    1545-1655
301.6104(d)-3..............................................    1545-1655

[[Page 849]]

 
301.6109-1.................................................    1545-0003
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
                                                               1545-1461
301.6109-3.................................................    1545-1564
301.6110-3.................................................    1545-0074
301.6110-5.................................................    1545-0074
301.6111-1T................................................    1545-0865
                                                               1545-0881
301.6111-2.................................................    1545-0865
                                                               1545-1687
301.6112-1.................................................    1545-0865
                                                               1545-1686
301.6112-1T................................................    1545-0865
                                                               1545-1686
301.6114-1.................................................    1545-1126
                                                               1545-1484
301.6222(a)-2..............................................    1545-0790
301.6222(b)-1..............................................    1545-0790
301.6222(b)-2..............................................    1545-0790
301.6222(b)-3..............................................    1545-0790
301.6223(b)-1..............................................    1545-0790
301.6223(c)-1..............................................    1545-0790
301.6223(e)-2..............................................    1545-0790
301.6223(g)-1..............................................    1545-0790
301.6223(h)-1..............................................    1545-0790
301.6224(b)-1..............................................    1545-0790
301.6224(c)-1..............................................    1545-0790
301.6224(c)-3..............................................    1545-0790
301.6227(c)-1..............................................    1545-0790
301.6227(d)-1..............................................    1545-0790
301.6229(b)-2..............................................    1545-0790
301.6230(b)-1..............................................    1545-0790
301.6230(e)-1..............................................    1545-0790
301.6231(a)(1)-1...........................................    1545-0790
301.6231(a)(7)-1...........................................    1545-0790
301.6231(c)-1..............................................    1545-0790
301.6231(c)-2..............................................    1545-0790
301.6241-1T................................................    1545-0130
301.6316-4.................................................    1545-0074
301.6316-5.................................................    1545-0074
301.6316-6.................................................    1545-0074
301.6316-7.................................................    1545-0029
301.6324A-1................................................    1545-0015
301.6361-1.................................................    1545-0024
                                                               1545-0074
301.6361-2.................................................    1545-0024
301.6361-3.................................................    1545-0074
301.6402-2.................................................    1545-0024
                                                               1545-0073
                                                               1545-0091
301.6402-3.................................................    1545-0055
                                                               1545-0073
                                                               1545-0091
                                                               1545-0132
                                                               1545-1484
301.6402-5.................................................    1545-0928
301.6404-1.................................................    1545-0024
301.6404-2T................................................    1545-0024
301.6404-3.................................................    1545-0024
301.6405-1.................................................    1545-0024
301.6501(c)-1..............................................    1545-1241
                                                               1545-1637
301.6501(d)-1..............................................    1545-0074
                                                               1545-0430
301.6501(o)-2..............................................    1545-0728
301.6511(d)-1..............................................    1545-0024
                                                               1545-0582
301.6511(d)-2..............................................    1545-0024
                                                               1545-0582
301.6511(d)-3..............................................    1545-0024
                                                               1545-0582
301.6652-2.................................................    1545-0092
301.6685-1.................................................    1545-0092
301.6689-1T................................................    1545-1056
301.6707-1T................................................    1545-0865
                                                               1545-0881
301.6708-1T................................................    1545-0865
301.6712-1.................................................    1545-1126
301.6723-1A(d).............................................    1545-0909
301.6903-1.................................................    1545-0013
                                                               1545-1783
301.6905-1.................................................    1545-0074
301.7001-1.................................................    1545-0123
301.7101-1.................................................    1545-1029
301.7207-1.................................................    1545-0092
301.7216-2.................................................    1545-0074
301.7216-2(o)..............................................    1545-1209
301.7425-3.................................................    1545-0854
301.7430-2(c)..............................................    1545-1356
301.7502-1.................................................    1545-1899
301.7507-8.................................................    1545-0123
301.7507-9.................................................    1545-0123
301.7513-1.................................................    1545-0429
301.7517-1.................................................    1545-0015
301.7605-1.................................................    1545-0795
301.7623-1.................................................    1545-0409
                                                               1545-1534
301.7654-1.................................................    1545-0803
301.7701-3.................................................    1545-1486
301.7701-4.................................................    1545-1465
301.7701-7.................................................    1545-1600
301.7701-16................................................    1545-0795
301.7701(b)-1..............................................    1545-0089
301.7701(b)-2..............................................    1545-0089
301.7701(b)-3..............................................    1545-0089
301.7701(b)-4..............................................    1545-0089
301.7701(b)-5..............................................    1545-0089
301.7701(b)-6..............................................    1545-0089
301.7701(b)-7..............................................    1545-0089
                                                               1545-1126
301.7701(b)-9..............................................    1545-0089
301.7805-1.................................................    1545-0805
301.9000-5.................................................    1545-1850
301.9001-1.................................................    1545-0220
301.9100-2.................................................    1545-1488
301.9100-3.................................................    1545-1488
301.9100-4T................................................    1545-0016
                                                               1545-0042
                                                               1545-0074
                                                               1545-0129
                                                               1545-0172
                                                               1545-0619
301.9100-6T................................................    1545-0872
301.9100-7T................................................    1545-0982
301.9100-8.................................................    1545-1112
301.9100-11T...............................................    1545-0123
301.9100-12T...............................................    1545-0026
                                                               1545-0074
                                                               1545-0172
                                                               1545-1027
301.9100-14T...............................................    1545-0046
301.9100-15T...............................................    1545-0046
301.9100-16T...............................................    1545-0152
302.1-7....................................................    1545-0024
305.7701-1.................................................    1545-0823
305.7871-1.................................................    1545-0823
404.6048-1.................................................    1545-0160
420.0-1....................................................    1545-0710
Part 509...................................................    1545-0846
Part 513...................................................    1545-0834
Part 514...................................................    1545-0845

[[Page 850]]

 
Part 521...................................................    1545-0848
601.104....................................................    1545-0233
601.105....................................................    1545-0091
601.201....................................................    1545-0019
                                                               1545-0819
601.204....................................................    1545-0152
601.401....................................................    1545-0257
601.504....................................................    1545-0150
601.601....................................................    1545-0800
601.602....................................................    1545-0295
                                                               1545-0387
                                                               1545-0957
601.702....................................................    1545-0429
------------------------------------------------------------------------


(26 U.S.C. 7805)

[T.D. 8011, 50 FR 10222, Mar. 14, 1985]

    Editorial Note: For Federal Register citations affecting Sec.  
602.101, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.

[[Page 851]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations (CFR) that 
were made by documents published in the Federal Register since January 
1, 2008 are enumerated in the following list. Entries indicate the 
nature of the changes effected. Page numbers refer to Federal Register 
pages. The user should consult the entries for chapters, parts and 
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the 
annual edition of the monthly List of CFR Sections Affected (LSA). The 
LSA is available at www.fdsys.gov. For changes to this volume of the CFR 
prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 1964-
1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. The 
``List of CFR Sections Affected 1986-2000'' is available at 
www.fdsys.gov.

                                  2008

26 CFR
                                                                   73 FR
                                                                    Page
Chapter I
20 Authority citation amended......................................78450
20.2036-1 (a) revised; undesignated text following (a)(3)(ii) 
        designated as (c)(1)(i) and amended; (c)(1)(ii), (2) and 
        (3) added..................................................40177
    (a)(3)(ii) correctly added.....................................44648
20.2039-1 (a) revised; (e) and (f) added...........................40178
20.6060-1 Added....................................................78450
20.6107-1 Added....................................................78450
20.6109-1 Added....................................................78450
20.6694-1 Added....................................................78450
20.6694-2 Added....................................................78451
20.6694-3 Added....................................................78451
20.6694-4 Added....................................................78451
20.6695-1 Added....................................................78451
20.6696-1 Added....................................................78451
20.7701-1 Added....................................................78451
25 Authority citation amended...............................37368, 78451
25.6060-1 Added....................................................78451
25.6081-1 Added....................................................37368
25.6081-1T Removed.................................................37368
25.6107-1 Added....................................................78451
25.6109-1 Added....................................................78451
25.6694-1 Added....................................................78451
25.6694-2 Added....................................................78451
25.6694-3 Added....................................................78452
25.6694-4 Added....................................................78452
25.6695-1 Added....................................................78452
25.6696-1 Added....................................................78452
25.7701-1 Added....................................................78452
26 Authority citation amended...............................37369, 78452
26.2600-1 Amended..................................................44650
26.2642-6 (d)(4), (7), (j) Example 3 and (k)(1) revised; (h) and 
        (j) Examples 6, 9, 12 and 13 added.........................44650
26.2654-1 (a)(1)(i) and (5) Example 8 revised; (a)(1)(iii) and (d) 
        added......................................................44652
26.6060-1 Added....................................................78452
26.6081-1 Added....................................................37369
26.6081-1T Removed.................................................37369
26.6107-1 Added....................................................78452
26.6109-1 Added....................................................78452
26.6694-1 Added....................................................78452
26.6694-2 Added....................................................78453
26.6694-3 Added....................................................78453
26.6694-4 Added....................................................78453
26.6695-1 Added....................................................78453
26.6696-1 Added....................................................78453
26.7701-1 Added....................................................78453

                                  2009

26 CFR
                                                                   74 FR
                                                                    Page
Chapter I
20 Authority citation correctly amended.............................5105
    Authority citation amended.....................................21484
    Technical correction...........................................27080

[[Page 852]]

20.2031-0 Revised..................................................21484
20.2031-7 (c), (d)(1) through (5) and (e) revised; (d)(7) 
        redesignated as 20.2031-7A(f)(4); new (d)(7) added.........21484
20.2031-7T Added...................................................21484
20.2031-7A Undesignated center heading, section heading, new 
        (f)(4) heading, introductory text, Table S heading and 
        Table 90CM heading revised; (f)(5) added...................21509
20.2032-1 (f)(1) revised...........................................21509
    (f)(1) correctly revised.......................................27080
20.2032-1T Added...................................................21509
20.2051-1 Revised..................................................53657
20.2053-1 (d) redesignated as (e); (a), (b)(2) and (3) revised; 
        (b)(4), new (d) and (f) added..............................53657
    (d)(7) Example 3 correctly amended.............................61525
20.2053-3 (b)(1) and (c)(1) revised; (b)(2), (c)(2), (d)(1) and 
        (2) amended; (d)(3) and (e) added..........................53660
20.2053-4 Revised..................................................53660
    (d)(3) correctly amended.......................................61525
20.2053-5 Introductory text, (a) and (b) redesignated as (a), (1) 
        and (2); new (a) revised; new (b) added....................53664
20.2053-6 (a) and (c) revised; (g) and (h) added...................53664
20.2053-9 (a) and (c) amended; (f) added...........................53664
20.2053-10 (c) amended; (e) added..................................53665
20.2055-2 (e)(3) heading, (iii) and (4) revised....................21510
20.2055-2T Added...................................................21510
20.2056A-4 (c)(4)(ii)(B) and (d) Example 4 revised.................21510
20.2056A-4T Added..................................................21510
20.6694-1 (a) correctly revised.....................................5105
20.7520-1 Heading, (a)(2), (c)(1), (2) and (d) revised; (a)(1) and 
        (b)(2) amended.............................................21511
20.7520-1T Added...................................................21511
25 Authority citation correctly amended.............................5105
    Authority citation amended.....................................21512
    Technical correction...........................................27080
25.2512-0 Revised..................................................21512
25.2512-5 (c), (d) and (e) revised.................................21512
25.2512-5T Added...................................................21512
25.2512-5A Undesignated center heading and section heading 
        revised; (f) added.........................................21515
25.2522(c)-3 (e) revised...........................................21515
25.2522(c)-3T Added................................................21515
25.6694-1 (a) correctly revised.....................................5105
25.7520-1 Heading, (a)(2), (c)(1), (2) and (d) revised; (a)(1) and 
        (b)(2) amended.............................................21516
25.7520-1T Added...................................................21516
25.7520-3 (b)(2)(v) Example 5 and (4) revised......................21517
25.7520-3T Added...................................................21517
26 Authority citation correctly amended.............................5105
26.6694-1 (a) correctly revised.....................................5105

                                  2010

 (No regulations published from January 1, 2010, through April 1, 2010)

                                  2011

26 CFR
                                                                   76 FR
                                                                    Page
Chapter I
17 Removed.........................................................51885
20 Authority citation amended......................................49612
20.2031-0 Table amended............................................49612
20.2031-7 (c), (d)(1) through (5), (7) amd (e) revised.............49612
20.2031-7T Removed.................................................49637
20.2031-7A (f)(1) amended..........................................49637
20.2036-1 (c)(2)(ii) and (iii) redesignated as (c)(2)(iii) and 
        (iv); (b)(1)(ii) and new (c)(2)(iv) introductory text 
        revised; (c)(1)(i), (2)(i), new (iii) and (3) amended; 
        (c)(1)(ii) Example 1, (2)(ii) and new (iv) Examples 7 and 
        8 added....................................................69128
20.2055-2 (e)(3) heading, (iii) and (4) revised; (f)(6) added......49637
20.2055-2T Removed.................................................49637
20.2056A-4 (c)(4)(ii)(B) and (d) Example 4 revised; (e) added......49637
20.2056A-4T Removed................................................49638
20.7520-1 Heading, (a)(1), (2), (b)(2), (c)(1), (2) and (d) 
        revised....................................................49638
20.7520-1T Removed.................................................49638
25 Authority citation amended......................................49638
25.2512-0 Amended..................................................49639
25.2512-5 (c), (d) and (e) revised.................................49639

[[Page 853]]

25.2512-5T Removed.................................................49641
25.2512-5A (f)(1) amended..........................................49641
25.2522(c)-3 (e) revised...........................................49641
25.2522(c)-3T Removed..............................................49642
25.7520-1 Heading, (a)(1), (2), (b)(2), (c)(1), (2) and (d) 
        revised....................................................49642
25.7520-1T Removed.................................................49642
25.7520-3 (b)(2)(v) Example 5, (b)(4) and (c) revised..............49642
25.7520-3T Removed.................................................49643
26 Authority citation amended......................................70341
26.6011-4 Added....................................................70341

                                  2012

26 CFR
                                                                   77 FR
                                                                    Page
Chapter I
20 Authority citation amended......................................36156
20.2001-2T Added...................................................36156
20.2010-0T Added...................................................36156
20.2010-1T Added...................................................36157
20.2010-2T Added...................................................36157
20.2010-3T Added...................................................36160
20.2053-4 (c)(3) Examples 1, 2 and 3 correctly added; CFR 
        correction.................................................19080
25 Authority citation amended......................................36161
25.2505-0T Added...................................................36161
25.2505-1T Added...................................................36161
25.2505-2T Added...................................................36161

                                  2013

 (No regulations published from January 1, 2013, through April 1, 2013)


                                  [all]